COTTER & CO, POS AM, 1994-03-18

COTTER & CO
POS AM, 1994-03-18
HARDWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 1994

REGISTRATION NO. 33-39477
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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POST-EFFECTIVE AMENDMENT NO. 3

FORM S-2

REGISTRATION STATEMENT

Under
THE SECURITIES ACT OF 1933

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COTTER & COMPANY
(Exact name of Registrant as specified in its charter)

Delaware 36-2099896
(State of Incorporation) (IRS Employer Identification No.)

2740 North Clybourn Avenue
Chicago, Illinois 60614
(312) 975-2700
(address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

Kerry J. Kirby, Vice President and Chief Financial Officer
Cotter & Company
2740 North Clybourn Avenue
Chicago, Illinois 60614
(312) 975-2700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Daniel T. Burns, Vice President and Robert N. Sodikoff, Esq.
General Counsel Aronberg Goldgehn Davis & Garmisa
Cotter & Company One IBM Plaza
2740 North Clybourn Avenue Suite 3000
Chicago, Illinois 60614 Chicago, Illinois 60611
(312) 975-2700 (312) 828-9600

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Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Post-Effective Amendment
to the Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /

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<PAGE> 2

COTTER & COMPANY

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CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
CAPTION IN
ITEM IN FORM S-2 PROSPECTUS
---------------- -----------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus

2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Available Information; Reports to
Securities Holders; Documents
Incorporated by Reference

3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Summary; The Company; Description of
Common Stock

4. Use of Proceeds.................................. Use of Proceeds

5. Determination of Offering Price.................. Outside Front Cover Page of
Prospectus and Plan of Distribution

6. Dilution......................................... Not Applicable

7. Selling Security Holders......................... Not Applicable

8. Plan of Distribution............................. Plan of Distribution

9. Description of Securities to be Registered....... Description of Common Stock

10. Interests of Named Experts and Counsel........... Not Applicable

11. Information with Respect to the Registrant....... Summary; The Company; Dividends; Se-
lected Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Distribution
of Patronage Dividends; Description
of Common Stock; Index to
Consolidated Financial Statements

12. Incorporation of Certain Information by
Reference........................................ Documents Incorporated By Reference

13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MARCH 18, 1994

PROSPECTUS

COTTER & COMPANY

14,960 SHARES CLASS A COMMON STOCK, $100 PAR VALUE

(IN UNITS OF TEN SHARES)

THE COMMON STOCK OFFERED HEREUNDER IS OFFERED EXCLUSIVELY TO
RETAILERS OF HARDWARE, VARIETY AND RELATED PRODUCTS,
IN CONNECTION WITH BECOMING MEMBERS OF THE COMPANY.
(SEE "PLAN OF DISTRIBUTION" HEREIN.)

THE COMMON STOCK OFFERED HEREUNDER IS LIMITED AS TO TRANSFERABILITY
BY ITS TERMS. THE COMPANY RETAINS AN AUTOMATIC LIEN AGAINST
SUCH COMMON STOCK, AND DIVIDENDS ACCRUING THEREON,
FOR ANY INDEBTEDNESS DUE THE COMPANY.
(SEE "DESCRIPTION OF COMMON STOCK" HEREIN.)

THERE IS NO EXISTING MARKET FOR THE COMMON STOCK OFFERED HEREUNDER AND
THERE IS NO EXPECTATION THAT ANY MARKET WILL DEVELOP.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING
UNIT OF 10 SHARES OF PRICE TO DISCOUNTS AND PROCEEDS TO
CLASS A COMMON STOCK PUBLIC COMMISSIONS COMPANY
<S> <C> <C> <C>
- -----------------------------------
Per Unit(1)........................ $1,000 See (2) Below $1,000(3)
Total.............................. $1,496,000 See (2) Below $1,496,000(3)
</TABLE>

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(1) The shares will be offered only in units of 10 shares and no shareholder may
purchase more than one such unit.

(2) There will be no underwriters. The subject stock will be sold directly by
the Company at par value.

(3) There is no firm commitment for the sale of the securities offered
hereunder; they will be sold from time to time by the Company. However,
assuming the sale of all securities offered hereunder, and before deduction
of approximately $50,000 for estimated expenses in connection with this
offering, the total proceeds will be as shown above.
------------------

THE DATE OF THIS PROSPECTUS IS APRIL , 1994.

<PAGE> 4

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: 219 S.
Dearborn Street, Chicago, Illinois 60604; 75 Park Place, New York, New York
10007; and 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies of
such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C., 20549 at prescribed rates.

REPORTS TO SECURITY HOLDERS

Each year the Company distributes to its stockholder-Members an annual
report containing consolidated financial statements reported upon by a firm of
independent auditors. The Company may, from time to time, also furnish to its
stockholder-Members interim reports, as determined by management.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Annual Report on Form 10-K for the year ended January 1, 1994
filed pursuant to Section 15(d) of the Exchange Act is incorporated herein by
reference. The Company will provide without charge to each person to whom a
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents incorporated by reference in the Registration
Statement (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents that the Registration
Statement incorporates). Requests for such copies should be directed to Kerry J.
Kirby, Vice President and Chief Financial Officer, Cotter & Company, 2740 North
Clybourn Avenue, Chicago, IL 60614, (312) 975-2700.

2
<PAGE> 5

SUMMARY

This Summary is qualified in its entirety by the detailed information and
the Company's consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus and in the documents incorporated herein
by reference.

Cotter & Company (the "Company"), located at 2740 North Clybourn Avenue,
Chicago, Illinois, 60614, telephone number (312) 975-2700, is a Member-owned
wholesaler of hardware, variety and related merchandise. It is the largest
wholesaler of hardware and related items in the United States. The Company also
manufactures paint, paint applicators, outdoor power equipment, heaters and
hardware related products. For reporting purposes, the Company operates in a
single industry as a Member-owned wholesaler cooperative.

The Company's Class A Common Stock being offered hereby is offered
exclusively to retailers of hardware, variety and related merchandise, in
connection with becoming Members of the Company. The Class A Common Stock (which
is the sole voting stock) is offered only in ten (10) share units, and no party
may acquire more than one unit; thus control of the Company is equally
distributed among the stockholder-Members. Sales of Class A Common Stock are
made for cash.

Membership entitles a Member to use certain Company trademarks and trade
names, including the federally registered collective membership trademarks
indicating membership in "True Value Hardware Stores" and "V&S Variety Stores".
Membership also entitles the Member to receive annual patronage dividends based
upon the Member's purchases from the Company. In accordance with the Company'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 and provisions authorized by the Board of Directors.

The Class A Common Stock being offered hereby is limited as to
transferability in that the Company has a ninety (90) day right of first refusal
to repurchase, at book value, a Member's stock before such stock can otherwise
be disposed of. Additionally, the Company retains an automatic lien on the Class
A Common Stock, and dividends accruing thereon, for any indebtedness due the
Company. The Company is obligated to repurchase a Member's Class A Common Stock
and the Member is obligated to sell such stock, at book value, in accordance
with the terms and conditions set forth in the Company's By-Laws upon
termination of the Member Agreement (the "Agreement"). The Agreement may be
terminated by either the Company or the Member on sixty (60) days written
notice. Termination by the Company requires approval by a two-thirds vote of the
Board of Directors, except in the following circumstances where the Company has
the right to immediately terminate the Agreement: the Member becomes insolvent,
commits any act of bankruptcy, files a voluntary petition in bankruptcy, is
adjudicated as bankrupt, or commits a breach of any obligation under the
Agreement, which breach is not cured within ten (10) days after written notice
to the Member by the Company.

There is no existing market for the Class A Common Stock offered hereunder
and there is no expectation that any market will develop.

The Company intends to use the proceeds of this offering primarily for
general working capital purposes, including the purchase of merchandise for
resale to Members and the maintenance of adequate inventory levels.

3
<PAGE> 6

THE COMPANY

The Company was organized as a Delaware corporation in 1953. Upon its
organization, it succeeded to the business of Cotter & Company, an Illinois
corporation organized in 1948. The Company's principal executive offices are
located at 2740 North Clybourn Avenue, Chicago, Illinois, 60614. Its telephone
number is (312) 975-2700.

The Company is a Member-owned wholesaler of hardware, variety and related
merchandise. It is the largest wholesaler of hardware and related items in the
United States. The Company also manufactures paint, paint applicators, outdoor
power equipment, heaters and hardware related products. For reporting purposes,
the Company operates in a single industry as a Member-owned wholesaler
cooperative.

The Company serves approximately 7,500 True Value Hardware Stores
throughout the United States, including approximately 900 combination True Value
Hardware and V&S Variety Stores and 1,000 V&S Variety Stores. Primary
concentrations of Members exist in California (approximately 8%), New York
(approximately 7%), Illinois (approximately 6%), Pennsylvania and Texas
(approximately 5% each) and Michigan and Ohio (approximately 4% each).

USE OF PROCEEDS

The proceeds to be received from this offering will be used by the Company
for general working capital purposes, including the purchase of merchandise for
resale to Members and the maintenance of adequate inventory levels. Until used
as provided herein, the net proceeds of the sale of the Class A Common Stock may
be invested in short-term commercial paper, bank certificates of deposit,
government securities, repurchase agreements, or other similar short-term
investment.

