TRUE VALUE CO - 10-K Annual Report

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UNITED STATES

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

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR

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

FOR THE TRANSITION PERIOD FROM TO

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COMMISSION FILE NUMBER 2-20910

TRUE VALUE COMPANY
(PRIOR TO DECEMBER 31, 2004, KNOWN AS TRUSERV CORPORATION)
(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

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TABLE OF CONTENTS

PART I

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

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

THE COMPANY

True Value Company ("True Value") was organized as Cotter & Company, a
Delaware corporation, in 1953. Upon its organization, it succeeded to the
business of Cotter & Company, an Illinois corporation organized in 1948. On July
1, 1997, Cotter & Company merged with ServiStar Coast to Coast Corporation
("SCC"). SCC was a hardware wholesaler incorporated in 1935, under the name
American Hardware Supply Company, with a strong presence in retail lumber and
building materials. Following the merger, Cotter & Company was renamed TruServ
Corporation. Effective December 31, 2004, TruServ Corporation changed its name
to True Value Company. True Value's main executive offices are located at 8600
West Bryn Mawr Avenue, Chicago, Illinois 60631-3505. Its main telephone number
is (773) 695-5000. Its web page address is www.truevaluecompany.com.

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

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

On December 31, 2002, True Value completed a sale leaseback transaction of
seven of its distribution centers. The sale generated net proceeds of $121,438,
which were used to pay down the revolving credit facility, senior notes and
synthetic lease obligation (the "Senior Debt"), pursuant to an intercreditor
agreement between all parties of the Senior Debt. The facilities are being
leased back by True Value under 20-year lease agreements that contain extension
periods on the lease at True Value's option. See "Properties -- Sale Leaseback
Transaction."

GENERAL DESCRIPTION OF THE BUSINESS

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

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

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functioning as a low cost distributor of goods, maximizing its volume purchasing
abilities primarily through vendor rebates and discount programs, for the
benefit of its members. These benefits are passed along to its members in the
form of lower prices and/or patronage dividends. True Value also provides to its
members value-added services such as marketing, advertising, merchandising, and
store location and design services.

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

As of December 31, 2004, True Value serves approximately 6,000 retail and
industrial distribution outlets for its members throughout the United States and
in 59 other countries. Primary concentrations of members exist in New York
(approximately 9%), Pennsylvania (approximately 7%), California (approximately
6%), Texas (approximately 5%), Illinois, Michigan, Massachusetts, Minnesota and
Wisconsin (approximately 4% each) and New Jersey, Ohio, and Washington
(approximately 3% each).

SALES AND SUPPLIERS

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

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

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

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

- to be included in future promotions,

- seasonal in nature,

- not normally held in inventory, or

- not conducive to direct shipment.

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

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

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

OTHER SERVICES

True Value annually sponsors two principal "markets," a separate rental
market and an outdoor power equipment show all funded primarily by vendors
through booth fees, at which it features the products available for purchase by
members, including new merchandise and seasonal items. In addition, the markets
permit members and prospective members to keep better informed as to industry
trends, attend continuing education classes and network with other members. In
the year 2005, one of the principal markets will be held in Atlanta, Georgia in
March and the other principal market will be held in Denver, Colorado in
September. As the markets generate income and stimulate member purchases, the
timing of markets impacts the timing of sales and income recognition for True
Value. All members are invited to the markets and attending members generally
place substantial orders for delivery of merchandise during the period between
markets.

BACKLOG

As of January 29, 2005 and January 31, 2004, respectively, True Value had a
backlog of firm orders (including relay orders) of approximately $34,383 and
$18,149. True Value's backlog at any given time is made up of two principal
components:

- normal re-supply orders, and

- market orders for future delivery.

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

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

COMPETITION

The retail hardware industry is characterized by intense competition.
Independent retail hardware businesses, including those served by True Value,
face intense competition from chain stores, discount stores, home centers and
warehouse operations such as Wal-Mart, Home Depot, Menards, Sears and Lowe's.
Increased operating expenses for the retail stores, including increased costs
due to longer store hours and higher retail occupancy costs, have cut into
operating margins for members and brought pressure on True Value to achieve
lower merchandise costs for its members. In 2004, under new leadership in the
merchandising function, True Value initiated a multi-year process to perform
comprehensive vendor line reviews. The focus of these reviews is to improve
product assortments and enhance wholesale and retail pricing. In 2004, 35
categories were reviewed with most of the new or modified assortments planned to
roll out in the first half of 2005. In 2005, True Value expects to complete
reviews of an additional 50 categories. These reviews will continue to fund
wholesale price reductions to the membership. In addition, True Value is
expanding its import program to source more products from lower cost foreign
manufacturers in order to enhance wholesale and retail pricing. Also, True Value
works with its members to drive profitability through operational improvement
programs such as AIM (advanced inventory management), which focuses on
assortments of fast turning products, as well as retail programs that focus on
areas such as pricing, merchandising, store design and signage.

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

TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS

True Value's trademarks, service marks and collective membership marks are
of prime importance to True Value. Many of the marks are highly recognized and
utilized in extensive advertising and marketing campaigns, and True Value
vigorously defends its marks. As of December 31, 2004, True Value's members have
approximately 6,000 retail and industrial distribution outlets that operate
predominately as hardware retail stores, industrial distributors, garden centers
and rental stores throughout the United States and in 59 countries, most of
which sell merchandise and services under the marks.

The marks include the True Value(R) marks, the ServiStar(R) mark, the Coast
to Coast(R) mark, the Induserve Supply(R) mark, the Party Central(R) mark, the
Grand Rental Station(R) mark, the Taylor Rental(R) mark, the Home & Garden
Showplace(R) mark and the Commercial Sales(R) mark. The marks also include E-Z
Kare(R), Weatherall(R), and Easy Color(R) for paint. All of the marks are
currently used in commerce and True Value intends to use the marks in commerce
in the future. Each of the marks is renewable at True Value's

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option and True Value intends to renew them upon expiration. Members have
continued to conduct their businesses under the same retail banners as before
the merger of Cotter and SCC; however, beginning in year 2000, many members with
the retail banners of Coast to Coast(R) and ServiStar(R) started to conduct
their business under the single retail banner of True Value(R). True Value's
marks also include Help is Just Around the Corner(R), Christmas is Just Around
the Corner(R) and Summer is Just Around the Corner(R).

EMPLOYEES

As of December 31, 2004, True Value employed approximately 2,800 persons in
the United States on a full-time basis. Due to the widespread geographical
distribution of True Value's operations, employee relations are governed by the
practices prevailing in the particular area where the employees are located and
are generally implemented locally. Approximately 36% of True Value's 2,100
hourly-wage employees are covered by collective bargaining agreements that are
generally effective for periods of three or four years. In general, True Value
considers its relationship with its employees to be good.

RETAIL MEMBER AGREEMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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CAPITAL STOCK

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

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

Participation in the earnings or losses of a cooperative is based on member
patronage purchasing and reflected by the payment of patronage dividends. In
general, these patronage dividends are based on a member's purchasing volume and
margins applicable to merchandise purchased by the member, less any expenses
related to such business and less certain cooperative reserves. Patronage
dividends are determined on a yearly basis for purchasing activity conducted for
that year and are allocated no later than September 15th of the following year.
True Value pays patronage dividends in a combination of cash, Class B common
stock, and occasionally promissory (subordinated) notes. True Value paid
patronage dividends for the past two years and paid a dividend for 2004 results
in 2005. The 2004 dividend was issued in a combination of cash, Class B common
stock and promissory (subordinated) notes. The Class B common stock earned from
patronage dividends was used to reduce the loss allocation account (for members
who have such an account). See "Loss Allocation to Members and Accumulated
Deficit" below.

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

CAPITAL STOCK REDEMPTION

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

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

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

DISTRIBUTION OF PATRONAGE DIVIDENDS

True Value operates on a cooperative basis with respect to business
transacted with or for members. All members are entitled to receive patronage
dividend distributions from True Value, calculated on a pro-rata basis of gross
margins on merchandise purchased by each member. In accordance with True Value's
By-Laws and Retail Member Agreement, the annual patronage dividend, as
authorized by the board of directors, is paid to members out of patronage source
income, less certain deductions, calculated as provided in the following
sentence. The total patronage dividend paid to members is based on pre-tax net
margins calculated in accordance with accounting principles generally accepted
in the United States of America after reducing or increasing net margins for
non-member income/(losses), reasonable reserves and deferred patronage
amortization. Commencing with the 2004 patronage dividend that was paid in 2005,
the board of directors has authorized retaining 5% of net patronage source
income, as a reasonable reserve, to reduce the accumulated deficit account. The
total dividend is allocated to each purchase category, with the main purchase
categories being warehouse, relay, direct shipment and paint. Once the patronage
dividend is allocated to the purchase categories, it is distributed to members
based on the relative gross margin participation of the member for each type of
purchase category.

Patronage dividends have historically been paid to members within 90 days
after the close of True Value's fiscal year; however, the Code permits
distribution of patronage dividends as late as the 15th day of the ninth month
after the close of True Value's fiscal year. True Value distributed the
patronage dividend for 2004 in February 2005.

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

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

- Promissory (subordinated) notes, or

- Other property.

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

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

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

LOSS ALLOCATION TO MEMBERS AND ACCUMULATED DEFICIT

During the third quarter of 2000, True Value management developed and the
board of directors approved a plan to equitably allocate to members the loss
incurred in 1999. This loss was previously recorded as a reduction of retained
earnings. True Value has distributed the 1999 loss allocation among its members
by establishing a loss allocation account as a contra-equity account in the
Consolidated Balance Sheet with the offsetting credit recorded to the
accumulated deficit account. The loss allocation account reflects the sum of
each member's proportionate share of the 1999 loss, after being reduced by
certain amounts that were not allocated to members. The allocation was generally
based on a member's proportionate Class B stock investment relative to the total
Class B stock investments of all the members, and therefore a member could not
be allocated a loss in excess of its equity investment. The loss allocation
account will be satisfied, on a member-by-member basis, by applying the portion
of future non-cash patronage dividends as a reduction to the loss allocation
account until fully satisfied. The loss allocation amount may also be satisfied,
on a member-by-member basis, by applying the par value of maturing member notes
and related interest payments as a reduction to the loss allocation account
until such account is fully satisfied. However, in the event a member should
terminate as a stockholder of True Value, any unsatisfied portion of that
member's loss allocation account will be satisfied by reducing the redemption
amount paid for the member's stock investment in True Value.

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

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

8

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

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

PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE

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

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

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

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

True Value has historically paid approximately 30% of the patronage
dividend to its members in cash (excluding nonqualified written notices of
allocation). However, True Value is only obligated to distribute 20% of the
annual patronage dividend (excluding nonqualified written notices of allocation)
in cash, and it may distribute this lesser percentage in future years.

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

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

9

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

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

SET OFF RIGHTS OF TRUE VALUE

True Value's Certificate of Incorporation and By-Laws specifically provide
that True Value, but not the member, may set off its obligation to make any
payment to a member for such member's stock, notes, interest and declared and
unpaid dividends against any obligation owed by the member to True Value. True
Value exercised its set off rights in 2004 when, upon rescinding its moratorium
on stock redemptions, it reduced the amounts paid to former members for their
equity investments at the time of redemption by:

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

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

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

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

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

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

10

ITEM 2. PROPERTIES.
($ IN THOUSANDS)

WAREHOUSING AND OFFICE FACILITIES

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

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

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

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

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

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

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

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

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

SALE LEASEBACK TRANSACTION

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

11

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

OTHER PROPERTY SALES

The Brookings, South Dakota regional distribution center was closed and
sold in 2002. True Value had been exiting and consolidating distribution
facilities since the merger with SCC in 1997 to both realize the benefit of
reduced operating costs of the merged cooperatives and to reflect a level of
contraction of its operations.

True Value continues to evaluate opportunities to capitalize on the
increase in market value over the historical book value of its owned real estate
assets through additional sale leaseback transactions, mortgages or other
financing methods.

