<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 30, 1995 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)
<TABLE>
<CAPTION>
DELAWARE 36-2099896
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<CAPTION>
8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (312) 695-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES 'X' . NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ['X']
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
THERE IS NO PUBLIC MARKET FOR REGISTRANT'S CLASS A 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 24, 1996
---------------------------------------------------- ---------
<S> <C>
CLASS A COMMON STOCK, $100 PAR VALUE................ 52,220
CLASS B COMMON STOCK, $100 PAR VALUE................ 1,111,143
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 8600 West Bryn Mawr Avenue, Chicago, Illinois,
60631-3505. Its telephone number is (312) 695-5000.
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.
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 5,600 True Value(R) Hardware Stores
throughout the United States. Primary concentrations of Members exist in
California (approximately 8%), Illinois and New York (approximately 6% each),
Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin
(approximately 4% each).
The Company's total sales of merchandise to its U.S. Members were divided
among the following general classes of merchandise:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Hardware Goods................................. 22.3% 20.1% 20.0%
Electrical and Plumbing........................ 17.7% 15.8% 16.3%
Painting and Cleaning.......................... 13.3% 14.4% 14.9%
Farm and Garden................................ 13.3% 12.5% 12.3%
Lumber and Building Materials.................. 12.7% 12.9% 12.3%
Appliances and Housewares...................... 11.7% 10.4% 10.3%
Sporting Goods and Toys........................ 9.0% 13.9% 13.9%
</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 48% of total sales); (2) direct shipment sales
(approximately 42% of total sales); and (3) relay sales (approximately 10% of
total sales). Warehouse shipment sales are sales of products purchased,
warehoused, and resold by the Company upon orders from the Members. Direct
shipment sales are sales of products purchased by the Company but delivered
directly to Members from manufacturers. Relay sales are sales of products
purchased by the Company in response to the requests of several Members for a
product which is not normally held in inventory and is not susceptible to direct
shipment. Generally, the Company will give notice to all Members of its
intention to purchase products for relay shipment and then purchases only so
many of such products as the Members order. When the product shipment arrives at
the Company, it is not warehoused; rather, the Company breaks up the shipment
and "relays" the appropriate quantities to the Members who placed orders.
The Company also manufactures paint 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.
1
<PAGE> 3
The Company annually sponsors two "markets" (one in the Spring and one in
the Fall). In fiscal year 1996, 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 24, 1996 and February 25, 1995, the Company had a backlog of
firm orders (including relay orders) of approximately $23,000,000 and
$21,000,000 respectively. It is anticipated that the entire backlog existing at
February 24, 1996 will be filled by April 30, 1996. 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 trueAdvantage program was introduced in 1995 to
promote higher retail standards in order to build consumer goodwill and create a
positive image for all True Value stores.
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 several non-member-owned wholesalers
withdrawing from business.
The Company, through a Canadian subsidiary, owns a majority equity interest
in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler
of hardware, variety and related merchandise. This cooperative serves
approximately 430 True Value(R) and V&S(R) Stores, all located in Canada. The
cooperative has approximately 340 employees and generated less than 5% of the
Company's consolidated revenue in fiscal year 1995.
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 3,500 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 34% 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 margins from operations and other patronage source
income, after deduction for expenses, reserves and provisions authorized by the
Board of Directors.
2
<PAGE> 4
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, as a result, effective with the 1996 patronage dividend,
these percentages may 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 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.
3
<PAGE> 5
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 LEASE
WAREHOUSE AND EXPIRATION
LOCATION OFFICE AREA INTEREST DATE
---------------------------------------------- ------------- -------- ------------------
<S> <C> <C> <C>
Chicago, Illinois............................. 980,000 Owned
Chicago, Illinois............................. 175,000 Leased December 31, 2010
Chicago, Illinois............................. 83,000 Leased October 31, 2000
Corsicana, Texas.............................. 450,000 Owned
Denver, Colorado.............................. 360,000 Leased June 30, 2004
Fogelsville (Allentown), Pennsylvania......... 600,000 Owned
Harvard, Illinois............................. 750,000 Owned
Harvard, Illinois............................. 720,000 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
Peachtree City, Georgia....................... 60,500 Leased November 24, 2005
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 August 1995, the Company closed the 720,000 square foot Harvard,
Illinois facility formerly used to manufacture outdoor power equipment.