Inasmuch as the Company will use its best efforts to sell the Class A
Common Stock being offered hereunder and has no assurances that all such Class A
Common Stock will be sold, the Company may not receive the entire amount of
estimated proceeds from the sale of said Class A Common Stock.

PLAN OF DISTRIBUTION

The Company's Class A Common Stock being offered hereby is offered
exclusively to retailers of hardware, variety and related merchandise, in
connection with becoming Members of the Company. Each independent retailer who
applies to become a stockholder-Member must subscribe for ten (10) shares of the
Company's Class A Common Stock, $100 par value, having a total purchase price of
$1,000. All sales of the Class A Common Stock will be made for cash.

Sales of Class A Common Stock are primarily made through the Company's
member development specialists but only after the executive officers of the
Company approve the admission of a new Member. Neither the Company's executive
officers nor its member development specialists receive any special or separate
compensation or commission in connection with the admission of new Members and
concomitant sales of Class A Common Stock. Although the member development
specialists frequently are the Company's initial contact with potential new
Members, they do not, and are not empowered to, admit new Members to the
Company.

4
<PAGE> 7

DIVIDENDS

Other than the payment of patronage dividends, including the redemption of
some nonqualified written notices of allocation, the Company has not paid
dividends on its Class A Common Stock or Class B Common Stock. The Board of
Directors does not plan to pay dividends on either of said classes. See
"Distribution of Patronage Dividends" and "Description of Common Stock".

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28, DECEMBER 29, DECEMBER 31,
1994 1993 1991 1990 1989
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................. $2,420,727 $2,356,468 $2,139,887 $2,135,120 $2,058,822
Net margins.......................... $ 57,023 $ 60,629 $ 59,425 $ 54,847 $ 66,507
Patronage dividends.................. $ 54,440 $ 60,901 $ 60,339 $ 56,269 $ 67,605
Total assets......................... $ 803,528 $ 833,372 $ 763,109 $ 709,895 $ 714,889
Long-term debt and obligations under
capital leases..................... $ 69,201 $ 72,749 $ 13,335 $ 15,077 $ 15,642
Promissory (subordinated) and
instalment notes payable........... $ 217,996 $ 235,695 $ 235,289 $ 215,452 $ 216,770
Redeemable Class A Common Stock...... $ 6,633 $ 6,857 $ 7,077 $ 7,362 $ 7,401
Redeemable Class B Common Stock...... $ 110,773 $ 108,982 $ 104,151 $ 101,398 $ 95,793
Book value per share of Class A
Common Stock and Class B Common
Stock(a)........................... $ 103.85 $ 101.42 $ 102.50 $ 103.38 $ 104.74
</TABLE>

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(a) The book value per share of the Company's Class A Common Stock and Class B
Common Stock is the value, determined in accordance with generally accepted
accounting principles, of such shares as shown by the respective year-end
consolidated balance sheets of the Company, included elsewhere herein as
reported on by the Company's independent auditors, after eliminating
therefrom all value for goodwill, and other intangible assets and any
retained earnings specifically appropriated by the Company's Board of
Directors.

5
<PAGE> 8

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992

Revenues increased $64,259,000 or 2.7% compared to the previous year. The
majority of this revenue gain resulted from increased direct shipment sales to
Members. Contributing to the increased direct shipments were strong increases of
15.6% from Lumber and Building Materials and a 20.5% increase from the Company's
manufacturing division, General Power Equipment Company. Another significant
portion of the Company's revenue increase was due to Cotter Canada Hardware and
Variety Cooperative, Inc. ("Cotter Canada"). With its growth in membership and
its first full year of operations, Cotter Canada shipments to Canadian members
increased by 36.4%.

Consolidated gross margins increased $1,313,000 but as a percentage of
revenue decreased to 9.0% from 9.2% reflecting the change in sales mix from
warehouse to direct shipments.

Warehouse, general and administrative expenses increased by $9,430,000 or
7.7% due to higher manufacturing and logistic costs, increases associated with a
full year of operations at Cotter Canada and non-recurring expenses related to
the decentralization of functions previously performed at the Company's National
Headquarters.

Interest paid to Members decreased $1,258,000 or 4.9% primarily due to a
lower average interest rate.

Other interest expense increased by $156,000 or 2.1% due to a long-term
financing agreement entered into by the Company during the second quarter of
fiscal year 1992 to finance the expansion of the Company's distribution network
and entry into Canada. This increase was partially offset by a decrease in
short-term borrowings and the average rate of interest compared to the
corresponding period last year.

The gain on sale of properties owned of $5,985,000 and the corresponding
increase in income tax expense of $2,193,000 resulted primarily from the
disposition of a regional distribution center in Pomona, California and real
estate located in Chicago, Illinois.

Net margins were $57,023,000 for the year ended January 1, 1994 compared to
$60,629,000 for the year ended January 2, 1993.

FISCAL YEAR 1992 COMPARED TO FISCAL YEAR 1991

Revenues for fiscal year 1992 increased by $216,581,000 or 10.1%. This
represents the highest single year dollar increase in the Company's history. The
majority of the revenue growth resulted from a 7.8% increase in merchandise
shipments to the True Value and V&S Variety Members from the Company's regional
distribution network and manufacturing facilities. All general classes of
merchandise experienced revenue gains, reflecting Member confidence in
merchandising programs and regional assortments. Another significant influence
on revenues was the Company's expansion into the Canadian market. Shipments to
Canadian Members by Cotter Canada exceeded $65,000,000.

Gross margins increased by $18,863,000 or 9.5%. As a percentage of
revenues, gross margins remained comparable to last year.

Warehouse, general and administrative expenses increased by $11,404,000 or
10.2% but as a percentage of revenues remained comparable with the prior year.
The Company was able to maintain this percentage, even though the Company
increased the number of items stocked in regional distribution centers and
member ordering patterns continued to shift away from direct (drop shipment)
sales. Additionally, fiscal year 1992 was

6
<PAGE> 9

the first full fiscal year of operating the Kingman, Arizona regional
distribution center, and the year the Company began its Canadian operation.

Interest paid to Members decreased slightly due to a decrease in the
average interest rate partially offset by an increase in the balance of the
promissory (subordinated) and instalment notes.

Other interest expense increased by $4,807,000 due to long-term financing
agreements entered into by the Company during fiscal year 1992, to finance the
expansion of the Company's distribution network and entry into Canada.

Other income, net decreased by $1,502,000 due to a reduction in interest
income compared to fiscal year 1991. Interest income decreased due to a
reduction in the notes receivable and short-term investment amounts held during
the year as well as lower rates of interest earned on these balances.

Net margins were $60,629,000 and $59,425,000 for fiscal years 1992 and
1991, respectively. The difference resulted primarily from increased merchandise
shipments to Members.

LIQUIDITY AND CAPITAL RESOURCES

At January 1, 1994, net working capital decreased to $225.2 million from
$230.2 million at January 2, 1993. The current ratio increased to 1.57 in fiscal
year 1993 compared to 1.56 in fiscal year 1992. Current assets decreased $18.0
million, primarily due to the Company's change in cash position, offset by an
increase of $22.2 million in receivables due to increased sales and offering
Members favorable payment terms received by the Company from its vendors.
Current liabilities decreased $13.0 million primarily due to a decrease in
accounts payable as a result of decreased wholesale merchandise inventory offset
by an increase in current maturities of long-term obligations and short-term
borrowings.

Historically, cash flow from operations together with proceeds of
short-term borrowings have sufficiently funded the Company's operations. In an
attempt to improve Members' cash flow, the Company continued to offer Members
extended terms on purchases during fiscal year 1993 thereby increasing extended
term receivables by 24.7%. During fiscal year 1994, the Company anticipates that
cash provided by operating activities will increase due to forecasted
improvement in the relationship between inventories and accounts payable.

Cash and cash equivalents decreased to $1.3 million at January 1, 1994
compared to $37.6 million at January 2, 1993. Short-term lines of credit
available under informal agreements with lending banks, cancelable by either
party under specific circumstances, amounted to $56.5 million at January 1,
1994. There were $23.3 million of borrowings outstanding under these agreements
at January 1, 1994 compared to $0.3 million at January 2, 1993.

The Company's capital is primarily derived from redeemable Class A Common
Stock and retained earnings, together with promissory (subordinated) notes and
redeemable nonvoting Class B Common Stock issued in connection with the
Company's annual patronage dividend. Funds derived from these capital resources
are usually sufficient to satisfy long-term capital needs.

Net capital expenditures, including those made under capital leases, were
$5.6 million in fiscal year 1993 compared to $27.0 million in fiscal year 1992
and $30.5 million in fiscal year 1991. These capital expenditures were
principally related to additional equipment and technological improvements at
the regional distribution centers and National Headquarters. Additionally, a
wholly-owned subsidiary of the Company acquired certain assets of a hardware and
variety wholesaler based in Canada for approximately $13.1 million in fiscal
year 1992. In fiscal year 1991, capital expenditures included the construction
of a new regional distribution center

7
<PAGE> 10

in Kingman, Arizona. Funding of capital expenditures in fiscal year 1994 is
anticipated to come from operations and external sources, if necessary.

The effects of all recent tax legislation have not had a material effect on
the Company's financial position and results of operations.

Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect of this adoption does
not have a material effect on the consolidated financial statements.
Additionally, the Company has reviewed the impact of all new accounting
standards issued as of the filing date of this report, that will be adopted at a
future date, and has determined that these will not have a material impact on
the Company's operating results and financial position.