MANUFACTURING FACILITIES

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

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

(1) Assigned as collateral under the Bank Facility

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

OTHER LEASES

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

ITEM 3. LEGAL PROCEEDINGS.
($ IN THOUSANDS)

ACTIVE LEGAL MATTERS:

FLEGLES ACTION

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

12

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

CLAIMS AGAINST ERNST & YOUNG LLP

True Value is pursuing claims against its former outside auditors, Ernst &
Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
business practices and fraud. True Value contends that E&Y failed to properly
discharge its duties to True Value and failed to identify, in a timely manner,
and indeed concealed, certain material weaknesses in True Value's internal
financial and operational controls. As a result, True Value was forced to make
an unanticipated accounting adjustment in the fourth quarter of 1999 in the
total amount of $121,333 (the "Fourth Quarter Charge"). As a result, True Value
reported a net loss of $130,803 for the fiscal year ended December 31, 1999. It
is True Value's belief that had E&Y properly discharged its duties, the scope
and breadth of the Fourth Quarter Charge, as well as the accounting and
operational control deficiencies that necessitated the charge, would have been
substantially lessened. As a result of E&Y's failures, True Value has suffered
significant financial damages. The factual allegations that form the basis for
True Value's claim against E&Y include, in part, the issues identified in the
Securities and Exchange Commission (the "Commission") cease and desist order
described below. True Value began discussion of its claims with E&Y early in the
fall of 2001. Pursuant to the dispute resolution procedures required by True
Value's engagement letter with E&Y, True Value and E&Y attempted to mediate this
dispute during the first six months of 2002. When those attempts proved
unsuccessful and again pursuant to the dispute resolution procedures, True Value
filed its claim with the American Arbitration Association on July 31, 2002. The
arbitration is subject to certain confidentiality requirements. Another effort
at non-binding mediation between the parties began in December 2004 and was
unsuccessful. Hearings before the arbitration panel occurred in early 2005 and a
decision is still pending. A portion of the recoveries under this matter, if
any, may be subrogated to the rights of True Value's insurer to the extent that
it has made payments to or on behalf of True Value associated with the 1999
loss.

COMPLETED LEGAL MATTERS:

KENNEDY ACTION

In June 2000, various former members of True Value filed an action against
True Value in the Circuit Court of the 19th Judicial Circuit (McHenry County,
Illinois) (the "Kennedy action"). The plaintiffs in the Kennedy action each
alleged that, based upon representations made to them by True Value and its
predecessors that the Coast to Coast brand name would be maintained, they voted
for the merger of ServiStar/Coast to Coast and Cotter & Company. The plaintiffs
alleged that after the merger, the Coast to Coast brand name was eliminated and
that each plaintiff thereafter terminated or had its membership in True Value
terminated. The plaintiffs further claimed that True Value breached its
obligations by failing to redeem their stock and by creating loss allocation
accounts for the plaintiffs. The plaintiffs each asserted claims for
fraud/misrepresentation, negligent misrepresentation, claims under the state
securities laws applicable to each plaintiff, claims under the state
franchise/dealership laws applicable to each plaintiff, breach of fiduciary
duty, unjust enrichment, estoppel and recoupment. Similar claims were filed
against True Value as counterclaims to various complaints filed by True Value in
McHenry County to recover accounts receivable balances from other former
members. Those claims were consolidated with the Kennedy action. In March 2001,
the Kennedy complaint was amended to add additional plaintiffs. Also in March
2001, another action was filed against True Value on behalf of additional former
members, in the same court, by the same law firm (the "A-Z action"). The
complaint in the A-Z action alleged substantially similar claims as those in the
Kennedy action, with the principal difference being that the claims related to
the elimination of the ServiStar brand name. The Kennedy and A-Z actions were
consolidated for purposes of discovery. In July 2002, the plaintiffs in these
consolidated actions amended their complaints to name as defendants two former
officers of True Value. In December 2004, True Value entered into a settlement
on confidential terms with the plaintiffs under

13

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

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

TRUE VALUE ORDER

On March 4, 2003, the Commission entered an Order Instituting
Cease-and-Desist Proceedings, Making Findings and Imposing Cease-and-Desist
Order Pursuant to Section 21C of the Securities and Exchange Act of 1934 as to
True Value Company, SEC File No. 3-11050 (the "Order"). True Value consented to
the entry of the Order without admitting or denying the findings in the Order.

The Commission entered the Order following an investigation by the staff of
the Commission of the circumstances that led to significant financial
adjustments resulting in the 1999 loss of $130,803. The Order found that, from
approximately July 1997 through the end of 1999, True Value's accounting systems
and internal controls related to inventory management were inadequate. The Order
also found that these deficiencies caused True Value to understate expenses,
which resulted in overstatement of net income, during 1998 and 1999. According
to the Order, True Value filed erroneous reports on Form 10-Q for the first,
second and third quarters of 1998 and 1999 and an erroneous report on Form 10-K
for 1998. In 1999, True Value reported a loss, caused by weaknesses in the
accounting practices and internal controls at True Value, of approximately
$130,803.

Pursuant to the Order, True Value has agreed to continue to maintain the
procedures that it has adopted since the Spring of 2000 and otherwise to comply
with the accounting, record keeping and internal control provisions of the
Securities and Exchange Act of 1934 (the "Exchange Act"). In addition, True
Value will continue to employ as a member of its management team, during the
fiscal years ending 2002, 2003 and 2004, a Director of Internal Audit who will
be responsible for executing True Value's internal audit plan and will continue
to engage a public accounting firm to assist the Director of Internal Audit in
performing internal audit procedures.

Also pursuant to the Order, within 90 days after the close of each fiscal
year ending 2002, 2003 and 2004, the Director of Internal Audit prepared and
delivered to True Value's board audit committee, with copies to the Commission,
True Value's auditors and the public accounting firm assisting the Director of
Internal Audit, a report describing the scope of the audit plan during the
preceding year, confirmation that the audit plan was carried out, an overview of
significant control weaknesses identified that require improvement and a review
of the steps taken to improve the system of internal controls. The report for
year end 2004 was filed with the Commission on March 3, 2005. True Value
believes it has no further reporting obligations under the Order.

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

None.

PART II

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

There is no existing market for the common stock of True Value and there is
no expectation that any market will develop. True Value's Class A common stock
is owned exclusively by retailers of hardware and related products, garden
center retailers and industrial distributors as well as rental retailers, each
of whom is a member or former member of True Value and purchased at least 60
shares of True Value's Class A common stock (the only class of voting stock)
upon becoming a member. True Value is organized as a Delaware stock corporation
and operates as a member-owned wholesaler cooperative corporation. The shares of
True Value's
14

Class B common stock now outstanding were issued to members in partial payment
of the annual patronage dividend that accrued as a result of patronage business
transacted by such members with True Value. In accordance with True Value's
By-Laws, the annual patronage dividend is paid to members out of the gross
margins from operations and other patronage source income, after deduction for
expenses, reserves and other provisions authorized by the board of directors.

The number of holders of record as of January 29, 2005 of each class of
stock of True Value was as follows:

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

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

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

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

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

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

15

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

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

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

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

(3) In 2004, True Value lifted the moratorium on stock redemptions and redeemed
shares for former shareholders who completed required stock redemption
procedures. Accordingly, no deferred stock redemptions remain as a result of
the moratorium. In 2003, Class A common stock and Class B common stock
excludes approximately $18,841 and $82,718, respectively, of amounts not
redeemed due to the stock moratorium. Class B common stock also excludes
$33,868 of nonqualified Class B common stock. These amounts are included in
Deferred stock redemptions and Redeemable nonqualified Class B common stock
and are offset by Loss allocation of $27,941, Accumulated deficit of $9,933
and an offset of accounts receivable of $6,821 pursuant to True Value's
agreements with its members. In 2002, Class A common stock and Class B
common stock include approximately $15,475 and $47,033, respectively, of
amounts not redeemed due to the stock moratorium. In 2001, Class A common
stock and Class B common stock include approximately $11,699 and $34,712,
respectively, of amounts not redeemed due to the stock moratorium. See Note
1, "Description of Business and Accounting Policies -- Capital Stock
Redemption," to the Consolidated Financial Statements beginning at page F-1.

16

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

OVERVIEW

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

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

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

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

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

17

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

STORE COUNT:

(YEAR END STORE COUNT GRAPH)
YEAR END STORE COUNT

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

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

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

18

NET REVENUE:
(NET REVENUE GRAPH)

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

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

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

19

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

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

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

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

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

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

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

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

20

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

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

RESULTS OF OPERATIONS FOR 2004 COMPARED TO 2003

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

NET REVENUE AND GROSS MARGIN

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

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

21

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

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

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

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

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

22

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

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

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

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

RESULTS OF OPERATIONS FOR 2003 COMPARED TO 2002

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

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

23

REVENUE AND GROSS MARGIN

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

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

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

24

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

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

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

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

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

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

25

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

26

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

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

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

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

The excess cash generated from operating and investing activities in 2004,
2003 and 2002 was used primarily for financing activities, which used cash of
$58,529, $45,639 and $329,870 for 2004, 2003 and 2002, respectively. In
particular, True Value applied the cash to reducing its long-term and short-term
financing in all three years. In addition, in 2004 True Value used cash for
payment of the patronage dividend and the redemption of Class A and Class B
common stock related to lifting the moratorium. See "Business -- Capital Stock
Redemptions." In 2003, cash was also used for payment of the patronage dividend
and in 2002 cash was used to pay down drafts payable.

Cash and cash equivalents at December 31, 2004, 2003 and 2002 were $7,222,
$9,234 and $9,001, respectively. As of December 31, 2004 and 2003, the
borrowings under the Bank Facility were $88,300 and $131,600, respectively.

True Value's net working capital at December 31, 2004, 2003 and 2002 was
$87,047, $50,602 and $84,051, respectively. The current ratio at December 31,
2004, 2003 and 2002 was 1.22, 1.11 and 1.21, respectively. The change in both
the working capital and current ratio between 2004, 2003 and 2002 was primarily
due to the classification of the Bank Facility borrowings between long-term debt
and current maturities. The classification is based on True Value's projection
of seasonal working capital needs. For each year presented, the amount of the
Bank Facility classified as long-term debt represents the expected lowest level
of borrowings during the next twelve months. At December 31, 2004, the Bank
Facility borrowings of $88,300 were estimated to be the lowest level of
borrowings for the next twelve months; accordingly, the entire balance has been
classified as long-term. At December 31, 2003, $71,600 of the $131,600 in the
Bank Facility borrowings was estimated to be paid down during the following
twelve months; accordingly, $60,000 was classified as long-term. The reduction
in both the working capital and the current ratio between 2003 and 2002

27

was primarily due to True Value refinancing its Senior Debt with the Bank
Facility in August 2003. The Bank Facility moved a significant portion of True
Value's debt from a long-term liability to a current liability.

True Value's management 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 due to be repaid in
2005. The Bank Facility should provide sufficient liquidity for future needs
until it expires in 2007.

CASH REQUIREMENTS

Below is the current schedule of the expected cash outflows necessary to
meet financial commitments for 2005 and thereafter:

- -------------------------
(1) Borrowings under the Bank Facility fluctuate for the seasonal needs of the
business. There are no required payments until the maturity of the Bank
Facility in August 2007. Interest on the Bank Facility is variable at either
the London Interbank Offering Rate ("LIBOR") or prime plus, in either case,
an additional amount of interest determined based on a performance-based
pricing grid.

(2) Effective July 6, 2004, the board of directors rescinded True Value's
moratorium on stock redemptions that had been effective since March 2000. In
accordance with True Value's By-Laws, since rescinding the moratorium, True
Value satisfied $7,779 of stock redemption liability in cash and $26,351 by
issuing subordinated installment notes. On December 31, 2004, the first
payment of principal of $5,241 on subordinated installment notes created
since the stock redemption moratorium was rescinded was paid. As of December
31, 2004, True Value had shareholders that discontinued their purchasing
activities with True Value and requested that their stock be redeemed but
who had not completed the redemption procedures. True Value classified this
$4,886 of stock redemption liability as $1,718 in Current maturities of
long-term debt, notes and capital lease obligations, $2,476 in Long-term
debt including notes and capital lease obligations, less current maturities,
and $692 in Other long-term liabilities representing True Value's redemption
obligations to former members that management anticipates may not complete
the redemption procedures for over a year.

(3) The amounts reflect payments as scheduled; however, historically a minimum
of 50% of the promissory (subordinated) notes have been renewed, extending
the maturity for an additional three years. In 2004 and 2003, this renewal
rate was approximately 70% and 85%, respectively.

(4) Purchase obligations represent commitments under open purchase orders, are
typically short-term and fluctuate with the seasonality of True Value's
business. Also, purchase obligations are part of a cycle where they are
continuously converted into inventory and new purchase obligations are
created.

28

DEBT DISCUSSION

True Value's total debt was $170,301 and $192,282 at December 31, 2004 and
2003, respectively. In 2004, True Value achieved this reduced level of debt
primarily with cash generated from operations, after giving effect to increased
debt resulting from the moratorium lift.

True Value's debt consisted of the following at December 31:

The change in True Value's debt balances was as follows for years ending
December 31:

True Value had outstanding borrowings under the Bank Facility of $88,300
and $131,600 at December 31, 2004 and 2003, respectively. The weighted average
interest rate on these borrowings was 4.7% and 3.6% at December 31, 2004 and
2003, respectively. True Value's weighted average interest rate on its total
debt was 5.7% and 5.3% at December 31, 2004 and 2003, respectively.

