TRUSERV CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002

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

FOR THE TRANSITION PERIOD FROM TO
----- ------

COMMISSION FILE NUMBER 2-20910
------------------------------------

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

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

8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
----------------- -----------
(Address of principal executive offices) (Zip Code)

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

Not applicable
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

The number of shares outstanding of each of the issuer's classes of common
stock, as of October 26, 2002.

Class A Common Stock, $100 Par Value..............................472,320 Shares
Class B Common Stock, $100 Par Value. ..........................1,731,490 Shares

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ITEM 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE OF STOCK)

ASSETS

See Notes to Condensed Consolidated Financial Statements.

2

TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

3

TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

4

TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

NOTE 1 - GENERAL

The condensed consolidated balance sheet at September 28, 2002, the condensed
consolidated statement of operations for the thirteen and thirty-nine weeks
ended September 28, 2002 and September 29, 2001, and the condensed consolidated
statement of cash flows for the thirty-nine weeks ended September 28, 2002 and
September 29, 2001 are unaudited and, in the opinion of the management of
TruServ, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of financial position at the
balance sheet dates and results of operations and cash flows for the respective
interim periods. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. These financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 2001 included in TruServ's 2001 Annual Report on Form 10-K.

NOTE 2 - RECLASSIFICATIONS

Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's presentation.
These reclassifications had no effect on Net margin/(loss) for any period or on
Total members' equity at the balance sheet dates.

NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS

If financial and operating conditions permit, patronage dividends are declared
and paid by TruServ after the close of each fiscal year. The estimated cash
portion of the patronage dividend for the nine-month period ended September 28,
2002 was $4,109, which was 20% of estimated patronage income; there was no
estimated patronage dividend for the corresponding period in 2001. TruServ's
by-laws and the IRS require that the payment of at least 20% of patronage
dividends be in cash. In the past, the remainder was primarily paid through the
issuance of TruServ's Redeemable Class B common stock; in certain cases, a small
portion of the dividend was paid by means of Promissory (subordinated) notes of
the company. For fiscal 2002 it is the intent of the company to issue the
non-cash portion of the dividend in the form of Class B common stock which will
be first used to reduce existing loss allocation account balances (Note 4); any
remaining Class B common stock will then be issued to members.

NOTE 4 - LOSS ALLOCATION TO MEMBERS

During the third quarter of fiscal 2000, TruServ management developed and the
board of directors approved a plan to equitably allocate to members the loss
incurred in 1999. This loss was previously recorded as a reduction of Retained
earnings. TruServ has allocated the 1999 loss among its members by establishing
a Loss allocation account as a contra-equity account in the condensed
consolidated balance sheet with the offsetting credit recorded to the
Accumulated deficit account. The Loss allocation account reflects the sum of
each member's proportionate share of the 1999 loss, after being reduced by
certain amounts that were not allocated to members. The Loss allocation account
will be satisfied, on a member by member basis, by applying the portion of
future non-cash patronage dividends as a reduction to the Loss allocation
account until fully satisfied. The Loss allocation amount may also be satisfied,
on a member by member basis, by applying the par value of maturing member notes
and related interest payments as a reduction to the Loss allocation account
until such account is fully satisfied. However, in the event a member should
terminate as a stockholder of the company, any unsatisfied portion of that
member's Loss allocation account will be satisfied by reducing the

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redemption amount paid for the member's stock investment in TruServ (Note 8).

The board of directors has determined that TruServ will retain the fiscal 2001
loss as part of the Accumulated deficit account. All or a portion of patronage
income and all non-patronage income, if any, may be retained in the future to
reduce the Accumulated deficit account. TruServ does not intend for the 2002 Net
margin to be retained for purposes of setting off the 2001 loss. TruServ will
determine for each member that was a stockholder in 2001, his share of the 2001
loss that is retained in the Accumulated deficit account based upon the member's
proportionate stock investment and purchases from the co-op in 2001. In the
event a member should terminate as a stockholder of TruServ, any remaining 2001
loss in the Accumulated deficit account that is allocable to the terminating
member will be satisfied by reducing the redemption amount paid for the member's
stock investment in TruServ.

NOTE 5 - INVENTORIES

Inventories consisted of the following:

September 28, December 31,
2002 2001
--------------- ---------------

Manufacturing inventories:
Raw materials $ 1,466 $ 1,607
Work-in-process and finished goods 20,537 22,298
--------------- ---------------
22,003 23,905
Merchandise inventories 272,142 310,071
--------------- ---------------
Total $ 294,145 $ 333,976
=============== ===============

Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. The cost of inventory also includes indirect costs
incurred to bring inventory to its existing location for resale. The amount of
indirect costs included in ending inventory at September 28, 2002 and December
31, 2001 was $19,235 and $23,272, respectively.

NOTE 6 - AMENDED FINANCING AGREEMENT

On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements that eliminated
the event of default created when the company failed to comply with a covenant
as of February 24, 2001. The amendment to the revolving credit facility extended
the terms of the facility from June 2002 to June 2004; the amount of the
commitment remained at $200,000. The commitment under the revolving credit
facility is permanently reduced by the amount of any prepayments allocated and
paid on the revolving credit facility. Since April 11, 2002, the revolving
credit facility commitment has been reduced to $187,221 at September 28, 2002
due to prepayments in 2002 from asset sales. There are, however, borrowing base
limitations on the commitment that fluctuate in part with the seasonality of the
business. The borrowing base formula limits advances to the sum of 85% of
eligible accounts receivable, 50% of eligible inventory, 60% of the appraised
value of eligible real estate and 50% of the appraised value of eligible
machinery and equipment; availability is further increased by seasonal
over-advances and decreased by reserves against availability. The revolving
credit facility has certain minimum unusable commitment amounts, which vary
based upon the projected working capital needs of TruServ. TruServ had available
and unused liquidity under the revolving credit facility of approximately
$100,000 at September 28, 2002. The interest rate on the revolving credit
facility was increased to the prime rate plus 3.25%, which was 8.00% as of
September 28, 2002. The unused commitment fee is 0.75% per annum.