BUSINESS

Membership entitles a Member to use certain Company trademarks and trade
names, including the federally registered collective membership trademarks
indicating membership in "True Value Hardware Stores" and "V&S Variety Stores".
The "True Value" collective membership mark has a present expiration date of
January 2, 2003 and the "V&S Variety Stores" collective membership mark has a
present expiration date of July 22, 1995.

The Company's total sales of merchandise to its U.S. Members were divided
among the following general classes of merchandise:

<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
------------ ------------ ------------
<S> <C> <C> <C>
Hardware Goods............................ 20.0% 20.8% 20.9%
Electrical and Plumbing Supplies.......... 16.3% 16.3% 16.7%
Painting and Cleaning Supplies............ 14.9% 14.7% 15.5%
Variety and Related Goods................. 13.9% 14.2% 13.7%
Farm and Garden Supplies.................. 12.3% 11.7% 12.0%
Lumber and Building Materials............. 12.3% 10.8% 9.5%
Appliances and Housewares................. 10.3% 11.5% 11.7%
</TABLE>

The Company serves its Members by purchasing products in quantity lots and
selling them to Members in smaller lots, passing along any savings to Members in
the form of lower prices and/or patronage dividends. The Company holds
conventions and meetings for its Members in order to keep them better informed
as to industry trends and as to new merchandise available. The Company also
provides each of its Members with an illustrated price catalog showing the
products available from the Company. The Company's sales to its Members are
divided into three categories, as follows: (1) warehouse shipment sales
(approximately 47% of

8
<PAGE> 11

total sales); (2) direct (drop shipment) sales (approximately 41% of total
sales); and (3) relay sales (approximately 12% of total sales). Warehouse
shipment sales are sales of products purchased, warehoused, and resold by the
Company upon orders from the Members. Direct shipment sales are sales of
products purchased by the Company but delivered directly to Members from
manufacturers. Relay sales are sales of products purchased by the Company in
response to the requests of several Members for a product which is not normally
held in inventory and is not susceptible to direct shipment. Generally, the
Company will give notice to all Members of its intention to purchase products
for relay shipment and then purchases only so many of such products as the
Members order. When the product shipment arrives at the Company, it is not
warehoused; rather, the Company breaks up the shipment and "relays" the
appropriate quantities to the Members who placed orders.

The Company also manufactures paint, paint applicators, outdoor power
equipment, heaters and hardware related products. The principal raw materials
used by the Company include chemicals, engines and steel. All raw materials are
purchased from outside sources. The Company has been able to obtain adequate
sources of raw materials and other items used in production and no shortages of
such materials which will materially impact operations are currently
anticipated.

The Company annually sponsors two "markets" (one in the Spring and one in
the Fall). In fiscal year 1994, these markets will be held in St. Louis,
Missouri. Members are invited to the markets and generally place substantial
orders for delivery during the period prior to the next market. During such
markets, new merchandise and seasonal merchandise for the coming season is
displayed to attending Members.

As of February 26, 1994 and February 27, 1993, the Company had a comparable
backlog of orders (including relay orders) believed to be firm of approximately
$23,000,000. It is anticipated that the entire backlog existing at February 26,
1994 will be filled by April 30, 1994. The Company's backlog at any given time
is made up of two principal components: (i) normal resupply orders and (ii)
market orders for future delivery. Resupply orders are orders from Members for
merchandise to keep inventories at normal levels. Generally, such orders are
filled the day following receipt, except that relay orders for future delivery
(which are in the nature of resupply orders) are not intended to be filled for
several months. Market orders for future delivery are orders for new or seasonal
merchandise given by Members during the Company's two markets, for delivery
during the several months subsequent to the markets. Thus, the Company will have
a relatively high backlog at the end of each market which will diminish in
subsequent months until the next market.

The retail hardware and variety industry is characterized by intense
competition. Independent retail hardware and variety businesses, as served by
the Company, have met increased competition from chain stores, discount stores,
home centers, and warehouse operations. Increased operating expenses for the
retail stores, including increased costs due to longer open-store hours and
higher rental costs of shopping center locations, have cut into operating
margins and brought pressures for lower merchandise costs, to which the Company
has been responsive. The Company competes with other Member-owned and
non-member-owned wholesalers as a source of supply and merchandising support for
independent retailers. Competitive factors considered by independent retailers
in choosing a source of supply include pricing, servicing capabilities,
promotional support and merchandise quality. General increased operating costs
and decreased margins have resulted in the withdrawal from business of several
non-member-owned wholesalers or conversion to Member-owned status.

During fiscal year 1992, the Company acquired a majority equity interest in
Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of
hardware, variety and related merchandise. This cooperative serves 336 MacLeod's
True Value and Stedman's V&S Variety Stores, all located in Canada. The
cooperative has approximately 330 employees and generated less than 5% of the
Company's consolidated revenue in fiscal year 1993.

9
<PAGE> 12

The Company operates several other subsidiaries, most of which are engaged
in businesses providing additional services to the Company's Members. In the
aggregate, these subsidiaries are not significant to the Company's results of
operations.

The Company employs approximately 4,300 persons in the United States on a
full-time basis. Due to the widespread geographical distribution of the
Company's operations, employee relations are governed by the practices
prevailing in the particular area and are generally dealt with locally.
Approximately 40% of the Company's hourly-wage employees are covered by
collective bargaining agreements which are generally effective for periods of
three years. In general, the Company considers its relationship with its
employees to be good.

DISTRIBUTION OF PATRONAGE DIVIDENDS

The Company operates on a cooperative basis with respect to business done
with or for Members. All Members are entitled to receive patronage dividend
distributions from the Company on the basis of gross margins of merchandise
and/or services purchased by each Member. In accordance with the Company's
By-Laws, the annual patronage dividend is paid to Members out of the gross
margins from operations and other patronage source income, after deduction for
expenses and provisions authorized by the Board of Directors.

Patronage dividends are usually paid to Members within 60 days after the
close of the Company's fiscal year; however, the Internal Revenue Code permits
distribution of patronage dividends as late as the 15th day of the ninth month
after the close of the Company's fiscal year, and the Company may elect to
distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Internal Revenue Code.

The Company's By-Laws provide for the payment of year-end patronage
dividends, after payment of at least 20% of such patronage dividends in cash, in
qualified written notices of allocation including (i) Class B nonvoting Common
Stock based on book value thereof, to a maximum of 2% of the Member's net
purchases of merchandise from the Company for the year (except in unusual
circumstances of individual hardships, in which case the Board of Directors
reserves the right to make payments in cash), (ii) Promissory (Subordinated)
Notes, and (iii) other property. The Company may also issue nonqualified written
notices of allocation to its Members as part of its annual patronage dividend.

A Member's required investment in Class B Common Stock of the Company is
currently limited to an amount in the aggregate not exceeding an amount
(computed on the basis of par value thereof and to the nearest multiple of $100)
equal to (i) two percent (2%) of a Member's net purchases of direct (drop
shipment) sales from the Company and purchases of direct (drop shipment) sales
of "Competitive Edge Program Lumber" materials computed separately at one
percent (1%), (ii) four percent (4%) of a Member's net purchases of relay sales
from the Company and (iii) eight percent (8%) of a Member's net warehouse
purchases from the Company in the year of the highest total net purchases of the
three preceding years. The Board of Directors anticipates maintaining these
percentages. In that each Member has equal voting power (voting rights being
limited to Class A Common Stock), acquisition of Class B Common Stock as
patronage dividends results in the larger volume Members having greater Common
Stock equity in the Company but a lesser proportionate voting power per dollar
of Common Stock owned than smaller volume Members.

10
<PAGE> 13

PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE

The Internal Revenue Code (the "Code") specifically provides for the
taxation of cooperatives (such as the Company) and their patrons (such as the
Company's Members) so as to ensure that the business earnings of cooperatives
are currently taxable either to the cooperatives or to the patrons.

The shares of Class B Common Stock and the Promissory (Subordinated) Notes
distributed by the Company to its Members as partial payment of the patronage
dividend are "written notices of allocation" within the meaning of that term as
used in the Code. In order that such written notices of allocation shall be
deducted from earnings in determining taxable income of the Company, it is
necessary that the Company pay 20% or more of the annual patronage dividend in
cash and that the Members consent to having the allocations (at their stated
dollar amount) treated as being constructively received by them and includable
in their gross income. These conditions being met, the shares of Class B Common
Stock and the Promissory (Subordinated) Notes distributed in payment of
patronage dividends become "qualified written notices of allocation" as that
term is used in the Code. Section 1385(a) of the Code provides, in substance,
that the amount of any patronage dividend which is paid in money or in qualified
written notices of allocation shall be included in the gross income of the
patron (Member) for the taxable year in which he receives such money or such
qualified written notices of allocation.

Thus, every year each Member will receive, as part of the Member's
patronage dividend, non-cash items ("written notices of allocation") including
Class B Common Stock and Promissory (Subordinated) Notes, the stated dollar
amount of which must be recognized as gross income for the taxable year in which
received. The portion of the patronage dividend paid in cash (at least 20%) may
be insufficient, depending on the tax bracket in each Member's case, to provide
funds for the payment of income taxes for which the Member will be liable as a
result of the receipt of the entire patronage dividend, including cash, Class B
Common Stock and Promissory (Subordinated) Notes.