BANK FACILITY

On August 29, 2003, True Value entered into a new four-year $275,000 Bank
Facility. The Bank Facility was used to refinance the then existing third party
senior debt at a substantially lower interest rate. Availability under the Bank
Facility is limited to the lesser of $275,000 or the collateral value of
eligible assets (the "borrowing base"), less outstanding borrowings, letters of
credit and reserves. The reserve amounts, if any, are set at the discretion of
the lenders. True Value's availability at December 31, 2004 was $132,796.

The interest rate charged for Bank Facility borrowings is variable at
either LIBOR or prime, plus in either case, an additional amount of interest
determined based on a performance-based pricing grid. True Value has the option
to select LIBOR or prime as the base rate. The performance grid is based upon
True Value's fixed charge coverage ratio, measured quarterly beginning in March
2004. Beginning with the first measurement period in 2004, True Value performed
at a level that resulted in a 0.25% reduction in pricing. As of December 31,
2004 and 2003, this interest rate was 4.7% and 3.6%, respectively. The unused
commitment fee is 0.375%. Letters of credit issued under the Bank Facility have
a fee based on the performance pricing grid and this fee was 2.0% and 2.25% at
December 31, 2004 and 2003, respectively.

The Bank Facility has no financial covenants unless daily average excess
availability for the last 60 days of each quarter drops below $35,000. If the
average is below $35,000, True Value is subject to a fixed charge coverage ratio
of 1.1 to 1. As of December 31, 2004, True Value's average excess availability
for the last 60 days was greater than $35,000 and True Value is therefore not
subject to the fixed charge coverage ratio

29

test. Additionally, True Value is required to maintain $15,000 of excess
availability at all times. Management believes it is in compliance with this
requirement and is in compliance with all terms and conditions of the Bank
Facility.

As a result of the lower interest rate under the Bank Facility and the
elimination of the prepayment fee amortization, True Value benefited from
approximately $7,158 of interest savings from September 2003 through December
31, 2003 and an incremental $17,572 in 2004. The $24,730 of total interest
expense savings are calculated on actual borrowing levels in 2003 and 2004 and
the lower average interest rate of approximately 4% on the new Bank Facility for
the 16 months since the refinancing compared to the approximate 13% average rate
on the refinanced debt.

Prior to its August 2003 refinancing, True Value's existing third party
senior debt consisted of a revolving credit facility, senior notes, and a
synthetic lease obligation, (collectively, the "Senior Debt"). The interest rate
on the revolving credit facility was prime plus 3.25%. The unused commitment fee
on this facility was 0.75%. The interest rate on the synthetic lease was prime
plus 3.25%. Interest rates on the senior notes ranged from 10.04% to 11.85%.
Additionally, the Senior Debt agreements all required initial, quarterly and
annual maintenance fees payments.

Fees paid for closing the Bank Facility totaled $3,752 and these fees are
being amortized by True Value over the four-year term. Upon entering into the
Bank Facility, True Value incurred a net expense of $19,221 upon refinancing the
Senior Debt. The net expense consisted of $26,927 of interest expense relating
to the write-off of old and new senior note prepayment obligations and prepaid
bank fees offset by $7,706 of other income relating to debt forgiveness for a
portion of the Senior Debt.

PROMISSORY (SUBORDINATED) AND INSTALLMENT NOTES

Promissory notes are issued from time to time for partial payment of the
annual patronage dividend. Promissory notes are subordinated to indebtedness to
banking institutions, trade creditors and other indebtedness of True Value 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 often
extended at the option of the member, for a three-year period, at interest rates
established by True Value and substantially equivalent to competitive market
rates of comparable instruments. In 2004 and 2003, approximately 70% and 85%,
respectively, of notes scheduled to mature in those years were extended for an
additional three years. True Value anticipates that this practice of extending
notes, based on historical results, will continue.

Installment notes are issued in payment of the redemption of Class B common
stock upon termination of membership in the cooperative. See Item 1,
"Business -- Capital Stock Redemption."

CRITICAL ACCOUNTING POLICIES

True Value's significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America 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.

- Accounts and notes receivable, net of allowance for doubtful
accounts -- At December 31, 2004, accounts receivable, net of $3,835 in
allowance for doubtful accounts, was $200,958. True Value determined the
allowance based upon its evaluation of known requirements, aging of
receivables, historical experience, the current economic environment and
its ability to set off against any unpaid receivable amounts due to
members for stock, notes, interest and declared and unpaid dividends.
While True Value believes it has appropriately considered known or
expected outcomes, its members' ability to pay their obligations,
including those to True Value, 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 stores.

30

- Inventories, net of valuation reserves -- At December 31, 2004,
inventories, net of $10,196 in valuation reserves, were $264,235, 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.
True Value estimated realizable value based on an analysis of historical
trends related to its distressed inventory. This analysis considers
trends to return merchandise to suppliers, transfers to other
distribution centers, the sell-down of product through the price
reduction process and final liquidation price. Additional downward
valuation adjustments could be required should any of the following
events occur: 1) a significant contraction in the current economic
climate, resulting in retailers being unwilling to accept deliveries of
advance orders placed, 2) True Value electing not to ship inventories to
retailers who pose a greater credit risk than appropriate, or 3) an
unanticipated decline in retail outlets or a significant contraction in
True Value's warehouse stock replenishment business for selected product
categories. Potential additional downward valuation adjustments would
also be required by True Value in the event of 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.

- Asset impairment -- For purposes of determining property impairment,
management reviews long-lived assets based on a geographic region or a
revenue producing activity, as appropriate. The 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 of the region or activity,
such assets would be determined to be impaired and would be written down
to their fair value. No asset impairment charges were recorded in 2004.
In 2003, True Value recorded asset impairment charges of $2,005 relating
primarily to equipment held for use at the East Butler, Pennsylvania
facility. In 2002, True Value recorded asset impairment charges that
netted to $470, consisting of a $1,769 charge relating to the East
Butler, Pennsylvania facility that was held for use. True Value offset
this amount by a $1,299 reduction of asset impairment charges, consisting
predominately of a favorable adjustment to the asset value for the
closing of the Brookings, South Dakota distribution center based on
actual proceeds received from the sale of this facility in 2002. The
asset impairment charges impacted True Value's hardware segment and are
included in Operating Expenses under the "Logistics and manufacturing
expenses" caption in the accompanying Consolidated Statement of
Operations.

- Goodwill -- At December 31, 2004, the accompanying Consolidated Balance
Sheet reflects $91,474 of goodwill. Goodwill is tested for impairment
using a discounted cash flow analysis by each reporting unit (Hardware
and Paint manufacturing). This test is completed annually unless
significant events necessitate a more frequent test. True Value
determined as of December 31, 2004 that no impairment exists. There are
inherent uncertainties related to the factors utilized to assess
impairment and in management's judgment in applying them to the analysis
of goodwill impairment. It is possible that assumptions underlying the
impairment analysis will change in such a manner that impairment in value
may occur in the future.

- Deferred tax assets -- At December 31, 2004, True Value has recorded
$70,939 of deferred tax assets, principally related to net operating loss
carryforwards, deferred gain recognition and nonqualified notices of
allocation. These deferred tax assets, net of deferred tax liabilities of
$5,405, are offset by a full valuation allowance at December 31, 2004.
True Value had approximately $59,624 of tax operating loss carryforwards
available to offset future taxable income. In general, such carryforwards
must be utilized within 20 years of incurring the net operating loss. At
December 31, 2004, True Value concluded that, based on the weight of
available evidence, it is more likely than not that the deferred tax
assets will not be realized and that a full valuation allowance is
required. Deferred tax assets will only be realized to the extent future
earnings are retained by True Value and not distributed to members as
patronage dividends.

31

- Accrued expenses -- At December 31, 2004, the accompanying Consolidated
Balance Sheet reflects $70,405 of accrued expenses, principally related
to compensation, benefits and other operating expenses. True Value works
with an actuarial firm in the valuation of benefit obligations. True
Value 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. The discount rate was based on an analysis of bond rates
with terms that have similar duration as the pension liabilities. The
medical trend rate was based on an analysis of inflation rates and
medical inflation rates and the long-term trend for these rates. The
expected return on assets was based on an analysis of historical real
returns on True Value's portfolio mix over 30 year periods. This analysis
produced a range of rates that True Value adjusted for a future inflation
factor and the impact of trust fees. True Value used a rate within this
range of rates. To the extent that the actual rates and mortality vary
from the assumptions used to determine the present actuarial valuation of
these benefits, True Value may have to increase its provision for
expenses.

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

Assumed discount rates and expected return on assets have a significant
effect on the amounts reported for the pension plans. A one-percentage point
change in assumed discount rates and expected return on assets would have the
following effects:

NEW ACCOUNTING PRONOUNCEMENTS

In July 2004, True Value adopted the Financial Accounting Standards Board
("FASB") Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." FSP FAS 106-2 provides guidance on accounting for
the effects of the new Medicare prescription drug legislation. The adoption of
this standard did not have a material impact on its financial statements.

In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs -- an amendment of ARB No. 43, Chapter 4" (FAS 151). FAS 151 requires
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) to be recognized as current-period charges. It also requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. FAS 151 will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. True Value 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.

32

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
($ IN THOUSANDS)

True Value's operations are subject to certain market risks, primarily
interest rate risk and credit risk. Interest rate risk pertains to True Value's
variable rate debt, which had approximately $88,300 outstanding at December 31,
2004. A 50 basis point movement in interest rates would result in an approximate
$442 annualized increase or decrease in interest expense and cash flows based on
the outstanding balance at December 31, 2004.

For the most part, True Value manages interest rate risk through a
combination of variable and fixed-rate debt instruments with varying maturities.
As required by the Bank Facility, True Value has purchased interest rate caps
that limit its risk on $25,000 of variable rate debt for the entire term of the
Bank Facility to a maximum underlying LIBOR rate of 3.5%, approximately 1%
increase over LIBOR as of December 31, 2004. Credit risk pertains primarily to
True Value's trade receivables. True Value extends credit to its members as part
of its day-to-day operations. True Value's management 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, True Value's management believes that its allowance for doubtful
accounts is adequate with respect to member credit risks. True Value performs no
speculative hedging activities. True Value does not have any interest in
variable interest entities and all related party transactions (i.e.,
transactions with members) are at arm's length.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
($ IN THOUSANDS)

True Value's consolidated financial statements and report of independent
registered public accounting firm are listed in the index on page F-1.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

True Value's Chief Executive Officer and Chief Financial Officer have
concluded that as of December 31, 2004 True Value's disclosure controls and
procedures are effective. There has been no change in True Value's internal
control over financial reporting identified in connection with reaching the
conclusion described above that occurred during True Value's last fiscal year
that has materially affected, or is reasonably likely to materially affect, True
Value's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

The directors and senior executive officers (officers who report directly
to the CEO) of True Value or are nominated or selected to be directors and
senior executive officers of True Value as of the date of this filing are:

Each current director's term expires at the annual stockholders' meeting to
be held March 6, 2005 and all have been nominated for re-election.

BOARD AUDIT COMMITTEE

The audit committee of True Value's board of directors is comprised of
three non-employee and independent directors. David Y. Schwartz is the "audit
committee financial expert" serving on the audit committee. Mr. Schwartz is an
independent member of the board of directors of True Value, as that term is used
in Item 7 (d) (3) (iv) of Schedule 14A under the Exchange Act and is defined in
Section 303.01 (B) (2) (a) and (3) of the New York Stock Exchange, Inc. Listed
Company Manual.

CODE OF ETHICS

True Value has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and any other person performing a similar function. The code of
ethics was filed as an exhibit (Ex. 99.3) to the Annual Report on Form 10-K for
the year ended December 31, 2002.

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 executive compensation and monitoring True Value's 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 True Value 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 True Value.
36

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

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

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

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

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 annual incentive and long-term components of the
total compensation package are accrued for during the year in which they are
earned based upon a forecast of the year's performance. A final computation is
made in the year following the year in which the incentives are earned. The
annual incentive, if earned, will be paid out on or before March 31st of the
following year. Any potential pay out on the long-term incentive plan would
occur on or before March 31st following the last year of a performance cycle and
when the cumulative performance over the performance period of these two-year
and three-year plans has met the required achievement, at least at the threshold
level.