The amendments to the various senior notes maintained 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 cash proceeds from certain asset sales
and 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 prepayments on the
senior notes are subject to make-

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whole provisions or a premium related to accelerated debt repayment. For the
thirteen and thirty-nine weeks ended September 28, 2002, the prepayments to
senior note holders were $14,627 and $21,134, respectively, resulting in
prepayment penalties or make-whole liabilities of $4,269 and $6,014,
respectively, which are recorded as additional debt with an offsetting entry to
a prepaid interest account. The prepaid interest account will be amortized to
interest expense over the remaining life of the original notes. Under the terms
of the amended senior note agreements, in the event of early termination or a
prepayment of a portion of the notes, substantial make-whole liabilities are
generally triggered. The nature of the transaction giving rise to the
prepayment, the length of time to maturity of the note, the magnitude of the
prepayment relative to the remaining debt outstanding and prevailing market
interest rates relative to the interest rates on the senior notes are factors in
determining the amount of potential make-whole liabilities. Any decision to
prepay a portion of these senior notes requires an analysis of the estimated
additional costs of prepayment against the benefit of reduced interest expense.

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 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 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
total senior debt outstanding at September 28, 2002 was $278,391. TruServ
intends to attain this reduced level of senior debt outstanding by June 30, 2003
with cash from operating activities supplemented with sale/lease-backs or
mortgages on various regional distribution centers.

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 agreements. 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.
TruServ is in compliance with all applicable covenants and events of default as
of September 28, 2002. As of October 7, 2002, TruServ appointed its fifth
outside director and one of these outside directors is the independent
"financial expert" on TruServ's audit committee in accordance with Section 407
of the Sarbanes-Oxley Act of 2002.

NOTE 7 - LEASE COMMITMENTS

The Hagerstown, Maryland distribution center is subject to a synthetic lease
with monthly payments that are recorded in Non-member interest expense on the
accompanying condensed consolidated statement of operations. 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, which is April
30, 2003. All obligations under this lease arrangement are guaranteed by the
company. As of September 28, 2002, the synthetic lease has a remaining balance
of $38,504, 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 Statement of Financial Accounting Standard ("SFAS") No. 13,
"Accounting for Leases." In the fourth quarter of 2001, TruServ announced its
decision to close and sell the Hagerstown facility and, as a result, recorded a
loss representing the difference between the lease obligation and management's
estimation of the fair value of the building in Accrued expenses on the
accompanying condensed consolidated balance sheet as a cost to exit the
facility. The Hagerstown facility ceased regular operations in September 2002.

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NOTE 8 - MEMBERS' EQUITY

As of September 28, 2002, the amount of Class A common stock and Class B common
stock presented for redemption, but deferred due to the moratorium (see Part II,
Item 2), is approximately $36,937 after the offset of the Loss allocation
account. This amount does not include an offset of approximately $7,269 of
Accounts receivable owed by terminated members to the co-op. Historically, the
company has offset such amounts due by members to the co-op against amounts the
co-op pays the members on redemption of their stock. The amount of stock
presented for redemption, but deferred due to the moratorium, includes
approximately $14,765 related to the Class A common stock (which was
historically paid out at the time of redemption) and $44,591 related to Class B
common stock (which was historically paid out in five equal annual
installments), offset by the amount of the Loss allocation account related to
the Class B common stock of $22,419.

NOTE 9 - RESTRUCTURING CHARGE

Net restructuring expenses of $895 and $1,136 were incurred in the thirteen and
thirty-nine weeks ended September 28, 2002, respectively. The expenses in the
third quarter related to additional severance costs of $1,822 at TruServ's
corporate headquarters and Hagerstown, Maryland and Brookings, South Dakota
distribution centers, offset by a gain of $927 on the sale of the Brookings
distribution center. Year to date expenses also included additional outplacement
costs at TruServ's corporate headquarters of $185 and additional facility exit
costs at TruServ's Hagerstown, Maryland distribution center of $150, offset by
the reversal of excess outplacement costs at the Hagerstown, Maryland and
Brookings, South Dakota distribution centers. TruServ used previously
established restructuring reserves in the first nine months of 2002 of $5,168
($2,852 in the first quarter of 2002, $1,595 in the second quarter of 2002 and
$721 in the third quarter of 2002) related to regional distribution center
closures and workforce reductions at the company's corporate headquarters.
TruServ incurred restructuring charges of $8,211 during the first nine months of
2001 ($560 in the first quarter of 2001, $4,390 in the second quarter of 2001
and $3,261 in the third quarter of 2001) related mainly to severance for the
Brookings, South Dakota distribution center closure, headcount reductions at
TruServ's corporate headquarters and facility exit costs for the Henderson,
North Carolina and Indianapolis, Indiana distribution center closures. Use of
previously established restructuring reserves of $4,540 in the first nine months
of 2001 mainly related to TruServ's various distribution center closures and the
headcount reductions at TruServ's corporate headquarters.

