<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
-----------------
COMMISSION FILE NUMBER 2-20910
COTTER & COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2099896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2740 NORTH CLYBOURN AVENUE, CHICAGO, ILLINOIS 60614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 975-2700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES 'X' . NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ['X']
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
THERE IS NO PUBLIC MARKET FOR REGISTRANT'S CLASS A COMMON STOCK. SUCH
SHARES ARE OFFERED BY THE REGISTRANT IN TEN-SHARE UNITS, EXCLUSIVELY TO
RETAILERS OF HARDWARE AND RELATED MERCHANDISE, IN CONNECTION WITH BECOMING
MEMBERS OF THE COMPANY. SAID STOCK IS LIMITED AS TO TRANSFERABILITY BY ITS
TERMS.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
OUTSTANDING
AT
FEBRUARY
CLASS 25, 1995
---------------------------------------------------- ---------
<S> <C>
CLASS A COMMON STOCK, $100 PAR VALUE................ 62,970
CLASS B COMMON STOCK, $100 PAR VALUE................ 1,147,815
</TABLE>
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<PAGE> 2
PART I
ITEM 1. BUSINESS.
Cotter & 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 and related
merchandise. It is the largest wholesaler of hardware and related merchandise in
the United States. The Company also manufactures paint and paint applicators.
The Company currently manufactures outdoor power equipment, heaters and hardware
related products. In January 1995, the Company agreed to sell certain assets of
this manufacturing division to a nationally recognized company and secured a
favorable supply agreement from the purchaser. For reporting purposes, the
Company operates in a single industry as a Member-owned wholesaler cooperative.
Membership entitles a Member to use certain Company trademarks and trade
names, including the federally registered collective membership trademark
indicating membership in "True Value(R) Hardware Stores". The "True Value(R)"
collective membership mark has a present expiration date of January 2, 2003.
The Company serves approximately 6,200 True Value(R) Hardware Stores
throughout the United States. Primary concentrations of Members exist in
California (approximately 8%), New York, Illinois and Texas (approximately 6%
each), Pennsylvania (approximately 5%) and Michigan and Ohio (approximately 4%
each). Also, the Company currently serves approximately 1,000 V&S(R) Variety
Stores. The Company announced in January 1995 the sale of certain inventory of
its domestic V&S(R) Variety division to a national wholesaler who has also
agreed to supply the majority of the V&S(R) stores.
The Company's total sales of merchandise to its U.S. Members were divided
among the following general classes of merchandise:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Hardware Goods....................... 20.1% 20.0% 20.8%
Electrical and Plumbing Supplies..... 15.8% 16.3% 16.3%
Painting and Cleaning Supplies....... 14.4% 14.9% 14.7%
Variety and Related Goods............ 13.9% 13.9% 14.2%
Lumber and Building Materials........ 12.9% 12.3% 10.8%
Farm and Garden Supplies............. 12.5% 12.3% 11.7%
Appliances and Housewares............ 10.4% 10.3% 11.5%
</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 the availability of new merchandise. 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 46% of total sales); (2) direct shipment sales (approximately 42%
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.
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The Company also manufactures paint and paint applicators. The principal
raw materials used by the Company are chemicals. 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 1995, 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 25, 1995 and February 26, 1994, the Company had a backlog of
firm orders (including relay orders) of approximately $21,000,000 and
$23,000,000 respectively. It is anticipated the entire backlog existing at
February 25, 1995 will be filled by April 30, 1995. 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 Member orders
for new or seasonal merchandise given at 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 industry is characterized by intense competition.
Independent retail hardware businesses served by the Company continue to face
intense 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 retail space, have cut into operating margins and brought pressures for lower
merchandise costs, to which the Company has been responsive through a retail
oriented competitive pricing strategy on high turnover, price sensitive items
(Pinpoint Pricing program). 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 selection and quality. Increased operating
expenses and decreased margins have resulted in the withdrawal from business of
several non-member-owned wholesalers.
During fiscal year 1992, the Company acquired through a Canadian
subsidiary, a majority equity interest in Cotter Canada Hardware and Variety
Cooperative, Inc., a Canadian wholesaler of hardware, variety and related
merchandise. This cooperative serves 391 True Value(R) and V&S(R) 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 1994.
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 4,200 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 39% of the Company's hourly-wage employees are covered by
collective bargaining agreements which are generally effective for periods of
three or four 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 and Retail Member Agreement, the annual patronage dividend is paid to
Members out of the gross
2
<PAGE> 4
margins from operations and other patronage source income, after deduction for
expenses, reserves 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 (the
"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 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, or (iii) other property. The Company may also issue nonqualified written
notices of allocation to its Members as part of its annual patronage dividend.
In determining the form of the annual patronage dividend, a Member's
required investment in Class B Common Stock of the Company had been limited by
the Board of Directors 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 shipment
sales from the Company and purchases of direct 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. In 1995, the Board of Directors adopted a plan to continue to adequately
capitalize the Company and to more equitably divide the responsibility for
capitalizing the Company among its Members. As a result, it is anticipated that
these percentages will be changed. 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 generally 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.
PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH 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 phrase
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
phrase 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 it receives such money or such
qualified written notices of allocation.
Thus, every year each Member may receive, as part of the Member's patronage
dividend, non-cash "qualified written notices of allocation", which may include
Class B Common Stock or 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
3
<PAGE> 5
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.
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% or more 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.
4
<PAGE> 6
ITEM 2. PROPERTIES.
The Company's national headquarters is located in Chicago, Illinois.
Information with respect to the Company's owned and leased warehousing and
office facilities is set forth below:
<TABLE>
<CAPTION>
SQUARE FEET
OF
WAREHOUSE AND
LOCATION OFFICE AREA INTEREST
-------- ------------- --------
<S> <C> <C>
Chicago, Illinois........................................ 980,000 Owned
Corsicana, Texas......................................... 450,000 Owned
Denver, Colorado......................................... 360,000 Leased
Fogelsville (Allentown), Pennsylvania.................... 600,000 Owned
Harvard, Illinois........................................ 640,000 Owned
Henderson, North Carolina................................ 300,000 Owned
Indianapolis, Indiana.................................... 420,000 Owned
Jonesboro (Atlanta), Georgia............................. 360,000 Owned
Kansas City, Missouri.................................... 415,000 Owned
Kingman, Arizona......................................... 375,000 Owned
Manchester, New Hampshire................................ 525,000 Owned
Mankato, Minnesota....................................... 320,000 Owned
Ocala, Florida........................................... 375,000 Owned
Portland, Oregon......................................... 405,000 Owned
Westlake (Cleveland), Ohio............................... 405,000 Owned
Winnipeg, Manitoba....................................... 432,000 Owned
Woodland, California..................................... 350,000 Owned
</TABLE>
No location owned by the Company is subject to a mortgage.
In December 1983, the Company completed construction of a 150,000 square
foot addition to its regional distribution center in Manchester, New Hampshire.
This addition was financed with the proceeds from the sale of $4,000,000 State
of New Hampshire Industrial Development Authority Revenue Bonds (Cotter &
Company Project) Series 1982. On October 1, 1997, and every three-year period
thereafter, the interest rate on the 5.28% industrial revenue bonds 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 each interest reset date
through maturity in 2003.
In February 1993, the Company completed the sale of a facility that it
previously owned in Pomona, California.
The Company's facility in Denver, Colorado is currently leased through June
30, 2004.
Information with respect to the Company's manufacturing facilities is set
forth below:
<TABLE>
<CAPTION>
SQUARE FEET
OF
MANUFACTURING PRINCIPAL
LOCATION AREA PRODUCT INTEREST
-------- ------------- ----------------- --------
<S> <C> <C> <C>
Chicago, Illinois............................. 105,000 Paint Owned
Cary, Illinois................................ 580,000 Paint and Owned
Paint Applicators
Harvard, Illinois............................. 830,000 Heaters and Owned
Outdoor Power
Equipment
</TABLE>
5
<PAGE> 7
The Company's facilities are suitable for their respective uses and are, in
general, adequate for the Company's present needs. In January 1995, the Company
agreed to sell certain assets of its outdoor power equipment manufacturing
division which the Company operated at the Harvard, Illinois facility. The
Company will continue to manufacture at the Harvard, Illinois facility through
August 1995 and is developing plans for the future use of this manufacturing
facility.
The Company owns and leases transportation equipment for use at its
regional distribution centers for the primary purpose of delivering merchandise
from the Company's regional distribution centers to its Members. Additional
information concerning these leases can be found in Notes 3 and 5 to the
consolidated financial statements included elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no existing market for the Common Stock of the Company and there
is no expectation that any market will develop. The Company's Class A Common
Stock is owned almost exclusively by retailers of hardware and related products
each of whom is a Member of the Company and purchases ten shares of the
Company's Class A Common Stock (the only class of voting stock) upon becoming a
Member. The Company is organized as a Delaware stock corporation and operates as
a Member-owned wholesaler cooperative corporation. The shares of the Company's
Class B Common Stock now outstanding were issued to Members in partial payment
of the annual patronage dividend to which they became entitled as a result of
patronage business done by such Members with 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, reserves and provisions authorized by the Board of Directors.
The number of holders of record (as of February 25, 1995) of each class of
stock of the Company is as follows:
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS OF
TITLE OF CLASS RECORD
-------------- -----------
<S> <C>
Class A Common Stock, $100 Par Value............................ 6,297
Class B Common Stock, $100 Par Value............................ 6,244
</TABLE>
Dividends (other than patronage dividends) upon the Class A Common Stock
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, reserves 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. Other than the payment of patronage dividends, including the
redemption of all 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 classes of stock.
See the discussion of patronage dividends under Item 1--Business.
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28, DECEMBER 29,
1994 1994 1993 1991 1990
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $2,574,445 $2,420,727 $2,356,468 $2,139,887 $2,135,120
Net margins....................... $ 60,318 $ 57,023 $ 60,629 $ 59,425 $ 54,847
Patronage dividends............... $ 60,421 $ 54,440 $ 60,901 $ 60,339 $ 56,269
Total assets...................... $ 868,785 $ 803,528 $ 833,372 $ 763,109 $ 709,895
Long-term debt and obligations
under capital leases............ $ 75,756 $ 69,201 $ 72,749 $ 13,335 $ 15,077
Promissory (subordinated) and
instalment notes payable........ $ 199,099 $ 217,996 $ 235,695 $ 235,289 $ 215,452
Redeemable Class A Common Stock... $ 6,370 $ 6,633 $ 6,857 $ 7,077 $ 7,362
Redeemable Class B Common Stock... $ 116,663 $ 110,773 $ 108,982 $ 104,151 $ 101,398
Book value per share of Class A
Common Stock and Class B Common
Stock(a)........................ $ 103.57 $ 103.85 $ 101.42 $ 102.50 $ 103.38
</TABLE>
- ---------------
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
In fiscal year 1994, the Company's revenues increased $153,718,000 from
last year. Total revenues grew to $2,574,445,000, an increase of 6.4%. The
improvement resulted from increased merchandise shipments to existing Members.
Classes of merchandise with the strongest percentage increases in fiscal
year 1994 were Lumber and Building Materials, up 11.9%; Farm and Garden
Supplies, up 8.9%; Hardware Goods, up 7.3%; Appliances and Housewares, up 7.0%;
and Variety and Related Goods, up 6.4%. The South Central region of the United
States showed the largest growth at 9.4%. Other regions showing strong growth
were the Southeast at 8.1%; the Northeast at 7.2%; and North Central at 7.1%.
Consolidated gross margins increased by $5,410,000 or 2.5% but as a
percentage of revenues decreased to 8.7% from 9.0% reflecting a change in the
Company's sales mix from warehouse to direct shipments, combined with the new
Pinpoint Pricing program and more promotionally oriented merchandising programs.
Warehouse, general and administrative expenses remained comparable with the
previous year but expressed as a percentage of revenues decreased to 5.2% from
5.5% due to the Company's continuing efforts to reduce operating costs.
Interest paid to Members decreased by $1,564,000 or 6.4% primarily due to a
lower average interest rate.
7
<PAGE> 9
Net margins were $60,318,000 for the year ended December 31, 1994 compared
to $57,023,000 for the year ended January 1, 1994. The fiscal year 1993 net
margins include a one-time gain on the sale of properties of $5,985,000 offset
by the related income tax of $2,162,000.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in 1994 remained comparable to the previous year.
Cash flows for the year ended December 31, 1994 of $88,663,000 were provided by
operating activities through shipment of inventories to True Value(R) and V&S(R)
Members, which were purchased or manufactured by the Company. Cash flows of
$18,121,000 were used for investing activities and cash flows of $70,025,000
were used for financing activities.
At the end of fiscal year 1994, inventories increased by $48,681,000, to
support anticipated future orders of seasonal merchandise. Short-term borrowings
decreased by $13,958,000, but accounts payable increased by $79,252,000 in
support of the increased inventories for anticipated future orders of seasonal
merchandise and favorable seasonal terms obtained from vendors. Since the
favorable seasonal terms were passed on to the Company's Members, accounts and
notes receivable increased by $18,078,000.
At December 31, 1994, net working capital decreased to $221,054,000 from
$225,206,000 at January 1, 1994. The current ratio decreased to 1.47 at December
31, 1994 compared to 1.57 at January 1, 1994.
Short-term lines of credit available under informal agreements with lending
banks, cancellable by either party under specific circumstances, amounted to
$67,800,000 at December 31, 1994. Borrowings under these agreements were
$9,329,000 at December 31, 1994 compared to $23,287,000 at January 1, 1994.
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
8
<PAGE> 10
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.
Total capital expenditures, including those made under capital leases, were
$21,427,000 in fiscal year 1994 compared to $13,382,000 in fiscal year 1993 and
$30,398,000 in fiscal year 1992. These capital expenditures were principally
related to additional equipment and technological improvements at the regional
distribution centers and National Headquarters. Funding of capital expenditures
in fiscal year 1995 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 did
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 results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and report of independent
auditors are listed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
POSITION(S) HELD AND
NAME AGE BUSINESS EXPERIENCE
---- --- -------------------------------------------------
<S> <C> <C>
Karen M. Agnew...................... 52 Vice President since February, 1992. Director of
National Headquarters Support from July, 1991 to
February, 1992. Prior position from April, 1986
was Executive Assistant to the President.
Daniel T. Burns..................... 44 Secretary since February, 1995. Vice President
since November, 1990. General Counsel from April,
1988 to February, 1995.
Danny R. Burton..................... 48 Vice President since May, 1992. National Member
Development Manager from July, 1990 to May, 1992.
Prior position from September, 1985 to June, 1990
was Sales Manager.
David W. Christmas.................. 46 Vice President of Merchandising since July, 1994.
Prior position was Vice President of Sales and
Marketing of a manufacturing company based in
North Carolina.
William M. Claypool, III............ 72 Director since March, 1970. Term expires April,
1997.
Samuel D. Costa, Jr. ............... 53 Director since July, 1988. Term expires April,
1996.
Daniel A. Cotter.................... 60 President, Chief Executive Officer and Director.
President since January, 1978, Chief Executive
Officer since January, 1983 and Director since
September, 1989. Term expires April, 1996.
Leonard C. Farr..................... 73 Director since March, 1972. Term expires April,
1996.
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
POSITION(S) HELD AND
NAME AGE BUSINESS EXPERIENCE
---- --- -------------------------------------------------
<S> <C> <C>
William M. Halterman................ 47 Director since June, 1990. Term expires April,
1995. Nominated by the Board of Directors for
reelection to a three-year term.
Robert F. Johnson................... 51 Appointed Vice President in January, 1994.