In response to the provisions of the Code, the Company's By-Laws provide
for the treatment of the shares of Class B Common Stock, Promissory
(Subordinated) Notes and such other notices as the Board of Directors may
determine, distributed in payment of patronage dividends as "qualified written
notices of allocation." The By-Laws provide in effect:

(i) for payment of patronage dividends partly in cash, partly in
qualified written notices of allocation (including the Class B Common Stock
and Promissory (Subordinated) Notes as described above), other property or
in nonqualified written notices of allocation, and

(ii) that membership in the organization (i.e. the status of being a
Member of the Company) shall constitute consent by the Member to take the
qualified written notices of allocation or other property into account in
the Member's gross income as provided in Section 1385(a) of the Code.

Under the provisions of the Code, persons who become or became Members of
the Company or who retained their status as Members after adoption of the
By-Laws providing that membership in the organization constitutes consent, and
after receiving written notification and a copy of the By-Laws are deemed to
have consented to the tax treatment of the cash and the qualified written
notices of allocation in which the patronage dividends are paid, 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 party
that became, or becomes a Member thereafter. Such consent is then effective
except as to patronage occurring after the distributee ceases to be a Member of
the organization or after the By-Laws of the organization cease to contain the
provision with respect to the above described consent.

11
<PAGE> 14

Each year since 1978, the Company has paid its Members 30% of the annual
patronage dividend in cash in respect to patronage (excluding nonqualified
written notices of allocation) occurring in the preceding year. It is the
judgment of management that the payment of 30% of patronage dividends in cash
will not have a material adverse effect on the operations of the Company or its
ability to maintain adequate working capital for the normal requirements of its
business. However, the Company is obligated to distribute only 20% of the annual
patronage dividend (excluding nonqualified written notices of allocation) in
cash and it may distribute this lesser percentage in future years.

In order to avoid the administrative inconvenience and expense of issuing
separate certificates representing shares of Class B Common Stock and separate
Promissory (Subordinated) Notes to each Member, the Company deposits a bulk
certificate and a bulk Promissory (Subordinated) Note with Harris Trust and
Savings Bank, Chicago, Illinois for safekeeping for and on behalf of its Members
and sends a written notice to each Member of these deposits and the allocation
thereof to such Member. Each Member is, and is shown on the books of the Company
as, the registered owner of his allocation of Class B Common Stock and
Promissory (Subordinated) Notes. Upon written request to the Company, a Member
can obtain a certificate for all or any portion of his Class B Common Stock and
a Note or Notes for all or any portion of the amount allocated to his account.

MANAGEMENT

The directors and principal executive officers of the Company are as
follows:

<TABLE>
<CAPTION>
NAME (AGE) OFFICE
---------- ------
<S> <C>
Karen M. Agnew (51)............................... Vice President
Daniel T. Burns (43).............................. Vice President and General Counsel
Danny R. Burton (47).............................. Vice President
Kenneth O. Cayce, Jr. (73)........................ Director
William M. Claypool, III (71)..................... Director
Michael P. Cole (50).............................. Director
Samuel D. Costa, Jr. (52)......................... Director
Daniel A. Cotter (59)............................. President, Chief Executive Officer,
and Director
Leonard C. Farr (72).............................. Director
William M. Halterman (46)......................... Director
Robert F. Johnson (50)............................ Vice President
Jerrald T. Kabelin (56)........................... Chairman of the Board and Director
Kerry J. Kirby (47)............................... Vice President, Chief Financial
Officer, Secretary and Treasurer
Robert J. Ladner (47)............................. Director
Lewis W. Moore (81)............................... Director
Robert A. Nolawski (55)........................... Vice President
Jeremiah J. O'Connor (51)......................... Director
Steven J. Porter (41)............................. Executive Vice President and Chief
Operating Officer
Richard L. Schaefer (64).......................... Director
John P. Semkus (47)............................... Vice President
Robert G. Waters (73)............................. Director
John M. West, Jr. (41)............................ Director
Donald E. Yeager (51)............................. Director
</TABLE>

12
<PAGE> 15

During the past five years, the principal occupation of each director of
the Company, other than Daniel A. Cotter, was the operation of retail hardware
stores.

DESCRIPTION OF COMMON STOCK

DIVIDEND RIGHTS. Dividends (other than patronage dividends) upon the Class
A Common Stock (which is being registered herein) and Class B Common Stock,
subject to the provisions of the Company's Certificate of Incorporation, may be
declared out of gross margins of the Company, other than gross margins from
operations with or for Members and other patronage source income, after
deduction for expenses and provisions authorized by the Board of Directors.
Dividends may be paid in cash, in property, or in shares of the common stock,
subject to the provisions of the Certificate of Incorporation (See "Dividends").

VOTING RIGHTS. The Class A Common Stock, which is the sole voting stock, is
offered only in ten (10) share units, and no party may acquire more than one
unit; thus control of the Company is equally distributed among all
stockholder-Members. The holders of Class A Common Stock have the exclusive
voting power upon all questions submitted to shareholders, being entitled to one
vote per share, with the right of "cumulative voting" in the election of
directors. Pursuant to the Certificate of Incorporation and By-Laws of the
Company, the Board of Directors consists of directors who are elected for
staggered three-year terms.

LIQUIDATION RIGHTS. Upon dissolution, liquidation or winding up of the
Company, voluntary or involuntary, the assets are to be divided among and
distributed ratably to the holders of shares of Class A Common Stock and Class B
Common Stock pro rata in accordance with their holdings and without preference
as between the classes.

PREEMPTIVE RIGHTS. Each shareholder has the right to purchase, and must
purchase when he becomes a shareholder-Members, ten (10) shares of Class A
Common Stock. No shares of Class A Common Stock shall be issued or sold except
in such units and under such circumstances as will assure that every holder of
Class A Common Stock shall own an identical number of said shares. No shares of
Class B Common Stock shall be issued or sold except to parties who are, at the
time of issuance, a holder of shares of Class A Common Stock.

REDEMPTION PROVISIONS. The Member Agreement (the "Agreement") may be
terminated by either the Company or the Member on sixty (60) days' written
notice. Termination by the Company requires approval by a two-thirds vote of the
Board of Directors, except in the following circumstances where the Company has
the right to immediately terminate the Agreement: the Member becomes insolvent,
commits any act of bankruptcy, files a voluntary petition in bankruptcy, is
adjudicated as bankrupt, or commits a breach of any obligation under the
Agreement, which breach is not cured within ten (10) days after written notice
to the Member by the Company. In the event the Agreement is terminated, the
Company undertakes to purchase and the Member is required to sell all of his
Class A Common Stock and Class B Common Stock at a price equal to the book value
thereof. Payment for the Class A Common Stock will be in cash. Payment for the
Class B Common Stock will be a note payable in five equal annual instalments
which bears interest at the same rate per annum as the Promissory (Subordinated)
Notes most recently issued as part of the Company's annual patronage dividend.

SHAREHOLDERS. As of February 26, 1994, there were 6,516 shareholders of
Class A Common Stock and 6,396 shareholders of Class B Common Stock.

OTHER RESTRICTIONS AND RIGHTS. (a) There are no conversion rights, sinking
fund provisions, or liability to further calls or assessment by the Company in
regard to the Class A Common Stock.

13
<PAGE> 16

(b) The Company is given an automatic lien to secure the payment of any
indebtedness due the Company from any shareholder of record upon the Class A
Common Stock and Class B Common Stock shares of such shareholder and upon any
declared and unpaid dividends thereon.

(c) There is no existing market for the Class A Common Stock being offered.
Whenever any shareholder may desire to dispose in any manner, by sale, gift or
otherwise, of all or any part of his shares of either class of common stock, and
whenever any shareholder dies or suffers any other event giving rise to
voluntary or involuntary transfer, by operation of law or otherwise, of all or
part of his said shares, the Company is given the option, exercisable within
ninety (90) days following the date upon which it receives written notice from
the shareholder, his heirs, executors, personal representatives or other party
in interest, as the case may be, of the intended disposition or of the death of
the shareholder or other event giving rise to voluntary or involuntary transfer
of the shares, to repurchase all shares referred to in the notice. The option
price in the case of either class of Common Stock is the book value thereof as
of the date of the most recently audited consolidated financial statements of
the Company. Any disposition or attempted disposition or transfer, voluntary or
involuntary, of Common Stock of the Company is null and void and confers no
rights upon the transferee unless and until the Company has been given the
required notice and has failed to exercise its option to purchase within the
specified time. The above restrictions do not apply, in the case of a pledge by
a shareholder of any of his shares in a bona fide transaction as security for a
debt, until the pledge or lienholder forecloses the pledge or lien. The above
restrictions do not apply at all in the case of a Class B Common Stock
disposition to a person who prior thereto is the owner of shares of Class A
Common Stock of the Company.

LEGAL MATTERS

The legality of the issuance of the Class A Common Stock offered hereby
will be passed upon for the Company by Messrs. Aronberg Goldgehn Davis &
Garmisa, Suite 3000, One IBM Plaza, Chicago, Illinois 60611.