In 1996, the Company will close the 980,000 square foot Chicago, Illinois
facility formerly used as the Company's national headquarters.
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
</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.
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 24, 1996) 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............................ 5,222
Class B common stock, $100 Par Value............................ 5,197
</TABLE>
Dividends (other than patronage dividends) on 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 class of stock. See the discussion of
patronage dividends under Item 1--Business.
6
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $2,437,002 $2,574,445 $2,420,727 $2,356,468 $2,139,887
Gross margins...................... $ 202,068 $ 223,331 $ 217,921 $ 216,608 $ 197,745
Net margins........................ $ 59,037 $ 60,318 $ 57,023 $ 60,629 $ 59,425
Patronage dividends................ $ 60,140 $ 60,421 $ 54,440 $ 60,901 $ 60,339
Total assets....................... $ 819,576 $ 868,785 $ 803,528 $ 833,372 $ 763,109
Long-term debt and obligations
under capital leases............. $ 79,213 $ 75,756 $ 69,201 $ 72,749 $ 13,335
Promissory (subordinated) and
installment notes payable........ $ 186,335 $ 199,099 $ 217,996 $ 235,695 $ 235,289
Redeemable Class A common stock.... $ 5,294 $ 6,370 $ 6,633 $ 6,857 $ 7,077
Redeemable Class B common stock.... $ 113,062 $ 116,663 $ 110,773 $ 108,982 $ 104,151
Book value per share of Class A
common stock and Class B common
stock(a)......................... $ 102.68 $ 103.57 $ 103.85 $ 101.42 $ 102.50
</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 1995 COMPARED TO FISCAL YEAR 1994
In fiscal year 1995, Cotter & Company revenues were $2,437,002,000, a
decrease of 5.3% from fiscal year 1994. This decrease was attributable to the
phase-out of the V&S(R) Variety division and the sale of the General Power
Equipment manufacturing division. Comparable sales categories were flat with the
prior year due to the soft economy and unusual weather in the United States,
combined with the declining sales in Mexico. In addition, the Company expanded
the Pinpoint Pricing program which reduced the selling price of many core
hardware and related products.
Overall merchandise gross margins, as a percentage of revenues, decreased
for the fourth year in a row. This reduction in gross margin percentage was the
result of an expanded Pinpoint Pricing program and the withdrawal from the
resigned businesses of V&S(R) Variety division and General Power Equipment
manufacturing division.
Warehouse, general and administrative expenses decreased by $18,652,000 or
14.0% compared to the prior year. As a percentage of revenue, these expenses
were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses
was attributable to continued efforts to reduce operating costs, an expense
recovery associated with prior years' favorable risk loss experience and
efficiencies derived from the resigned businesses.
7
<PAGE> 9
Interest paid to Members decreased by $2,267,000 or 9.9% primarily due to a
lower average principal balance and a decrease in the average interest rate.
Other interest increased due to the increase in the Cotter & Company term
note program.
Net margins were $59,037,000 for the year ended December 30, 1995 compared
to $60,318,000 for the year ended December 31, 1994.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal year 1995 increased $20,642,000 to
$22,473,000. This improvement was primarily due to improved cash flow from
operating activities, which was $106,640,000 for the year ended December 30,
1995 compared to $88,663,000 for the year ended December 31, 1994. This
improvement in cash flow from operating activities was the result of better
management of current assets. Inventories decreased by $69,436,000 during fiscal
year 1995. Much of this reduction can be attributed to the sale of the V&S(R)
Variety and General Power Equipment Manufacturing divisions. This was
accomplished with no reduction in the Company's ability to provide merchandise
to Members. This decrease in inventory was offset partially by a corresponding
decrease in accounts payable of $36,584,000 and short-term borrowings of
$6,672,000 from fiscal year 1994 to fiscal year 1995.
Cash flows of $19,265,000 used for investing activities were comparable to
the previous year. Financing activities required $66,733,000 for the year ended
December 30, 1995 compared to $70,025,000 a year earlier.
At December 30, 1995, net working capital decreased to $202,999,000 from
$221,054,000 at December 31, 1994. The current ratio of 1.47 for December 30,
1995 is comparable to last year.
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 $63,000,000 at December 30, 1995. The Company
pays commitment fees for these lines. The borrowings under these agreements were
$2,657,000 at December 30, 1995 and $9,329,000 at December 31, 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 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.