True Value provides salary levels that are intended to fall at the median
(the 50th percentile) of the executive marketplace of comparable size in True
Value's industry. The following types of organizations are considered within
True Value's industry: member-owned organizations, wholesale distribution firms,
mass merchandising retail 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 2004 compensation of Pamela Forbes Lieberman, True Value's President
and Chief Executive Officer through November 2, 2004, consisted of a salary paid
on an annualized amount of $725,000, which became effective on April 1, 2004.
This amount is comparable to base salaries for persons holding this position at
companies of comparable size within True Value's industry. The incentive
component of Ms. Forbes Lieberman's compensation was set by the compensation
committee to reflect the achievement of True Value's performance goals
determined by the committee, including the attainment of targets for net sales
and net margin, together with individual goals relating to organizational
strengthening. On November 2, 2004, at the request of True Value's board of
directors, Ms. Forbes Lieberman resigned her positions and the compensation due
her was replaced by the terms of a separation agreement executed in November
2004 between True Value and Ms. Forbes Lieberman. Ms. Forbes Lieberman also
received certain compensation in March 2004 attributable to a long-term
compensation payment for her performance in 2003 and 2002.

Since November 2, 2004, Thomas S. Hanemann has been serving as the
President and Chief Executive Officer of True Value, pursuant to a Consulting
Agreement executed in November 2004. Under such Consulting Agreement, Mr.
Hanemann is entitled to a weekly consulting fee of $14,000, as well as
reimbursement or payment by True Value of certain other expenses. There is no
incentive portion of Mr. Hanemann's compensation.

True Value continues to actively search for candidates to become its new
President and Chief Executive Officer. While it is not possible to forecast the
exact salary or other compensation that would ultimately be payable to a new
President and Chief Executive Officer, it is currently anticipated that any
salary paid would be within industry benchmarks, and that any incentive
compensation would be based upon attainment of performance goals such as those
previously applied by True Value.

COMPENSATION COMMITTEE
Gilbert L. Wachsman, Chairman
Judith S. Harrison
Kenneth A. Niefeld
Charles W. Welch

37

EXECUTIVE COMPENSATION

The following table sets forth the total annual compensation earned by
individuals serving as True Value's Chief Executive Officer and the four most
highly compensated executive officers of True Value during 2004 and the total
compensation earned by each such individual for True Value's two previous years:

SUMMARY COMPENSATION TABLE

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

(1) Earned and paid in year shown.

(2) Annual incentive amounts are earned and accrued during the years indicated,
and paid subsequent to the end of each year. To attain achievement of the
business plan objectives necessary for the success of True Value, the board
of directors approved, effective January 1, 2004, an annual incentive plan
for identified key associates and officers employed by True Value in 2004 or
who joined True Value by September 30, 2004, and remained employed through
the end of 2004. The 2004 incentive plan had targets related to sales, net
margin and individual-specific goals in support of one or more of True
Value's key initiatives. The 2003 incentive plan had targets related to
individual-specific goals associated with leadership and one or more of True
Value's initiatives and either sales and EBITDA or sales, net margin and net
debt established as of the effective date of the plan. The 2002 incentive
plan had targets related to fill rates, sales, EBITDA, and
individual-specific goals associated with one or more of True Value's key
initiatives established as of the effective date of the plan.

(3) Other compensation consists of True Value's contributions to the True Value
Company Employee's Savings and Compensation Deferral Plan (the "401k Plan"),
life insurance plan, financial planning services and automobile allowances.
Under the 401k Plan and in accordance with IRS regulations, each participant
may elect to make a contribution in an amount of up to 50% of the
participant's annual compensation, not to exceed $13,000, $12,000, and
$11,000 per year for 2004, 2003 and 2002, respectively. Also, plan
participants who are 50 years of age or older may elect to make additional
catch-up contributions not to exceed $3,000, $2,000 and $1,000 for 2004,
2003 and 2002, respectively. The total participants' deferred compensation
including True Value's contributions to the participants' balances may not
exceed $41,000 in 2004 and $40,000 in both 2003 and 2002, respectively.
Effective in 2002, the 401k Plan included a guaranteed match of one-third of
a participant's contribution up to a total of 2% of the participant's annual
compensation. Based on True Value achieving certain financial goals, a match
of greater than one-third of a participant's contribution can be earned. A
match equaling two-thirds of a

38

participant's contribution, up to a total of 4% of the participant's annual
compensation, was earned for 2002 and 2003 and funded by March 2003 and
2004, respectively. For 2004, a match equaling one-third of a participant's
contribution, up to a total of 2% of the participant's annual compensation,
was earned and will be funded by March 2005. Thomas S. Hanemann's other
compensation in 2004 consisted of $135,916 related to fees paid, housing,
travel and use of a car while providing consulting services to serve in the
President and Chief Executive Officer position. Additionally in 2004, Mr.
Hanemann received $57,000 for his service on the board of directors. Mr.
Hanemann's other compensation in 2003 and 2002 was for his service on the
board of directors.

(4) At the request of True Value's board of directors, Pamela Forbes Lieberman
resigned her positions with True Value as of November 2, 2004.

(5) Cathy C. Anderson, Michael Haining and Leslie A. Weber joined True Value
February 17, 2003, April 21, 2003 and September 2, 2003, respectively;
compensation is for a partial year.

(6) All other compensation for Pamela Forbes Lieberman consists of amounts paid
or due to Ms. Forbes Lieberman under the terms of the separation agreement
between True Value and Ms. Forbes Lieberman.

True Value has a severance policy providing termination benefits based upon
annual compensation and years of service. Certain officers of True Value are
also offered agreements providing for severance in the event of involuntary
termination without cause with the imposition of certain restrictions regarding
competition and confidentiality. The officer severance agreements provide for
payments that vary from 12 to 24 months of base compensation.

True Value did not make loans to its executive officers or to its directors
during the last three years.

LONG-TERM PERFORMANCE CASH AWARDS

Under the long-term incentive compensation plan for selected officers of
True Value, such officers are eligible for cash pay-outs calculated on a
percentage of their annual salary based upon cumulative performance over the
performance period of these multi-year plans. Any potential pay-out would occur
on or before March 31st following the last year of a performance cycle.
Performance goals for the current plans relate to achieving financial goals
pertaining to a combination of sales and EBITDA or net margin, depending on the
appropriate three-year Performance Period.

The officers of True Value will receive a pay-out in March 2005 based upon
their aggregate performance in 2002, 2003 and 2004 [Performance Period Two]. The
first awards under the Long-Term Incentive Plan ("LTIP") occurred in 2004 for
performance in years 2002 and 2003 [Performance Period One]. There were no
pay-outs of long-term incentive compensation to True Value officers in 2002 or
2003.

Target pay-outs, shown as a percentage of eligible base salary, which could
be earned by the current officers listed in the Summary Compensation Table for
the current plans are as follows: David A. Shadduck, Cathy C. Anderson, Michael
Haining and Leslie A. Weber at 60%.

39

BOARD COMPENSATION

True Value compensates members of the board of directors based on their
roles, committee participation and other circumstances as noted below. At its
July 23, 2004 meeting, the board approved increased board compensation levels,
summarized as follows:

In addition, the Chairman and Vice Chairman were paid $50,000 and $10,000,
respectively, to facilitate the transition of the former President and Chief
Executive Officer. The President and Chief Executive Officer does not receive
additional compensation for serving in the capacity of director. During their
first term, outside directors are paid an additional $500 for each of up to four
company-related events they attend. All directors are reimbursed for
company-related travel expenses.

DEFINED BENEFIT RETIREMENT PLANS

True Value has a defined benefit pension plan, the True Value Company
Defined Lump Sum Pension Plan (the "Qualified Plan"), which is qualified under
the Code. The Qualified Plan was amended and restated effective January 1, 1998
(including amendments effective after January 1, 1998 where indicated). The
amount of True Value's annual contribution to the Qualified Plan is determined
for the total of all participants covered by the Qualified 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 Qualified Plan.
The Qualified Plan provides fully vested lump sum benefits to eligible employees
who have been employed a minimum of five years. 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 Qualified Plan.

In accordance with the Qualified Plan, as amended as of February 28, 2002,
for service after December 31, 2001, the percentage ranges from 1% of "Final
Average Compensation" (the average compensation that includes salary, overtime
pay, commissions, short-term incentive based bonuses, deferral contributions
under the 401k Plan and pre-tax Section 125 plan premiums paid to an eligible
employee during the three highest calendar years within the 10 calendar years
immediately preceding the date of termination of employment) for years of
service performed prior to age 26 to 9% of Final Average Compensation for years
of service performed at or after age 56. For service prior to January 1, 2002,
the percentages range from 2% of Final Average Compensation for years of service
performed prior to age 26 to 12% of Final Average Compensation for years of
service performed at or after age 61. Participants with Final 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 one-half of the percentage earned
as of December 31, 2001. For participants who had attained age 50 and completed
at least 15 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 Qualified Plan cannot be less than the benefits already earned by the
participant under the Qualified Plan as it existed prior to its amendment.

The Qualified Plan was amended effective January 1, 1998 to include former
employees of ServiStar Coast to Coast (SCC). These employees received credit
under the Qualified Plan for all years for which they received credit under the
SCC Retirement Income Plan (the "ServiStar Plan"). In addition, for any
ServiStar

40

(but not Coast to Coast) employees who had attained age 50 and completed at
least 15 years of service as of January 1, 1998, the sum of their annual pension
credit percentage is increased by 25 percentage points. Also, the benefits under
the Qualified Plan cannot be less than benefits already earned by the
participant under the ServiStar Plan as of December 31, 1997.

The estimated annual retirement benefits that 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 Code, which outlines the
maximum earnings amounts that may be considered under the Qualified Plan in
determining retirement benefits. This limit was $205,000 for 2004. Section 415
of the Code outlines the maximum annual benefit that may be payable from the
Qualified Plan during the year. The dollar limit is $165,000 for 2004 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.

True Value maintains a Supplemental Retirement Plan for Officers of True
Value (the "Supplemental Plan"). The Supplemental Plan provides participants
with a benefit equal to 33% of their Final Average Compensation multiplied by
their years of service, reduced by any benefits payable under the Qualified
Plan. Service is limited to 20 years and the maximum aggregate percentage is
660%. Final Average Compensation for the Supplemental Plan is defined similarly
to the Qualified Plan, as discussed above. Benefits are payable in a lump sum,
following termination of employment.

On January 1, 2005, the Supplemental Plan was amended and restated. The
amendment and restatement provides for prospective changes in various elements
of the Supplemental Plan as they apply to Current Participants (participants of
the Supplemental Plan as of December 31, 2004) or eligible participants entering
the service of True Value on or after January 1, 2005. The amendment and
restatement provides for the following modifications effective January 1, 2005:

- For the purposes of the Supplemental Plan, "Compensation" means, for any
calendar year, the base salary plus short-term incentive pay that is paid
for goal or performance achievements, with Supplemental Plan defined
exceptions, to the participant in such year related to prior year
performance, plus pre-tax deferrals.

- Final Average Compensation, for the Supplemental Plan, was amended to add
the provision that the highest three of the last ten calendar years were
contiguous years.

- Eligibility: Current Participants' eligibility in the Supplemental Plan
will continue on a "grandfathered" basis. Future participation will be
restricted to those individuals employed in the position of Senior Vice
President or above.

- Any Current Participant's benefit accrued prior to January 1, 2005 will
be governed under the provisions of the Supplemental Plan in place when
the benefit was earned. Benefits accrued on January 1, 2005 and
thereafter will be governed by the Supplemental Plan provisions in effect
on January 1, 2005 unless future amendments are applicable.

- The amended Supplemental Plan provides participants with a benefit equal
to 25% of their Final Average Compensation multiplied by their years of
service, reduced by any benefits payable under the Qualified Plan.
Service is limited to 20 years and the maximum aggregate percentage is
500% for participation on or after the effective date of the amendment.

- The amendment also provides for a reduction of the benefits, for benefits
earned on or after the effective date of the amendment, if the eligible
participant retires before attaining age 65, provided, however, the
participant's benefit shall not be less than the amount calculated for
such participants as of December 31, 2004.

41

- The amendment introduced the ability for the Plan Administrator to pay
such benefits in a lump-sum or in a series of substantially equal
payments made no less frequently than annually over a period not to
exceed ten years. If the benefit is paid pursuant to a series of
payments, the benefit will earn interest.

The Supplemental Plan is not a qualified plan under the Code. Benefits
payable under the Supplemental Plan are financed through operations.

The following table reflects the combined estimated annual retirement
benefits that 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 current officers of True
Value listed in the Summary Compensation Table are as follows: David A.
Shadduck, 4 years; Cathy C. Anderson, 2 years; Michael Haining, 2 years; Leslie
A. Weber, 1 year.

True Value implemented a Transition Incentive Plan ("TIP") effective March
1, 2005 for the ten elected officers who were participants in True Value's
Supplemental Plan as of that date. The TIP is a limited duration, transitional
incentive plan that will expire effective February 29, 2008. The purpose of the
TIP is to provide a short-term offset resulting from the reduction of benefits
under the amended Supplemental Plan and is intended to provide a retention
incentive for True Value's top officers.