14
<PAGE> 17

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED
BY REPORT OF INDEPENDENT AUDITORS

<TABLE>
<CAPTION>
PAGE(S)
-----
<S> <C>
Report of Independent Auditors....................................................... 16
Consolidated Balance Sheet at January 1, 1994 and January 2, 1993.................... 17-18
Consolidated Statement of Operations for each of the three years in the period ended
January 1, 1994.................................................................... 19
Consolidated Statement of Cash Flows for each of the three years in the period ended
January 1, 1994.................................................................... 20
Consolidated Statement of Capital Stock and Retained Earnings for each of the three
years in the period ended January 1, 1994.......................................... 21
Notes to Consolidated Financial Statements........................................... 22-29
</TABLE>

15
<PAGE> 18

REPORT OF INDEPENDENT AUDITORS

To the Members and the Board of Directors
Cotter & Company

We have audited the accompanying consolidated balance sheets of Cotter &
Company as of January 1, 1994 and January 2, 1993, and the related consolidated
statements of operations, cash flows and capital stock and retained earnings for
each of the three years in the period ended January 1, 1994. These financial
statements 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cotter &
Company at January 1, 1994 and January 2, 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 1, 1994 in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG

Chicago, Illinois

February 9, 1994

16
<PAGE> 19

COTTER & COMPANY

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

CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
JANUARY JANUARY
1, 2,
1994 1993
-------- --------
<S> <C> <C>
(000'S OMITTED)
Current assets:
Cash and cash equivalents....................................... $ 1,314 $ 37,603
Accounts and notes receivable................................... 276,585 254,401
Inventories..................................................... 336,066 336,603
Prepaid expenses................................................ 6,969 10,330
-------- --------
Total current assets............................... 620,934 638,937
Properties owned, less accumulated depreciation................... 164,319 178,484
Properties under capital leases, less accumulated amortization.... 6,769 8,954
Other assets...................................................... 11,506 6,997
-------- --------
Total assets....................................... $803,528 $833,372
-------- --------
-------- --------
</TABLE>

See Notes to Consolidated Financial Statements.

17
<PAGE> 20

COTTER & COMPANY

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

CONSOLIDATED BALANCE SHEET

LIABILITIES AND CAPITALIZATION

<TABLE>
<CAPTION>
JANUARY JANUARY
1, 2,
1994 1993
-------- --------
<S> <C> <C>
(000'S OMITTED)
Current liabilities:
Accounts payable................................................ $255,216 $300,925
Accrued expenses................................................ 38,926 39,367
Short-term borrowings........................................... 23,287 293
Current maturities of notes, long-term debt and lease
obligations.................................................. 61,685 49,582
Patronage dividend payable in cash.............................. 16,614 18,570
-------- --------
Total current liabilities.......................... 395,728 408,737
Long-term debt.................................................... 63,977 65,282
Obligations under capital leases.................................. 5,224 7,467
Capitalization:
Promissory (subordinated) and instalment notes.................. 217,996 235,695
Redeemable Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid 65,880 and
68,080 shares)............................................... 6,633 6,857
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid 1,019,640
and 979,700 shares; issuable as partial payment of patronage
dividends, 75,780 and 97,842 shares)......................... 110,773 108,982
Retained earnings............................................... 3,867 1,284
-------- --------
339,269 352,818
Foreign currency translation adjustment......................... (670) (932)
-------- --------
Total capitalization............................... 338,599 351,886
-------- --------
Total liabilities and capitalization............... $803,528 $833,372
-------- --------
-------- --------
</TABLE>

See Notes to Consolidated Financial Statements.

18
<PAGE> 21

COTTER & COMPANY

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

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
<S> <C> <C> <C>
Revenues................................................. $2,420,727 $2,356,468 $2,139,887
---------- ---------- ------------
Cost and expenses:
Cost of revenues....................................... 2,202,806 2,139,860 1,942,142
Warehouse, general and administrative.................. 132,674 123,244 111,840
Interest paid to Members............................... 24,458 25,716 26,006
Other interest expense................................. 7,429 7,273 2,466
Gain on sale of properties owned....................... (5,985) -- --
Other income, net...................................... (260) (643) (2,145)
Income tax expense..................................... 2,582 389 153
---------- ---------- ------------
2,363,704 2,295,839 2,080,462
---------- ---------- ------------
Net margins.............................................. $ 57,023 $ 60,629 $ 59,425
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

See Notes to Consolidated Financial Statements.

19
<PAGE> 22

COTTER & COMPANY

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

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net margins.......................................... $ 57,023 $ 60,629 $ 59,425
Adjustments to reconcile net margins to cash and cash
equivalents provided by (used for) operating
activities:
Depreciation and amortization..................... 21,566 21,869 20,727
Provision for losses on accounts and notes
receivable...................................... 4,057 4,447 5,417
Changes in operating assets and liabilities:
Accounts and notes receivable................... (38,605) (29,798) (30,043)
Inventories..................................... 183 (11,819) (44,628)
Accounts payable................................ (45,070) 23,770 13,954
Accrued expenses................................ (1,143) (6,221) 8,238
Other adjustments, net.......................... (2,679) (3,035) (1,771)
---------- ---------- ------------
Net cash and cash equivalents provided
by (used for) operating activities....... (4,668) 59,842 31,319
---------- ---------- ------------
Cash flows used for investing activities:
Additions to properties owned........................ (13,382) (17,871) (20,092)
Proceeds from sale of properties owned............... 13,999 682 1,250
Changes in other assets.............................. (3,850) (2,076) 894
---------- ---------- ------------
Net cash and cash equivalents (used for)
investing activities.................. (3,233) (19,265) (17,948)
---------- ---------- ------------
Cash flows used for financing activities:
Payment of annual patronage dividend................. (18,570) (18,423) (16,978)
Payment of notes, long-term debt and lease
obligations....................................... (32,730) (18,776) (25,231)
Proceeds from long-term borrowings................... -- 54,124 --
Increase (decrease) in short-term borrowings......... 23,059 (20,975) 12,000
Purchase of Class A common stock..................... (470) (337) (266)
Proceeds from sale of Class A common stock........... 323 352 328
---------- ---------- ------------
Net cash and cash equivalents (used for)
financing activities.................. (28,388) (4,035) (30,147)
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents... (36,289) 36,542 (16,776)
---------- ---------- ------------
Cash and cash equivalents at beginning of year......... 37,603 1,061 17,837
---------- ---------- ------------
Cash and cash equivalents at end of year............... $ 1,314 $ 37,603 $ 1,061
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

See Notes to Consolidated Financial Statements.

20
<PAGE> 23

COTTER & COMPANY

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

CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS

FOR THE THREE YEARS ENDED JANUARY 1, 1994

<TABLE>
<CAPTION>
COMMON STOCK, $100 PAR VALUE
-------------------------------
CLASS B
--------
ISSUED FOREIGN
CLASS A AND CURRENCY
----------------- TO BE RETAINED TRANSLATION
ISSUED SUBSCRIBED ISSUED EARNINGS ADJUSTMENT
------ ----- -------- -------- -----
<S> <C> <C> <C> <C> <C>
(000'S OMITTED)
Balances at December 29, 1990.......... $7,274 $ 88 $101,398 $ 2,470 $ --
Net margins.......................... 59,425
Patronage dividend................... 8,095 (60,339)
Stock issued for paid-up
subscriptions..................... 363 (363)
Stock subscriptions.................. 336
Stock purchased and retired.......... (621) (5,342)
------ ----- -------- -------- -----
Balances at December 28, 1991.......... 7,016 61 104,151 1,556 --
Net margins.......................... 60,629
Foreign currency translation
adjustment........................ (932)
Patronage dividend................... 10,029 (60,901)
Stock issued for paid-up
subscriptions..................... 357 (357)
Stock subscriptions.................. 345
Stock purchased and retired.......... (565) (5,198)
------ ----- -------- -------- -----
Balances at January 2, 1993............ 6,808 49 108,982 1,284 (932)
Net margins.......................... 57,023
Foreign currency translation
adjustment........................ 262
Patronage dividend................... 7,686 (54,440)
Stock issued for paid-up
subscriptions..................... 312 (312)
Stock subscriptions.................. 308
Stock purchased and retired.......... (532) (5,895)
------ ----- -------- -------- -----
Balances at January 1, 1994............ $6,588 $ 45 $110,773 $ 3,867 $(670)
------ ----- -------- -------- -----
------ ----- -------- -------- -----
</TABLE>

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

Subscribed Class A common stock amounts are net of unpaid amounts of
$14,000 at January 1, 1994, $27,000 at January 2, 1993 and December 28, 1991,
and $32,000 at December 29, 1990 (for 590, 760, 880, and 1,200 shares
subscribed, respectively).

See Notes to Consolidated Financial Statements.

21
<PAGE> 24

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES

Cotter & Company (the Company) is a member-owned wholesaler of hardware,
variety and related merchandise. The Company also manufactures paint, paint
applicators, outdoor power equipment, heaters and hardware related products. The
Company's goods and services are sold predominantly within the United States,
primarily to retailers of hardware, variety and related lines, each of whom has
purchased ten shares of the Company's Class A common stock on becoming a Member.
The Company operates in a single industry as a member-owned wholesaler
cooperative. In accordance with the Company's By-laws, the annual patronage
dividend is paid to Members out of gross margins from operations and other
patronage source income, after deduction for expenses and provisions authorized
by the Board of Directors. The significant accounting policies of the Company
are summarized below.