Restructuring reserves summary:

8

NOTE 10 - SEGMENT INFORMATION

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

THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002
---------------------------------------

THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001
---------------------------------------

THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002
------------------------------------------

THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001
------------------------------------------

9

NOTE 11 - ASSET SALES

In October 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 member group of the cooperative. The
Canadian operations generated revenue of $26,249 and $77,328 in the thirteen and
thirty-nine weeks ended September 29, 2001, respectively, and $84,397 in 2001 to
its date of sale in October; however, the sale of the business did not
materially impact net margin.

In July 2002, TruServ received a payment of $16,900 from Builder Marts of
America, Inc. on a note receivable that it held in connection with the fiscal
2000 sale of the lumber and building materials business. In accordance with the
amended intercreditor agreement, these proceeds, along with other miscellaneous
asset sale proceeds, were used to pay down short-term borrowings and prepay
long-term senior debt in August 2002. The note, which has a remaining balance of
$100, as of September 28, 2002, was to be paid in annual installments through
December 31, 2007 and carried an interest rate of 7.75% per annum.

In August 2002, TruServ sold its Brookings, South Dakota regional distribution
center to Rainbow Play Systems Properties of Brookings, LLC. The net proceeds
after all closing costs for this sale of $6,141 were distributed to the senior
lenders in the third quarter in accordance with the amended intercreditor
agreement to pay down short-term borrowings and prepay long-term senior debt.

NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS

In January 2002, TruServ adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changed
the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. In accordance with the
adoption of SFAS No. 142, TruServ stopped amortizing goodwill at the beginning
of fiscal 2002. TruServ has completed its initial impairment assessment as
required by SFAS No. 142 and has determined that no impairment exists. The
reported Net margin/(loss), Goodwill amortization and adjusted Net margin/(loss)
are as follows:

In August 2001, the Financial Accounting Standards Board ("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, but does not expect the impact of its adoption to be material.

In January 2002, TruServ adopted 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. The adoption of this standard did not have a
material impact on the company's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS 4, 44 and 64,
Amendment of FAS 13 and Technical

10

Corrections as of April 2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" (eliminating the extraordinary
treatment of gains or losses on debt modification other than for certain
exceptions), amends SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," amends SFAS No. 13, "Accounting for Leases" (to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions) and
amends other existing authoritative pronouncements (to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions). SFAS No. 145 is effective for TruServ for fiscal 2003 but earlier
application is encouraged. The company is currently evaluating the impact this
standard will have on its financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF Issue No. 94-3 relates to the requirement for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized only when the liability is incurred;
under EITF Issue No. 94-3, a liability for an exit cost, as defined in EITF
Issue No. 94-3, was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 also requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value and
only when the liability is incurred. SFAS No. 146 is effective for TruServ for
any exit or disposal activities undertaken after December 31, 2002 but earlier
application is encouraged.

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This quarterly report on form 10-Q may 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, seasonal variations,
competition, risks of new business areas, the availability and cost of real
estate and construction, changes in federal or state legislation or regulations
and trends in our industry.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)

RESULTS OF OPERATIONS

THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001

A reconciliation of revenue and gross margin for the thirteen weeks ending
September 28, 2002 and September 29, 2001 follows:

Revenues for the thirteen weeks ended September 28, 2002 totaled $499,818. This
represented a decrease in revenues of $122,159, or 19.6%, compared to the same
period last year. The key contributors to the decrease in revenue are the 9.8%
decline in the average number of participating member retail outlets (an average
of 6,714 in the third quarter of 2002 versus an average of 7,446 in the third
quarter of 2001), a reduction in same store sales, and the sale of TruServ
Canada Cooperative, Inc. in October of 2001.

Gross margin for the thirteen weeks ended September 28, 2002 decreased by
$12,648, or 17.4%, compared to the prior year. The key contributors to the
decrease in gross margin dollars were the decline in the number of participating
member retail outlets and the sale of the TruServ Canada Cooperative Inc.

While gross margin dollars decreased by 17.4%, gross margin as a percent of
revenue increased to 12.0% from 11.7% for the comparable period last year. The
unfavorable volume impacts to gross margin were partially offset by product
price increases. The indirect cost of revenues, which also favorably impacted
the gross margin dollars, were the result of distribution center closures and
headcount reductions. The distribution center closures and headcount reductions
in turn reduced the direct inbound logistics and labor and related overhead
expenses incurred to bring merchandise to the distribution centers that are
classified as indirect costs of revenue.

These trends in revenues and gross margins are expected to continue in the
fourth quarter, except that the variance caused by the sale of TruServ Canada
Cooperative, Inc. will only be $7,069 and $1,013, respectively, since it was
sold in October of 2001. Additional

12

negative impact on revenues and gross margins in the fourth quarter may result
from the October dock workers' strike on the West Coast, but TruServ has
implemented distribution changes in the supply chain to minimize the strike's
effect on revenues. TruServ made changes in order to optimize the time of
delivery to the member stores given the strike circumstances. TruServ
anticipates additional costs in the area of shipping to accommodate the
execution of those changes. TruServ introduced an initiative called "Priced2Win"
to the member stores in the fourth quarter that also may impact revenues and
gross margins. The initiative is designed to lower wholesale pricing. Wholesale
prices will be analyzed item by item and decisions made to lower wholesale
prices will be communicated to members monthly. The effect of these price
changes should reduce gross margin percentages; however, TruServ anticipates the
initiative will increase sales volume.