Contingent upon remaining an employee through February 29, 2008, each of
the eligible officers covered by the TIP will receive a one-time cash award
equal to 16% of their eligible earnings received in calendar years 2005, 2006
and 2007. Eligible earnings, for the purposes of the TIP, are the combination of
base salary and awards paid during the calendar year under the annual incentive
plan.

42

PERFORMANCE GRAPH

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

EMPLOYMENT AND SEPARATION AGREEMENTS

On November 15, 2001, True Value entered into an employment agreement with
Pamela Forbes Lieberman, pursuant to which she assumed the duties of President
and Chief Executive Officer of True Value. This employment agreement specified
that Ms. Forbes Lieberman would serve in those capacities at the will of the
board of directors. Pursuant to her employment agreement, the board of directors
awarded to Ms. Forbes Lieberman an annual base salary of $725,000 effective
April 1, 2004. In addition, Ms. Forbes Lieberman was eligible for annual
incentives, if and when approved by the board of directors of True Value. For
calendar years 2002 and beyond, the employment agreement provided for an annual
incentive of 70% of her base salary upon achievement of certain pre-established
targets, with thresholds and maximums for each year. In addition, Ms. Forbes
Lieberman was eligible to receive a long-term incentive equal to specified
percentages of her annual base salary if True Value met certain threshold
financial performance levels. See "Summary Compensation Table" under the item
"Executive Compensation" for the amount of salary and incentives earned by Ms.
Forbes Lieberman in 2004, 2003 and 2002. Long-term compensation was earned by
Ms. Forbes Lieberman and other officers of True Value for 2003 and 2002
performance, based upon cumulative performance over this multi-year performance
period. In accordance with the plan, the first payout occurred in March 2004
based upon performance in 2002 and 2003.

On November 24, 2004, True Value and Ms. Forbes Lieberman entered into a
Separation Agreement and General Release (the "Separation Agreement") whereby
Ms. Forbes Lieberman's position as President and Chief Executive Officer was
terminated effective November 2, 2004 and her general employment with True Value
was terminated effective December 31, 2004. In connection with the Separation
Agreement, True Value agreed to pay to Ms. Forbes Lieberman (i) her regular base
salary through December 31, 2004, (ii) the amount of $1,450,000, payable pro
rata over True Value's standard payroll periods in 2005 and 2006, (iii) a bonus
of $500,000, payable in 2005 contemporaneously with True Value's other executive
bonuses, in lieu of any other short-term bonus, long-term bonus and any other
awards payable under True Value incentive plans, and (iv) certain amounts for
outplacement services. In addition, True Value will provide standard benefits to
Ms. Forbes Lieberman during 2005 and 2006 in the same fashion provided to other
executive employees to the extent such benefit plans permit. True Value will
allow Ms. Forbes Lieberman to maintain her accounts in certain of True Value's
defined contribution retirement plans and her accrued benefits in certain
defined benefit pension plans. In consideration for the aforementioned payments,
Ms. Forbes Lieberman agreed to perform certain services for True Value
throughout 2005 and 2006 in order to assist and cooperate with True Value in the
transition of her responsibilities and relationships with True Value's members,
banks and suppliers, and to act as a consultant to True Value for up to five
days per month in 2005 and up to two days per month in 2006, performing such
reasonable duties as requested by True Value. The Separation Agreement also
contains a general release by Ms. Forbes Lieberman of all claims against True
Value, as well as certain non-compete and non-solicitation covenants which
extend through 2006.

On November 2, 2004, True Value entered into a Consulting Agreement with
Thomas S. Hanemann whereby Mr. Hanemann was engaged to serve as the President
and Chief Executive Officer of True Value. The term of the Consulting Agreement
may be terminated with or without cause by either party at any time. As
consideration for Mr. Hanemann's services, he is entitled to a consulting fee in
the amount of $14,000 per week. As a consultant, Mr. Hanemann agrees that he is
not entitled to receive any other benefits or participate in any True Value
benefit plans; however, the Consulting Agreement requires True Value to provide
Mr. Hanemann with housing and use of a company car, as well as reimbursement of
business and weekly travel expenses. Mr. Hanemann has agreed, pursuant to the
Consulting Agreement, to perform such services consistent with this position, as
well as services requested by True Value's board of directors. Furthermore,

43

Mr. Hanemann has agreed that during the term of the Consulting Agreement and for
one year thereafter, he shall abide by certain non-compete and non-solicitation
restrictions.

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

As of January 31, 2005, each of the member directors of True Value was the
owner of at least 60 shares of Class A common stock of True Value (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 January 31, 2005. No non-member director or senior officer owns any
shares of Class B common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Other than as disclosed below, True Value does not enter into any
transaction with directors or officers other than in their capacity as such.

True Value sells hardware and related merchandise and provides value-added
services such as marketing, advertising, merchandising, and store location and
design services to member directors of True Value on the same basis as it
provides these merchandise and services to other members.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

FEES OF INDEPENDENT AUDITORS

AUDIT FEES

The aggregate audit fees for 2004 and 2003 were approximately $609,000 and
$528,732, respectively. These amounts include fees for professional services
rendered by PricewaterhouseCoopers LLP in connection with the audit of our
consolidated financial statements and reviews of our unaudited consolidated
interim financial statements.

AUDIT-RELATED FEES

The aggregate fees for audit-related services rendered by
PricewaterhouseCoopers LLP for 2004 and 2003 were approximately $97,641 and
$253,952, respectively. The fees under this category relate to audits of
employee benefit plans and True Value Specialty Company and various Commission
reporting and filing matters.

TAX FEES

The aggregate fees for tax services rendered by PricewaterhouseCoopers LLP
for 2004 and 2003 were approximately $3,272 and $98,004, respectively. Tax fees
relate to tax compliance and advisory services and assistance with tax audits.

ALL OTHER FEES

The aggregate fees for all other services rendered by
PricewaterhouseCoopers LLP for 2004 and 2003 were approximately $4,700 and $0,
respectively. These fees relate to general consulting services.

All services described under the headings "Audit-Related Fees," "Tax Fees"
or "All Other Fees" were pre-approved by the Audit Committee pursuant to the
procedures set forth in 17 CFR 210.2-01(c)(7)(i)(C). The Audit Committee's
"Polices and Procedures Regarding Approval of Services Provided by the
Independent Auditor" are set forth below:

All services provided by PricewaterhouseCoopers LLP, both audit and
non-audit, must be pre-approved by the Chairman of the Audit Committee or a
designee, and are subject to review by the Audit Committee at the
discretion of the Audit Committee Chairman. The decisions of the Audit
Committee

44

Chairman, or Designated Member, to pre-approve a permitted service shall be
reported to the Audit Committee at each of its regularly scheduled
meetings. Consistent with current practice, management will submit to the
Audit Committee for pre-approval the scope and estimated fees associated
with the current year audit at the July Audit Committee meeting.

The pre-approval of nonaudit services may be given at any time up to a
year before commencement of the specified service. Although the Act permits
de minimis exceptions, True Value's policy is to pre-approve all audit and
nonaudit services.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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-31 is filed as part of this
annual report.

3. EXHIBITS

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

45

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.

TRUE VALUE COMPANY

By: /s/ DAVID A. SHADDUCK
------------------------------------
David A. Shadduck
Senior Vice President and Chief
Financial Officer
DATED: March 3, 2005

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.

46

ITEM 15(a)(1). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Members of True Value Company:

In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 15(a)(1) present fairly, in all material
respects, the financial position of True Value Company and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) 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 based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the Consolidated Financial Statements, on January
1, 2003, the Company adopted Emerging Issues Task Force Issue No. 02-16,
"Accounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor."

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Chicago, Illinois
March 3, 2005

F-2

TRUE VALUE COMPANY

CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004 AND 2003
($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

ASSETS

The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-3

TRUE VALUE COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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

F-4

TRUE VALUE COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-5

TRUE VALUE COMPANY

CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

Redeemable Class A common stock amounts are net of unpaid subscription amounts
of $1,484 relating to 22,920 issued shares at December 31, 2004; $112 relating
to 9,840 issued shares at December 31, 2003; $866 relating to 35,700 issued
shares at December 31, 2002 and $1,110 relating to 54,480 issued shares at
December 31, 2001.

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

F-6

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)

1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES

Principal business activity

True Value Company ("True Value") is a member-owned wholesaler cooperative
of hardware and related merchandise. True Value changed its name from TruServ
Corporation on December 31, 2004. True Value also manufactures and sells paint
and paint applicators. True Value's goods and services are sold predominantly
within the United States, primarily to retailers of hardware, industrial
distributors, garden centers and rental retailers who have entered into retail
agreements with it. True Value also provides to its members value-added services
such as marketing, advertising, merchandising and store location and design
services.

Consolidation

The consolidated financial statements include the accounts of True Value
and all wholly owned subsidiaries.

Reclassifications

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

Capitalization

True Value's capitalization from its members is classified in Members'
equity and Liabilities. Members' equity is comprised of Redeemable Class A
voting common stock, Redeemable qualified Class B non-voting common stock,
Accumulated deficit, Loss allocation, Deferred patronage and Accumulated other
comprehensive loss. Members are required to purchase upon becoming a member 60
shares of True Value's Class A common stock per store (up to a maximum of 5
stores (300 shares)). The Class A common stock is redeemable by True Value and
has voting rights (the "Redeemable Class A voting common stock").

True Value issues Class B common stock as part of its patronage dividend.
The Class B common stock is redeemable and has no voting rights (the "Redeemable
Class B non-voting common stock"). Redeemable Class B non-voting common stock
had been issued in connection with True Value's annual patronage dividend. The
By-Laws provide True Value the right to allow a member to meet the stock
ownership requirements for True Value's Redeemable Class B non-voting common
stock by the issuance of Redeemable Class B non-voting common stock in payment
of the year-end patronage dividend. The shares of Redeemable Class B non-voting
common stock and other written notices distributed by True Value to its members,
which disclose to the recipient the stated amount allocated to the member by
True Value and the portion thereof that is a patronage dividend, are "written
notices of allocation" as that phrase is used in the Internal Revenue Code (the
"Code"). For such written notices to be "qualified written notices of
allocation" within the meaning of the Code, it is necessary that True Value pay
20% or more of the annual patronage dividend in cash and that the members
consent to having the allocations (at their stated dollar amounts) treated as
being constructively received by them and includable in their gross income. True
Value has customarily issued Redeemable Class B non-voting common stock that is
"qualified written notices of allocation" (the "Redeemable qualified Class B
non-voting common stock") with its patronage dividend and the current amount
issued and outstanding are classified in the Consolidated Balance Sheet as
Redeemable qualified Class B non-voting common stock. Any written notices that
do not meet these requirements are "nonqualified written notices of allocation"
within the meaning of the Code. True Value has issued Redeemable Class B
non-voting common stock that are "nonqualified written notices of allocation"
(the "Redeemable nonqualified Class B non-voting

F-7

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock") as part of prior patronage dividends. Amounts issued and
outstanding are classified as a long-term liability in the Consolidated Balance
Sheet as Redeemable nonqualified Class B non-voting common stock. These shares
are classified in long-term liabilities because they have a planned redemption
schedule. The redemption schedule calls for at least 10% of the shares to be
redeemed by December 31, 2011; 40% of the shares by December 31, 2019 and all of
the shares by December 31, 2029.

True Value follows the practice of accounting for deferred patronage
charges and credits as a separate component of equity. Deferred patronage
consists of net charges and expenses, primarily related to costs associated with
the merger of Cotter & Company and ServiStar Coast to Coast Corporation to form
True Value (the "Merger"), which are included in the computation of Net margin
in different periods for financial statement purposes than for patronage
purposes.

Either True Value or the member, upon 60 days' written notice, may
terminate membership without cause. In the event membership is terminated, True
Value undertakes to purchase, and the member is required to sell to True Value,
all of the member's Redeemable Class A voting common stock and Redeemable Class
B non-voting common stock at par value. Payment for the Redeemable Class A
voting common stock and Redeemable nonqualified Class B non-voting common stock
has historically been in cash. In accordance with True Value's By-Laws, payment
for the Redeemable qualified Class B non-voting common stock is in the form of a
note payable in five equal annual installments and with interest set at
comparable treasury rates plus 1.0%. Historically, True Value has offset amounts
due by its members against amounts that it pays to the members on redemption of
their stock.