Consolidation. The consolidated financial statements include the accounts
of the Company and all wholly-owned subsidiaries. In fiscal years 1992 and 1993,
the consolidated financial statements also include the accounts of Cotter Canada
Hardware and Variety Cooperative, Inc., a Canadian member-owned wholesaler of
hardware, variety and related merchandise, in which the Company has a majority
equity interest.

Capitalization. The Company's capital (Capitalization) is derived from
redeemable Class A voting common stock and retained earnings, together with
promissory (subordinated) notes and redeemable Class B nonvoting common stock
issued in connection with the Company's annual patronage dividend. The By-laws
provide for partially meeting the Company's capital requirements by payment of
the year-end patronage dividend, of which at least twenty percent must be paid
in cash, and the balance in promissory (subordinated) notes and redeemable $100
par value Class B common stock.

Membership may be terminated without cause by either the Company or the
Member on sixty days written notice. In the event membership is terminated, the
Company undertakes to purchase, and the Member is required to sell to the
Company, all of the Member's Class A common stock and Class B common stock at
book value. Payment for the Class A common stock will be in cash. Payment for
the Class B common stock will be a note payable in five equal annual instalments
bearing interest at the same rate per annum as the promissory (subordinated)
notes most recently issued as part of the Company's patronage dividend.

Cash equivalents. The Company classifies its temporary investments in
highly liquid debt instruments, with an original maturity of three months or
less, as cash equivalents. The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value.

Inventories. Inventories are stated at the lower of cost, determined on
the "first-in, first-out" basis, or market.

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, warehouse
and office equipment--5 to 10 years; transportation equipment--3 to 7 years; and
leasehold improvements--the life of the lease without regard to options for
renewal.

Income Taxes. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 3,
1993. Under this standard, the liability method is used whereby deferred income
taxes are recognized for the tax consequences of temporary differences by
applying

22
<PAGE> 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities adjusting for the impact of tax credit carryforwards.

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

Reporting year. The Company's reporting year-end is the Saturday closest to
December 31.

NOTE 2--INVENTORIES

Inventories consisted of:

<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Manufacturing inventories:
Raw materials.......................................... $ 14,795 $ 13,520
Work-in-process and finished goods..................... 54,992 46,126
-------- --------
69,787 59,646
Merchandise inventories................................ 266,279 276,957
-------- --------
$336,066 $336,603
-------- --------
-------- --------
</TABLE>

NOTE 3--PROPERTIES

Properties owned or leased under capital leases consisted of:

<TABLE>
<CAPTION>
JANUARY 1, 1994 JANUARY 2, 1993
------------------- -------------------
OWNED LEASED OWNED LEASED
-------- ------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Buildings and improvements............................ $166,055 $ -- $171,479 $ --
Machinery and warehouse equipment..................... 76,330 -- 77,591 --
Office equipment...................................... 55,191 -- 50,408 --
Transportation equipment.............................. 18,778 15,337 16,297 15,337
-------- ------- -------- -------
316,354 15,337 315,775 15,337
Less accumulated depreciation and amortization........ 164,731 8,568 152,250 6,383
-------- ------- -------- -------
151,623 6,769 163,525 8,954
Land.................................................. 12,696 -- 14,959 --
-------- ------- -------- -------
$164,319 $ 6,769 $178,484 $ 8,954
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>

23
<PAGE> 26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--LONG-TERM DEBT AND BORROWING ARRANGEMENTS

Long-term debt consisted of:

<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Senior note at 8.60%.............................. $ 50,000 $ 50,000
Term loan:
7.75%........................................... 6,200 6,200
Canadian prime (5.50% and 7.25%)................ 3,777 3,932
Industrial Revenue Bonds:
5.94%........................................... 4,000 4,000
8.25%........................................... 1,150 2,950
---------- ----------
65,127 67,082
Less amounts due within one year.................. 1,150 1,800
---------- ----------
$ 63,977 $ 65,282
---------- ----------
---------- ----------
</TABLE>

The proceeds from the 8.60% senior note were used for operations. Principal
payments starting in 1995 are due in increasing amounts through maturity in
2007. Under the senior note agreement, the Company is required to meet certain
financial ratios and covenants.

The two term loans relate to the Canadian acquisition and are due in 1997.

The 5.94% issuance of bonds relates to financing the expansion of a
distribution center. On October 1, 1994 and every three-year period thereafter,
the interest rate will be adjusted based on a bond index. These bonds may be
redeemed at face value at either the option of the Company or the bondholders at
October 1, 1994 and every three-year period thereafter until maturity in 2003.
The 8.25% issuance of bonds relates to financing the construction of a
distribution center.

Total maturities of long-term debt for fiscal years 1994, 1995, 1996, 1997,
1998, and thereafter are $1,150,000, $1,000,000, $2,000,000, $12,977,000,
$4,000,000 and $44,000,000 respectively.

In addition, the Company has various short-term lines of credit available
under informal agreements with lending banks, cancelable by either party under
specific circumstances, which amount to $56,500,000 at January 1, 1994. There
were $23,287,000 borrowings under these agreements at January 1, 1994. The
Company pays commitment fees for these lines.

The fair value of the 8.6% senior note was approximately $54,375,000 and
$51,250,000 at January 1, 1994 and January 2, 1993, respectively. The fair value
was estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rate for similar borrowings. The carrying amounts of the
Company's other long term borrowings and short-term lines of credit approximate
fair value.

NOTE 5--CAPITAL LEASES AND OTHER LEASE COMMITMENTS

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 expiration of the lease term.

24
<PAGE> 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments, as of
January 1, 1994:

<TABLE>
<CAPTION>
FISCAL YEARS (000'S OMITTED)
<S> <C>
1994......................................................... $ 2,545
1995......................................................... 1,834
1996......................................................... 1,485
1997......................................................... 1,025
1998......................................................... 751
1999......................................................... 416
-------
Net minimum lease payments...................................... 8,056
Less amount representing interest............................... 589
-------
Present value of net minimum lease payments..................... 7,467
Less amounts due within one year................................ 2,243
-------
$ 5,224
-------
-------
</TABLE>

The Company also is committed under cancelable operating leases on certain
transportation equipment which, in certain cases, also provide for contingent
rental arrangements and purchase options. The Company made contingent rental
payments relating to operating leases of $575,000, $616,000 and $483,000 for
fiscal years 1993, 1992 and 1991, respectively. Rental expense under operating
leases for fiscal years 1993, 1992 and 1991 were $7,536,000, $6,850,000 and
$5,583,000, respectively.

NOTE 6--CAPITALIZATION

Promissory (subordinated) and instalment notes consisted of:

<TABLE>
<CAPTION>
JANUARY JANUARY
1, 2,
1994 1993
--------- ---------
<S> <C> <C>
(000'S OMITTED)
Promissory (subordinated) notes--
Due currently................................................... $ 51 $ 56
Due on December 31, 1993--8%.................................... -- 24,734
Due on December 31, 1993--11%................................... -- 18,393
Due on December 31, 1994--8 1/2%................................ 26,173 26,739
Due on December 31, 1994--9 1/2%................................ 30,321 31,548
Due on December 31, 1995--7 1/2%................................ 21,324 22,686
Due on December 31, 1995--10%................................... 36,257 38,259
Due on December 31, 1996--9 1/2%................................ 28,930 30,324
Due on December 31, 1996--6%.................................... 27,187 --
Due on December 31, 1997--10%................................... 18,138 24,668
Due on December 31, 1998--8%.................................... 29,266 30,090
Due on December 31, 1999--8% (issued 1993)...................... 27,827 28,863
Due on December 31, 2000--6 1/2% (to be issued)................. 26,752 --
Instalment notes at interest rates of 8% to 10% with maturities
through 1997.................................................... 4,062 4,575
--------- ---------
276,288 280,935
Less amounts due within one year.................................. 58,292 45,240
--------- ---------
$ 217,996 $ 235,695
--------- ---------
--------- ---------
</TABLE>

The promissory notes are issued principally in payment of the annual
patronage dividend. Promissory notes are subordinated to indebtedness to banking
institutions, trade creditors and other indebtedness of the Company as specified
by its Board of Directors. Notes to be issued relate to the patronage dividend
which is distributed after the end of the year. Prior experience indicates that
the maturities of a substantial portion of

25
<PAGE> 28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the notes due within one year are extended, for a three year period, at interest
rates substantially equivalent to competitive market rates of comparable
instruments. The Company anticipates that this practice will continue.

Due to the uncertainty of the ultimate maturities of the promissory notes,
management believes it is impracticable to estimate their fair value. The
carrying amount of the instalment notes at January 1, 1994 and January 2, 1993
approximates fair value.

Total maturities of promissory and instalment notes for fiscal years 1994,
1995, 1996, 1997, 1998, and thereafter are $58,292,000, $58,826,000,
$56,812,000, $18,513,000, $29,266,000 and $54,579,000, respectively.

NOTE 7--INCOME TAXES

Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes" (See Note 1). As permitted under the new rules, prior years'
financial statements have not been restated.

The cumulative effect of adopting SFAS No. 109 as of January 3, 1993 was
not material to the consolidated financial statements of the Company.

At January 1, 1994, the Company has alternative minimum tax credit
carryforwards of approximately $1,000,000 which do not expire. The carryforwards
are available to offset future federal tax liabilities.