Logistics and manufacturing expenses decreased $5,520, or 24.9%, as compared to
the same period last year. The sale of the Canadian operations accounted for
$3,609 of this positive variance. The remainder of the decrease occurred in
direct regional distribution center expenses. These decreased primarily due to
the closure of distribution centers, headcount reductions of an aggregate of
approximately 670 employees as a result of a reduction in the member base and
other cost saving initiatives.

Selling, general and administrative ("SG&A") expenses decreased $12,997, or
37.0%, as compared to the same period last year. Lower labor and benefit costs
of $6,785 are due to the cost of non-restructuring separations that occurred in
2001, restructuring related headcount reductions (average SG&A headcount for the
quarter went to 776 in 2002 from 836 in 2001), and lower estimated health care
costs in 2002. An additional reduction of $2,024 in SG&A expenses for fiscal
2002 compared to fiscal 2001 is the result of lower bad debt expense due to
TruServ's improved ability to collect receivables. Also in 2002, TruServ adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which changed the
accounting for goodwill from an amortization method to an impairment only
approach. Goodwill amortization in the third quarter of 2001 was $644.

TruServ incurred restructuring expenses of $895 in the third quarter of 2002.
The expenses reflect additional severance costs of $1,822 at TruServ's corporate
headquarters and Hagerstown, Maryland and Brookings, South Dakota distribution
centers. These expenses were offset by a gain of $927 on the sale of the
Brookings distribution center. TruServ incurred restructuring charges of $3,261
in the third quarter of 2001 related mainly to severance payments made in
connection with closing the Brookings, South Dakota distribution center,
reductions in headcount at TruServ's corporate headquarters and facility exit
costs incurred by the Henderson, North Carolina and Indianapolis, Indiana
distribution center closures.

Interest paid to members decreased by $321, or 16.6%, as compared to the same
period last year, due to a decrease in the average principal balance of debt
outstanding of approximately $29,639. The decrease was partially offset by an
increase of approximately 1.3% in the average interest rate. Non-member interest
expense decreased $341, or 2.5%, as compared to the same period last year. This
net decrease is due to a lower average principal balance of senior debt
outstanding, which produced incremental savings of $1,247, and lower average
interest rates, which resulted in savings of $351. TruServ reduced its senior
debt balances as a result of the sale of a distribution center and the receipt
of payment on a note receivable held in connection with the fiscal 2000 sale of
the lumber and building materials business. These decreases are partially offset
by higher financing fees of $1,257, which resulted from amending its existing
credit facility and senior note agreements due to the debt covenant violation
under the revolving credit facility and the senior note agreements in 2001.

The thirteen weeks ended September 28, 2002 resulted in net margin of $5,934 up
from net loss of $2,477 from the same period a year ago. The closure of regional
distribution centers and headcount reductions that resulted from restructuring
activities in 2001, the non-recurrence of significant 2001 restructuring
charges, and a better gross margin percentage favorably impacted net margin. The
favorable impact was partially offset by the reduction in participating member
retail outlets.

13

THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 2001

A reconciliation of revenue and gross margin for the thirty-nine weeks ending
September 28, 2002 and September 29, 2001 follows:

Revenues for the thirty-nine weeks ended September 28, 2002 totaled $1,650,901.
This represented a decrease in revenues of $373,191, or 18.4%, compared to the
same period last year. The key contributors to the decrease in revenue are the
11.2% decline in the average number of participating member retail outlets (an
average of 6,857 in the first nine months of 2002, compared to an average of
7,723 in the first nine months of 2001), a reduction in same store sales, the
sale of TruServ Canada Cooperative, Inc. in October of 2001, and the residual
2001 lumber sales from the lumber and building materials business that was sold
to Builder Marts of America, Inc. in December 2000.

Gross margin for the thirty-nine weeks ended September 28, 2002 decreased by
$16,546, or 8.2%, compared to the prior year. The key contributors to the
decrease in gross margin dollars were the decline in the number of participating
member retail outlets and the sale of TruServ Canada Cooperative, Inc.

While gross margin declined 8.2%, gross margin as a percent of revenue increased
to 11.2% from 9.9% for the comparable period last year. The unfavorable volume
impacts to gross margin were partially offset by certain product price
increases. The indirect cost of revenues, which also favorably impacted the
gross margin dollars, were the result of the closure of distribution centers and
headcount reductions. The distribution center closures and headcount reductions
in turn reduced the direct inbound logistics and labor and related overhead
expenses incurred to bring merchandise to the distribution centers that are
classified as indirect cost of revenues.

Logistics and manufacturing expenses decreased $18,138, or 26.8%, as compared to
the same period last year. The sale of the Canadian operations accounted for
$10,312 of this positive variance. The remainder of the decrease occurred in
direct regional distribution center expenses. These decreased primarily due to
the closure of distribution centers, headcount reductions of approximately 600
employees as a result of a reduction in the member base and other cost saving
initiatives.