Director of Corporate Planning and Information
Services since March, 1992. Prior position was
Distribution Industry Consulting Manager of a
corporation in Illinois.
Jerrald T. Kabelin.................. 57 Chairman of the Board since April, 1993. Director
since April, 1985. Term expires April, 1997.
Kerry J. Kirby...................... 48 Vice President and Chief Financial Officer since
November, 1990. Treasurer (Principal Financial
and Accounting Officer) since April, 1989.
Secretary from April, 1989 to February, 1995.
Controller from April, 1988 to October, 1990.
Robert J. Ladner.................... 48 Director since April, 1994. Term expires April,
1997.
Lewis W. Moore...................... 82 Director since June, 1948. Term expires April,
1997.
Kenneth W. Noble.................... 37 Nominated by the Board of Directors for election
as a Director to a three-year term to replace
Jeremiah J. O'Connor, whose term expires April,
1995.
Jeremiah J. O'Connor................ 52 Director since July, 1984. Term expires April,
1995.
Steven J. Porter.................... 42 Executive Vice President and Chief Operating
Officer since August, 1993. Prior position was
Vice President of Merchandising of a retail
building materials and hardware company based in
Missouri.
Richard L. Schaefer................. 65 Director since May, 1976. Term expires April,
1995. Nominated by the Board of Directors for
reelection to a three-year term.
John P. Semkus...................... 48 Vice President, Distribution and Transportation
since February 1992. Appointed Vice President in
June, 1988. Prior position was Operating Manager
of a regional distribution center.
George V. Sheffer................... 42 Director since July, 1994. Replaced Kenneth O.
Cayce, Jr. Term expires April, 1995. Nominated by
the Board of Directors for reelection to a
three-year term.
Dennis A. Swanson................... 55 Nominated by the Board of Directors for election
to a one-year term to replace Michael P. Cole,
who resigned and whose unexpired term will expire
April, 1996.
Robert G. Waters.................... 74 Director since March, 1973. Term expires April,
1997.
John M. West, Jr.................... 42 Director since October, 1991. Term expires April,
1995. Nominated by the Board of Directors for
reelection to a three-year term.
Donald E. Yeager.................... 52 Director since April, 1993. Term expires April,
1996.
</TABLE>
- ---------------
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.
10
<PAGE> 12
ITEM 11. EXECUTIVE COMPENSATION.
PENSION AND COMPENSATION COMMITTEE
The Management Development and Compensation Committee of the Board of
Directors (the "Committee") consists of three non-employee directors: Samuel D.
Costa, Jr. (Chairman), Lewis W. Moore and Jeremiah J. O'Connor. In addition,
Jerrald T. Kabelin, Chairman of the Board of Directors, and Daniel A. Cotter,
President and Chief Executive Officer, served as ex-officio members of the
Committee. The Committee assists the Board of Directors in fulfilling its
responsibilities for setting and administering the policies which govern annual
compensation and monitoring the Company's pension and certain other benefit
plans. It meets in executive session and with ex-officio members and the Chief
Financial Officer concerning executive compensation matters. The Committee calls
upon outside consultants for assistance, as necessary.
The Committee meets at least annually. In fiscal year 1994, the Committee
met on three occasions. Primary responsibilities of the Committee include:
- Establishing the President's salary and annual and long-term incentive
opportunities.
- Approving other executive officer salaries recommended by the President.
- Setting performance goals for the annual and long-term incentive plans.
- Assessing performance achievement relative to goals and approving
incentive payments.
The Committee makes recommendations to the Board of Directors regarding
compensation of the Company's executive officers. The philosophy of the
Committee is to maintain an executive compensation program to help the Company
attract, retain and motivate the executive resources needed to maintain industry
leadership, provide high levels of service to Members, and achieve the financial
objectives as determined by the Board of Directors.
To achieve its stated goals, the Company has developed three executive
compensation policies.
- The Company provides levels of salaried compensation that are
competitive.
- The Company provides annual incentive compensation for executives that
vary in a consistent and predictable manner with the performance of the
Company.
- The Company provides an incentive program which enables selected
executives to achieve incentive awards based on the long-term (multiple
year) performance of the Company.
The combination of these three compensation policies is intended to provide
competitive earnings opportunities when performance reaches desired levels. Both
the annual and long-term incentive plans are cancelable by the Board of
Directors at any time.
The Company provides salary levels that are competitive with the median
(50th percentile) of the executive marketplace. The industry comparison groups
used to evaluate competitiveness include: member owned organizations, wholesale
distribution firms, mass merchandising firms and general industry and
manufacturing organizations. Competitiveness is measured using data from a
number of sources, including published information, proxies and surveys by
consulting firms.
The annual incentive plan is designed to ensure that executive compensation
varies in relation to achievement of annual performance goals. In fiscal year
1994, the plan's overall Company goal was based on achieving Member payout
objectives. Each executive's incentive award was determined by Member payout
results.
The long-term incentive plan assures a continuing focus on the Company's
future. Goals are set for performance achievement over three-year intervals. A
new performance period starts each year and goals for each three-year cycle
currently underway are related to achievement of revenue growth.
11
<PAGE> 13
EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid to the
Company's five most highly compensated executive officers during fiscal year
1994 and the total compensation paid to each such individual for the Company's
two previous fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND OTHER LONG-TERM
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) INCENTIVES(3)
- --------------------------------------- ---- -------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel A. Cotter....................... 1994 $500,000 $375,000 $ 4,430 $ 250,000
President and Chief 1993 500,000 -- 4,996 --
Executive Officer 1992 500,000 136,500 3,928 250,000
Steven J. Porter....................... 1994 325,000 170,625 58,719 --
Executive Vice President 1993 167,115 25,000 11,944 --
and Chief Operating Officer 1992 -- -- -- --
Kerry J. Kirby......................... 1994 225,000 101,250 6,930 45,000
Vice President, 1993 225,000 25,313 6,746 --
Finance 1992 193,299 36,304 7,518 --
Robert A. Nolawski..................... 1994 205,000 90,000 4,727 40,000
Vice President 1993 200,000 41,100 33,038 --
1992 205,111 77,175 13,046 --
Daniel T. Burns........................ 1994 175,000 78,750 6,906 35,000
Vice President, Law 1993 175,000 23,625 5,214 --
and Human Resources 1992 162,602 39,946 9,466 --
</TABLE>
- ---------------
(1) Annual bonus amounts are earned and accrued during the fiscal years
indicated, and paid subsequent to the end of each fiscal year.
(2) Other compensation consists primarily of Company contributions to the Cotter
& Company Employee's Savings and Compensation Deferral Plan (the "Savings
Plan"). Under the Savings Plan, each participant may elect to make a
contribution in an amount of up to ten percent (10%) of his annual
compensation, not to exceed $30,000 (including Company contributions) a
year, of which $9,240 of the executive officer's salary in fiscal year 1994
may be deferred. The Company's contribution to the Savings Plan is equal to
seventy-five percent (75%) of the participant's contribution, but not to
exceed four and one-half percent (4 1/2%) of the participant's annual
compensation. Other compensation for Mr. Nolawski, who retired January 6,
1995, includes $4,443 and $27,427 of relocation payments in fiscal year 1992
and 1993, respectively. Mr. Porter's other compensation consists of $11,944
and $56,891 of relocation payments in fiscal year 1993 and 1994,
respectively.
(3) Mr. Cotter earned a transition award in 1992 under the long-term incentive
plan initiated in fiscal year 1991.
Daniel A. Cotter is employed under a long-term contract which commenced
January 1, 1985 for a period of 15 years terminating December 31, 1999. Mr.
Cotter agreed, in 1990, to revise his contract to conform his compensation to
that applicable to all other executives. His base salary has not changed since
1990.
The Company has a severance policy providing termination benefits based
upon annual compensation and years of service.
No reportable loans were made by the Company to its executive officers or
to its directors during the last three fiscal years.
LONG-TERM PERFORMANCE CASH AWARDS
Beginning in fiscal year 1991, the Board of Directors adopted a long-term
incentive plan for selected senior executive officers of the Company. The plan
covers three-year periods beginning in 1991 through 1993.
12
<PAGE> 14
Senior executives of the Company are eligible for cash payouts ranging from 10%
to 75% of their annual salary if performance goals established for the plan are
met. Performance goals for the current plans relate to the achievement of
revenue growth.
A new plan starts each year with goals set for the next three-year period.
A range of estimated payouts which could be earned by the individuals listed in
the Summary Compensation Table in fiscal year 1995, and paid in fiscal year 1996
is shown in the following table:
<TABLE>
<CAPTION>
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
- ---------------------------------------------- ------------------ --------- -------- --------
<S> <C> <C> <C> <C>
Daniel A. Cotter.............................. 1993-1995 $ 125,000 $250,000 $375,000
Kerry J. Kirby................................ 1993-1995 25,000 50,000 75,000
Daniel T. Burns............................... 1993-1995 22,500 45,000 67,500
</TABLE>
DEFINED BENEFIT RETIREMENT PLANS
The Company has a defined benefit pension plan, the Cotter & Company
Pension Plan (the "Plan"), which is qualified under the Code. The amount of the
Company's annual contribution to the Plan is determined for the total of all
participants covered by the Plan, and the amount of payment with respect to a
specified person is not and cannot readily be separated or individually
calculated by the actuaries for the Plan. The Plan provides fully vested
unreduced monthly benefits to eligible employees who have retired at or after
age 65 or served a minimum of five years of service and reached age 62. Each of
the executive officers listed in the foregoing Summary Compensation Table is a
participant in the Plan. The Plan has been amended to be a Social Security
"excess" plan instead of being a Social Security "offset" plan. The benefits
provided by the Plan are calculated in the form of a single annuity.
The formula of the benefit for the service completed before January 1, 1989
is one and two-thirds percent of the participant's "average compensation"
multiplied by the person's years of service thru December 31, 1988 up to a
maximum of thirty such years, minus one and two-thirds percent of the
participant's primary Social Security benefit multiplied by the person's years
of service thru December 31, 1988 up to a maximum of thirty such years.
For service completed after January 1, 1989, the benefit formula is one and
one-twentieth percent of the participant's "average compensation" up to
one-third of the retirement year Taxable Wage Base multiplied by the person's
years of service after January 1, 1989, plus one and one-half percent of the
participant's "average compensation" over one-third of the retirement year
Taxable Wage Base multiplied by the person's years of service after January 1,
1989. Post January 1, 1989 service is limited such that the total service
credited through January 1, 1989 plus post January 1, 1989 service does not
exceed 30 years.
A third benefit formula for service completed prior to January 1, 1992 is
one and two-thirds percent of the participant's "average compensation"
multiplied by the person's years of service thru December 31, 1991 up to a
maximum of thirty such years, minus one and two-thirds percent of the
participant's primary Social Security benefit multiplied by the person's years
of service thru December 31, 1991 up to a maximum of thirty such years. The
third formula will be used only if the benefit calculated is higher than the
combination of the first two formulas.
"Average compensation" means the average of the compensation received by an
eligible employee during the five highest consecutive calendar years within the
ten consecutive calendar years immediately preceding the date of termination of
employment. Compensation considered in determining benefits includes salary,
overtime pay, commissions, bonuses and deferral contributions under the Savings
Plan. The average compensation does not differ substantially from all of the
compensation for the officers listed in the Summary Compensation Table.
The Company amended and restated in 1994 a Supplemental Retirement Plan
(the "Supplemental Plan") for certain employees as designated by the Company's
President and Chief Executive Officer. The benefits provided by the Supplemental
Plan are calculated in the form of a single annuity in an amount per year which
is equal to three percent of the participant's "average compensation" multiplied
by years of service
13
<PAGE> 15
up to a maximum of twenty such years, minus any benefits provided to the
participants by the Plan, and minus the participant's primary Social Security
benefit. "Average Compensation" for the Supplemental Plan is defined the same as
for the Plan, as discussed above. The Supplemental Plan is not a qualified plan
under the Code. Benefits payable under the Supplemental Plan will be financed
through internal operations.
The estimated annual retirement benefits which may be payable pursuant to
the Plan to the officers named in the Summary Compensation Table is currently
limited under Section 401(a)(17) of the Code, which outlines the maximum
earnings amounts which may be considered under the Plan in determining
retirement benefits. This limit is $150,000 for 1995. Section 415 of the Code
outlines the maximum annual benefit which may be payable from the Plan during
the year; the single dollar limit is $120,000 for 1995 for a participant
retiring at age 65.
The following table reflects the combined estimated annual retirement
benefits which may be payable pursuant to the Plan and the Supplemental Plan to
the officers named in the Summary Compensation Table at retirement under various
assumed conditions. The benefit amounts are not subject to deduction for Social
Security except as provided by the aforesaid benefit formula nor are said
amounts subject to any other offset.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
COMPENSATION 10 15 20 25 30
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$800,000................................. $228,400 $348,400 $468,400 $468,400 $468,400
700,000................................. 198,400 303,400 408,400 408,400 408,400
600,000................................. 168,400 258,400 348,400 348,400 348,400
500,000................................. 138,400 213,400 288,400 288,400 288,400
400,000................................. 108,400 168,400 228,400 228,400 228,400
300,000................................. 78,400 123,400 168,400 168,400 168,400
200,000................................. 48,400 78,400 108,400 108,400 108,400
100,000................................. 18,400 33,400 48,400 48,400 48,400
</TABLE>
The present credited years of service for the officers listed in the above
table are as follows: Daniel A. Cotter, 30 years; Robert A. Nolawski, 30 years;
Kerry J. Kirby, 19 years, Daniel T. Burns, 14 years, and Steven J. Porter, 2
years.
There is no existing market for the Company's Common Stock and there is no
expectation that any market will develop. There are no broad market or peer
group indexes the Company believes would render meaningful comparisons.
Accordingly, a performance graph of the Company's cumulative total shareholder
return for the previous five years, with a performance indicator of the overall
stock market for the Company's peer group, has not been prepared.
In fiscal year 1994 directors of the Company were each paid $1,000 per
month. The Chairman of the Board is paid $1,000 per day to a maximum of $104,000
per year, when serving in the capacity as Chairman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of February 25, 1995, each of the directors of the Company was the
beneficial owner of 10 shares of Class A Common Stock of the Company comprising
.2% of such shares issued and outstanding. Other than Daniel A. Cotter, no
executive officer owns any shares of Class A Common Stock.
The directors own in the aggregate approximately 1.5% of Class B Common
Stock as of February 25, 1995. No executive officer owns any shares of Class B
Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company uses Galaxy Travel Agency, Inc., a company engaged in providing
normal travel business services, for Company officers, directors, employees, and
Members. Daniel A. Cotter and his brother each own a one-half interest of Galaxy
Travel. The total bookings placed by the Company with Galaxy Travel in fiscal
year 1994 were approximately $2,000,000 and are estimated to be approximately
the same in fiscal year 1995.
The Company believes the foregoing transactions are on no-less favorable
terms to it than could have been obtained from an independent party.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying
index (page F-1) to the consolidated financial statements are filed
as part of this annual report.
2. FINANCIAL STATEMENT SCHEDULES
No schedules have been filed because the required information is not
applicable or is not material or because the required information is
included in the consolidated financial statements or the notes
thereto.
3. EXHIBITS
The exhibits listed on the accompanying index to exhibits (pages E-1
and E-2) are filed as part of this annual report.
(B) REPORTS ON FORM 8-K
None.