Significant components of the Company's deferred tax assets and liabilities
as of January 1, 1994 resulted primarily from alternative minimum tax credit
carryforwards and temporary differences between income tax and financial
reporting for depreciation, vacation pay and contributions to fund retirement
plans.

Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
LIABILITY
METHOD DEFERRED METHOD
---------- --------------------------
FOR THE YEARS ENDED
----------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
<S> <C> <C> <C>
Current:
Federal............................................ $ 343 $ 551 $ 2,051
State.............................................. 22 152 326
Foreign............................................ 237 122 --
---------- ---------- ------------
Total current...................................... 602 825 2,377
---------- ---------- ------------
Deferred:
Federal............................................ 1,582 (497) (2,051)
State.............................................. 317 (14) (173)
Foreign............................................ 81 75 --
---------- ---------- ------------
Total deferred..................................... 1,980 (436) (2,224)
---------- ---------- ------------
$2,582 $ 389 $ 153
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

The Company operates as a nonexempt cooperative and is allowed a deduction
in determining its taxable income for amounts paid as patronage dividend based
on margins from business done with or for Members.

26
<PAGE> 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The reconciliation of income tax expense to income tax computed at the U.S.
federal statutory tax rate of 35% in fiscal year 1993 and 34% in 1992 and 1991
is as follows:

NOTE 8--CASH FLOW

The Company's noncash financing and investing activities in fiscal years
1992 and 1991 include acquisitions of transportation and warehouse equipment by
entering into capital leases. In fiscal year 1992, ownership of a distribution
center previously under capital lease was transferred to the Company. Also in
fiscal year 1992, a wholly-owned subsidiary of the Company acquired certain
assets, in part, by assuming debt. In fiscal year 1991, the Company acquired a
new distribution center by assuming debt. These transactions aggregate
$12,527,000 and $11,382,000 in fiscal years 1992 and 1991, respectively. In
addition, the annual patronage dividend and promissory (subordinated) note
renewals relating to noncash operating and financing activities are as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
<S> <C> <C> <C>
Patronage dividend payable in cash...................... $ 16,614 $ 18,570 $ 18,423
Promissory (subordinated) notes......................... 20,852 22,711 26,875
Class B nonvoting common stock.......................... 2,086 4,934 2,800
Instalment notes........................................ 2,939 2,485 2,996
Member indebtedness..................................... 11,949 12,201 9,245
---------- ---------- ------------
$ 54,440 $ 60,901 $ 60,339
---------- ---------- ------------
---------- ---------- ------------
Promissory (subordinated) note renewals................. $ 27,187 $ 22,686 $ 26,328
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

Cash paid for interest during fiscal years 1993, 1992 and 1991, totalled
$32,056,000, $31,638,000 and $28,668,000, respectively. Cash paid for income
taxes during fiscal years 1993, 1992 and 1991 totalled $1,387,000, $1,771,000
and $2,380,000, respectively.

27
<PAGE> 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--RETIREMENT PLANS

The components of net pension cost for the Company administered pension
plans consisted of:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
<S> <C> <C> <C>
Income:
Actual return on plan assets.......................... $ 7,486 $ 2,856 $ 10,202
Amortization of excess plan assets.................... 920 920 920
---------- ---------- ------------
8,406 3,776 11,122
---------- ---------- ------------
Expenses:
Service cost--benefits earned during year............. 4,556 3,633 3,196
Interest on projected benefit obligation.............. 6,266 5,738 5,314
Deferral of excess (deficiency) of actual over
estimated return on plan assets.................... 1,042 (3,060) 4,972
---------- ---------- ------------
11,864 6,311 13,482
---------- ---------- ------------
Net pension cost........................................ $ 3,458 $ 2,535 $ 2,360
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

The discount rate and the rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7 1/2% and 4 1/2%, respectively, in fiscal year 1993 compared to
9% and 6%, respectively, in fiscal years 1992 and 1991. These changes in
actuarial assumptions did not have a material impact on net pension cost for
fiscal year 1993 and the Company does not anticipate that these changes will
have a material impact on net pension cost in future years. In fiscal years
1993, 1992 and 1991, the expected long-term rate of return on assets was 9 1/2%.

Plan assets are composed primarily of corporate equity and debt securities.
Benefits are based on years of service and the employee's compensation during
the last ten years of employment, offset by a percentage of

28
<PAGE> 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Social Security retirement benefits. Trusteed net assets and actuarially
computed benefit obligations for the Company administered pension plans are
presented below:

<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Assets:
Total plan assets at fair value........................... $ 81,726 $ 73,705
---------- ----------
---------- ----------
Obligations:
Accumulated benefit obligation--
Vested................................................. $ 55,605 $ 41,382
Non-vested............................................. 8,704 5,039
Effect of projected compensation increases................ 24,110 21,863
---------- ----------
Total obligations......................................... 88,419 68,284
---------- ----------
Net excess assets (liabilities):
Unrecognized--
Unamortized excess assets at original date............. 9,563 10,483
Net actuarial gain (loss).............................. (5,773) 5,706
Prior service costs.................................... (6,170) (6,836)
Recognized accrued pension cost........................... (4,313) (3,932)
---------- ----------
Total net excess assets (liabilities)..................... (6,693) 5,421
---------- ----------
Total obligations and net excess assets (liabilities)....... $ 81,726 $ 73,705
---------- ----------
---------- ----------
</TABLE>

The Company also participates in union-sponsored defined contribution
plans. Pension costs related to these plans were $702,000, $556,000 and $522,000
for fiscal years 1993, 1992 and 1991, respectively.

29
<PAGE> 32

THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE
REGISTRATION STATEMENT, AND THE EXHIBITS AND SCHEDULES RELATING THERETO, WHICH
THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON,
D. C. UNDER THE SECURITIES ACT OF 1933 AND TO WHICH REFERENCE IS HEREBY MADE FOR
FURTHER INFORMATION WITH RESPECT TO THE COMPANY AND THE SECURITIES OFFERED
HEREBY.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
Available Information................... 2
Reports to Security Holders............. 2
Documents Incorporated by Reference..... 2
Summary................................. 3
The Company............................. 4
Use of Proceeds......................... 4
Plan of Distribution.................... 4
Dividends............................... 5
Selected Financial Data................. 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 6
Business................................ 8
Distribution of Patronage Dividends..... 10
Management.............................. 12
Description of Common Stock............. 13
Legal Matters........................... 14
Index to Consolidated Financial
Statements Covered by Report of
Independent Auditors.................. 15
</TABLE>

NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY.

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

COTTER & COMPANY

14,960 SHARES
CLASS A COMMON STOCK

$100 PAR VALUE
(IN UNITS OF 10 SHARES)

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

PROSPECTUS

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

DATED APRIL , 1994

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 33

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the actual or estimated expenses in connection with the
issuance and distribution of the Common Stock being registered:

<TABLE>
<S> <C>
Registration Fee.................................................... $ --
Printing of Registration Statement and Prospectus................... 16,000
Accounting Fees and Expenses........................................ 9,000
Legal Fees.......................................................... 10,000
Fees and Expenses for Qualifying Securities under "Blue Sky" Laws of
Various States.................................................... 15,000
-------
Total............................................................... $50,000
-------
-------
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's certificate of incorporation, as amended, provides that the
Company shall indemnify, in accordance with and to the full extent permitted by
the Delaware General Corporation Law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, an action by or in the right of the Company), by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise, against any liability or expense actually
and reasonably incurred by such person in respect thereof. Such indemnification
is not exclusive of any other right of such director, officer, or employee to
indemnification provided by law or otherwise.

Additionally, pursuant to Section 145(a)-(g) of the Delaware Corporation
Law which empowers a corporation to indemnify its directors, officers, employees
and agents, the Board of Directors of the Company on July 23, 1973 adopted a
By-Law (Article XII, Indemnification of Directors, Officers and
Employees--Exhibit 3-A to the Company's Form 10-K Annual Report for the year
ended January 1, 1994 and incorporated herein by reference) providing for such
indemnification. The following is a summary of the most significant provisions
of said By-Law:

As against third parties, the Company shall indemnify any director,
officer, employee or agent for any expenses (including attorneys' fees,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred in defending any threatened, pending or completed suit or proceeding,
whether civil, criminal, administrative or investigative brought against such
person by reason of the fact that he was or is a director, officer, employee or
agent, if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of the Company, and with respect to
any criminal action or proceeding if he had no reasonable cause to believe his
conduct unlawful.

In any action or suit by or in the right of the Company, the Company shall
indemnify any director, officer, employee or agent who is or was a party or
threatened to be made a party to such threatened, pending or completed action or
suit, for expenses (including attorney's fees and amounts paid in settlement)
reasonably and actually incurred in connection with the defense or settlement of
such suit or action, if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the Company,
except that no indemnification shall be made if such person has been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
Company unless and only to the extent that the Court of Chancery of Delaware or
the court where the suit was brought finds that in view of all the circumstances
of the case, such person is entitled to indemnification.

Any indemnification, unless ordered by a court, shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the party to be
indemnified has met the applicable standard of conduct. Such determination shall
be made by the Board of Directors by a majority vote of a quorum, consisting of
directors who were not parties of such action, suit or

S-1
<PAGE> 34
proceeding, or if such a quorum is not obtainable, or even if obtainable, if a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or by the stockholders.