8
<PAGE> 10
Total capital expenditures, including those made under capital leases, were
$28,912,000 in fiscal year 1995 compared to $21,427,000 in fiscal year 1994 and
$13,382,000 in fiscal year 1993. 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 1996 is anticipated to come from operations and external sources
if necessary. On December 29, 1995, the Company finalized a private shelf
agreement for available borrowings of up to $50,000,000.
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...................... 53 Vice President since February, 1992. Director of
National Headquarters Support from July, 1991 to
February, 1992. Prior position was Executive
Assistant to the President.
Joe W. Blagg........................ 46 Nominated by the Board of Directors for election
as a Director to a three-year term to replace
Donald E. Yeager, whose term expires April, 1996.
Daniel T. Burns..................... 45 Secretary since February, 1995. Vice President
since November, 1990. General Counsel since
April, 1988.
Danny R. Burton..................... 49 Vice President since May, 1992. National Member
Development Manager from July, 1990 to May, 1992.
David W. Christmas.................. 47 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............ 73 Director since March, 1970. Term expires April,
1997.
Samuel D. Costa, Jr. ............... 54 Director since July, 1988. Term expires April,
1996. Nominated by the Board of Directors for
reelection to a three-year term.
Daniel A. Cotter.................... 61 President and Chief Executive Officer since
January, 1983 and Director since September, 1989.
Term expires April, 1996. Nominated by the Board
of Directors for reelection to a three-year term.
Leonard C. Farr..................... 74 Director since March, 1972. Term expires April,
1996. Nominated by the Board of Directors for
reelection to a three-year term.
William M. Halterman................ 48 Director since June, 1990. Term expires April,
1998.
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C> <C>
Robert F. Johnson................... 52 Vice President since January, 1994. Director of
Corporate Planning and Information Services from
March, 1992 to January, 1994. Prior position was
Distribution Industry Consulting Manager of a
corporation in Illinois.
Jerrald T. Kabelin.................. 58 Chairman of the Board since April, 1993. Director
since April, 1985. Term as Chairman of the Board
expires April, 1996. Term as Director expires
April, 1997.
Kerry J. Kirby...................... 49 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.
Charles L. Kremers.................. 45 Appointed Vice President in April, 1995. Director
of Marketing from February, 1994 to April, 1995.
Prior position was a Vice President of
Advertising and Sales Promotions for a retail
computer company based in Texas.
Robert J. Ladner.................... 49 Director since April, 1994. Term expires April,
1997. Elected Chairman of the Board for a
one-year term beginning April, 1996.
John F. Lottes, III................. 55 Nominated by the Board of Directors for election
to a one-year term to replace Robert G. Waters,
who resigned and whose unexpired term will expire
in April, 1997.
Lewis W. Moore...................... 83 Director since June, 1948. Term expires April,
1997.
Kenneth M. Noble.................... 38 Director since April, 1995. Term expires April,
1998.
Steven J. Porter.................... 43 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................. 66 Director since May, 1976. Term expires April,
1998.
John P. Semkus...................... 49 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................... 43 Director since July, 1994. Term expires April,
1998.
Dennis A. Swanson................... 56 Director since April, 1995. Term expires April,
1996. Nominated by the Board of Directors for
reelection to a three-year term.
Robert G. Waters.................... 75 Director since March, 1973. Term expires April,
1997. Retired February, 1996.
John M. West, Jr.................... 43 Director since October, 1991. Term expires April,
1998.
Donald E. Yeager.................... 53 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.
COMPENSATION COMMITTEE
The Management Development and Compensation Committee of the Board of
Directors (the "Committee") consists of four non-employee directors: Samuel D.
Costa, Jr. (Chairman), Lewis W. Moore , Kenneth M. Noble and Dennis A. Swanson.
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. The Committee calls upon outside consultants for assistance, as
necessary.