15
<PAGE> 17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COTTER & COMPANY
By: /s/ KERRY J. KIRBY
--------------------------------------
Kerry J. Kirby,
Vice President, Treasurer and
DATED: March 16, 1995 Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- --------------------
<S> <C> <C>
/s/ DANIEL A. COTTER President, Chief Executive March 16, 1995
- --------------------------------------------- Officer and Director
Daniel A. Cotter
/s/ STEVEN J. PORTER Executive Vice President March 16, 1995
- --------------------------------------------- and Chief Operating Officer
Steven J. Porter
/s/ KERRY J. KIRBY Vice President, Treasurer and March 16, 1995
- --------------------------------------------- Chief Financial Officer
Kerry J. Kirby
/s/ JERRALD T. KABELIN Chairman of the Board March 16, 1995
- --------------------------------------------- and Director
Jerrald T. Kabelin
/s/ WILLIAM M. CLAYPOOL, III Director March 16, 1995
- ---------------------------------------------
William M. Claypool, III
/s/ SAMUEL D. COSTA, JR. Director March 16, 1995
- ---------------------------------------------
Samuel D. Costa, Jr.
/s/ LEONARD C. FARR Director March 16, 1995
- ---------------------------------------------
Leonard C. Farr
/s/ WILLIAM M. HALTERMAN Director March 16, 1995
- ---------------------------------------------
William M. Halterman
/s/ ROBERT J. LADNER Director March 16, 1995
- ---------------------------------------------
Robert J. Ladner
/s/ LEWIS W. MOORE Director March 16, 1995
- ---------------------------------------------
Lewis W. Moore
/s/ JEREMIAH J. O'CONNOR Director March 16, 1995
- ---------------------------------------------
Jeremiah J. O'Connor
/s/ RICHARD L. SCHAEFER Director March 16, 1995
- ---------------------------------------------
Richard L. Schaefer
/s/ GEORGE V. SHEFFER Director March 16, 1995
- ---------------------------------------------
George V. Sheffer
/s/ ROBERT G. WATERS Director March 16, 1995
- ---------------------------------------------
Robert G. Waters
/s/ JOHN M. WEST, JR. Director March 16, 1995
- ---------------------------------------------
John M. West, Jr.
/s/ DONALD E. YEAGER Director March 16, 1995
- ---------------------------------------------
Donald E. Yeager
</TABLE>
16
<PAGE> 18
ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Auditors................................................. F-3
Consolidated Balance Sheet at December 31, 1994 and January 1, 1994............ F-4; F-5
Consolidated Statement of Operations for each of the three years in the period
ended December 31, 1994...................................................... F-6
Consolidated Statement of Cash Flows for each of the three years in the period
ended December 31, 1994...................................................... F-7
Consolidated Statement of Capital Stock and Retained Earnings for each of the
three years in the period ended December 31, 1994............................ F-8
Notes to Consolidated Financial Statements..................................... F-9 to F-17
</TABLE>
F-1
<PAGE> 19
-------------------------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
-------------------------------------
F-2
<PAGE> 20
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 December 31, 1994 and January 1, 1994, 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 December 31, 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 December 31, 1994 and January 1, 1994, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 13, 1995
F-3
<PAGE> 21
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ----------
(000'S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 1,831 $ 1,314
Accounts and notes receivable................................... 294,663 276,585
Inventories..................................................... 384,747 336,066
Prepaid expenses................................................ 7,861 6,969
---------- ----------
Total current assets............................... 689,102 620,934
Properties owned, less accumulated depreciation................... 164,261 164,319
Properties under capital leases, less accumulated amortization.... 4,691 6,769
Other assets...................................................... 10,731 11,506
---------- ----------
Total assets....................................... $868,785 $ 803,528
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 22
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ----------
(000'S OMITTED)
<S> <C> <C>
Current liabilities:
Accounts payable................................................ $334,468 $ 255,216
Accrued expenses................................................ 45,304 38,926
Short-term borrowings........................................... 9,329 23,287
Current maturities of notes, long-term debt and lease
obligations.................................................. 60,564 61,685
Patronage dividend payable in cash.............................. 18,383 16,614
-------- ---------
Total current liabilities.......................... 468,048 395,728
Long-term debt.................................................... 72,163 63,977
Obligations under capital leases.................................. 3,593 5,224
Capitalization:
Promissory (subordinated) and instalment notes.................. 199,099 217,996
Redeemable Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid 63,350 and
65,880 shares)............................................... 6,370 6,633
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid 1,047,756
and 1,019,640 shares; issuable as partial payment of
patronage dividends, 104,275 and 75,780 shares).............. 116,663 110,773
Retained earnings............................................... 3,764 3,867
-------- ---------
325,896 339,269
Foreign currency translation adjustment......................... (915) (670)
-------- ---------
Total capitalization............................... 324,981 338,599
-------- ---------
Total liabilities and capitalization............... $868,785 $ 803,528
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 23
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Revenues........................................... $2,574,445 $2,420,727 $2,356,468
---------- ---------- ----------
Cost and expenses:
Cost of revenues................................. 2,351,114 2,202,806 2,139,860
Warehouse, general and administrative............ 132,759 132,674 123,244
Interest paid to Members......................... 22,894 24,458 25,716
Other interest expense........................... 7,493 7,429 7,273
Gain on sale of properties owned................. (692) (5,985) --
Other income, net................................ (604) (260) (643)
Income tax expense............................... 1,163 2,582 389
---------- ---------- ----------
2,514,127 2,363,704 2,295,839
---------- ---------- ----------
Net margins........................................ $ 60,318 $ 57,023 $ 60,629
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 24
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Operating activities:
Net margins......................................... $ 60,318 $ 57,023 $ 60,629
Adjustments to reconcile net margins to cash and
cash
equivalents from operating activities:
Depreciation and amortization.................... 21,613 21,566 21,869
Provision for losses on accounts and notes
receivable..................................... 4,233 4,057 4,447
Changes in operating assets and liabilities:
Accounts and notes receivable.................... (33,112) (38,605) (29,798)
Inventories...................................... (49,145) 183 (11,819)
Accounts payable................................. 79,957 (45,070) 23,770
Accrued expenses................................. 6,022 (1,143) (6,221)
Other adjustments, net........................... (1,223) (2,679) (3,035)
-------- --------- ---------
Net cash and cash equivalents provided
by (used for) operating activities... 88,663 (4,668) 59,842
-------- --------- ---------
Investing activities:
Additions to properties owned....................... (21,427) (13,382) (17,871)
Proceeds from sale of properties owned.............. 2,174 13,999 682
Changes in other assets............................. 1,132 (3,850) (2,076)
-------- --------- ---------
Net cash and cash equivalents (used
for) investing activities............ (18,121) (3,233) (19,265)
-------- --------- ---------
Financing activities:
Payment of annual patronage dividend................ (16,614) (18,570) (18,423)
Payment of notes, long-term debt and lease
obligations...................................... (39,632) (32,730) (18,776)
Proceeds from long-term borrowings.................. -- -- 54,124
Increase (decrease) in short-term borrowings........ (13,851) 23,059 (20,975)
Purchase of Class A common stock.................... (216) (470) (337)
Proceeds from sale of Class A common stock.......... 288 323 352
-------- --------- ---------
Net cash and cash equivalents (used
for) financing activities............ (70,025) (28,388) (4,035)
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 517 (36,289) 36,542
-------- --------- ---------
Cash and cash equivalents at beginning of year........ 1,314 37,603 1,061
-------- --------- ---------
Cash and cash equivalents at end of year.............. $ 1,831 $ 1,314 $ 37,603
======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 25
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK, $100 PAR VALUE
------------------------------------
CLASS B FOREIGN
CLASS A ------------ CURRENCY
-------------------- ISSUED AND RETAINED TRANSLATION
ISSUED SUBSCRIBED TO BE ISSUED EARNINGS ADJUSTMENT
------ ---------- ------------ -------- -----------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C>
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)
Net margins.............................. 60,318
Foreign currency translation
adjustment............................ (245)
Patronage dividend....................... 10,829 (60,421)
Stock issued for paid-up subscriptions... 275 (275)
Stock subscriptions...................... 265
Stock purchased and retired.............. (528) (4,939)
------ ------ -------- -------- -----
Balances at December 31, 1994.............. $6,335 $ 35 $116,663 $ 3,764 $(915)
====== ====== ======== ======== =====
</TABLE>
- ---------------
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000
at December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993
and December 28, 1991 (for 360, 590, 760 and 880 shares subscribed,
respectively).
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 26
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 and
related merchandise. The Company also manufactures paint and paint applicators.
The Company's goods and services are sold predominantly within the United
States, primarily to retailers of hardware and related lines, each of whom has
purchased ten shares of the Company's Class A common stock upon 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. 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 five-year promissory (subordinated) notes (from
fiscal year 1985 through fiscal year 1993, the promissory (subordinated) notes
were for a term of seven years) and redeemable $100 par value Class B common
stock.
Membership may be terminated without cause by either the Company or the
Member upon sixty days' written notice. In the event membership is terminated,
the Company undertakes to purchase, and the Member is required to sell to the
Company, all of the Member's 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.
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 and
warehouse, office and computer 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 enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis 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
F-9
<PAGE> 27
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
DECEMBER 31, 1994 JANUARY 1, 1994
----------------- ---------------
(000'S OMITTED)
<S> <C> <C>
Manufacturing inventories:
Raw materials........................... $ 12,986 $ 14,795
Work-in-process and finished goods...... 60,094 54,992
--------- ---------
73,080 69,787
Merchandise inventories................... 311,667 266,279
--------- ---------
$ 384,747 $ 336,066
========= =========
</TABLE>
NOTE 3--PROPERTIES
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 JANUARY 1, 1994
-------------------- --------------------
OWNED LEASED OWNED LEASED
-------- ------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Buildings and improvements.................... $168,311 $ -- $166,055 $ --
Machinery and warehouse equipment............. 79,953 -- 76,330 --
Office and computer equipment................. 62,868 -- 55,191 --
Transportation equipment...................... 22,757 14,556 18,778 15,337
-------- ------- -------- -------
333,889 14,556 316,354 15,337
Less accumulated depreciation and
amortization................................ 181,920 9,865 164,731 8,568
-------- ------- -------- -------
151,969 4,691 151,623 6,769
Land.......................................... 12,292 -- 12,696 --
-------- ------- -------- -------
$164,261 $ 4,691 $164,319 $ 6,769
======== ======= ======== =======
</TABLE>
F-10
<PAGE> 28
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 JANUARY 1, 1994
----------------- ---------------
(000'S OMITTED)
<S> <C> <C>
Senior note at 8.60%........................ $50,000 $50,000
Term loans:
Canadian prime (8.00% and 5.50%,
respectively).......................... 3,565 3,777
United States prime plus .5% (9.00%) and
fixed (7.75%), respectively............ 6,200 6,200
Redeemable (subordinated) term notes:
7.00%..................................... 4,346 --
7.37%..................................... 1,512 --
7.61%..................................... 3,540 --
Industrial Revenue Bonds:
5.28% and 5.94%, respectively............. 4,000 4,000
8.25%..................................... -- 1,150
------- -------
73,163 65,127
Less amounts due within one year............ 1,000 1,150
------- --------
$72,163 $63,977
======= =======
</TABLE>
Principal payments for the 8.60% senior note are due in incrementally
increasing amounts starting in 1995 through maturity in 2007. Under the senior
note agreement, the Company is required to meet certain financial ratios and
covenants.
The two term loans are due in 1997 and 1999, respectively.
The redeemable (subordinated) term notes were issued in exchange for
promissory (subordinated) notes maturing on December 31, 1994 that were held by
promissory note holders, who do not own the Company's Class A Common Stock. The
notes are due in 1996, 1997 and 1998.
On October 1, 1997, and every three-year period thereafter, the interest
rate on the 5.28% industrial revenue bonds 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 each interest reset date through maturity in 2003.
Total maturities of long-term debt for fiscal years 1995, 1996, 1997, 1998,
1999 and thereafter are $1,000,000, $6,346,000, $8,077,000, $7,540,000,
$10,200,000 and $40,000,000, 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 $67,800,000 at December 31, 1994.
Borrowings under these agreements were $9,329,000 at December 31, 1994. The
Company pays commitment fees for these lines. The weighted average interest rate
on short-term borrowings was 6.63% at December 31, 1994 and 3.48% at January 1,
1994.
NOTE 5--CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouse, office, computer and
transportation equipment under operating and capital leases.
F-11
<PAGE> 29
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum lease payments under capital
and operating leases, together with the present value of the net minimum lease
payments, as of December 31, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(000'S OMITTED)
<S> <C> <C>
Fiscal years
1995................................................. $ 1,887 $ 6,356
1996................................................. 1,538 4,812
1997................................................. 1,039 2,892
1998................................................. 751 1,830
1999................................................. 416 1,351
Thereafter........................................... -- 4,400
------- -------
Net minimum lease payments............................. 5,631 $21,641
=======
Less amount representing interest...................... 298
-------
Present value of net minimum lease payments............ 5,333
Less amounts due within one year....................... 1,740
-------
$ 3,593
=======
</TABLE>
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.
Rent expense under operating leases was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Minimum rent..................................... $8,487 $8,174 $7,253
Contingent rent.................................. 611 575 616
------ ------ ------
$9,098 $8,749 $7,869
====== ====== ======
</TABLE>
F-12
<PAGE> 30
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ----------
(000'S OMITTED)
<S> <C> <C>
Promissory (subordinated) notes--
Due currently............................................ $ 39 $ 51
Due on December 31, 1994--8.50%.......................... -- 26,173
Due on December 31, 1994--9.50%.......................... -- 30,321
Due on December 31, 1995--7.50%.......................... 20,744 21,324
Due on December 31, 1995--10.00%......................... 35,355 36,257
Due on December 31, 1996--9.50%.......................... 28,436 28,930
Due on December 31, 1996--6.00%.......................... 24,888 27,187
Due on December 31, 1997--10.00%......................... 17,579 18,138
Due on December 31, 1997--7.87%.......................... 16,793 --
Due on December 31, 1998--8.00%.......................... 28,512 29,266
Due on December 31, 1999--8.00%.......................... 27,030 27,827
Due on December 31, 1999--8.20% (to be issued)........... 27,909 --
Due on December 31, 2000--6.50% (issued 1994)............ 25,628 26,752
Instalment notes at interest rates of 6.50% to 10.00%
with maturities through 1998............................. 4,010 4,062
-------- ---------
256,923 276,288
Less amounts due within one year........................... 57,824 58,292
-------- ---------
$199,099 $ 217,996
======== =========
</TABLE>
The promissory (subordinated) 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. Promissory (subordinated) 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 significant
portion of the promissory (subordinated) 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.
Total maturities of promissory (subordinated) and instalment notes for
fiscal years 1995, 1996, 1997, 1998, 1999 and thereafter are $57,824,000,
$54,463,000, $35,197,000, $28,872,000, $54,939,000 and $25,628,000,
respectively.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the uncertainty of the ultimate maturities of the promissory
(subordinated) notes, management believes it is impracticable to estimate their
fair value. The carrying amounts of the Company's other financial instruments
approximate fair value. Fair value was estimated using discounted cash flow
analyses, based on the Company's incremental borrowing rate for similar
borrowings.
F-13
<PAGE> 31
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--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 December 31, 1994, the Company has alternative minimum tax credit
carryforwards of approximately $1,200,000 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 December 31, 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>
DEFERRED
LIABILITY METHOD METHOD
--------------------------- ----------
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Current:
Federal........................................ $ 486 $ 343 $ 551
State.......................................... 462 22 152
Foreign........................................ 278 237 122
------ ------ ------
Total current.................................. 1,226 602 825
------ ------ ------
Deferred:
Federal........................................ (147) 1,582 (497)
State.......................................... (26) 317 (14)
Foreign........................................ 110 81 75
------ ------ ------
Total deferred................................. (63) 1,980 (436)
------ ------ ------
$1,163 $2,582 $ 389
======= ====== ======
</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.