Additionally, the shareholders of the Company have approved an amendment to
the Certificate of Incorporation to eliminate personal liability of directors to
the Company or its shareholders for monetary damages for breach of fiduciary
duty of care. The amendment provides that a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability
or limitation thereof is not permitted under the Delaware General Corporation
Law as the same exists or may hereafter be amended.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 is concerned, see Item 17 "Undertakings" below.

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----- -------------------------------------------------------------------------------
<S> <C>
4-A Article Fourth of the Certificate of Incorporation of the Company, setting
forth the designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions of the Class A Common Stock and
Class B Common Stock of the Company. Article Twelfth of the Certificate of
Incorporation of the Company, setting forth certain limitations on the rights
of shareholders to bring an action against directors for breach of the duty of
care. Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual
Report for the year ended January 1, 1994.
4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to:
certain qualifications, limitations and restrictions on the Common Stock of the
Company; the Member agreement between the Company and its shareholders; the
payment of patronage dividends; dividends; qualifying shares; and valuation of
Class B Common Stock of the Company issued as part of the annual patronage
dividend. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K
Annual Report for the year ended January 1, 1994.
4-C Specimen certificate of Class A Common Stock. Incorporated by
reference--Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836).
4-D Specimen certificate of Class B Common Stock. Incorporated by
reference--Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836).
4-E Promissory (Subordinated) Note form effective for the year-ending December 31,
1986 and thereafter. Incorporated by reference--Exhibit 4-H to Registration
Statement on Form S-2 (No. 33-20960).
4-F Instalment Note form. Incorporated by reference--Exhibit 4-F to Registration
Statement on Form S-2 (No. 2-82836).
4-G Copy of Note Agreement with Prudential Insurance Company of America dated April
13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a
maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-J to
Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No.
33-39477).
5 Opinion of Messrs. Aronberg Goldgehn Davis & Garmisa.
10-A Form of "Retail Member Agreement with Cotter & Company" between the Company and
its Members that offer primarily hardware, variety merchandise and related
items. Incorporated by reference--Exhibit 10-C to Post-Effective Amendment No.
2 to Registration Statement on Form S-2 (No. 33-39477).
10-B Current form of "Subscription to Shares of Cotter & Company". Incorporated by
reference--Exhibit 10-H to Registration Statement on Form S-2 (No. 2-82836).
</TABLE>

S-2
<PAGE> 35

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----- -------------------------------------------------------------------------------
<S> <C>
10-C Cotter & Company Pension Plan, amended and restated as of January 1, 1989.
Incorporated by reference--Exhibit 10-D to Post-Effective Amendment No. 2 to
Registration Statement on Form S-2 (No. 33-39477).
10-D Cotter & Company Employees' Savings and Compensation Deferral Plan, amended and
restated as of July 1, 1992. Incorporated by reference--Exhibit 10-E to
Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No.
33-39477).
10-E Supplemental Retirement Plan between Cotter & Company and selected executives
of the Company dated December 30, 1988. Incorporated by reference--Exhibit 10-V
to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (No.
33-20960).
10-F First Amendment to Supplemental Retirement Plan between Cotter & Company and
selected executives of the Company. Incorporated by reference--Exhibit 10-Q to
Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (No.
33-39477).
10-G Annual Incentive Compensation Program and Long-Term Incentive Compensation
Program between Cotter & Company and selected executives of the Company.
Incorporated by reference--filed as Exhibits A and B to Exhibit 10-N to
Registration Statement on Form S-2 (No. 33-39477).
10-H Employment Agreement between Cotter & Company and Daniel A. Cotter dated
October 15, 1984. Incorporated by reference--Exhibit 10-N to Post-Effective
Amendment No. 2 to Registration Statement on Form S-2 (No. 2-82836).
10-I Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel A.
Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by refer-
ence--Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477).
23-A Consent of Aronberg Goldgehn Davis & Garmisa is included in Exhibit 5 to this
Registration Statement.
23-B Consent of Independent Auditors (included on page S-6).
</TABLE>

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

S-3
<PAGE> 36

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions described in Item 15, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

S-4
<PAGE> 37

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 17TH DAY OF
MARCH 1994.

COTTER & COMPANY

By: /s/ DANIEL A. COTTER
-------------------
Daniel A. Cotter
President, Chief Executive Officer and
Director

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------
<S> <C> <C>
/s/ DANIEL A. COTTER President, Chief Executive March 17, 1994
---------------- Officer and Director
Daniel A. Cotter

/s/ STEVEN J. PORTER Executive Vice President March 17, 1994
---------------- and Chief Operating Officer
Steven J. Porter

/s/ KERRY J. KIRBY Vice President, Secretary, March 17, 1994
-------------- Treasurer and Chief
Kerry J. Kirby Financial Officer

/s/ JERRALD T. KABELIN Chairman of the Board March 17, 1994
------------------ and Director
Jerrald T. Kabelin

/s/ KENNETH O. CAYCE, JR. Director March 17, 1994
---------------------
Kenneth O. Cayce, Jr.

/s/ WILLIAM M. CLAYPOOL, III Director March 17, 1994
------------------------
William M. Claypool, III

/s/ MICHAEL P. COLE Director March 17, 1994
---------------
Michael P. Cole

/s/ SAMUEL D. COSTA, JR. Director March 17, 1994
--------------------
Samuel D. Costa, Jr.

/s/ LEONARD C. FARR Director March 17, 1994
---------------
Leonard C. Farr

/s/ WILLIAM M. HALTERMAN Director March 17, 1994
--------------------
William M. Halterman

/s/ ARTHUR W. KETELSEN Director March 17, 1994
------------------
Arthur W. Ketelsen

/s/ LEWIS W. MOORE Director March 17, 1994
--------------
Lewis W. Moore

/s/ JEREMIAH J. O'CONNOR Director March 17, 1994
--------------------
Jeremiah J. O'Connor

/s/ RICHARD L. SCHAEFER Director March 17, 1994
-------------------
Richard L. Schaefer

/s/ ROBERT G. WATERS Director March 17, 1994
----------------
Robert G. Waters

/s/ JOHN M. WEST, JR. Director March 17, 1994
-----------------
John M. West, Jr.

/s/ DONALD E. YEAGER Director March 17, 1994
----------------
Donald E. Yeager
</TABLE>

S-5
<PAGE> 38

CONSENT OF INDEPENDENT AUDITORS

We consent to the use of our report dated February 9, 1994, in
Post-Effective Amendment No. 3 to the Registration Statement (Form S-2 No.
33-39477) and related Prospectus of Cotter & Company for the registration of
14,960 shares of its Class A Common Stock. We also consent to the incorporation
by reference therein our report with respect to the consolidated financial
statements and consolidated financial statement schedules of Cotter & Company
for each of the three years in the period ended January 1, 1994 included in the
Annual Report (Form 10-K) of Cotter & Company for the year ended January 1,
1994, filed with the Securities and Exchange Commission.

/s/ ERNST & YOUNG

Chicago, Illinois

March 17, 1994

S-6
<PAGE> 39

INDEX TO EXHIBITS FILED
TO POST-EFFECTIVE AMENDMENT NO. 3 TO
REGISTRATION STATEMENT ON
FORM S-2 OF COTTER & COMPANY

EXHIBIT
NUMBER EXHIBIT
-------
<S> <C>
5 Opinion of Messrs. Aronberg Goldgehn Davis & Garmisa.............
23-B Consent of Independent Auditors (included on page S-6)...........
</TABLE>

Exhibits incorporated by reference are listed on Pages S-2 and S-3 of
Post-Effective Amendment No. 3 to Registration Statement on Form S-2 of Cotter &
Company.

S-7

<PAGE> 1
EXHIBIT 23-A

ARONBERG GOLDGEHN DAVIS & GARMISA
[LETTERHEAD]

March 17, 1993

Cotter & Company
2740 North Clybourn Avenue
Chicago, Illinois 60614

Gentlemen:

We refer to the Post Effective Amendment No. 3 to Registration Statement on
Form S-2 (No. 33-39477) being filed by Cotter & Company, a Delaware corporation
(hereinafter referred to as the Company"), with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, pertaining to the
registration of 14,960 shares of Class A Common Stock, $100 par value.

The Class A Common Stock shall be issued and sold directly by the Company in
10 share units at the part value thereof, for an aggregate purchase price of
$1,000 per unit. Sales shall be made to retailers of hardware, variety and
related merchandise, in connection with becoming members of the Company.

Upon the basis of our examination, we are of the opinion that:

1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware.

2. The Company has an authorized capital consisting of 100,000 shares of
Class A Common Stock, $100 par value and 2,000,000 shares of Class B
Common Stock, $100 par value. As of February 26, 1994, there were 65,160
Class A Common shares issued and outstanding and 1,086,978 Class B Common
shares issued and outstanding. All of said shares were legally issued,
fully paid and non-assessable as of said date.

3. The proposed offering of 14,960 shares of Class A Common Stock, $100 par
value, of the Company has been duly

<PAGE> 2
ARONBERG GOLDGEHN DAVIS & GARMISA

Cotter & Company
March 17, 1993
Page 2

authorized and when sold as contemplated will be legally issued and fully
paid and non-assessable.

We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the related Prospectus as counsel for the Company
who have passed upon the legalities of the securities registered thereunder.

Sincerely,

ARONBERG GOLDGEHN DAVIS & GARMISA

By: /s/ ROBERT N. SODIKOFF
------------------------
Robert N. Sodikoff

RNS:jgm