Patronage dividend

True Value operates on a cooperative basis with respect to business
transacted with or for members. When there are annual profits, members in good
standing are entitled to receive patronage dividend distributions from True
Value on the basis of gross margins of merchandise purchased by each member. In
accordance with True Value's By-Laws and Retail Member Agreement, the annual
patronage dividend, as authorized by the board of directors, is paid to members
out of patronage source income, less certain deductions, calculated as provided
in the following sentence. The total patronage dividend paid to members is based
on pre-tax net margins calculated in accordance with accounting principles
generally accepted in the United States of America after reducing or increasing
net margins for non-member income/(losses), reasonable reserves, earnings
retained by the cooperative and deferred patronage amortization. Commencing with
the 2004 patronage dividend that was paid in 2005, the board of directors has
authorized retaining 5% of net patronage source income, as a reasonable reserve,
to reduce the accumulated deficit account. The total dividend is then 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 related to the year ended December 31, 2004 were
$41,375. Approximately $12,669 of the dividend was paid in cash, which was
approximately 30% of the estimated patronage income for the year. True Value's
By-Laws and the Internal Revenue Service (the "IRS") require that the payment of
at least 20% of patronage dividends be in cash. True Value paid the remainder
through the issuance of True Value's Redeemable qualified Class B non-voting
common stock and Promissory (subordinated) notes. For those members who have
loss allocation accounts, the Redeemable qualified Class B non-voting common
stock was offset against those accounts. Patronage dividends of $18,269 related
to the year ended December 31, 2003 were paid in March 2004; approximately 49%
of which were paid in cash, which was 30% of the dividend before the net effect
of the refinancing of the revolving credit facility, senior notes and synthetic
lease obligation (the "Senior Debt"). True Value paid the remainder through the
issuance of True Value's Redeemable qualified Class B non-voting common stock,
offsetting that against the loss allocation accounts of

F-8

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

those members that had such accounts. Patronage dividends of $20,541 related to
the year ended December 31, 2002 were paid in March 2003; approximately 30% of
which were paid in cash. True Value paid the remainder through the issuance of
True Value's Redeemable qualified Class B non-voting common stock. For those
members who had loss allocation accounts, the Redeemable qualified Class B
non-voting common stock was offset against those accounts.

Capital Stock Redemption

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

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

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

Loss allocation to members and Accumulated deficit

During the third quarter of 2000, True Value management developed and the
board of directors approved a plan to equitably allocate to members the loss
incurred in 1999. This loss was previously recorded as a reduction of retained
earnings. True Value has distributed the 1999 loss among its members by
establishing a loss allocation account as a contra-equity account in the
Consolidated Balance Sheet with the offsetting credit recorded to the
accumulated deficit account. The loss allocation account reflects the sum of
each member's

F-9

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

proportionate share of the 1999 loss, after being reduced by certain amounts
that were not allocated to members. The allocation was generally based on a
member's proportionate Class B stock investment relative to the total Class B
stock investments of all the members, and therefore a member could not be
allocated a loss in excess of its equity investment. The loss allocation account
will be satisfied, on a member by member basis, by applying the portion of
future non-cash patronage dividends as a reduction to the loss allocation
account until fully satisfied. The loss allocation amount may also be satisfied,
on a member by member basis, by applying the par value of maturing member notes
and related interest payments as a reduction to the loss allocation account
until such account is fully satisfied. However, in the event a member should
terminate as a stockholder of True Value, any unsatisfied portion of that
member's loss allocation account will be satisfied by reducing the redemption
amount paid for the member's stock investment in True Value.

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

A member's proportionate share of the 1999 and/or 2001 losses have been
limited to the extent of its equity investment in True Value. Any portion of a
loss allocation that exceeds a member's equity investment is retained by True
Value in the accumulated deficit account. Commencing with the 2004 patronage
dividend that was paid in 2005, the board of directors has authorized retaining
5% of net patronage source income, as a reasonable reserve, to reduce the
accumulated deficit account. Such reduction will be applied first against the
oldest components of the deficit and the annual retention of the 5% of patronage
source income will continue until the deficit no longer exists.

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

Cash equivalents

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

Allowance for doubtful accounts

The allowance for doubtful accounts is determined principally on the basis
of past collection experience applied to ongoing evaluations of True Value's
receivables and the risks of repayment. The allowance was $3,835 and $8,395 as
of December 31, 2004 and 2003, respectively. Primary reasons for the reduction
in the reserve during 2004 included favorable collections experience, the
settlement or charge-off of older accounts,
F-10

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain of which relate to the rescinding of the stock moratorium, and overall
improvement in the aging and risk characteristics of the portfolio. True Value
considers accounts receivable past due if invoices remain unpaid past their due
date and charges-off uncollectible receivables after exhausting all collection
efforts.

Inventories

Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market value. The lower of cost or market value considers
the estimated realizable value in the current economic environment associated
with disposing of surplus and/or damaged/obsolete inventories. True Value's 2004
inventory valuation reserve of $10,196 is up from 2003 of $6,718 due to
increased levels of unproductive inventory. True Value calculated the estimated
realizable value based on an analysis of historical trends related to its
distressed inventory. In its analysis, True Value considers historical data on
its ability to return inventory to suppliers, to transfer inventory to other
distribution centers, to sell inventory to members through the price reduction
process and to sell remaining inventory to liquidators. The cost of inventory
also includes indirect costs (such as logistics, manufacturing, freight-in,
vendor rebates 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 revenue as the
product is sold (see Note 2, "Inventories").

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 -- 3 to 10 years; transportation
equipment -- 3 to 12 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.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is tested for impairment using a discounted cash flow
analysis for each reporting unit (Hardware and Paint manufacturing). This test
is completed annually, unless significant events necessitate a more frequent
test. The test completed at December 31, 2004 used a discount rate of 10% and
assumed a modest revenue increase in future years. Rates used to discount cash
flows are dependent upon interest rates and the cost of capital at a point in
time. A 100 basis point movement in the discount rate did not significantly
impact the analysis. In evaluating the recoverability of goodwill, management
estimates each reporting unit's fair value. In making this estimate, True
Value's management relies on a number of factors including operating results,
business plans and present value techniques, to discount anticipated future cash
flows. True Value completes its annual impairment assessment at the end of each
year and has determined that no impairment existed at December 31, 2004 or 2003.

At December 31, 2004 and 2003, Goodwill was comprised of $78,429 for the
hardware segment and $13,045 for the paint segment.

Conversion funds

In connection with the Merger, True Value made funds available to the
members to defray various conversion costs (i.e., costs to change store signage
and branding to True Value) associated with the Merger and costs associated with
certain upgrades and expansions of their stores. The total amount of funds
distributed was $27,175 for these conversion costs. The funds are amortized over
a 5 year period, the period of time during which members committed to stay with
True Value. The members agree to refund to True Value all or a portion of the
conversion funds in the event they defaulted on their obligations to True Value
or terminated their membership during the five years following the date of the
agreement. The annual
F-11

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortization expense for 2004, 2003 and 2002 was $1,027, $4,060, and $6,056,
respectively. All amounts have been fully amortized at December 31, 2004.

Asset impairment

For purposes of determining impairment, management reviews long-lived
assets based on a geographic region or a revenue producing activity, as
appropriate. The 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 of the region or
activity, such assets would be determined to be impaired and would be written
down to their fair value. No asset impairment charges were recorded in 2004. In
2003, True Value recorded asset impairment charges of $2,005 relating primarily
to equipment held for use at the East Butler, Pennsylvania facility. In 2002,
True Value recorded asset impairment charges that netted to $470, consisting of
a $1,769 charge relating to the East Butler, Pennsylvania facility that was held
for use. True Value offset this amount by a $1,299 reduction of asset impairment
charges, consisting predominately of a favorable adjustment to the asset value
for the closing of the Brookings, South Dakota distribution center based on
actual proceeds received from the sale of this facility in 2002. The asset
impairment charges impacted True Value's hardware segment and are included in
Operating Expenses under the "Logistics and manufacturing expenses" caption in
the Consolidated Statement of Operations.

Revenue recognition

True Value's policy is to recognize revenue from product sales and services
when earned, in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104.
Specifically, product revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, 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 and other cash consideration given
to customers, and returns are provided for at the time the related sales are
recorded and are reflected as a reduction of sales. Service revenue is comprised
of advertising and transportation and amounted to $58,870 and $49,987 for 2004,
respectively, $58,131 and $49,305 for 2003, respectively, and $69,463 and
$52,665 for 2002, respectively. Advertising revenue is recognized when the
underlying advertisement is run or when the related circulars are dropped.
Transportation revenue is recognized when the services are provided. Effective
for arrangements with vendors initiated on or after January 1, 2003 and in
accordance with Emerging Issues Task Force ("EITF") Issue No. 02-16 "Accounting
by a Customer (including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), consideration received from vendors that was previously
classified as advertising revenue is applied as a decrease in the price paid for
inventory and is recognized in cost of sales as the related inventory is sold.

Advertising expenses

Amounts billed to members for advertising are included in revenue.
Advertising costs are expensed in the period the advertising takes place. Such
costs amounted to $37,254, $44,817 and $56,407 in 2004, 2003 and 2002,
respectively, and are included in Cost of revenue.

Amortization of financing fees

Amounts paid for financing fees incurred in connection with True Value's
financing arrangements are capitalized and amortized to interest expense over
the remaining lives of the underlying financing agreements. During the third
quarter of 2003, True Value expensed the financing fees related to the Senior
Debt as a result of refinancing the Senior Debt with a new asset-based revolving
credit facility ("Bank Facility"). True Value purchased interest rate caps in
2003 that limit its risk on $25,000 of variable rate debt for the entire term of
the

F-12

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Bank Facility to a maximum underlying LIBOR rate of 3.5%, which represents
approximately 1.0% increase over current LIBOR. This interest rate cap
instrument is considered speculative and is carried at current market value.

Repairs and maintenance expense

Expenditures which extend the useful lives of True Value'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 True Value's manufacturing
operations are expensed as incurred. Such costs amounted to $920, $911 and $941
in 2004, 2003 and 2002, respectively, and are included in Logistics and
manufacturing expenses.

Shipping and handling costs

Amounts billed to members for shipping and handling costs are included in
Net revenue. Amounts incurred for shipping and handling are included in Cost of
revenue.

Income taxes

Deferred tax assets and liabilities are determined based on cumulative
temporary differences between the amounts shown on the financial statements 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, 2004,
True Value concluded that, based on the weight of available evidence, it is more
likely than not that the deferred tax assets will not be realized, and that a
full valuation allowance is required. Deferred tax assets will only be realized
to the extent future earnings are taxable to True Value and not allocated to
members as tax-deductible patronage dividends.

Per share information

There is no existing market for the True Value common stock and there is no
expectation that any market will develop. True Value's Redeemable Class A voting
common stock is owned by members and former members whose stock has not yet been
redeemed. True Value'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.

Fair value of financial instruments

The carrying amounts of True Value's financial instruments, which were
comprised primarily of accounts and notes receivable, accounts payable,
short-term borrowings, long-term debt and promissory (subordinated) and
installment notes, approximate fair value. The total carrying amount of debt and
credit facilities approximates fair value due to their stated interest rates
approximating market rates. 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 True Value's trade receivables. True
Value extends credit to its members as part of its day-to-day operations. True
Value 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.
F-13

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additionally, True Value's management believes that its allowance for doubtful
accounts is adequate with respect to member credit risks. Also, the Certificate
of Incorporation and By-Laws specifically provide that True Value may set off
its obligation to make any payment to a member for such member's stock, notes,
interest and declared and unpaid dividends against any obligation owed by the
member to True Value. True Value exercises these set off rights when its notes
and interest become due to former members with outstanding accounts receivable
to True Value and current members with past due accounts receivable to True
Value.

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.

Consideration Given by a Vendor

On January 1, 2003, True Value adopted Emerging Issues Task Force ("EITF")
Issue No. 02-16 "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"), which addresses the
accounting and income statement classification for consideration given by a
vendor to a retailer in connection with the sale of the vendor's products or for
the promotion of sales of the vendor's products. The EITF concluded that such
consideration received from vendors should be reflected as a decrease in prices
paid for inventory and recognized in cost of sales as the related inventory is
sold, unless specific criteria are met qualifying the consideration for
treatment as reimbursement of specific, identifiable incremental costs and is
effective for arrangements with vendors initiated on or after January 1, 2003.
Most of True Value's arrangements with vendors in 2003 were initiated before
January 1, 2003. However, most arrangements with vendors for 2004 were initiated
in the fourth quarter of 2003, and the application of EITF 02-16 has impacted
the 2004 results of operations and financial position as Net margin was
negatively impacted in 2004 compared to the same period last year by $3,996. The
application of EITF 02-16 impacted 2004 as vendor advertising funds are being
earned based on merchandise purchases and the vendor advertising funds are
recognized in income when the merchandise is sold. In 2003, the vendor
advertising funds were matched and recognized in Net revenue when the
advertising took place and the costs were incurred. Additionally, Net revenue
was impacted by the application of EITF 02-16, as the advertising revenue that
was recognized as the advertising occurred is now recorded as part of the cost
of the product. Also impacting Net revenue was the recording of monies earned
for holding markets that is a service provided to vendors and members. Monies
earned from prior year markets were recorded as an offset in SG&A expenses and
are now recorded into Net revenue for 2004. Also, expenses related to providing
the markets were previously recorded in SG&A expenses and are now recorded in
Cost of revenue for 2004.