F-14
<PAGE> 32
COTTER & COMPANY
------------------
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 1994 and 1993 and 34% in fiscal
year 1992 is as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
-------------------------- ----------
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Tax at U.S. statutory rate.................... $ 21,518 $ 20,862 $ 20,746
Effects of:
Patronage dividend.......................... (21,147) (19,054) (20,706)
State income taxes, net of federal tax
benefit.................................. 283 220 91
Other, net.................................. 509 554 258
-------- --------- ---------
$ 1,163 $ 2,582 $ 389
======== ========= =========
</TABLE>
NOTE 9--CASH FLOW
The Company's noncash financing and investing activities in fiscal year
1992 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. These transactions aggregate $12,527,000. 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
--------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Patronage dividend payable in cash...................... $ 18,383 $ 16,614 $ 18,570
Promissory (subordinated) notes......................... 23,213 20,852 22,711
Class B nonvoting common stock.......................... 5,900 2,086 4,934
Instalment notes........................................ 3,058 2,939 2,485
Member indebtedness..................................... 9,867 11,949 12,201
-------- -------- --------
$ 60,421 $ 54,440 $ 60,901
======== ======== ========
Note renewals........................................... $ 26,191 $ 27,187 $ 22,686
======== ======== ========
</TABLE>
Cash paid for interest during fiscal years 1994, 1993 and 1992 totalled
$30,583,000, $32,056,000 and $31,638,000, respectively. Cash paid for income
taxes during fiscal years 1994, 1993 and 1992 totalled $1,709,000, $1,387,000
and $1,771,000, respectively.
F-15
<PAGE> 33
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--RETIREMENT PLANS
The components of net pension cost for the Company administered pension
plans consisted of:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Income:
Actual return (loss) on plan assets................... $ (1,543) $ 7,486 $ 2,856
Amortization of excess plan assets.................... 920 920 920
-------- -------- --------
(623) 8,406 3,776
-------- -------- --------
Expenses:
Service cost-benefits earned during year.............. 4,765 4,556 3,633
Interest on projected benefit obligation.............. 6,736 6,266 5,738
Deferral of excess (deficiency) of actual over
estimated return on plan assets.................... (8,815) 1,042 (3,060)
-------- -------- --------
2,686 11,864 6,311
-------- -------- --------
Net pension cost........................................ $ 3,309 $ 3,458 $ 2,535
======== ======== ========
</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 8.5% and 4.5%, respectively, in fiscal year 1994; 7.5% and 4.5%,
respectively, in fiscal year 1993; and 9.0% and 6.0%, respectively, in fiscal
year 1992. These changes in actuarial assumptions did not have a material impact
on net pension cost for fiscal year 1994 and the Company does not anticipate
that these changes will have a material impact on net pension cost in future
years. In fiscal years 1994, 1993 and 1992, the expected long-term rate of
return on assets was 9.5%.
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
F-16
<PAGE> 34
COTTER & COMPANY
------------------
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>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ----------
(000'S OMITTED)
<S> <C> <C>
Assets:
Total plan assets at fair value................................... $ 80,046 $ 81,726
======== ========
Obligations:
Accumulated benefit obligations:
Vested......................................................... $ 53,055 $ 55,605
Non-vested..................................................... 7,683 8,704
Effect of projected compensation increases........................ 19,924 24,110
-------- --------
Total projected benefit obligations............................... 80,662 88,419
-------- --------
Net excess assets (liabilities):
Unrecognized:
Unamortized excess assets at original date..................... 8,643 9,563
Net actuarial gain (loss)...................................... 565 (5,773)
Prior service costs............................................ (5,313) (6,170)
Recognized accrued pension cost................................... (4,511) (4,313)
-------- --------
Total net excess assets (liabilities)............................. (616) (6,693)
-------- --------
Total obligations and net excess assets (liabilities)............... $ 80,046 $ 81,726
======== ========
</TABLE>
The Company also participates in union-sponsored defined contribution
plans. Pension costs related to these plans were $757,000, $702,000 and $556,000
for fiscal years 1994, 1993 and 1992, respectively.
NOTE 11--SUBSEQUENT EVENTS
On January 13, 1995, the Company announced the sale of certain inventory of
its V&S(R) Variety division to a national wholesaler who has also agreed to
supply the majority of the V&S(R) stores. Also, on January 31, 1995, the Company
agreed to sell certain assets of its outdoor power equipment manufacturing
division to a nationally recognized company and secured a favorable supply
agreement for such equipment. These transactions should not have a material
impact on the Company's results of operations or financial position.
F-17
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS NUMBERED
ENCLOSED DESCRIPTION PAGE
-------- ---------------------------------------------------------------- ------------
<S> <C> <C>
21 Subsidiaries.
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
INCORPORATED
BY REFERENCE
--------------
<S> <C>
3-A Amended and Restated Certificate of Incorporation of Cotter & Company dated
May 10, 1993. Incorporated by reference -- Exhibit 3-A to the Company's Form
10-K Annual Report for the year ended January 1, 1994.
3-B By-Laws of Cotter & Company as amended and restated through June 1, 1993.
Incorporated by reference -- Exhibit 3-B to the Company's Form 10-K Annual
Report for the year ended January 1, 1994.
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).
10-A Form of "Retail Member Agreement with Cotter & Company" between the Company
and its Members that offer primarily hardware 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>
E-1
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBITS
INCORPORATED
BY REFERENCE
--------------
<S> <C>
10-C Cotter & Company Pension Plan (As Amended and Restated June 20, 1994
Effective As Of January 1, 1989). Incorporated by reference -- Exhibit 10-C
to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No.
33-39477).
10-D Cotter & Company Employees' Savings and Compensation Deferral Plan (As
Amended and Restated Effective April 1, 1994). Incorporated by reference --
Exhibit 10-D to Post-Effective Amendment No. 4 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 Amendment dated November 1, 1991 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 Amendment dated December 15, 1994 to Supplemental Retirement Plan between
Cotter & Company and selected executives of the Company. Incorporated by
reference -- 10-G to Post-Effective Amendment No. 4 to Registration Statement
on Form S-2 (No. 33-39477).
10-H 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-I Cotter & Company Long-Term Incentive Compensation Program for Executive
Management (Amended) dated November 7, 1994. Incorporated by reference --
10-I to Post-Effective Amendment No. 4 to Registration Statement on Form S-2
(No. 33-39477).
10-J 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-K Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel
A. Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by
reference -- Exhibit 10-N to Registration Statement on Form S-2 (No.
33-39477).
27 Financial Data Schedule. Incorporated by reference -- Exhibit 27 to Post-
Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477)
</TABLE>
<TABLE>
<CAPTION>
SEQUENTIALLY
SUPPLEMENTAL NUMBERED
INFORMATION PAGE
- ------------ -------------
<S> <C> <C>
(a) Notice of Annual Meeting of Stockholders on April 4, 1995.
(b) Proxy solicited by the Board of Directors.
(c) Cotter & Company 1994 Annual Report.
</TABLE>
E-2
<PAGE> 1
EXHIBIT 21
Subsidiaries of Registrant
The registrant owns 100% of the issued and outstanding Capital Stock of
Cotter Real Estate Agency, Inc., Cotter Acceptance Co., Inc., Cotter Insurance
Agency, Inc., Cotter Trucking, Inc., Wheeler Manufacturing Co., and Atlas Power
Equipment Company, all Illinois corporations, and indirectly through Cotter
Acceptance, Co., 100% of the issued and outstanding Capital Stock of Warner
True Value Hardware, Inc., a Minnesota corporation. The accounts of these
subsidiaries have been consolidated with the registrant's at December 31, 1994
and January 1, 1994.
In January 1992, the registrant formed a Canadian subsidiary, Cotter
Canada Hardware & Variety Company, Inc., owning 100% of the issued and
outstanding Capital Stock. Indirectly, through this subsidiary, the registrant
owns 100% of the issued and outstanding voting Preferred Stock of the newly
formed Canadian cooperative, Cotter Canada Hardware and Variety Cooperative,
Inc.
<PAGE> 1
SUPPLEMENT (a)
COTTER & COMPANY
2740 North Clybourn Avenue
Chicago, Illinois 60614
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 4, 1995
TO THE STOCKHOLDERS OF COTTER & COMPANY:
The Annual Meeting of Stockholders of COTTER & COMPANY, a Delaware Corporation,
will be held at its Distribution Center located at 7058 Snowdrift Road,
Fogelsville, Pennsylvania 18051, on Tuesday, April 4, 1995, at the hour of
10:00 in the morning, local time, for the following purposes:
1. To elect five Directors to serve for a term of three years and to
elect one Director for a term of one year to fill an unexpired
term and until the election and qualification of their respective
successors;
2. To approve the appointment of Ernst & Young, independent public
accountants, as auditors of the Company for fiscal year 1995; and
3. To consider and act upon such further business as may properly
come before the meeting or any adjournments thereof.
Election of Directors. The Nominating Committee and the Board of Directors
have nominated for election five (5) nominees listed below, each to hold office
for a term of three (3) years and until his successor is elected and qualified:
William M. Halterman George V. Sheffer
Kenneth M. Noble John M. West, Jr.
Richard L. Schaefer
Additionally, Dennis A. Swanson has been nominated to serve for a term of one
(1) year to fill the unexpired term of Michael P. Cole, retired.
The shares represented by the Proxy solicited by the Board of Directors will be
voted in favor of the election of the above-named nominees unless authority is
expressly withheld.
The Board of Directors knows of no reason why any nominee for director will be
unable to serve if elected. If any nominee shall become unavailable for
election, it is intended that such shares shall be voted for the election of a
substitute nominee selected by the persons named in the enclosed Proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES PRESENTED.
<PAGE> 2
Appointment of Independent Public Accountants. The Board recommends that you
vote FOR the approval of the appointment of Ernst & Young, independent public
accountants, as auditors for the Company for the fiscal year ending December
30, 1995. The Proxy solicited by the Board will be voted in favor of the
approval of Ernst & Young to serve as auditors for the Company for fiscal year
1995 unless a contrary decision is made by the Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE APPOINTMENT OF
ERNST & YOUNG AS AUDITORS FOR THE COMPANY FOR FISCAL YEAR 1995.
Only holders of record of the Class A Stock of the Company at the close of
business on February 25, 1995, will be entitled to notice of and to vote at
said meeting. The Proxy solicited by the Board will be voted in favor of all
proposals unless a contrary decision is made by the Stockholders, and of all
other matters to come before the meeting, or any adjournments thereof, in the
discretion of the Proxies therein.
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE ANNUAL MEETING IN PERSON
ARE ASKED TO SIGN, DATE, AND RETURN THE ENCLOSED PROXY TO THE COMPANY IN THE
ENCLOSED, STAMPED ENVELOPE, ADDRESSED TO COTTER & COMPANY, P.O. BOX 5314,
NAPERVILLE, IL 60567-5314.
YOUR VOTE IS IMPORTANT
YOU ARE URGED TO SIGN, DATE, AND RETURN YOUR PROXY WITHOUT
DELAY, TO INSURE ITS ARRIVAL IN TIME FOR THE MEETING.
THIS WILL ENSURE THE PRESENCE OF A QUORUM AT THE MEETING.
By Order of the Board of Directors
/s/ DANIEL T. BURNS
-----------------------------------
Daniel T. Burns
Secretary
Chicago, Illinois
Date of Mailing: March 10, 1995
<PAGE> 1
SUPPLEMENT (b)
COTTER & COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William M. Claypool, III; Lewis W. Moore; and
Robert G. Waters, and each of them, as Proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as
designated below, all shares of Class A Common Stock of Cotter & Company held
of record by the undersigned on February 25, 1995, at the Annual Meeting of
Stockholders to be held on Tuesday, April 4, 1995, at the Company's
Distribution Center located at 7058 Snowdrift Road, Fogelsville, Pennsylvania
18051, at 10:00 a.m., local time, and at any adjournments thereof.
<TABLE>
<S> <C>
MARK AN X INSIDE BOX [X]
THE BOARD RECOMMENDS A VOTE FOR ALL OF THE FOLLOWING PROPOSALS. WITHHOLD AUTHORITY
TO VOTE FOR ALL
FOR NOMINEES LISTED BELOW
1.* ELECTION OF DIRECTORS
For all nominees listed below (except as marked to the contrary below).
2. To vote for the election of Dennis A. Swanson to serve for a term of one
year to fill the unexpired term of Michael P. Cole, retired.
* William M. Halterman, Kenneth M. Noble, Richard L. Schaefer, George V.
Sheffer, and John M. West, Jr., for a term of three years. To withhold
authority to vote for any individual nominee, write that nominee's name
on the space provided.
FOR AGAINST ABSTAIN
3. Proposal to approve the appointment of Ernst & Young, independent public
accountants, as auditors of the Company for the fiscal year 1995.
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournments
thereof.
This Proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted for Proposals 1, 2, 3 and 4.
Please sign exactly as your name appears on your Class A Common Stock
certificate. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
A copy of the Company's 10-K Annual Report is available upon request.
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY
BALLOT PROMPTLY USING THE ENCLOSED ENVELOPE.
</TABLE>
<PAGE> 1
SUPPLEMENT(c)
COTTER & COMPANY 1994 ANNUAL REPORT
[COLLAGE OF 110 TRUE VALUE CUSTOMERS]
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.
67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.
78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.
100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.