Selling, general and administrative ("SG&A") expenses decreased $25,684, or
27.4%, as compared to the same period last year. Lower labor and benefit costs
of $13,912 are due to the cost of non-restructuring separations that occurred in
2001 and restructuring related headcount reductions (average SG&A headcount for
the year went to 801 in 2002 from 906 in 2001). An additional reduction of
$5,177 in SG&A expenses for fiscal 2002 compared to fiscal 2001 is the result of
lower bad debt expense due to TruServ's improved ability to collect receivables.
Also in 2002, TruServ adopted SFAS No. 142, "Goodwill and Other Intangible
Assets", which changed the accounting for goodwill from an amortization method
to an impairment only approach. Goodwill amortization in the first nine months
of 2001 was $1,933.

TruServ incurred restructuring expenses of $1,136 incurred in the thirty-nine
weeks ended September 28, 2002. The expenses reflect additional severance costs
of $2,007 at TruServ's corporate headquarters and Hagerstown, Maryland and
Brookings, South Dakota distribution centers and additional facility exit costs
of $150 at the Hagerstown, Maryland distribution center. These costs were offset
by the reversal of excess outplacement costs at the Hagerstown, Maryland and
Brookings, South Dakota distribution centers and the gain of $927 on the sale of
the Brookings distribution center. TruServ incurred restructuring charges of
$8,211 for the same period ended September 29, 2001 related mainly to severance
payments made in connection with the closing of the Brookings, South Dakota

14

distribution center, reductions in headcount at TruServ's corporate
headquarters, and facility exit costs incurred by the Henderson, North Carolina
and Indianapolis, Indiana distribution center closures.

Interest paid to members decreased by $897, or 15.3%, as compared to the same
period last year, due to a decrease in the average principal balance of debt
outstanding of approximately $26,106 partially offset by an increase in the
average interest rate of approximately 1.0%. Non-member interest expense
increased $402, or 1.0%, as compared to the same period last year. This increase
is due to higher financing fees of $3,385 and higher interest rates, which
caused an incremental increase in expense of $1,307. This increase was the
result of TruServ amending its existing credit facility and senior note
agreements due to the debt covenant violation under the revolving credit
facility and the senior note agreements in 2001. These increased financing fees
and interest rates were partially offset by lower interest expense of $4,291,
which resulted from the lower average principal balance of senior debt
outstanding as compared to the same period last year.

The first nine months of 2002 resulted in net margin of $21,014 up from a net
loss of $13,840 from the same period a year ago. Net margin was favorably
impacted by the closure of regional distribution centers and headcount
reductions that occurred from the restructuring activities in 2001, the
non-recurrence of the significant 2001 restructuring charges and a better gross
margin percentage, partially offset by the loss of participating member retail
outlets.

LIQUIDITY AND CAPITAL RESOURCES

In 2001, the Securities and Exchange Commission ("SEC") issued Financial
Reporting Release ("FRR") No. 61, which sets forth the views of the SEC
regarding certain disclosures relating to liquidity and capital resources. The
information provided below, which should be read in conjunction with the
information in TruServ's Annual Report on Form 10-K, fulfills the requirement of
FRR No. 61 by describing TruServ's debt, credit facilities, guarantees and
future commitments in order to facilitate a review of TruServ's liquidity.

TruServ's operating activities for the thirty-nine weeks ended September 28,
2002 produced cash in the amount of $97,256, compared to cash provided of
$128,859 for the thirty-nine weeks ended September 29, 2001. The primary reason
for the reduction in cash provided by operating activities is due to the net
decrease in cash generated from working capital activities. During 2001, TruServ
collected approximately $62,510 of remaining accounts receivable from the lumber
and building materials business which was sold in December 2000. In addition,
decreases in inventories generated $33,125 less working capital in 2002 as
compared to 2001. These decreases were partially offset by a reduction of
$44,592 in the amounts used for accounts payable. The decrease in cash generated
from working capital was partially offset by favorable 2002 net margins totaling
$34,854 achieved through TruServ's initiatives to reduce costs as compared to
the first nine months of 2001.

Investing activities provided cash of $26,561 for the thirty-nine weeks ended
September 28, 2002, compared to cash used of $11,934 for the same period last
year. Additions to owned properties used cash of $8,254 for the period ended
September 28, 2002, which is down $589 compared to the same period last year.
These capital expenditures consist of various building improvements and
purchases of additional equipment and technology at the company's regional
distribution centers and at its corporate headquarters. Changes in other assets
provided additional cash of $13,728 in 2002 compared to $1,359 in 2001. The cash
in 2002 was mainly provided from the early payment of the note receivable from
Builder Marts of America. In addition, restricted cash decreased, which
generated cash of $14,528, as compared to an increase in restricted cash of
$4,573 for the same period last year. Asset sale proceeds were distributed
during 2002 to the senior lenders in accordance with the intercreditor
agreement.

For the thirty-nine weeks ended September 28, 2002, TruServ experienced a net
decrease in cash and cash equivalents of $77,409. This decrease was primarily
related to excess cash being used to pay down the revolving credit facility when
the debt amendments were completed. TruServ is only borrowing its daily need for
cash against the revolving credit facility. TruServ had held the revolving
credit facility borrowing level at $140,000 since September 2001. In the
thirty-nine weeks ended September 29, 2001 TruServ had a net increase in cash
and cash equivalents of $24,512. In the first nine months of 2001, TruServ's
cash flow generated by operating activities was used for its investing and
financing activities and the additional funds were retained in the cash account
since TruServ held the revolving credit facility borrowing level at $140,000,
while it negotiated the amendment earlier this year.