The Committee meets at least annually. In fiscal year 1995, 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
1995, 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
1995 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
- ----------------------------------------- ---- -------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Daniel A. Cotter......................... 1995 $500,000 $250,000 $ 6,305 $ --
President and Chief 1994 500,000 375,000 4,430 250,000
Executive Officer 1993 500,000 -- 4,996 --
Steven J. Porter......................... 1995 375,000 131,250 6,461 --
Executive Vice President 1994 325,000 170,625 58,719 --
and Chief Operating Officer 1993 167,115 25,000 11,944 --
Kerry J. Kirby........................... 1995 250,000 75,000 6,750 --
Vice President, Treasurer and 1994 225,000 101,250 6,930 45,000
Chief Financial Officer 1993 225,000 25,313 6,746 --
Daniel T. Burns.......................... 1995 225,000 67,500 6,750 --
Vice President, Secretary 1994 175,000 78,750 6,906 35,000
and General Counsel 1993 175,000 23,625 5,214 --
David W. Christmas....................... 1995 200,000 60,000 3,750 --
Vice President, 1994 80,200 26,250 -- --
Merchandising 1993 -- -- -- --
</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 1995
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. Mr. Porter's other compensation consists of $56,891 and
$11,944 of relocation payments in fiscal year 1994 and 1993, respectively.
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 remained the same
from 1990 to 1995.
The Company has a severance policy providing termination benefits based
upon annual compensation and years of service. Officers of the Company are also
offered agreements providing for severance in the event of termination with the
imposition of certain restrictions regarding competition and confidentiality.
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
The Board of Directors adopted a long-term incentive plan for selected
senior executive officers of the Company. 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.
12
<PAGE> 14
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 1996, and paid in fiscal year 1997
is shown in the following table:
<TABLE>
<CAPTION>
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
- ---------------------------------------------- ------------------ --------- -------- --------
<S> <C> <C> <C> <C>
Daniel A. Cotter.............................. 1994-1996 $ 143,750 $287,500 $431,250
Steven J. Porter.............................. 1994-1996 65,625 131,250 196,875
Kerry J. Kirby................................ 1994-1996 25,000 50,000 75,000
Daniel T. Burns............................... 1994-1996 22,500 45,000 67,500
</TABLE>
DEFINED BENEFIT RETIREMENT PLANS
The Company has a defined benefit pension plan, the Cotter & Company
Defined Lump Sum Pension Plan (the "Plan"), which is qualified under the Code.
The Plan was amended and restated effective January 1, 1996. 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 lump
sum benefits to eligible employees who have served a minimum of five years of
service. Annuities are also available and are the actuarial equivalent of the
lump sum payment. Each of the executive officers listed in the foregoing Summary
Compensation Table is a participant in the Plan.
For each year of service, a participant receives a percentage of his or her
"average compensation" in the form of a lump sum. The percentages range from two
percent of average compensation for years of service performed prior to age 26,
to twelve percent of average compensation for years of service performed at or
after age 61. Participants with average compensation in excess of two-thirds of
the Social Security Taxable Wage Base in the year of termination of employment
or retirement receive an additional benefit on this excess compensation equal to
half of the percentage applied to their full average compensation. Participants
who were age 50 with at least fifteen years of service as of January 1, 1996
receive an additional 25% of their average compensation. The benefits under the
Plan cannot be less than benefits already earned by the participant under the
Plan as it existed prior to its amendment.
"Average compensation" means the average of the compensation received by an
eligible employee during the three 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, deferral contributions under the Savings
Plan, and pre-tax medical premiums.
The Company amended and restated effective January 1, 1996, a Supplemental
Retirement Plan (the "Supplemental Plan") for certain employees as designated by
the Company's President and Chief Executive Officer. For each year of service,
participants receive a percentage of their "average compensation" in the form of
a lump sum. The percentages are 22 percent of average compensation for years of
service performed prior to age 55, to 28 percent of average compensation for
years of service performed at or after age 55. Service is limited to 20 years,
and the maximum aggregate percentage is 500%. This amount is reduced by any
benefits payable under the Plan and eight times 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 benefits under the
Supplemental Plan cannot be less than benefits already earned by the participant
under the Supplemental Plan as it existed prior to its amendment.
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 1996. Section 415 of the Code
outlines the maximum annual benefit which may be payable from the Plan during
the year; The
13
<PAGE> 15
dollar limit is $120,000 for 1996 for a participant retiring at age 65, with
reduced amounts at younger ages. The actuarial equivalent of the annual amount
may be payable as a lump sum.