</TABLE>
<TABLE>
<S> <C>
1. Scott Stryker, Stone Ridge, NY 56. Dale Kennow, Glendale, AZ
2. Tammy Murphy, Thompson Station, TN 57. Mary White, Worland, WY
3. Jimmy Scott, Marks, MS 58. Albert Jost, Pittsburg, KS
4. John Duclos, Goffstown, NH 59. Susan L. Burkhert, Adrian, MI
5. Kenneth G. Korges, Dallas, TX 60. Joseph J. Witt, Wilmington, DE
6. Jan Emery, Hillsboro, OR 61. Tammy Burr, Shawano, WI
7. Brian Pletcher&Missy Kidder, Elkhart, IN 62. Lane Campbell, Suwanee, GA
8. Robert A. Hayes, Sun City West, AZ 63. Konrad McCree, Clearwater, FL
9. Terri Williams, Benton, KY 64. Dorothy Yaw, Sandpoint, ID
10. Dan Aurilio, McDonald, OH 65. Charles Cochran, Metropolis, IL
11. Jennifer Smith, Metropolis, IL 66. Gary W. Trabert, Bethlehem, WV
12. Russ Rector, Sandpoint, ID 67. Phyllis Phipps, Goffstown, NH
13. Owen Eric McClinchey, Powell River, BC 68. Ronald King, Columbus, IN
14. Maureen M. Moore, Stanwood, WA 69. Clyde Nason, Jr., S. Portland, ME
15. Phil Garner, Sugar Hill, GA 70. Jeffrey Lawler, Rapid City, SD
16. Virginia Butler, Pike Road, AL 71. Georgia Leithead, Ten Sleep, WY
17. Danny Nobles, Cerro Gordo, NC 72. William O. Thompson, Wilmington, DE
18. Carolyn Burris, Irving, TX 73. Charlie E. Shirley, Marysville, WA
19. Anthony D. Martin, Williamston, SC 74. Betty Smith, Williamston, SC
20. Hung Tran, Granger, IN 75. Robert E. Lara, Arrey, NM
21. Bob E. Burris, Sr., Belton, SC 76. Charles Dean Finley, Coralville, IA
22. Pat Grantham, Coralville, IA 77. Valerie Carpenter, Brattleboro, VT
23. Nina B. Huff, Wheeling, WV 78. Robbie Williams, Aurora, CO
24. Ronald Coram, Metropolis, IL 79. Steve Oellermann, Glendive, MT
25. Mike Price, Cumming, GA 80. Patricia Johnson, Carrollton, VA
26. Jose Melendez, Rapid City, SD 81. Robert Collins, Benton, KY
27. Robert G. Coonan, Brattleboro, VT 82. Joey Yaeger, Elko, NV
28. R. Scott Brinkman, Delta, UT 83. Dawn M. Geldof, Newark, DE
29. Joe Milo, Deming, NM 84. Steve Swader, Sandpoint, ID
30. Kelli Dawn Burt, Sandpoint, ID 85. John D. Soto, Glendale, AZ
31. Elbert, Oxendine, Fairmont, NC 86. Kitty Bell. Lumberton, NC
32. Gloria Ahern, S, Portland, ME 87. Mark Jester, Ponca City, OK
33. James Rindo, Pepperell, MA 88. Gary H. Bosley, Wheeling, WV
34. Richard Norman, Thompson Station, TN 89. James French, Pittsburg, KS
35. Larry & Rosemary Dunlap, Granger, IN 90. Susan & Melody Fulone, New Boston, NH
36. Jerry K. Fogle, Elko, NV 91. John E. Frost, Brattleboro. VT
37. Helen D. Meyers, Allenwood, PA 92. Meri Huckins, Clearwater, FL
38. Thomas Fleming, Aurora, CO 93. David Crawford, Mtn. Home, AR
39. Diane Price, Phoenix, AZ 94. Ted King, Murray, KY
40. Ray Hauser, Ponca City, OK 95. Dennis Hartsell, Edwardsburg, MI
41. John Skufca, McDonald, OH 96. Arma T. Holman, Delta, UT
42. Charles E. Goss, Jr., Dunstable, MA 97. Clint Holmes, Worland, WY
43. Mark Crasnick, Portland, ME 98. Jack Brown, Hannibal, MO
44. Peter Kane, New Paltz, NY 99. Barb Darling, Slinger, WI
45. Joan Brenner, Glendive, MT 100. Kendric Haithcox, Cassopolis, MI
46. Rev. Johnny Alford, Montgomery, Al 101. Tom Corcoran, Marietta, GA
47. Pamela Berovic, Hillsboro, OR 102. Dee Miller, Hartville, OH
48. Edward Pewitt, Franklin, TN 103. Dean Hamer, Tipton, IA
49. Joice Evans, Hannibal, MO 104. R. David Hunter, Turbotville, PA
50. Ray Arnold, Jr., Franklin, TN 105. Karen Willard, Smithfield, VA
51. Clair Noble, Iowa City, IA 106. Jimmy Autrey, Columbus, NM
52. Ed Akers, Tonkawa, OK 107. Donald Burwell, Adrian, MI
53. Thomas Herbert, Deming, NM 108. Anne Brennan, Groton, MA
54. Terry Gumm, Columbus, IN 109. Thomas Violante, Hillsboro, OR
55. Sam & Daniel Abtam, Dunbarton, NH 110. Winkey Weil, Montgomery, AL
</TABLE>
<PAGE> 3
The business mission of Cotter & Company is
AS OUR
to maximize our Members' profitability and growth
CUSTOMER
by aggressively providing cost-effective, innovative
EVOLVES
products, programs and services. To do that, we must
SO MUST OUR
serve today's True Value customers even while we prepare
BUSINESS.
to serve tomorrow's different and changing customers.
<PAGE> 4
YOUR CUSTOMERS ARE THE MOST IMPORTANT
PEOPLE IN COTTER & COMPANY'S BUSINESS.
[PICTURE OF CHAIRMAN OF THE BOARD AND PRESIDENT]
Chairman Jerry Kabelin and President Dan Cotter.
As you read this annual report, you will see very quickly that it is
focused on your customers as much as on your company.
On the cover you see the faces of more than 100 True Value(R) Store
customers, from practically every state in the union. They are not models,
they are the people who come into your stores every day.
- -------------------------------------------------------------------------------
Your patronage dividend grew by 11%, faster than your company's revenues.
- -------------------------------------------------------------------------------
They are the most important people in your business, and we know that at Cotter
& Company. That's why so much attention is being paid to these people in
today's actions and tomorrow's plans.
That emphasis on your customers continues throughout this report, for good
reason. One of the most difficult, and most important, things in business is
striking the right balance between serving the needs and wants of customers
today, and tooling up to meet the very different wants and needs of different
customers tomorrow.
During 1994, Cotter & Company achieved that balance.
Here are a few of the highlights of 1994. Your wholesaler has:
- Increased patronage dividends 11.0%
- Increased revenues by 6.4% to nearly $2.6 billion
- Created a new, modern and effective advertising program
- Reduced corporate margins (leaving more money in the Member's
pocket throughout the entire year)
- Filled Member orders at the highest rate in history
- Successfully moved your Red Carpet Market to St. Louis
- Invested money and manpower in technology for the future
- Merged key new executives into your top management team
Everything that was accomplished in 1994 was the result of years of good
planning and hard work.
When this process started, professionals told your management team the
needed changes would take three to five years. We thought it could be done
sooner. We were wrong.
But now everything is coming together, and the results will compound year
after year.
If there is one single thing in which we, your chairman and president,
take the most pride, it is the way your top management has pulled together as a
team.
These executives have devoted all their efforts to giving Members what
they need. At meeting after meeting your executives have addressed every issue
with no concern about how it affects them or their departments, but only
considering how it affects Members.
Financially, this has been a very good year. We have surpassed our sales
goal and the patronage dividend has exceeded 1993 and our 1994 Budget. It's
also better than it looks at first glance.
More than $6 million that would have been included in the year-end
patronage dividend in years past stayed with Members all year long in 1994,
because of the impact of our very successful Pinpoint Pricing program. Your
wholesaler's lower-than-normal margins on these high-profile items made you more
competitive and more profitable.
You kept that $6+ million at work in your business all year long. If you
had not received an "instant" patronage dividend through lower prices, your
total patronage dividend would have been about $66 million, the highest since
1989 and more than 20% above 1993.
In 1994, we invested $5 million to enhance your company's technological
infrastructure. This investment, approved by Members, will make your future
more secure and more profitable.
- -------------------------------------------------------------------------------
Pinpoint Pricing kept $6 million of your money working in your business
throughout the entire year.
- -------------------------------------------------------------------------------
Many of our other accomplishments have been equally important and equally
impressive.
2
<PAGE> 5
Growth in the Just Ask Rental program has been outstanding. This
program gives Members a unique competitive advantage over giant chain
competitors and other independents, too.
Your Lumber and Building Materials division (LBM) had an excellent year,
with sales surpassing $300 million for the first time in history, as the result
of an 11.9% increase.
- -------------------------------------------------------------------------------
Record fill rates especially in core departments, prevented loss sales and kept
your customers happy.
- -------------------------------------------------------------------------------
Cotter Canada showed strong growth with a revenue increase of 11.6% to
$128 million (Canadian) in 1994. Cotter Canada provides a solid base for our
international growth.
Leaders of both Cotter Canada and LBM retired in 1994, and their loss will
be felt, but both men fully deserve all the good things that retirement can
bring, and they go with our best wishes.
Bob Nolawski, who started with Cotter & Company unloading trucks in the
Cleveland Distribution Center, worked his way up through the ranks to Vice
President, and was the logical choice to be the first President of Cotter
Canada, where he did a great job. Fred McCarthy led LBM to 15% annual growth
for the 18 years he headed that operation.
But good leadership is common throughout your company, and good leaders
always prepare their successors. That's why our strong 1994 will be followed by
an even better 1995.
Details of your company's performance in 1994 fill the following pages of
this report. It was a year filled with significant accomplishments.
One factor considered in all forward-looking decisions in 1994 has been
the long-discussed move of your national headquarters.
It has been increasingly obvious for several years that this move had to
be made in order to serve Members better. The buildings that now house your
headquarters are more valuable for other purposes, and Cotter & Company must
have more efficient facilities to lower costs and keep you competitive.
In fact, any element of your own wholesaler that is non-productive is open
to review. We cannot afford under-performing assets and all decisions must be
made on the basis of what is best for the total Membership.
That philosophy was behind the sale of V&S(R) early in 1995 and the
announced sale of General Power, effective in August, 1995.
Both these actions will enhance the company's profitability, but of equal
importance, they are part of an ongoing response to changes in the marketplace.
These two moves allow Cotter & Company to concentrate on what made True
Value Stores industry leaders ever since the company was founded in 1948. This
concentration on hardware, housewares, building materials and related products
will benefit every True Value Store.
Your Board of Directors and your executives are concentrating on meeting
your needs today and into the future, not resting on the success of the past.
During 1994 you heard frequent reference to the need for a fully
participating Membership.
[BAR CHART SHOWING COMPANY REVENUES AND AMOUNT PAID BY COMPANY AS PATRONAGE
DIVIDEND FOR THE YEARS 1993 AND 1994]
The unselfish interests of committed Members, regardless of size, must
come before the self-interest of those few who want to take the benefits of
Membership without giving anything back.
We will remain strong and successful only if Members work together,
cooperating with each other and with the executives, managers and employees of
the company they own.
Your management recognizes that this past year was successful because of
the loyalty, understanding and cooperation of the vast majority of Members.
We salute you, we thank you, and we promise to do everything we can to lead
your company to even greater success in the years ahead.
/s/ Jerrald T. Kabelin
Jerrald T. Kabelin
Chairman of the Board
/s/ Daniel A. Cotter
Daniel A. Cotter
President and Chief Executive Officer
3
<PAGE> 6
1994 WAS THE YEAR OF THE CUSTOMER AS
COTTER & COMPANY BUILT FOR THE FUTURE.
[PICTURE OF FAMILY SHOPPING]
Dennis Hartsell, a corporate pilot, and his wife, Mary, are active
do-it-yourselfers. Family life centers around church, children--two boys and a
girl--and their home. They've been shopping at least twice a month at the same
True Value Store for 12 years, for service and "helpful step-by-step advice."
They don't consider themselves experts, even though they remodel one room a
year, so they use their True Value Store as "a trusted partner," according to
Dennis. Recent projects include adding closets, tiling bathrooms and upgrading
plumbing and electrical.
Dennis and Mary, both 45, are typical of the "baby boomer" generation that
accounts for almost half of all American households. Boomers are in their peak
earning years and 74% own their home. Many are outgrowing their homes and they
have the income to do something about it, adding rooms, improving kitchens and
baths, and more. Baby boomers represent the largest volume potential in the
home improvement industry.
If ever there was a "year of the customer" for Cotter & Company and True
Value Stores, 1994 surely was that year.
All of the changes that have been implemented in the last few years,
changes designed to help True Value Stores serve today's customers and prepare
to serve tomorrow's different customers, began to bear fruit.
It was a good year in every department, from Retail Development to
Merchandising to Distribution to Management Information Services.
Reorganized and renamed in late 1994, Cotter & Company's new "Retail
Development Department" was both a functioning part and a symbol of the changes
within the company.
With more professionally-trained people in the field, Members got strong
proof of Cotter's commitment to help their business.
MARKET MOVE VERY SUCCESSFUL.
Moving Cotter's Red Carpet Markets from Chicago to St. Louis was
successful beyond our greatest hopes. Attendance set records in Spring and
Fall, in both people and stores. Sparkling facilities, efficient for Members
and vendors, helped increase orders to record levels at both Markets.
Equally important was the expanded role of the Markets in training Members
and their employees to meet challenges of the future.
A series of Friday seminars designed to keep Members on top of the
external changes that will dictate how they do business in the years ahead drew
more than 700 stores in the spring. It was the first time such programs were
offered at this level of skill and expertise, and attendance at the Fall
seminars tripled.
[BAR CHART SHOWING HOMEOWNERSHIP BY AGE OF HEAD OF HOUSEHOLD]
Popular product knowledge meetings held previously in crowded quarters on
Clybourn Avenue also were expanded, and at the Fall Market 3,838 men and women
attended 46 of these meetings.
RENTAL PROGRAM EXPANDS.
Of all the accomplishments in providing support for Members, nothing in
recent years equals the success of Just Ask Rental.
The number of participants doubled again in 1994, after doubling in 1993,
and opening stock orders for the participating Members were up 171% in dollars.
Participants report very profitable add-on sales to rental customers and
ROI has exceeded expectations.
There were 168 Just Ask Rental departments operating at year-end and 32
more Members were surveyed, trained and awaiting delivery of equipment.
Opening a Just Ask Rental department isn't as simple as "just signing up."
The process includes surveying the market, analyzing the store's location and
physical facilities, training managers and employees, ordering equipment, and
merchandising the department. Therefore, Just Ask Rental growth is not limited
by Member interest, but by availability of personnel to provide management
expertise, training and leadership. In 1995 more staff and resources are being
devoted to Just Ask Rental.
The highly rated Member Information Center, already a winner by any
standard, became even more successful.
4
<PAGE> 7
[PICTURE OF FATHER AND SON FIXING SINK]
When they tell me something, I know it's right and they answer all my questions
without making me feel dumb.
Dennis Hartsell
5
<PAGE> 8
ADVERTISING HIT NEW HEIGHTS WITH GREATER
CREATIVITY, IMPROVED COMMUNICATIONS.
[PICTURE OF FATHER AND SON LOOKING AT TOOLS]
Kendrick Haithcox is an active do-it-yourselfer, and when he and his wife,
Kelly, expand their two-bedroom home this spring, he will do most of the work
himself. He's been shopping at the same True Value Store almost twice a week
for nearly 10 years. His Dad first took him to that store when he was a child,
and he values their knowledgeable assistance. Kendrick works for an excavating
contractor, and when anyone needs supplies at work, "I always tell them to go to
True Value because I know they will have it."
Folks like Kendrick and Kelly Haithcox are part of the largest minority
group in America. African-American families represent more than 10% of all U.S.
households and 45% are home owners. This is an important segment of the
home-improvement business, and the older average age of homes owned by
African-Americans further expands the sales potential. The number of
African-American do-it-yourselfers grow every year!
The number of calls grew to more than 130,000 during the year, a 13%
increase, and 70% of all callers got immediate answers to their questions. In
1993, 63% of the calls were answered immediately, up significantly from 1992.
The popular "town-hall" meetings, conducted by your directors, expanded to
every distribution center in 1994.
Store remodeling continued as an important service for Members, and the
size of the average remodeling project grew 6% to 11,400 square feet.
ADVERTISING HIT NEW HEIGHTS.
The spectacular new "Red Cross Across America" promotion, new television
advertising, strengthened direct mail advertising, and the introduction of the
new Member-friendly Marketing Advisor were highlights of True Value advertising
in 1994.
"Red Cross Across America" was Cotter & Company's first cause marketing
program, and it helped familiarize all Americans with the True Value motto "Help
is just around the corner," while raising more than $12 million in viewer
donations to support disaster programs of the Red Cross.
More exciting and creative TV advertising, emphasizing the help available
in True Value Stores, was more closely tied to print and direct mail promotions.
Start and closing dates were established for all promotions, to enhance the "buy
now" message vital to successful advertising.
Direct mail has now been reformatted for a cleaner, more contemporary
look, with stronger pricing, taking advantage of the Pinpoint Pricing program.
National print ads support Members who use direct mail.
The number of Members using direct mail grew again, largely because of the
Impact 8 program, and total direct mail circulation soared 20% in 1994.
MARKETING ADVISOR SIMPLIFIED PROMOTIONS.