At September 28, 2002, TruServ's working capital was $48,080, as compared to
$18,252 at December 31, 2001. The current ratio

15

was 1.10 at September 28, 2002, as compared to 1.03 at December 31, 2001. The
improvement in working capital was in large part due to the reduction of the
revolving credit facility balance, which was held at $140,000 during the process
to amend the revolving credit facility. This balance was reduced to $31,881 by
September 28, 2002, for a net reduction of $108,119. Cash and cash equivalents
were reduced by only $77,409 during the same period.

On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements that eliminated
the event of default created when the company failed to comply with a covenant
as of February 24, 2001. The amendment to the revolving credit facility extended
the terms of the facility from June 2002 to June 2004; the amount of the
commitment remained at $200,000. The commitment under the revolving credit
facility is permanently reduced by the amount of any prepayments allocated and
paid on the revolving credit facility. Since April 11, 2002, the revolving
credit facility commitment has been reduced to $187,221 at September 28, 2002
due to prepayments in 2002 from asset sales. There are, however, borrowing base
limitations on the commitment that fluctuate in part with the seasonality of the
business. The borrowing base formula limits advances to the sum of 85% of
eligible accounts receivable, 50% of eligible inventory, 60% of the appraised
value of eligible real estate and 50% of the appraised value of eligible
machinery and equipment; availability is further increased by seasonal
over-advances and decreased by reserves against availability. The revolving
credit facility has certain minimum unusable commitment amounts, which vary
based upon the projected working capital needs of TruServ. TruServ had available
and unused liquidity under the revolving credit facility of approximately
$100,000 at September 28, 2002. The interest rate on the revolving credit
facility was increased to the prime rate plus 3.25%, which was 8.00% as of
September 28, 2002. The unused commitment fee is 0.75% per annum.

The amendments to the various senior notes maintained 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 cash proceeds from certain asset sales
and 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 prepayments on the
senior notes are subject to make-whole provisions or a premium related to
accelerated debt repayment. For the thirteen and thirty-nine weeks ended
September 28, 2002, the prepayments to senior note holders were $14,627 and
$21,134, respectively, resulting in prepayment penalties or make-whole
liabilities of $4,269 and $6,014, respectively, which are recorded as additional
debt with an offsetting entry to a prepaid interest account. The prepaid
interest account will be amortized to interest expense over the remaining life
of the original notes. Under the terms of the amended senior note agreements, in
the event of early termination or a prepayment of a portion of the notes,
substantial make-whole liabilities are generally triggered. The nature of the
transaction giving rise to the prepayment, the length of time to maturity of the
note, the magnitude of the prepayment relative to the remaining debt outstanding
and prevailing market interest rates relative to the interest rates on the
senior notes are factors in determining the amount of potential make-whole
liabilities. Any decision to prepay a portion of these senior notes requires an
analysis of the estimated additional costs of prepayment against the benefit of
reduced interest expense.

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 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 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
total senior debt outstanding at September 28, 2002 was $278,391. TruServ
intends to attain this reduced level of senior debt outstanding by June 30, 2003
with cash from operating activities supplemented with sale/lease-backs or
mortgages on various regional distribution centers.

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

16

require the continuation of the stock redemption moratorium through the term of
the amended senior debt agreements. 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. TruServ is in compliance with all applicable covenants and
events of default as of September 28, 2002. As of October 7, 2002, TruServ
appointed its fifth outside director and one of these outside directors is the
independent "financial expert" on TruServ's audit committee in accordance with
Section 407 of the Sarbanes-Oxley Act of 2002.

In the fourth quarter of 2001, management announced their decision to close and
sell the Hagerstown facility. 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 Statement of
Financial Accounting Standard ("SFAS") No. 13, "Accounting for Leases." All
obligations under this lease arrangement are guaranteed by the company. As of
September 28, 2002, the lease had a remaining balance of $38,504, which is due
at the end of the lease term, April 30, 2003. The company believes that it has
adequate financial resources available, including the anticipated proceeds from
the sale of the facility, to satisfy this obligation at the end of the lease
term.

TruServ's costs of providing pension benefits are dependent upon the rates of
return on pension plan assets. The market value of plan assets has been affected
by sharp declines in the equity market since the third quarter of 2000.
TruServ's defined benefit pension plan currently meets the minimum funding
requirements of the Employment Retirement Income Security Act of 1974; however,
TruServ currently expects to make a discretionary plan contribution in the
fourth quarter of 2002 and in 2003. These contributions are expected to be
funded primarily by internally generated cash flows from operations or through
external sources.

TruServ believes that its cash from operations and existing credit facilities
will provide sufficient liquidity in fiscal year 2002 and through fiscal year
2003 to meet its working capital needs, planned capital expenditures and debt
obligations that are due to be repaid, including senior note principal payments
of $26,619 due November 13, 2002.

CRITICAL ACCOUNTING POLICIES

FRR No. 60, issued by the SEC in 2001, recommends that all registrants include a
discussion of "critical" accounting policies or methods used in the preparation
of financial statements in their Annual Report on Form 10-K and update such
information in their Form 10-Q for any significant changes to their "critical"
accounting policies or methods. A significant change in accounting policy
occurred with the adoption of SFAS No. 142 and the accounting for Goodwill, net.
The impairment analysis completed for Goodwill showed that Goodwill was not
impaired. The analysis was completed using discounted cash flows. The discount
rate used was a blended senior debt borrowing rate of 13.3%, which consists of
not only the rate of interest paid on all senior debt but also the effect of
initial fees, quarterly fees, commitment fees and annual fees paid on the senior
debt. The allocation of debt to the Paint segment assumed a debt capacity of 2.5
times EBITDA with the remainder of the debt carried by the Hardware segment.
Earnings before Interest and Taxes ("EBIT") are estimated to attain plan for
Fiscal Year 2002 and 2003 and for future years are expected to decline by 3.0%.
While TruServ believes that these are reasonable assumptions, a decline in EBIT
below plan due to lower revenue or higher expenses from plan could result in the
recognition of an impairment loss on Goodwill. As of September 28, 2002, TruServ
has been performing better than the plan used in this analysis.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(DOLLARS IN THOUSANDS)