New accounting pronouncements

In July 2004, True Value adopted the Financial Accounting Standards Board
("FASB") Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." FSP FAS 106-2 provides guidance on accounting for
the effects of the new Medicare prescription drug legislation. The adoption of
this standard did not have a material impact on its financial statements.

In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs -- an amendment of ARB No. 43, Chapter 4" (FAS 151). FAS 151 requires
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) to be recognized as current-period charges. It also requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. FAS 151 will be
effective for inventory costs incurred during fiscal years beginning after

F-14

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

June 15, 2005. True Value 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.

2. INVENTORIES

Inventories consisted of the following at December 31:

The amount of warehouse, general and administrative costs included in
ending inventory at December 31, 2004 and 2003 was $17,373 and $18,386,
respectively. Warehouse, general and administrative costs incurred for 2004 and
2003 were $94,431 and $95,403, respectively.

3. PROPERTIES

Properties consisted of the following at December 31:

Depreciation expense for 2004, 2003 and 2002 was $15,440, $22,000 and
$28,795, respectively.

F-15

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. DEBT ARRANGEMENTS

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

At December 31, 2004, True Value had $88,300 in Bank Facility borrowings,
which were included in Long-term debt including notes and capital lease
obligations, less current maturities and had a weighted average interest rate of
4.7%. At December 31, 2003, True Value had $131,600 in Bank Facility borrowings
with a weighted average interest rate on these borrowings of 3.6%. The amount of
$71,600 of the Bank Facility borrowings was included in Current maturities of
long-term debt, notes and capital lease obligations and the remaining $60,000
was included in Long-term debt including notes and capital lease obligations,
less current maturities. Based on True Value's projection of seasonal working
capital needs, the amount of the Bank Facility classified as Long-term debt
including notes and capital lease obligations, less current maturities
represents the expected lowest level of borrowings during the next twelve months
for each year.

BANK FACILITY

On August 29, 2003, True Value entered into a new four-year $275,000 Bank
Facility. The Bank Facility was used to refinance the then existing third party
senior debt at a substantially lower interest rate. Availability under the Bank
Facility is limited to the lesser of $275,000 or the collateral value of
eligible assets (the "borrowing base"), less outstanding borrowings, letters of
credit and reserves. The reserve amounts, if any, are set at the discretion of
the lenders. True Value's availability as of December 31, 2004 was $132,796.

The interest rate charged for Bank Facility borrowings is variable at
either LIBOR or prime, plus in either case, an additional amount of interest
determined based on a performance-based pricing grid. True Value has the option
to select LIBOR or prime as the base rate. The performance grid is based upon
True Value's fixed charge coverage ratio, measured quarterly beginning in March
2004. Beginning with the first measurement period in 2004, True Value has
performed at a level that resulted in a 0.25% reduction in pricing. As of
December 31, 2004 and 2003, this interest rate was 4.7% and 3.6%, respectively.
The unused commitment fee is 0.375%. Letters of credit issued under the Bank
Facility have a fee based on the performance pricing grid and this fee was 2.0%
and 2.25% at December 31, 2004 and 2003, respectively.

The Bank Facility has no financial covenants unless daily average excess
availability for the last 60 days of each quarter drops below $35,000. If the
average is below $35,000, True Value is subject to a fixed charge coverage ratio
of 1.1 to 1. As of December 31, 2004, True Value's average excess availability
for the last 60 days was greater than $35,000 and True Value is therefore not
subject to the fixed charge coverage ratio test. Additionally, True Value is
required to maintain $15,000 of excess availability at all times. Management
believes it is in compliance with this requirement and is in compliance with all
terms and conditions of the Bank Facility.

F-16

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Bank Facility is collateralized by substantially all of the assets of
True Value and a pledge of 100% of the stock of True Value's subsidiaries.
Borrowings under the Bank Facility are subject to borrowing base limitations
that fluctuate in part with the seasonality of the business. In addition, the
qualification of accounts receivable and inventory items as "eligible" for
purposes of the borrowing base is subject to unilateral change in the discretion
of the lenders. The borrowing base is calculated as the sum of:

i. 85% of eligible accounts receivable, plus

ii. the lesser of 65% of the value of eligible inventory, 85% of the
net orderly liquidation value of inventory, or $160,000, plus

iii. a fixed asset sublimit, calculated as the lesser of $25,000 or
65% of the fair value of certain real estate, and 80% of orderly
liquidation value of certain machinery and equipment. The sublimit is
subject to a seven-year amortization for the portion predicated on
machinery and equipment and a ten-year amortization for the portion
predicated on real estate.

The Bank Facility imposes certain limitations on and requires compliance
with covenants from True Value that are usual and customary for similar
asset-based revolving credit facilities. Unless such terms and conditions are
waived by a majority of the lenders, these terms and conditions include, among
other things:

i. limitations on additional lease transactions, additional
third-party and subordinated debt, the granting of certain liens and
guarantees, capital expenditures and cash dividend payments and
distributions;

ii. restrictions on mergers, investments, transactions with related
parties, acquisitions and changes in corporate control; and

iii. periodic financial and collateral reporting requirements.

Fees paid for closing the Bank Facility totaled $3,752 and these fees are
being amortized by True Value over the four-year term. Upon entering into the
Bank Facility, True Value incurred a net expense of $19,221 upon refinancing the
Senior Debt. The net expense consisted of $26,927 of interest expense relating
to the write-off of old and new senior note prepayment obligations and prepaid
bank fees offset by $7,706 of other income relating to debt forgiveness for a
portion of the Senior Debt.

PROMISSORY (SUBORDINATED) AND INSTALLMENT NOTES

Promissory notes are issued from time to time for partial payment of the
annual patronage dividend. Promissory notes are subordinated to indebtedness to
banking institutions, trade creditors and other indebtedness of True Value 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 often
extended at the option of the member, for a three-year period, at interest rates
established by True Value and substantially equivalent to competitive market
rates of comparable instruments. In 2004 and 2003, approximately 70% and 85%,
respectively, of notes scheduled to mature in those years were extended for an
additional three years. True Value anticipates that this practice of extending
notes, based on historical results, will continue.

Installment notes are issued in payment of the redemption of Class B common
stock upon termination of membership in the cooperative. See Note 1,
"Description of Business and Accounting Policies -- Capital Stock Redemption."

F-17

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The amount due within one year for both years was classified in Current
maturities of long-term debt, notes and capital lease obligations.

Amounts shown below as scheduled repayments are the stated note amounts.
True Value will seek members' consent in 2005 to extend the Promissory
(subordinated) note due dates at market competitive interest rates.

Principal payment schedule for long-term debt:

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

(1) Borrowings under the Bank Facility fluctuate as a result of the seasonal
needs of the business. There are no required payments until the maturity of
the Bank Facility in August 2007.

F-18

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LEASE COMMITMENTS

True Value is a lessee of distribution centers, office space, and 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 (including sale leasebacks), together with the
present value of the net minimum lease payments under capital leases, as of
December 31, 2004:

Minimum annual operating lease payments as shown have been reduced by
$4,497 from future sublease rentals due over the term of the subleases, and
include estimated payments for operating costs and real estate taxes due to the
lessor, where applicable.

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.

Rent expense under operating leases (reduced by sublease rentals) was
$35,643, $36,366 and $25,436 for the years ended December 31, 2004, 2003 and
2002, respectively. The increase in rent beginning in 2003 was due to the rental
payments required due to the sale leaseback transaction of seven of True Value's
distribution centers.

Sale Leaseback Transaction

On December 31, 2002, True Value sold seven of its distribution centers to
unrelated third parties for an aggregate purchase price of $125,753. True Value
concurrently agreed to lease the distribution centers for a period of 20 years.
The transaction was recorded as a real property sale and as on-going operating
leases in True Value's financial statements. The resulting gain on sale of
$55,564 was recorded as deferred gain in the Consolidated Balance Sheet and is
being amortized to income on a straight-line basis over the initial 20 year
lease term. True Value has the right to extend each lease for two additional
periods of approximately 10 years each. True Value may elect to renew a lease or
leases with respect to any one or more of the properties without renewing the
lease or leases with respect to all of the properties. True Value has the right
to assign the lease without the landlord's prior written consent, but subject to
certain conditions described in the leases. Provided that True Value assigns the
rent to the landlord, True Value may sublet all or any part of any property
without the landlord's consent.

F-19

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES

True Value is involved in various claims and lawsuits incidental to its
business. The following significant matters existed at December 31, 2004:

ACTIVE LEGAL MATTERS:

FLEGLES ACTION

On February 12, 2003, a former True Value member, Flegles Inc. ("Flegles"),
filed suit against True Value in the Circuit Court of Carlisle County, Kentucky.
The complaint alleges that True Value is liable to Flegles for the role True
Value played with respect to Flegles' construction of a new retail store
facility in Bardwell, Kentucky that has allegedly incurred financial losses.
Flegles sought $2,400 in compensatory damages and also an award of punitive
damages. On July 30, 2004, a jury found True Value liable to Flegles for certain
losses incurred by Flegles and awarded Flegles $1,300 in compensatory damages.
The jury did not award any punitive damages. As True Value believes that the
verdict was rendered in error, it pursued post-trial motions before the Circuit
Court, including a request that the verdict be set aside or that True Value be
awarded a new trial. Such relief was denied by the Circuit Court and True Value
is now pursuing its appeal for such relief in the Kentucky Appellate Court. True
Value posted with the court a bond in an amount necessary to prevent Flegles
from enforcing its judgment during the appeal. True Value intends to continue to
vigorously defend this case and does not believe that the ultimate resolution
will have a material effect on results from operations or financial position.

CLAIMS AGAINST ERNST & YOUNG LLP

True Value is pursuing claims against its former outside auditors, Ernst &
Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
business practices and fraud. True Value contends that E&Y failed to properly
discharge its duties to True Value and failed to identify, in a timely manner,
and indeed concealed, certain material weaknesses in True Value's internal
financial and operational controls. As a result, True Value was forced to make
an unanticipated accounting adjustment in the fourth quarter of 1999 in the
total amount of $121,333 (the "Fourth Quarter Charge"). As a result, True Value
reported a net loss of $130,803 for the fiscal year ended December 31, 1999. It
is True Value's belief that had E&Y properly discharged its duties, the scope
and breadth of the Fourth Quarter Charge, as well as the accounting and
operational control deficiencies that necessitated the charge, would have been
substantially lessened. As a result of E&Y's failures, True Value has suffered
significant financial damages. The factual allegations that form the basis for
True Value's claim against E&Y include, in part, the issues identified in the
Securities and Exchange Commission (the "Commission") cease and desist order
described below. True Value began discussion of its claims with E&Y early in the
fall of 2001. Pursuant to the dispute resolution procedures required by True
Value's engagement letter with E&Y, True Value and E&Y attempted to mediate this
dispute during the first six months of 2002. When those attempts proved
unsuccessful and again pursuant to the dispute resolution procedures, True Value
filed its claim with the American Arbitration Association on July 31, 2002. The
arbitration is subject to certain confidentiality requirements. Another effort
at non-binding mediation between the parties began in December 2004 and was
unsuccessful. Hearings before the arbitration panel occurred in early 2005 and a
decision is still pending. A portion of the recoveries under this matter, if
any, may be subrogated to the rights of True Value's insurer to the extent that
it has made payments to or on behalf of True Value associated with the 1999
loss.