The Marketing Advisor, the product of teamwork throughout the company,
concentrates each month's advertising, marketing information and promotions in
one book, making it easy for the Member to order. Included are locked-in ship
dates, 15 to 45 days before the date of the sale.
Bargains of the Month, newspaper advertising, promotional relays and more
are part of this simplified, consolidated communication.
With the Marketing Advisor, promotional buying at the Spring and Fall
Markets is being de-emphasized.
Other True Value promotions achieved excellent results in 1994.
[BAR CHART SHOWING TOTAL MINORITY POPULATION (MILLIONS OF HOUSEHOLDS)]
The 13th annual True Value/Jimmy Dean Country Showdown in Nashville
created a lot of excitement at local and state competitions across the country,
concluding with the national finals in the home of the original Grand Ole Opry
in Nashville.
True Value continued its highly productive promotional role in automobile
racing, leading with sponsorship of the International Race of Champions, the
motorsports version of The Masters tournament in golf. True Value and Master
Mechanic(R) tools again sponsored the Silver Crown racing series in USAC, and
awards for drivers, mechanics and crew members in NASCAR.
6
<PAGE> 9
[PICTURE OF FATHER AND SON FIXING DOOR WITH MOTHER IN BACKGROUND]
We've got two hardware stores, and their prices are like night and day. I drive
two miles further to True Value to save money and get better service.
Kendrick Haithcox
7
<PAGE> 10
PINPOINT PRICING, RECORD ORDER FILL RATES
MADE 1994 THE BEST EVER FOR MERCHANDISING.
[PICTURE OF MAN AND WOMAN SELECTING HOUSEHOLD ITEM]
Brian Pletcher and Missy Kidder, both 22, still live at home but they
already have started a "house-buying" fund and will be married after graduating
from college in June. Brian worked in construction and as a painter during his
summers, so he knows how to do most anything around the house, and plans to turn
a "fixer-upper" into something much better. They like the True Value Store
where they already shop because "the layout is efficient, you don't have to
search all through it, you can find things, and the people help you." Like most
busy young people, time is important to them, and they value shopping
convenience.
First-time homeowners (ages 20 to 34) are most likely to do their own home
improvements. And more than 73% of young homeowners buy a single family house.
Because most young couples' first homes are almost twice the age of "trade-up"
houses, they spend heavily to repair and improve their homes. Establishing
shopping loyalty with these buyers, whose home ownership rates are now
increasing, brings strong business for today and the future.
Leo Burnett, one of the nation's largest and most creative ad agencies,
was named as Cotter's new agency in 1994. Italia/Gal Advertising was added for
local and retail support.
Late in 1994 Cotter announced an agreement with Major League Baseball to
tie many 1995 promotions to the country's favorite game, but the players' strike
forced postponement of this 1995 promotion, now slated for 1996.
PINPOINT PRICING HELPED EVERYONE.
Members everywhere benefited from Pinpoint Pricing, the new Marketing
Advisor, improved service level, and the reorganization of the Merchandising
Department.
Pinpoint Pricing has expanded to more than 500 items. It gives Members
the support of low prices to meet competition and build their store's image as
the place for great values.
Cotter & Company's reduced margins on these specially priced items has the
effect of giving Members an "instant patronage dividend" totalling more than $6
million.
The fill rates for warehouse shipments set records all through 1994, and
the average for the year was a remarkable 91%, up from the 1993 figure of 89.8%.
For the last 34 consecutive weeks of 1994, the fill rate was higher every week
than for the comparable week of 1993.
[BAR CHART SHOWING DOING IT YOURSELF IMPROVEMENT ACTIVITY BY AGE]
Service levels on core departments were much higher. Plumbing,
electrical, hand tools, power tools and paint sundries all had fill rates from
92.4% to 95.1%, improving from 1.5 to 3 percentage points over 1993.
COMMERCIAL SALES GET BIG BOOST.
Another breakthrough in Member support was the introduction of the
Commercial/Industrial Catalog at the Fall Market. Members earlier had used a
Janitorial/Cleaning Supplies catalog with good effect. The new catalog will
help expand outside sales.
The Commercial/Industrial Catalog was developed from fine-line catalogs,
showing other products that could be sold to this growing category of potential
customers. It includes some 38,000 SKUs from all core departments, including
only warehouse stocked items. It shows "the total world of True Value," far
beyond what is in stores, by illustrating what is available in distribution
centers.
Expanding the potential for commercial sales even more, Cotter & Company
struck an exclusive deal with Grainger, the world's largest seller of commercial
and industrial products, to give Members access to all of the 55,000 SKUs in
that catalog.
The Commercial/Industrial Catalog will be re-issued in an improved version
in 1995, and Cotter & Company is working to lower the cost so more copies can be
distributed by Members. In 1994, 1,000 Members bought more than 10,000 copies.
The Plan-o-Gram Program was moved to the Merchandising Department in 1994,
and the number of plan-o-grams, in basic and extended formats, was doubled to
over 400 offerings. Nearly 100,000 plan-o-grams were distributed to Members,
at no charge, after the Fall Red Carpet Market.
8
<PAGE> 11
[PICTURE OF MAN PUTTING UP LIGHT FIXTURE WITH WOMAN WATCHING HIM]
I trust my True Value store. They have local owners and you know who they are.
Missy Kidder
9
<PAGE> 12
HIGH TECHNOLOGY FOR THE FUTURE UNDERGOES
TESTS WHILE STORE USE OF COMPUTERS GROWS.
[PICTURE OF WOMAN SELECTING PAINT]
Barb Darling, divorced mother of a helpful 10-year-old, has been shopping
at least twice a month at her True Value Store since her son was born. Barb is
busy at work, handling billing for a national company, and at home with projects
like painting and refinishing. "True Value," she says, "makes it easy for me to
get what I need when I'm in a hurry." There's no limit to Barb's home repairs,
"If it has to be done, Itry it," she explains, so she values the professional
help and the honesty she gets in her True Value store.
Women like Barb Darling make up the fastest growing segment of the DIY home
improvement market. Single women households doubled from 1970 to 1990, and now
account for 30% of all households. And single women are taking on DIY projects
in record numbers. Only 15 years ago, 30% of all do-it-yourselfers were women;
now that number is over 50%. Because their time is so limited and many women are
newer to DIY home repairs, they rely heavily on expert sales people, preferring
convenient stores with personalized service like True Value.
The plan-o-grams are reviewed twice a year for integration of new
products and elimination of discontinued items, and to reflect changes in
customer product choices, wants and needs.
The Merchandising Department held nine round table sessions during 1994,
about the same as in the past, but the format of these meetings is changing as
conditions and needs change. Roundtable sessions still feature "listening"
time for executives and managers to learn Member concerns and needs, but tighter
focus gives participants the opportunity to take a more proactive role in
discussions of products, programs and services.
MORE SUPPORT TO COME FROM VENDORS.
During the last six months of the year, extensive time and effort went
into development of a Vendor Agreement that will have far-reaching effect on
every Member and Cotter & Company. This document is the cornerstone for all
future relationships with vendors, including terms and conditions on deals,
dating, pricing, delivery, advertising, and in-store support for our Members.
In October, the Merchandising department was reorganized so all of the
buyers and their support staff could use their experience and strength with
greater efficiency in the appropriate departments.
Parts Central has been moved from General Power Company to the
Merchandising Department to increase the opportunity for True Value Stores to
become the prime source for repair and service parts for thousands of name brand
items. Parts Central expanded to more than 75,000 SKUs in 1994.
[BAR CHART SHOWING FEMALE HEADS OF HOUSEHOLDS (IN MILLIONS)]
INFORMATION SERVICES SERVES TWO MASTERS.
While most of the departments at Cotter & Company have a single "customer
base," Information Services is in the unique position of having to satisfy two
constituencies, national headquarters on one hand and the Membership on the
other. Both want the same thing: greater productivity and lower cost.
At the retail level, a major success story was the continued growth of the
Tru-Trac(R) POS(point-of-sale) system. The number of Tru-Trac users increased
by nearly 23% during the year, and at year end more than 530 of these efficient
and economical systems were in place. Triad grew to 1,300 Member stores.
In addition to Tru-Trac and Triad, Members invested in other POS systems
as well. The total gives Cotter & Company the largest base of computerized
stores in the industry.
Both Tru-Trac and Triad announced significant enhancements to Member
systems during 1994. Improvements were in the areas of file maintenance,
greater ease of operation and use, and improved communications features, and the
availability of hand-held laser bar code terminals.
With Member training as an emphasis, Tru-Trac held its first education
conference in Orlando in 1994 to increase the level of knowledge concerning use
of automated systems.
Testing of Cotter & Company's electronic catalog, featuring CD-ROM
technology, advanced significantly in 1994, and now there are 250 participants
as the system moves closer to a complete rollout.
10
<PAGE> 13
[PICTURE OF MOTHER AND SON REFINISHING CHAIR]
You go into True Value, you walk out with what you need and you feel good
because people have helped you. I appreciate that!
Barb Darling
11
<PAGE> 14
REDUCED COSTS AND IMPROVED DELIVERY SERVICES
HELPED MEMBERS TAKE BETTER CARE OF CUSTOMERS.
[PICTURE OF MAN AND WOMAN SELECTING WOOD PRODUCTS]
Hung Tran and his wife Nhung came to the United States as refugees from
Vietnam in 1975, and almost immediately became regular shoppers at their nearby
True Value Store. Their home maintenance and repair projects include painting,
paneling and finishing a basement, but they'll tackle almost anything despite
the little time they have available away from their family owned restaurant.
Hung values the way his True Value Store treats him and his projects. "When I
go in I find the same salesperson, and he doesn't just sell stuff, he helps us
with our projects and solves our problems."
The Trans are one of the minority households whose growth represents the
biggest demographic event since the baby boom. Asians and Hispanics accounted
for 49% of new U.S. households in the 1990s, and are a growing force in the home
improvement market. Asians and Hispanics are growing more rapidly than any
other minority group, and tend to leave central cities for the suburbs to
become homeowners.
This development process has successfully provided the first hardware
industry deployment of CD-ROM technology, brought Member feedback on the use
and effectiveness of a stand-alone electronic catalog, and built a foundation to
launch a new Member ordering system.
Information Services also started a pilot program in 100 stores testing
expansion of credit card authorization systems at retail, using the Cotter
Communications Systems infrastructure to reduce the cost and increase the speed
of checkout transactions.
Within corporate headquarters, Information Services had multiple projects
under way in 1994.
TOP PRIORITY GOES TO LISTMENT.
In re-engineering major business operating systems, top priority has gone
to the listment, simplifying this critical payment process for the Membership.
The development will be complete in 1995, with roll-out to follow as quickly as
possible.
Marketing information systems are being upgraded as Cotter & Company
creates a new Member Data Base. Stronger regional marketing and advertising
support systems and better order fill rates will flow from this profile of the
Membership.
Automation of the Retail Development staff with lap-top PCs started in
1994. This will result in better analysis of Members' business operations, and
stronger support by the field staff.
Continued emphasis on Electronic Data Interchange has built the number of
vendors using EDI about one third, to 800 major vendors, and today over 80% of
Cotter's volume is bought on EDI purchase orders.
[BAR CHART SHOWING MINORITY POPULATION GROWTH
(IN MILLIONS OF ADDITIONAL PEOPLE)]
SATELLITE NETWORK STILL GROWING.
The Cotter Satellite Network continues to grow. The network now serves
some 2,200 stores, an increase of 10% from the year before, at a cost to the
Member lower than retailers elsewhere are paying for in-store music alone.
A highlight of CSN during 1994 has been improved in-store advertising,
with better ties in copy and timeliness to the other advertising by Cotter &
Company.
CSN has become a major communication vehicle for the company, unique in
the industry. In addition to in-store advertising, it offers messages, data
transmission, training and video communications from National Headquarters
executives and managers.
All transportation and distribution activity in 1994 met two objectives.
The first was to contain, or even reduce, costs through increased productivity
and efficiency; the second was a continuing evaluation of the needs of the
total Membership, so that any "efficiencies" did not come at the cost of
reduced service to Members.
Productivity was increased and operating expenses were trimmed, leaving
Members with one of the lowest freight costs in the industry, about 2% of the
cost of the merchandise they buy.
Service to Members was improved, with expanded hours in the distribution
centers, more timely delivery of promotional merchandise, and record order fill
rate.
The department's statistics were awesome. More than 325 tractors hauled
some 900 delivery trailers nearly 25 million miles in 1994, the equivalent of
7,800 trips from Portland, Oregon, to Portland, Maine.
12
<PAGE> 15
[PICTURE OF MAN AND WOMAN DOING WOODWORK]
If you buy something for 10 cents they still treat you like you have bought
something for $10 million.
Nhung Tran
13
<PAGE> 16
MANUFACTURING INCREASES PROFITABILITY WHILE
PROVIDING PRODUCT INNOVATIONS AND SERVICE.
[PICTURE OF MAN AND WOMAN PURCHASING VASE]
Larry Dunlap is a retired banker, and an active do-it-yourselfer, who
moved back to Indiana in 1991. True Value is his store of first choice because
of service and convenience; "True Value has everything, they know how to use it
and they know where to find it." In the California home where they lived 25
years Larry and Rosemary did everything--built a deck, painted, put up fences.
"We're not real knowledgeable," Rosemary says, "so we need a store where we can
get helpful advice. The True Value sales people must be jacks of all trades
because they know about almost everything."
Senior citizens are the most likely of all Americans to own their
homes--80% do. The Dunlaps, like other mature couples, take pride and derive
satisfaction from do-it-yourself projects around the home. The number of older
Americans is increasing, and with more disposable dollars for home renovation
than any other age group, they are very important home improvement customers.
Cotter & Company's transportation and distribution team handled more than
1.8 billion pounds of merchandise in 1994, an increase of 10% over the year
previous. Cost per pound, the best measure of productivity, was reduced more
than 4%.
The Denver Regional Distribution Center was relocated, to a more efficient
and larger building completed on schedule and on budget.
If one looks at the bottom line of Cotter & Company's manufacturing
subsidiaries, 1994 was a good year. But if you evaluate the year based on
service to Members and financial results, it was outstanding.
All three manufacturing segments had sale increases. Both Tru-Test Mfg.
Company and Baltimore Brush & Roller Co. added significantly to an already good
patronage dividend.
Baltimore Brush & Roller completed 8 years without a price increase, an
unheard of record in the industry. That means dollars in Members' hands and
better competitive positioning for True Value Stores.
Sales were up 1.7% to $18 million and patronage dividend increased
slightly.
Product innovations continue, with the highest quality Accu-Flo(R)
contractor line now being sold in over 1,100 stores, more than double the number
of stores from a year ago. The line is highly profitable and it brings
contractors into True Value Stores where our Members can introduce them to
everything else in the stores and in distribution centers.
[BAR CHART SHOWING HOMEOWNERSHIP RATES BY AGE]
AUTOMATIC REPLENISHMENT BOOSTS SALES.
A major achievement at Baltimore Brush was the introduction of its Vendor
Managed Inventory program on a test basis. This automatic replenishment
program ties the Member's Tru-Trac system to Baltimore Brush computers,
automatically reordering selected applicators as the product is sold in the
store.
The store reduces its reordering cost, needs no back room inventory to
prevent out-of-stock conditions, and increases sales. Paint applicator sales
rose by as much as 22% in the test stores.
Tru-Test Manufacturing served Members extremely well, with sales up 2.2%
to $112 million, and a patronage dividend that climbed 8%.
The higher patronage dividend did not come at the expense of higher
prices, either. Tru-Test implemented only modest price increases on the
WeatherAll(R) and E-Z Kare(TM) lines late in the year, and that only raised
prices back to where they were before 1992's price reduction.