TruServ's operations are subject to certain market risks, primarily interest
rate risk and credit risk. Interest rate risk pertains to the company's variable
rate debt, which totaled $31,881 at September 28, 2002. A 50 basis point
movement in the interest rates would

17

result in an approximate $159 annualized increase or decrease in interest
expense and cash flows. For the most part, interest rate risk is managed through
a combination of variable and fixed-rate debt instruments with varying
maturities. Credit risk pertains mostly 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 with 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"). All
related party transactions, which are primarily product and service sales to
shareholders of TruServ, are conducted by TruServ at arm's length.

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation within 90 days prior to the filing date of this report,
TruServ's Chief Executive Officer and Chief Financial Officer concluded that
TruServ's disclosure controls and procedures are effective. There have been no
significant changes in TruServ's internal controls or in other factors that
could significantly affect TruServ's internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)

In June 2000, various former members of TruServ filed an action against TruServ
in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois)
(the "Kennedy action"). The plaintiffs in the Kennedy action each allege that,
based upon representations made to them by TruServ and its predecessors that the
Coast to Coast brand name would be maintained, they voted for the merger of
ServiStar/Coast to Coast and Cotter & Company. The plaintiffs allege that after
the merger the Coast to Coast brand name was eliminated and that each plaintiff
thereafter terminated or had its membership in TruServ terminated. The
plaintiffs further claim that TruServ breached its obligations by failing to
redeem their stock and by creating loss allocation accounts for the plaintiffs.
The plaintiffs have each asserted claims for fraud/misrepresentation, negligent
misrepresentation, claims under the state securities laws applicable to each
plaintiff, claims under the state franchise/dealership laws applicable to each
plaintiff, breach of fiduciary duty, unjust enrichment, estoppel and recoupment.
Similar claims were filed against TruServ as counterclaims to various complaints
filed by TruServ in McHenry County to recover accounts receivable balances from
other former members. Those claims were consolidated with the Kennedy action. In
March 2001, the Kennedy complaint was amended to add additional plaintiffs. Also
in March 2001, another action was filed against TruServ on behalf of additional
former members, in the same court, by the same law firm (the "A-Z action"). The
A-Z complaint alleges substantially similar claims as those in the Kennedy
action, with the principal difference being that the claims relate to the
elimination of the ServiStar brand name. The Kennedy and A-Z actions have been
consolidated for purposes of discovery, which is ongoing. The complaints seek
damages in excess of over $50. The total amount of damages being sought in
these consolidated cases are not further specified, and although discovery is
ongoing, the extent of damages being claimed has not been determined. In July,
2002, the plaintiffs in these consolidated actions amended their complaints to
name as defendants two former officers of TruServ, thereby triggering potential
indemnification obligations on the part of TruServ.

In August 2000, an action was brought in Delaware Chancery Court (New Castle
County) by a former TruServ member ("Hudson City Properties") against certain
present and former directors and officers of TruServ and against TruServ. The
complaint is brought derivatively on behalf of TruServ and alleges that the
individual defendants breached their fiduciary duties in connection with the
accounting adjustments made by TruServ in the fourth quarter of 1999. Hudson
City Properties also seeks to proceed on a class-action basis against TruServ on
behalf of all those affected by the moratorium on stock redemption and the
creation of the loss allocation accounts. Hudson City Properties alleges that
TruServ breached, and the named directors caused TruServ to breach, agreements
with members by suspending payment of the members' 1999 annual patronage
dividend, by declaring the moratorium on the redemption of members' TruServ
stock, and by imposing minimum annual purchase requirements upon members. The
plaintiff seeks monetary and non-monetary relief in connection with the various
claims asserted in the complaint. The lawsuit, despite its vintage, is in an
early stage and the extent of the damages claimed has not yet been determined.
The parties have entered into settlement negotiations, but a final settlement
has not been reached at this time and no assurances can be given that one will
be entered into.

18

In May 2000, TruServ filed a complaint in the Circuit Court of McHenry County,
Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an accounts
receivable balance in excess of $400. Bess filed a counterclaim, seeking a
setoff against its accounts receivable balance for the par redemption value of
Bess' shares of TruServ Stock. Bess contested the validity of a March 17, 2000
corporate resolution declaring a moratorium on the redemption of all TruServ
capital stock, as well as an allocation of Bess' proportionate share of the loss
which TruServ declared for its fiscal year 1999. On June 21, 2002, the court
issued an oral ruling granting summary judgment to TruServ on its accounts
receivable claim, and granting summary judgment to Bess on its counterclaim. The
judgment was entered on August 6, 2002. TruServ believes that the court's ruling
on Bess' counterclaim is not supported by either the facts or Delaware corporate
law and TruServ has asked the court to reconsider and reverse its ruling and the
court has taken the issue of reconsideration under advisement.

TruServ intends to vigorously defend all of these cases.