F-20

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPLETED LEGAL MATTERS:

KENNEDY ACTION

In June 2000, various former members of True Value filed an action against
True Value in the Circuit Court of the 19th Judicial Circuit (McHenry County,
Illinois) (the "Kennedy action"). The plaintiffs in the Kennedy action each
alleged that, based upon representations made to them by True Value and its
predecessors that the Coast to Coast brand name would be maintained, they voted
for the merger of ServiStar/Coast to Coast and Cotter & Company. The plaintiffs
alleged that after the merger, the Coast to Coast brand name was eliminated and
that each plaintiff thereafter terminated or had its membership in True Value
terminated. The plaintiffs further claimed that True Value breached its
obligations by failing to redeem their stock and by creating loss allocation
accounts for the plaintiffs. The plaintiffs each asserted claims for
fraud/misrepresentation, negligent misrepresentation, claims under the state
securities laws applicable to each plaintiff, claims under the state
franchise/dealership laws applicable to each plaintiff, breach of fiduciary
duty, unjust enrichment, estoppel and recoupment. Similar claims were filed
against True Value as counterclaims to various complaints filed by True Value in
McHenry County to recover accounts receivable balances from other former
members. Those claims were consolidated with the Kennedy action. In March 2001,
the Kennedy complaint was amended to add additional plaintiffs. Also in March
2001, another action was filed against True Value on behalf of additional former
members, in the same court, by the same law firm (the "A-Z action"). The
complaint in the A-Z action alleged substantially similar claims as those in the
Kennedy action, with the principal difference being that the claims related to
the elimination of the ServiStar brand name. The Kennedy and A-Z actions were
consolidated for purposes of discovery. In July 2002, the plaintiffs in these
consolidated actions amended their complaints to name as defendants two former
officers of True Value. In December 2004, True Value entered into a settlement
on confidential terms with the plaintiffs under the Kennedy and A-Z actions,
which settled all claims under these actions and pursuant to which the Kennedy
and A-Z actions were dismissed.

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

TRUE VALUE ORDER

On March 4, 2003, the Commission entered an Order Instituting
Cease-and-Desist Proceedings, Making Findings and Imposing Cease-and-Desist
Order Pursuant to Section 21C of the Securities and Exchange Act of 1934 as to
True Value Company, SEC File No. 3-11050 (the "Order"). True Value consented to
the entry of the Order without admitting or denying the findings in the Order.

The Commission entered the Order following an investigation by the staff of
the Commission of the circumstances that led to significant financial
adjustments resulting in the 1999 loss of $130,803. The Order found that, from
approximately July 1997 through the end of 1999, True Value's accounting systems
and internal controls related to inventory management were inadequate. The Order
also found that these deficiencies caused True Value to understate expenses,
which resulted in overstatement of net income, during 1998 and 1999. According
to the Order, True Value filed erroneous reports on Form 10-Q for the first,
second and third quarters of 1998 and 1999 and an erroneous report on Form 10-K
for 1998. In 1999, True Value reported a loss, caused by weaknesses in the
accounting practices and internal controls at True Value, of approximately
$130,803.

Pursuant to the Order, True Value has agreed to continue to maintain the
procedures that it has adopted since the Spring of 2000 and otherwise to comply
with the accounting, record keeping and internal control provisions of the
Securities and Exchange Act of 1934 (the "Exchange Act"). In addition, True
Value will

F-21

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

continue to employ as a member of its management team, during the fiscal years
ending 2002, 2003 and 2004, a Director of Internal Audit who will be responsible
for executing True Value's internal audit plan and will continue to engage a
public accounting firm to assist the Director of Internal Audit in performing
internal audit procedures.

Also pursuant to the Order, within 90 days after the close of each fiscal
year ending 2002, 2003 and 2004, the Director of Internal Audit prepared and
delivered to True Value's board audit committee, with copies to the Commission,
True Value's auditors and the public accounting firm assisting the Director of
Internal Audit, a report describing the scope of the audit plan during the
preceding year, confirmation that the audit plan was carried out, an overview of
significant control weaknesses identified that require improvement and a review
of the steps taken to improve the system of internal controls. The report for
year end 2004 was filed with the Commission on March 3, 2005. True Value
believes it has no further reporting obligations under the Order.

7. INCOME TAXES

Income tax expense consisted of the following for the years ended December
31:

True Value 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:

F-22

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects to True Value of its net
operating loss carryforwards, which expire in years through 2023, alternative
minimum tax credit carryforwards, which do not expire, nonqualified notices of
allocations, which are deductible when redeemed and 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. The deferred
tax effect of the net operating loss carryforward was reduced in 2004 by $4,141.
This reduction is attributable to the net effect of a $5,793 decrease
attributable to amounts to be charged against members' loss allocation accounts
partially offset by a $1,652 increase primarily in other deferred tax assets and
liabilities.

True Value has recorded a valuation allowance for the full amount of
deferred tax assets net of deferred tax liabilities because True Value has
concluded that, based on the weight of available evidence, it is more likely
than not that the deferred tax assets will not be realized. Deferred tax assets
will only be realized to the extent future earnings are taxable to True Value
and not allocated to members as tax-deductible patronage dividends.

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

F-23

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. SUPPLEMENTAL CASH FLOW INFORMATION

True Value may set off its obligation to make payments to members for
redeemable stock, notes, interest or declared and unpaid dividends against any
obligation owed by the member to True Value. The annual patronage dividend is
satisfied through cash payments and issuance of Promissory (subordinated) notes
and Redeemable Class B non-voting common stock; for members with loss allocation
accounts, the Class B non-voting common stock is offset to satisfy members'
remaining allocation of the 1999 loss. Non-cash operating and financing
activities relating to the issuance of patronage dividends were as follows for
the years ended December 31:

True Value exercised its set off rights in 2004, 2003 and 2002 when
patronage dividends were declared for members with loss allocation accounts. In
addition, True Value reduced the Patronage dividend payable in cash of $8,983
and $6,121 in 2003 and 2002, respectively, to $8,452 and $5,791 when they were
paid in 2004 and 2003, respectively. The amounts not paid were used to set off
past due accounts receivable of $531 and $330 in 2004 and 2003, respectively.

True Value also had non-cash operating and financing activities related to
the redemption of stock due to the lifting of the moratorium. In 2003, True
Value reclassed amounts presented for redemption, but deferred due to the
moratorium, into Liabilities. True Value reclassed $18,841 of Redeemable Class A
voting common stock and $59,579 of Redeemable Class B non-voting common stock,
offset by: $27,941 of Loss allocation, $9,933 of Accumulated deficit (related to
the 2001 loss) and $6,821 of Accounts receivable to Deferred stock redemptions.
In 2004, True Value began redeeming these shares and related offset amounts, and
also began redeeming shares that were presented for redemption during 2004. The
components of the stock redemptions and payments in 2004 were as follows:

F-24

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2004, True Value classified $4,886 in Liabilities for
stock redemption requests that had not fully completed the redemption
procedures. True Value reclassed $2,729 of Redeemable Class A voting common
stock, $6,270 of Redeemable qualified Class B non-voting common stock and $1,433
of Redeemable nonqualified Class B non-voting common stock, offset by: $3,212 of
Loss allocation, $1,575 of Accumulated deficit (related to the 2001 loss) and
$759 of Accounts receivable. True Value exercised its set off rights in 2004
when obligations to redeem the stock of former members were set off against
their related loss allocation, accumulated deficit and accounts receivable
balances.

True Value exercised its set off rights with member accounts receivable and
loss allocation accounts when True Value member notes and interest came due in
2004, 2003 and 2002 as follows:

In 2004, in accordance with the Stipulation of Settlement related to the
Derivative Action, upon rescinding the moratorium, True Value reduced the loss
allocation accounts of the parties to the Stipulation of Settlement by
approximately $5,000 on a pro-rata basis by increasing the Accumulated deficit
account.

In 2004, 2003 and 2002, True Value extended promissory (subordinated)
notes, at the option of the member, for a three year period in the amounts of
$13,714, $16,479 and $22,538, respectively.

True Value's non-cash financing and investing activities in 2004 included
$1,697 related to the acquisition of new computer equipment by entering into
capital leases. No capital lease obligations were incurred in 2003 and 2002.

Cash paid for interest during 2004, 2003 and 2002 totaled $11,938, $27,496
and $61,989, respectively. Cash paid for income taxes during 2004, 2003 and 2002
totaled $167, $285 and $305, respectively.

F-25

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. BENEFIT PLANS

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

The accumulated benefit obligation for True Value administered pension
plans was $62,393 and $53,870 at December 31, 2004 and 2003, respectively.

One of True Value's pension plans is the supplemental retirement plan
("SRP"), which is an unfunded unqualified defined benefit plan. The SRP had an
Accumulated Benefit Obligation of $4,430 and $4,717 as of December 31, 2004 and
December 31, 2003, respectively. Since the SRP is an unfunded plan, there were
no plan assets at December 31, 2004 and December 31, 2003.

True Value recorded in Other long-term liabilities, for the SRP plan, an
additional minimum pension liability of $4,479 and $5,096 as of December 31,
2004 and December 31, 2003, respectively, which represents the amount by which
the accumulated benefit obligation exceeded the fair value of plan assets plus
the previously recognized prepaid asset. The additional liability has been
offset by an intangible asset, which is included in Other assets, to the extent
of previously unrecognized prior service cost. The amount in excess of
previously unrecognized prior service cost of $1,903 and $1,979 at December 31,
2004 and December 31, 2003 is recorded as a reduction of Members' equity in
Accumulated other comprehensive loss.

True Value has a prepaid pension expense for both plans of $4,986 and
$8,925 at December 31, 2004 and 2003, respectively. The prepaid pension expense
at December 31, 2004 and December 31, 2003 is classified in "Prepaid expenses."

F-26

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

PLAN ASSETS

Plan assets consist primarily of publicly traded common stocks and
corporate debt instruments and the split by asset category is as follows:

The target asset allocation of the plan assets is:

CONTRIBUTIONS

True Value expects to contribute $7,000 to its qualified pension plan and
$772 to its SRP plan in 2005. True Value's policy is to fund its qualified
pension plan to maintain assets equal to at least 90% of current liability in
order to maintain its exemption from the Pension Benefit Guarantee Corporation
variable premium.

F-27

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

True Value also participates in union-sponsored defined contribution plans.
Costs related to these plans were $90, $59 and $60 for 2004, 2003 and 2002,
respectively.

ESTIMATED FUTURE BENEFIT PAYMENTS

The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:

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

The basis used to determine the assumption of overall expected return on
assets was an analysis of the historical real (net of inflation) returns
beginning in 1926 for a portfolio consisting of 60% of large-cap US equities,
20% corporate bonds, 16% US government bonds, and 4% cash, a combination
intended to approximate True Value's pension asset mix. Using the historical
returns over 30-year periods, True Value calculated the average returns for this
portfolio over 30-year periods. The calculated 25th and 75th percentile were
4.6% and 6.4%, respectively. With the inflation assumption (3.0%) and the
adjustment for expected fees paid from the pension trust (1.0%), the 25th and
75th percentile nominal yields are 6.6% and 8.4%. The True Value Company Defined
Benefit Pension Plan assumes a rate of return of 8.0%.

True Value also contributes to the True Value Company Employee Savings and
Compensation Deferral Plan (the "401k Plan") in accordance with IRS regulations.
Under the 401k Plan, each participant may elect to contribute an amount up to
50% of the participant's annual compensation, not to exceed $13, $12 and $11 per
year for 2004, 2003 and 2002, respectively. Also, plan participants who are 50
years of age or older may elect to make additional catch-up contributions not to
exceed $3, $2 and $1 for 2004, 2003 and 2002, respectively. The total
participants' deferred compensation including True Value's contributions to the
participants' balances may not exceed $41 in 2004 and $40 in both 2003 and 2002.
Effective in 2002, the 401k Plan included a guaranteed match of one-third of a
participant's contribution up to a total of 2% of the participant's annual
compensation. Based on True Value achieving certain financial goals, a match of
greater than one-third of a participant's contribution can be earned. A match
equaling two-thirds of a participant's contribution, up to a total of 4% of the
participant's annual compensation, was earned for 2002 and 2003 and funded by
March 2003 and 2004, respectively. For 2004, a match equaling one-third of a
participant's contribution, up to a total of 2% of the participant's annual
compensation, was earned and will be funded by March 2005. True Value recognized
costs of $1,520, $2,928 and $2,445 for 2004, 2003 and 2002, respectively, for
the 401k Plan.

F-28

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SEGMENT INFORMATION

True Value is principally engaged as a wholesaler of hardware and related
products and is a manufacturer of paint products. True Value identifies segments
based on management responsibility and the nature of the business activities of
each component of its business. True Value 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:

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

F-29

TRUE VALUE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Primary product revenue categories for the last three years are set forth
in the following table:

11. ASSET SALES

In August 2002, True Value 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 were $6,286

12. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

Selected quarterly financial information for each of the four quarters in
2004 and 2003 is as follows:

F-30

ITEM 15(a)(2). INDEX TO FINANCIAL STATEMENT SCHEDULE.

F-31

TRUE VALUE COMPANY

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

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

INVENTORY RESERVES

VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS

F-32

ITEM 15(a)(3). INDEX TO EXHIBITS

E-1

E-2

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, 2004 has been sent to security holders.
Copies of such Annual Report will subsequently be furnished to the Securities
and Exchange Commission.

E-3