Major product improvements and introductions took place in 1994. The Easy
Color(TM) line of mid-price latex paint was introduced very successfully in the
July 4 circular. The Woodsman(R) line underwent major improvements, with
upgraded products and point-of-purchase support. The results were a better
product, with greater durability and reduced drying time, and a 23% increase in
sales!
E-Z KARE GETS
MAGAZINE'S NO.1 RATING!
The image coup of the year came in February when Consumer Reports honored E-Z
Kare(TM) Flat Enamel with its No. 1 rating. Sales have been great ever since,
up 17.5% for E-Z Kare Flat Enamel for the year, and the resulting carry-over
gave the entire line a 8.8% increase.
14
<PAGE> 17
[PICTURE OF MAN AND WOMAN POTTING PLANTS]
I've given up on the bigger stores--they usually don't know much, so we go where
we can get advice. That's True Value, and I just don't go anywhere else
Larry Dunlap
15
<PAGE> 18
LUMBER/BUILDING MATERIALS, INSURANCE AND
INTERNATIONAL BUSINESS ALL REPORT GROWTH.
Computer color matching systems within True Value Stores now constitute
the largest network of this kind of color-matching computers anywhere in the
nation. The 1,000th unit was sold at the Fall Market.
Tru-Test changed its supplier for the Custom Color Analyzer after the
financial failure of the previous manufacturer. But your management was alert
and able to make a relatively trouble-free change.
All new equipment has state-of-the-art technology and Members with older
models are getting excellent service on their equipment.
Customer calls for product knowledge rose 55%, to more than 135,000 calls
on the toll-free information hot line during the year. This is the equivalent of
a call every 40 seconds for 10 hours a day every day of the year.
[PICTURE OF TRUE VALUE CUSTOMER]
A major project in 1994 was writing bilingual (Spanish/English)
instructional labels for the paint line in 1995. The new labels will bring
major increases in sales in many markets where there is a substantial Hispanic
population.
General Power's 1994 sales increase of nearly 15% was more than double the
entire industry's growth of about 6%.
Pre-season booking meetings at 70 locations (no Members were more than 150
miles away) were very successful because of the heavy product-knowledge training
for owners, managers and employees.
Lumber and Building Materials 1994 sales climbed 11.9% to $303 million.
Continued innovations in products and product lines contributed to the
growth. A kitchen and bathroom products program, offering merchandise with
varied price points and products, achieved very strong acceptance from our
Members.
The first LBM market ever at Las Vegas drew a record crowd in January,
with the number of stores attending up 17%.
Continued efforts to increase efficiency and reduce costs paid off
throughout National Headquarters administrative offices in 1994. For example,
printing and production costs have been contained, and even reduced in some
situations, despite four paper price increases in calendar 1994.
The 17 fine-line catalogs were re-formatted to meet Member requests
during 1994, and now are routinely issued twice a year.
Increased efficiency helped subscribers to Cotter Member Insurance Ltd.
again in 1994. Rates on health coverage were basically unchanged from the year
before, although the industry in general saw rates of 8% to 10%.
Cotter Member Insurance, completely owned by Members who use it,
protects participating Members at the lowest possible cost. More than half of
all Members use Cotter Member Insurance.
INTERNATIONAL BUSINESS EXPANDING.
Cotter & Company continued to expand its off-shore business, and in 1994,
as evidence of that commitment to globalization, formed a new division, True
Value International, to serve this expanding market.
In 1994, True Value International served 143 stores in more than 40
countries and U.S. Provinces, and sales to these stores were up 17% for the
year. (These numbers do not include Cotter Canada.)
Cotter Canada had an excellent year, with sales rising 11.6% to $128
million (Canadian), and after tax profits were up 34.8%. Membership also grew,
but major emphasis throughout the year was on refinement of systems and programs
for long-term growth.
[PICTURE OF TRUE VALUE CUSTOMER]
CANADA A LEADER IN HIGH TECH PROGRAMS.
Cotter Canada is a leader in high tech systems that increase efficiency,
build sales and reduce costs for all Members.
Currently 32% of all Cotter Canada stores have point-of-sale systems, and
60% of those computerized stores are using the innovative automatic
replenishment system being pioneered in the industry by Cotter Canada.
The Member is in complete control of the program, identifying items to be
automatically replenished, setting reorder points and reorder quantities. Some
stores have as many as 7,000 SKUs on automatic replenishment, and some are
buying as much as 80% of their warehouse purchases by this system.
Total membership increased by 15%, and combination hardware and variety
stores, a new idea in Canada, more than doubled. Another new idea for Cotter
Canada was addition of "Crafts 'n' More" stores, a category with great potential
in that country.
[PICTURE OF TRUE VALUE CUSTOMER]
These new concepts are typical of the changes True Value and its Members
are making to serve the customer better than ever before. 1994 was a good year
and the future holds exciting potential for the entire True Value organization.
16
<PAGE> 19
FINANCIAL REVIEW.
- --------------------------------------------------------------------------------
REVENUES
In fiscal year 1994, Cotter & Company revenues increased $153,718,000 from
last year. Total revenues grew to $2,574,445,000, an increase of 6.4%. The
improvement resulted from increased merchandise shipments to existing Members.
Classes of merchandise with the strongest percentage increases in fiscal
year 1994 were Lumber and Building Materials, up 11.9%; Farm and Garden
Supplies, up 8.9%; Hardware Goods, up 7.3%; Appliances and Housewares, up 7.0%;
and Variety and Related Goods, up 6.4%. The South Central region of the United
States showed the largest growth at 9.4%. Other regions showing strong growth
were the Southeast at 8.1%; the Northeast at 7.2%; and North Central at 7.1%.
- --------------------------------------------------------------------------------
OPERATIONS
Overall merchandise gross margins, as a percentage of revenues, decreased
compared to last year reflecting a change in the Company's sales mix from
warehouse to direct shipments, combined with the Pinpoint Pricing program and
more promotionally oriented merchandising programs. Warehouse, general and
administrative expenses, expressed as a percentage of revenues, decreased
primarily due to the Company's continuing efforts to reduce operating costs.
- --------------------------------------------------------------------------------
PATRONAGE DIVIDEND AND MEMBER PAYOUT
The annual patronage dividend for fiscal year 1994 was $60,421,000
compared to $54,440,000 last year, representing an increase of 11.0%. Total
Member payout, which includes interest paid semi-annually on previously issued
promissory (subordinated) notes in addition to the patronage dividend, totalled
$83,315,000 compared to $78,898,000 last year. The sources and components of
Member payout for fiscal years 1994 and 1993 are presented in the table below.
The patronage dividend paid to each Member will vary depending upon the
volume and type of purchases, the method of shipment and extent of participation
in each of the above source programs. Each Member's patronage dividend will
differ slightly from the overall Company averages. In fiscal year 1994, the
average dividend percentages from stock, relay, and direct shipment purchases
were 3.3%, 1.5% and 0.4%, respectively. Purchases of Tru-Test Manufacturing and
Baltimore Brush & Roller products earned Members a manufacturing patronage
dividend of 12.3% and 12.6%, respectively, in fiscal year 1994. In fiscal year
1993, the average dividend percentages for stock, relay, direct shipment,
Tru-Test Manufacturing and Baltimore Brush & Roller purchases were 3.0%, 1.5%,
0.5%, 11.6% and 12.8%, respectively.
The Company considers promissory (subordinated) notes and Class B common
stock important parts of its patronage dividend. The notes provide Members a
recurring return on their investment and the Class B common stock provides the
Company a source of permanent capital. Promissory (subordinated) notes issued as
part of the fiscal year 1994 patronage dividend bear interest at an annual rate
of 8.2% compared to 6.5% in 1993. The Member cash payout in fiscal year 1994 was
$41,277,000 compared to $41,072,000 in fiscal year 1993.
- --------------------------------------------------------------------------------
MEMBER PAYOUT
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1994 1993
----------- -----------
(000's omitted)
<S> <C> <C>
Sources of Member payout:
Patronage dividend from:
Stock Shipments $36,008 $30,877
Relay shipments 4,269 4,048
Direct shipments 3,916 4,331
Tru-Test Manufacturing 13,890 12,862
Baltimore Brush & Roller 2,338 2,322
------- -------
Total patronage dividend 60,421 54,440
Interest paid to Members 22,894 24,458
------- -------
Total Member payout $83,315 $78,898
======= =======
Components of Member payout:
Cash Payout:
Interest paid to Members $22,894 $24,458
Cash patronage dividend 18,383 16,614
------- -------
Total Member cash payout 41,277 41,072
Promissory (subordinated) notes 27,909 26,752
Class B common stock 10,829 7,686
Member indebtedness 3,300 3,388
------- -------
Total Member payout $83,315 $78,898
======= =======
</TABLE>
17
<PAGE> 20
CONSOLIDATED BALANCE SHEET.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, January 1,
1994 1994
------------ ----------
(000's omitted)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,831 $ 1,314
Accounts and notes receivable 294,663 276,585
Inventories 384,747 336,066
Prepaid expenses 7,861 6,969
-------- --------
Total current assets 689,102 620,934
Properties owned, less accumulated depreciation 164,261 164,319
Properties under capital leases, less accumulated amortization 4,691 6,769
Other assets 10,731 11,506
-------- --------
Total assets $868,785 $803,528
======== ========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable $334,468 $255,216
Accrued expenses 45,304 38,926
Short-term borrowings 9,329 23,287
Current maturities of notes, long-term debt and lease
obligations 60,564 61,685
Patronage dividend payable in cash 18,383 16,614
-------- --------
Total current liabilities 468,048 395,728
Long-term debt 72,163 63,977
Obligations under capital leases 3,593 5,224
Capitalization:
Promissory (subordinated) and instalment notes 199,099 217,996
Redeemable Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid
63,350 and 65,880 shares) 6,370 6,633
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid
1,047,756 and 1,019,640 shares; issuable as partial
payment of patronage dividends, 104,275 and 75,780 shares) 116,663 110,773
Retained earnings 3,764 3,867
-------- --------
325,896 339,269
Foreign currency translation adjustment (915) (670)
-------- --------
Total capitalization 324,981 338,599
-------- --------
Total liabilities and capitalization $868,785 $803,528
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE> 21
CONSOLIDATED STATEMENT OF OPERATIONS.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
------------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Revenues $2,574,445 $2,420,727 $2,356,468
---------- ---------- ----------
Cost and expenses:
Cost of revenues 2,351,114 2,202,806 2,139,860
Warehouse, general and administrative 132,759 132,674 123,244
Interest paid to Members 22,894 24,458 25,716
Other interest expense 7,493 7,429 7,273
Gain on sale of properties owned (692) (5,985) --
Other income, net (604) (260) (643)
Income tax expense 1,163 2,582 389
---------- ---------- ----------
2,514,127 2,363,704 2,295,839
---------- ---------- ----------
Net margins $ 60,318 $ 57,023 $ 60,629
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 22
CONSOLIDATED STATEMENT OF CASH FLOWS.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Operating activities:
Net margins $ 60,318 $ 57,023 $ 60,629
Adjustments to reconcile net margins to cash
and cash equivalents from operating activities:
Depreciation and amortization 21,613 21,566 21,869
Provision for losses on accounts and notes
receivable 4,233 4,057 4,447
Changes in operating assets and liabilities:
Accounts and notes receivable (33,112) (38,605) (29,798)
Inventories (49,145) 183 (11,819)
Accounts payable 79,957 (45,070) 23,770
Accrued expenses 6,022 (1,143) (6,221)
Other adjustments, net (1,223) (2,679) (3,035)
-------- -------- --------
Net cash and cash equivalents provided by
(used for) operating activities 88,663 (4,668) 59,842
-------- -------- --------
Investing activities:
Additions to properties owned (21,427) (13,382) (17,871)
Proceeds from sale of properties owned 2,174 13,999 682
Changes in other assets 1,132 (3,850) (2,076)
-------- -------- --------
Net cash and cash equivalents (used for)
investing activities (18,121) (3,233) (19,265)
-------- -------- --------
Financing activities:
Payment of annual patronage dividend (16,614) (18,570) (18,423)
Payment of notes, long-term debt and lease
obligations (39,632) (32,730) (18,776)
Proceeds from long-term borrowings -- -- 54,124
Increase (decrease) in short-term borrowings (13,851) 23,059 (20,975)
Purchase of Class A common stock (216) (470) (337)
Proceeds from sale of Class A common stock 288 323 352
-------- -------- --------
Net cash and cash equivalents (used for)
financing activities (70,025) (28,388) (4,035)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 517 (36,289) 36,542
-------- -------- --------
Cash and cash equivalents at beginning of year 1,314 37,603 1,061
-------- -------- --------
Cash and cash equivalents at end of year $ 1,831 $ 1,314 $ 37,603
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 23
CONSOLIDATED STATEMENT OF
CAPITAL STOCK AND RETAINED EARNINGS.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Years Ended December 31, 1994 Common Stock, $100 Par Value
-----------------------------------------
Class A Class B
------------------------- --------
Issued Foreign
and Currency
to be Retained Translation
Issued Subscribed Issued Earnings Adjustment
------ ---------- -------- -------- -----------
(000's omitted)
<S> <C> <C> <C> <C> <C>
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)
Net margins 60,318
Foreign currency translation
adjustment (245)
Patronage dividend 10,829 (60,421)
Stock issued for paid-up
subscriptions 275 (275)
Stock subscriptions 265
Stock purchased and retired (528) (4,939)
------ ----- -------- -------- -------
Balances at December 31, 1994 $6,335 $ 35 $116,663 $ 3,764 $ (915)
====== ===== ======== ======== =======
</TABLE>
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at
December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993 and
December 28, 1991 (for 360, 590, 760 and 880 shares subscribed, respectively).
See Notes to Consolidated Financial Statements.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES
Cotter & Company (the Company) is a Member-owned wholesaler of hardware
and related merchandise. The Company also manufactures paint and paint
applicators. The Company's goods and services are sold predominantly within the
United States, primarily to retailers of hardware and related lines, each of
whom has purchased ten shares of the Company's Class A common stock upon
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. 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 five-year promissory (subordinated) notes {from fiscal year 1985
through fiscal year 1993, the promissory (subordinated) notes were for a term of
seven years} and redeemable $100 par value Class B common stock.
Membership may be terminated without cause by either the Company or the
Member upon sixty days' written notice. In the event membership is terminated,
the Company undertakes to purchase, and the Member is required to sell to the
Company, all of the Member's 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.
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 and warehouse,
office and computer 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 enacted
statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis 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 contributions 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.