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, assuming retirement at age 65.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
COMPENSATION 10 15 20 25 30
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$1,000,000................................ $255,122 $360,535 $465,948 $465,948 $465,948
900,000................................. 228,290 323,162 418,033 418,033 418,033
800,000................................. 201,458 285,788 370,118 370,118 370,118
700,000................................. 174,625 248,414 322,203 322,203 322,203
600,000................................. 147,793 211,041 274,288 274,288 274,288
500,000................................. 120,960 173,667 226,373 226,373 226,373
400,000................................. 94,128 136,293 178,458 178,458 178,458
300,000................................. 67,296 98,920 130,543 130,543 130,543
200,000................................. 40,463 61,546 82,628 82,628 82,628
100,000................................. 13,631 24,172 34,713 34,713 34,713
</TABLE>
The present credited years of service for the officers listed in the above
table are as follows: Daniel A. Cotter, 30 years; Kerry J. Kirby, 20 years,
Daniel T. Burns, 15 years, Steven J. Porter, 3 years and David W. Christmas, 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 1995 directors of the Company were each paid $1,000 per
month. Effective 1996, this amount will be $1,500 per month. The Chairman of the
Board is paid $1,000 per day to a maximum of $100,000 per year, when serving in
the capacity as Chairman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of February 24, 1996, each of the directors of the Company was the
beneficial owner of 10 shares of Class A common stock of the Company comprising
.3% 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 1.6% of Class B common
stock as of February 24, 1996. No executive officer owns any shares of Class B
common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company previously used 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 owned a one-half
interest of Galaxy Travel. The total bookings placed by the Company with Galaxy
Travel in fiscal year 1995 were approximately $1,650,000. Subsequent to the sale
of Galaxy Travel by Mr. Cotter and his brother, the relationship between the
Company and Galaxy Travel Agency, Inc. was terminated at the end of 1995.
The Company believes the foregoing transactions were 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 19, 1996 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
- --------------------------------------------- -----------------------------------------------
<C> <S> <C>
/s/ DANIEL A. COTTER President, Chief Executive March 19, 1996
- --------------------------------------------- Officer and Director
Daniel A. Cotter
/s/ STEVEN J. PORTER Executive Vice President March 19, 1996
- --------------------------------------------- and Chief Operating Officer
Steven J. Porter
/s/ KERRY J. KIRBY Vice President, Treasurer and March 19, 1996
- --------------------------------------------- Chief Financial Officer
Kerry J. Kirby
/s/ JERRALD T. KABELIN Chairman of the Board March 19, 1996
- --------------------------------------------- and Director
Jerrald T. Kabelin
/s/ WILLIAM M. CLAYPOOL, III Director March 19, 1996
- ---------------------------------------------
William M. Claypool, III
/s/ SAMUEL D. COSTA, JR. Director March 19, 1996
- ---------------------------------------------
Samuel D. Costa, Jr.
/s/ LEONARD C. FARR Director March 19, 1996
- ---------------------------------------------
Leonard C. Farr
/s/ WILLIAM M. HALTERMAN Director March 19, 1996
- ---------------------------------------------
William M. Halterman
/s/ ROBERT J. LADNER Director March 19, 1996
- ---------------------------------------------
Robert J. Ladner
/s/ LEWIS W. MOORE Director March 19, 1996
- ---------------------------------------------
Lewis W. Moore
/s/ KENNETH M. NOBLE Director March 19, 1996
- ---------------------------------------------
Kenneth M. Noble
/s/ RICHARD L. SCHAEFER Director March 19, 1996
- ---------------------------------------------
Richard L. Schaefer
/s/ GEORGE V. SHEFFER Director March 19, 1996
- ---------------------------------------------
George V. Sheffer
/s/ DENNIS A. SWANSON Director March 19, 1996
- ---------------------------------------------
Dennis A. Swanson
/s/ ROBERT G. WATERS Director March 19, 1996
- ---------------------------------------------
Robert G. Waters
/s/ JOHN M. WEST, JR. Director March 19, 1996
- ---------------------------------------------
John M. West, Jr.
/s/ DONALD E. YEAGER Director March 19, 1996
- ---------------------------------------------
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 30, 1995 and December 31, 1994.......... F-4; F-5
Consolidated Statement of Operations for each of the three years in the period
ended December 30, 1995...................................................... F-6
Consolidated Statement of Cash Flows for each of the three years in the period
ended December 30, 1995...................................................... F-7
Consolidated Statement of Capital Stock and Retained Earnings for each of the
three years in the period ended December 30, 1995............................ F-8
Notes to Consolidated Financial Statements..................................... F-9 to F-16
</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 30, 1995 and December 31, 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 30, 1995.