In June 2002, TruServ reached a confidential settlement with Paul Pentz, a
former president of TruServ, which TruServ found to be satisfactory. Mr. Pentz,
in October 1999, had filed a claim in the Circuit Court of the 20th Judicial
Circuit (Collier County, Florida) against TruServ alleging he was due bonus and
retirement compensation payments in addition to amounts already paid to him. The
case was removed to Federal Court and transferred to the Northern District of
Illinois. TruServ 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.

On May 24, 2002, TruServ filed a Form 8-K in which it disclosed that the Midwest
Regional Office of the Securities and Exchange Commission (the "Commission")
intended to recommend to the Commission an enforcement proceeding against
TruServ seeking a Cease and Desist Order relating to the 1999 loss and to the
then existing deficiencies in TruServ's internal controls. TruServ has made an
Offer of Settlement to the Commission in connection with the Commission's
investigation of these matters. TruServ has made such Offer of Settlement
without admitting or denying the findings in any Commission Order. If the
Commission accepts TruServ's Offer of Settlement, TruServ will be subject to a
Cease and Desist Order requiring it to maintain books and records in conformance
with the requirements of the Securities Exchange Act of 1934 and to undertake
certain other ancillary procedures.

TruServ is pursuing claims against its former outside auditors, Ernst & Young
LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
business practices and fraud. TruServ contends that E&Y failed to properly
discharge its duties to TruServ and failed to identify, in a timely manner, and
indeed concealed, certain material weaknesses in TruServ's internal financial
and operational controls. As a result, TruServ was forced to make an
unanticipated accounting adjustment in the fourth quarter of 1999, in the total
amount of $121,333 (the "Fourth Quarter Charge"). As a consequence, TruServ
reported a net loss of $131,143 for the fiscal year ended December 31, 1999. It
is TruServ's belief that had E&Y properly discharged its duties, the scope and
breadth of the Fourth Quarter Charge, as well as the accounting and operational
control deficiencies that necessitated the charge, would have been substantially
lessened, if not eliminated in their entirety. As a result of E&Y's failures,
TruServ has suffered significant financial damages. TruServ filed its claim with
the American Arbitration Association on July 31, 2002. The arbitration, which is
subject to certain confidentiality requirements, is currently pending.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(DOLLARS IN THOUSANDS)

In March 2000, the board of directors of TruServ declared a moratorium on
redemption 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

19

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 prohibited redemptions when TruServ, among other things, did
not attain certain profit margins.

TruServ's amended debt agreements preclude the lifting of the stock moratorium
during the term of the agreement, which expires June 30, 2004, except for
certain hardship cases, not to exceed $2,000 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 September 28, 2002, the amount of Class A common stock and Class B common
stock presented for redemption, but deferred due to the moratorium is
approximately $36,937 after the offset against the Loss allocation account. This
amount does not include an offset of approximately $7,269 of Accounts receivable
owed by terminated members to the co-op. Historically, the company has offset
such amounts due by members to the co-op against amounts the co-op pays the
members on redemption of their stock. The amount of stock presented for
redemption, but deferred due to the moratorium, includes approximately $14,765
related to the Class A common stock (which was historically paid out at the time
of redemption) and $44,591 related to Class B common stock (which was
historically paid out in five equal annual installments), offset by the amount
of the Loss allocation account related to the Class B common stock of $22,419.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 99.1 Section 906 Certification (Chief Executive Officer)

Exhibit 99.2 Section 906 Certification (Chief Financial Officer)

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed on August 1, 2002
regarding second quarter earnings.

20

A Current Report on Form 8-K was filed on August 16, 2002
containing Statements of Oath of TruServ's principal executive
officers.

A Current Report on Form 8-K was filed on August 16, 2002
regarding the appointment of TruServ's fourth outside director.

A Current Report on Form 8-K was filed on August 20, 2002
regarding July earnings.

A Current Report on Form 8-K was filed on September 12, 2002
regarding August earnings.

21

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

TRUSERV CORPORATION

Date: November 12, 2002 By /s/ DAVID A. SHADDUCK
------------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer

22

Certification

I, Pamela Forbes Lieberman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Truserv Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Truserv as of, and for, the periods presented in this quarterly report;

4. Truserv's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Truserv and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to Truserv, including its consolidated
subsidiaries, is made known to us, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of Truserv's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. Truserv's other certifying officer and I have disclosed, based on our most
recent evaluation, to Truserv's auditors and the audit committee of Truserv's
board of directors:

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Truserv's ability to record, process,
summarize and report financial data and have identified for Truserv's auditors
any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Truserv's internal controls; and

6. Truserv's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

TRUSERV CORPORATION
Date: November 12, 2002
By /s/PAMELA FORBES LIEBERMAN
----------------------------
Pamela Forbes Lieberman

Chief Executive Officer

Certification

I, David A. Shadduck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Truserv Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Truserv as of, and for, the periods presented in this quarterly report;

4. Truserv's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Truserv and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to Truserv, including its consolidated
subsidiaries, is made known to us, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of Truserv's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. Truserv's other certifying officer and I have disclosed, based on our most
recent evaluation, to Truserv's auditors and the audit committee of Truserv's
board of directors:

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Truserv's ability to record, process,
summarize and report financial data and have identified for Truserv's auditors
any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Truserv's internal controls; and

6. Truserv's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

TRUSERV CORPORATION
Date: November 12, 2002
/s/DAVID A. SHADDUCK
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David A. Shadduck

Senior Vice President and
Chief Financial Officer