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
December 31, January 1,
1994 1994
------------ ----------
(000's omitted)
<S> <C> <C>
Manufacturing inventories:
Raw materials $ 12,986 $ 14,795
Work-in-process and
finished goods 60,094 54,992
-------- --------
73,080 69,787
Merchandise inventories 311,667 266,279
-------- --------
$384,747 $336,066
======== ========
</TABLE>
3. PROPERTIES
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
December 31, 1994 January 1, 1994
--------------------- ---------------------
Owned Leased Owned Leased
-------- ---------- --------- ---------
(000's omitted)
<S> <C> <C> <C> <C>
Buildings and improvements $168,311 $ -- $166,055 $ --
Machinery and warehouse
equipment 79,953 -- 76,330 --
Office and computer equipment 62,868 -- 55,191 --
Transportation equipment 22,757 14,556 18,778 15,337
------- ------- -------- -------
333,889 14,556 316,354 15,337
Less accumulated depreciation
and amortization 181,920 9,865 164,731 8,568
------- ------- -------- -------
151,969 4,691 151,623 6,769
Land 12,292 -- 12,696 --
------- ------- -------- -------
$164,261 $ 4,691 $164,319 $ 6,769
======== ======= ======== =======
</TABLE>
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31, January 1,
1994 1994
------------ ----------
(000's omitted)
<S> <C> <C>
Senior note at 8.60% $50,000 $50,000
Term loans:
Canadian prime (8.00% and 5.50%,
respectively) 3,565 3,777
United States prime plus .5% (9.00%)
and fixed (7.75%), respectively 6,200 6,200
Redeemable (subordinated) term notes:
7.00% 4,346 --
7.37% 1,512 --
7.61% 3,540 --
Industrial Revenue Bonds:
5.28% and 5.94%, respectively 4,000 4,000
8.25% -- 1,150
------- -------
73,163 65,127
Less amounts due within one year 1,000 1,150
------- -------
$72,163 $63,977
======= =======
</TABLE>
Principal payments for the 8.60% senior note are due in incrementally
increasing amounts starting in 1995 through maturity in 2007. Under the senior
note agreement, the Company is required to meet certain financial ratios and
covenants.
The two term loans are due in 1997 and 1999, respectively.
The redeemable (subordinated) term notes were issued in exchange for
promissory (subordinated) notes maturing on December 31, 1994 that were held by
promissory note holders, who do not own the Company's Class A Common Stock. The
notes are due in 1996, 1997 and 1998.
On October 1, 1997, and every three-year period thereafter, the interest
rate on the 5.28% industrial revenue bonds 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 each interest reset date through maturity in 2003.
Total maturities of long-term debt for fiscal years 1995, 1996, 1997, 1998,
1999 and thereafter are $1,000,000, $6,346,000, $8,077,000, $7,540,000,
$10,200,000 and $40,000,000, 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 $67,800,000 at December 31, 1994.
Borrowings under these agreements were $9,329,000 at December 31, 1994. The
Company pays commitment fees for these lines. The weighted average interest rate
on short-term borrowings was 6.63% at December 31, 1994 and 3.48% at January 1,
1994.
5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouse, office, computer and
transporation equipment under operating and capital leases.
The following is a schedule of future minimum lease payments under capital
and operating leases, together with the present value of the net minimum lease
payments, as of December 31, 1994:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
(000's omitted)
<S> <C> <C>
Fiscal years
1995 $1,887 $ 6,356
1996 1,538 4,812
1997 1,039 2,892
1998 751 1,830
1999 416 1,351
Thereafter -- 4,400
------ -------
Net minimum lease payments 5,631 $21,641
=======
Less amount representing interest 298
------
Present value of net minimum lease payments 5,333
Less amounts due within one year 1,740
------
$3,593
======
</TABLE>
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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.
Rent expense under operating leases was as follows:
<TABLE>
<CAPTION>
December 31, January 1, January 2,
1994 1994 1993
------------ ----------- ----------
(000's omitted)
<S> <C> <C> <C>
Minimum rent $8,487 $8,174 $7,253
Contingent rent 611 575 616
------ ------ ------
$9,098 $8,749 $7,869
====== ====== ======
</TABLE>
6. CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
<TABLE>
<CAPTION>
December 31, January 1,
1994 1994
------------ ----------
(000's omitted)
<S> <C> <C>
Promissory (subordinated) notes -
Due currently $ 39 $ 51
Due on December 31, 1994-8.50% -- 26,173
Due on December 31, 1994-9.50% -- 30,321
Due on December 31, 1995-7.50% 20,744 21,324
Due on December 31, 1995-10.00% 35,355 36,257
Due on December 31, 1996-9.50% 28,436 28,930
Due on December 31, 1996-6.00% 24,888 27,187
Due on December 31, 1997-10.00% 17,579 18,138
Due on December 31, 1997-7.87% 16,793 --
Due on December 31, 1998-8.00% 28,512 29,266
Due on December 31, 1999-8.00% 27,030 27,827
Due on December 31, 1999-8.20% (to be issued) 27,909 --
Due on December 31, 2000-6.50% (issued 1994) 25,628 26,752
Instalment notes at interest rates of
6.50% to 10.00% with maturities through 1998 4,010 4,062
-------- --------
256,923 276,288
Less amounts due within one year 57,824 58,292
-------- --------
$199,099 $217,996
======== ========
</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 significant portion of the notes due within one year are
extended, for a three year period, at interest rates substantially equivalent to
competitive market rates of comparable instruments. The Company anticipates that
this practice will continue.
Total maturities of promissory and instalment notes for fiscal years 1995,
1996, 1997, 1998, 1999 and thereafter are $57,824,000, $54,463,000, $35,197,000,
$28,872,000, $54,939,000 and $25,628,000, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the uncertainty of the ultimate maturities of the promissory notes,
management believes it is impracticable to estimate their fair value. The
carrying amounts of the Company's other financial instruments approximate fair
value. Fair value was estimated using discounted cash flow analyses, based on
the Company's incremental borrowing rate for similar borrowings.
8. 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 December 31, 1994, the Company has alternative minimum tax credit
carryforwards of approximately $1,200,000 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 December 31, 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>
Deferred
Liability Method Method
--------------------------- ----------
For the Years Ended
------------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Current:
Federal $ 486 $ 343 $ 551
State 462 22 152
Foreign 278 237 122
------ ------ ------
Total current 1,226 602 825
------ ------ ------
Deferred:
Federal (147) 1,582 (497)
State (26) 317 (14)
Foreign 110 81 75
------ ------ ------
Total deferred (63) 1,980 (436)
------ ------ ------
$1,163 $2,582 $ 389
====== ====== ======
</TABLE>
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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. The reconciliation of income
tax expense to income tax computed at the U.S. federal statutory tax rate of 35%
in fiscal year 1994 and 1993 and 34% in fiscal year 1992 is as follows:
<TABLE>
<CAPTION>
Deferred
Liability Method Method
----------------------- ----------
For the Years Ended
------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 21,518 $ 20,862 $ 20,746
Effects of:
Patronage dividend (21,147) (19,054) (20,706)
State income taxes, net of
federal tax benefit 283 220 91
Other, net 509 554 258
-------- -------- --------
$ 1,163 $ 2,582 $ 389
======== ======== ========
</TABLE>
9. CASH FLOW
The Company's noncash financing and investing activities in fiscal year 1992
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. These transactions aggregate $12,527,000. 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
------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Patronage dividend payable in cash $18,383 $16,614 $18,570
Promissory (subordinated) notes 23,213 20,852 22,711
Class B nonvoting common stock 5,900 2,086 4,934
Instalment notes 3,058 2,939 2,485
Member indebtedness 9,867 11,949 12,201
------- ------- -------
$60,421 $54,440 $60,901
======= ======= =======
Note renewals $26,191 $27,187 $22,686
======= ======= ========
</TABLE>
Cash paid for interest during fiscal years 1994, 1993 and 1992 totalled
$30,583,000, $32,056,000 and $31,638,000, respectively. Cash paid for income
taxes during fiscal years 1994, 1993 and 1992 totalled $1,709,000, $1,387,000
and $1,771,000, respectively.
10. RETIREMENT PLANS
The components of net pension cost for the Company administered pension
plans consisted of:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------
December 31, January 1, January 2,
1994 1994 1993
-------------------------------------
(000's omitted)
<S> <C> <C> <C>
Income:
Actual return (loss) on plan assets ($1,543) $ 7,486 $2,856
Amortization of excess plan assets 920 920 920
------- ------- ------
(623) 8,406 3,776
------- ------- ------
Expenses:
Service cost - benefits earned during year 4,765 4,556 3,633
Interest on projected benefit obligation 6,736 6,266 5,738
Deferral of excess (deficiency) of actual
over estimated return on plan assets (8,815) 1,042 (3,060)
------- ------- ------
2,686 11,864 6,311
------- ------- ------
Net pension cost $3,309 $ 3,458 $2,535
======= ======= ======
</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 8.5% and 4.5%, respectively, in fiscal year 1994; 7.5% and 4.5%,
respectively, in fiscal year 1993; and 9.0% and 6.0%, respectively, in fiscal
year 1992. These changes in actuarial assumptions did not have a material impact
on net pension cost for fiscal year 1994 and the Company does not anticipate
that these changes will have a material impact on net pension cost in future
years. In fiscal years 1994, 1993 and 1992, the expected long-term rate of
return on assets was 9.5%.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 Social Security
retirement benefits. Trusteed net assets and actuarially computed benefit
obligations for the Company administered pension plans are presented below:
<TABLE>
<CAPTION>
December 31, January 1,
1994 1994
----------- ----------
(000's omitted)
<S> <C> <C>
Assets:
Total plan assets at fair value $80,046 $81,726
======= =======
Obligations:
Accumulated benefit obligation:
Vested $53,055 $55,605
Non-vested 7,683 8,704
Effect of projected compensation increases 19,924 24,110
------- -------
Total projected benefit obligation 80,662 88,419
------- -------
Net excess assets (liabilities):
Unrecognized:
Unamortized excess assets at original date 8,643 9,563
Net actuarial gain (loss) 565 (5,773)
Prior service costs (5,313) (6,170)
Recognized accrued pension cost (4,511) (4,313)
------- -------
Total net excess assets (liabilities) (616) (6,693)
------- -------
Total obligations and net excess assets (liabilities) $80,046 $81,726
======= =======
</TABLE>
The Company also participates in union-sponsored defined contribution plans.
Pension costs related to these plans were $757,000, $702,000 and $556,000 for
fiscal years 1994, 1993 and 1992, respectively.
11. SUBSEQUENT EVENTS
On January 13, 1995, the Company announced the sale of certain inventory of
its V&S Variety division to a national wholesaler who has also agreed to supply
the majority of the V&S stores. Also, on January 31, 1995, the Company agreed to
sell certain assets of its outdoor power equipment manufacturing division to a
nationally recognized company and secured a favorable supply agreement for such
equipment. These transactions should not have a material impact on the Company's
results of operations or financial position.
26
<PAGE> 29
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 December 31, 1994 and January 1, 1994, 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 December 31,
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 December 31, 1994 and January 1, 1994, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG, LLP
Chicago, Illinois
February 13, 1995
27
<PAGE> 30
SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For The Years Ended
-----------------------------------------------------------------------
December 31, January 1, January 2, December 28, December 29,
1994 1994 1993 1991 1990
------------ ---------- ---------- ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Revenues $2,574,445 $2,420,727 $2,356,468 $2,139,887 $2,135,120
Net margins $ 60,318 $ 57,023 $ 60,629 $ 59,425 $ 54,847
Total assets $ 868,785 $ 803,528 $ 833,372 $ 763,109 $ 709,895
Member payout:
Patronage dividend $ 60,421 $ 54,440 $ 60,901 $ 60,339 $ 56,269
Interest paid to Members 22,894 24,458 25,716 26,006 24,083
---------- ---------- ---------- ---------- ----------
$ 83,315 $ 78,898 $ 86,617 $ 86,345 $ 80,352
---------- ---------- ---------- ---------- ----------
Member cash payout:
Patronage dividend in cash $ 18,383 $ 16,614 $ 18,570 $ 18,423 $ 16,978
Interest paid to Members 22,894 24,458 25,716 26,006 24,083
---------- ---------- ---------- ---------- ----------
$ 41,277 $ 41,072 $ 44,286 $ 44,429 $ 41,061
---------- ---------- ---------- ---------- ----------
Member notes and common stock:
Promissory (subordinated) and
instalment notes $ 199,099 $ 217,996 $ 235,695 $ 235,289 $ 215,452
Redeemable Class A
common stock 6,370 6,633 6,857 7,077 7,362
Redeemable Class B
common stock 116,663 110,773 108,982 104,151 101,398
---------- ---------- ---------- ---------- ----------
$ 322,132 $ 335,402 $ 351,534 $ 346,517 $ 324,212
---------- ---------- ---------- ---------- ----------
</TABLE>
28
<PAGE> 31
DIRECTORS AND OFFICERS.
[PICTURE OF BOARD OF DIRECTORS]
(Front, left to right) Len Farr, Sam Costa, Dick Schaefer, Bob Waters
(Center) Lew Moore, Jerry Kabelin, Ed Yeager, Jerry O'Conner, Will Halterman
(Rear) Mitch West, Bill Claypool, Bob Ladner, Dan Cotter, George Sheffer
BOARD OF DIRECTORS
WILLIAM M. CLAYPOOL III (1)(2)
Claypool True Value Hardware
Needles, CA
(619) 326-4660
Director since 1970
Term expires 1997
SAMUEL D. COSTA, JR. (4)
Costa's True Value Hardware
Smethport, PA
(814) 887-5542
Director since 1988
Term expires 1996
DANIEL A. COTTER*
President and
Chief Executive Officer
Cotter & Company
Chicago, IL
(312) 975-2700
Director since 1989
Term expires 1996
LEONARD C. FARR (3)
Farr's True Value Hardware
Coos Bay, OR
(503) 267-2137
Director since 1972
Term expires 1996
WILLIAM M. HALTERMAN (3)
Halterman's True Value Hardware
Petersburg, WV
(304) 257-4552
Director since 1990
Term expires 1995
JERRALD T. KABELIN, CHAIRMAN*
Kabelin True Value Hardware
LaPorte, IN
(219) 362-3310
Director since 1985
Term expires 1997
ROBERT J. LADNER (3)
Ladner's True Value Hardware
Granite Falls, MN
(612) 564-3130
Director since 1994
Term expires 1997
LEWIS W. MOORE (1)(4)
Moore's True Value Hardware
Rochelle, IL
(815) 562-7682
Director since 1948
Term expires 1997
JEREMIAH J. O'CONNOR (1)(4)
O'Connor True Value
Billerica, MA
(508) 663-3520
Director since 1984
Term expires 1995
RICHARD L. SCHAEFER (3)
Carroll-Ames True Value Hardware
Bryan, OH
(419) 636-1149
Director since 1976
Term expires 1995
GEORGE V. SHEFFER (2)
Murdale True Value Hardware
Carbondale, IL
(618) 529-3400
Director since 1994
Term expires 1995
ROBERT G. WATERS (1)
Waters True Value Hardware
Junction City, KS
(913) 238-3114
Director since 1973
Term expires 1997
JOHN M.WEST, JR. (2)
Gulf Coast True Value Hardware
Englewood, FL
(813) 474-1807
Director since 1991
Term expires 1995
DONALD E.YEAGER (2)
Yeager True Value
Van Buren, AR
(501) 474-5278
Director since 1993
Term expires 1996
Committee Memberships:
1. Executive Committee
2. Long Range Planning Committee
3. Audit and Finance Committee
4. Management Development and
Compensation Committee
* Ex officio member of all committees
CORPORATE OFFICERS
DANIEL A. COTTER
President;
Chief Executive Officer
STEVEN J. PORTER
Executive Vice President;
Chief Operating Officer
KERRY J. KIRBY
Vice President, Finance;
Secretary and Treasurer;
Chief Financial Officer
KAREN M. AGNEW
Vice President,
Management Services;
Assistant Secretary
DANIEL T. BURNS
Vice President, Law
and Human Resources
DANNY R. BURTON
Vice President, Retail
Development and
Operations/Markets
DAVID W. CHRISTMAS
Vice President, Merchandising
ROBERT F. JOHNSON
Vice President,
Information Services
JOHN P. SEMKUS
Vice President, Distribution
and Transportation
JOHN F. MOYNIHAN
Assistant Secretary
<PAGE> 32
COTTER&COMPANY 2740 N. Clybourn Avenue Chicago, Illinois 60614 312-975-2700