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 30, 1995 and December 31, 1994, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 30, 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1996
F-3
<PAGE> 21
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(000'S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 22,473 $ 1,831
Accounts and notes receivable................................. 287,888 294,663
Inventories................................................... 315,311 384,747
Prepaid expenses.............................................. 11,180 7,861
------------ ------------
Total current assets............................. 636,852 689,102
Properties owned, less accumulated depreciation................. 165,683 164,261
Properties under capital leases, less accumulated
amortization.................................................. 5,393 4,691
Other assets.................................................... 11,648 10,731
------------ ------------
Total assets..................................... $819,576 $868,785
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 22
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(000'S OMITTED)
<S> <C> <C>
Current liabilities:
Accounts payable.............................................. $297,884 $334,468
Accrued expenses.............................................. 53,363 45,304
Short-term borrowings......................................... 2,657 9,329
Current maturities of notes, long-term debt and lease
obligations................................................ 61,634 60,564
Patronage dividend payable in cash............................ 18,315 18,383
------------ ------------
Total current liabilities........................ 433,853 468,048
Long-term debt.................................................. 75,449 72,163
Obligations under capital leases................................ 3,764 3,593
Capitalization:
Promissory (subordinated) and instalment notes................ 186,335 199,099
Redeemable Class A common stock and partially paid
subscriptions
(Authorized 100,000 shares; issued and fully paid 52,710
and
63,350 shares)............................................. 5,294 6,370
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid
1,055,700 and 1,047,756 shares; issuable as partial payment
of patronage dividends, 62,005 and 104,275 shares)......... 113,062 116,663
Retained earnings............................................. 2,661 3,764
------------ ------------
307,352 325,896
Foreign currency translation adjustment....................... (842) (915)
------------ ------------
Total capitalization............................. 306,510 324,981
------------ ------------
Total liabilities and capitalization............. $819,576 $868,785
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 23
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Revenues........................................... $2,437,002 $2,574,445 $2,420,727
------------ ------------ ----------
Cost and expenses:
Cost of revenues................................. 2,234,934 2,351,114 2,202,806
Warehouse, general and administrative............ 114,107 132,759 132,674
Interest paid to Members......................... 20,627 22,894 24,458
Other interest expense........................... 9,298 7,493 7,429
Gain on sale of properties owned................. -- (692) (5,985)
Other income, net................................ (1,177) (604) (260)
Income tax expense............................... 176 1,163 2,582
------------ ------------ ----------
2,377,965 2,514,127 2,363,704
------------ ------------ ----------
Net margins........................................ $ 59,037 $ 60,318 $ 57,023
========== ========== =========
</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 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Operating activities:
Net margins....................................... $ 59,037 $ 60,318 $ 57,023
Adjustments to reconcile net margins to cash and
cash equivalents from operating activities:
Depreciation and amortization.................. 20,706 21,613 21,566
Provision for losses on accounts and notes
receivable................................... 3,741 4,233 4,057
Changes in operating assets and liabilities:
Accounts and notes receivable.................. (13,921) (33,112) (38,605)
Inventories.................................... 69,436 (49,145) 183
Accounts payable............................... (36,584) 79,957 (45,070)
Accrued expenses............................... 7,552 6,022 (1,143)
Other adjustments, net......................... (3,327) (1,223) (2,679)
------------ ------------ ----------
Net cash and cash equivalents
provided
by (used for) operating
activities......................... 106,640 88,663 (4,668)
------------ ------------ ----------
Investing activities:
Additions to properties owned..................... (24,904) (21,427) (13,382)
Proceeds from sale of properties owned............ 5,022 2,174 13,999
Changes in other assets........................... 617 1,132 (3,850)
------------ ------------ ----------
Net cash and cash equivalents (used
for) investing activities.......... (19,265) (18,121) (3,233)
------------ ------------ ----------
Financing activities:
Payment of annual patronage dividend.............. (18,383) (16,614) (18,570)
Payment of notes, long-term debt and lease
obligations.................................... (43,106) (39,632) (32,730)
Proceeds from long-term borrowings................ 3,000 -- --
Increase (decrease) in short-term borrowings...... (6,672) (13,851) 23,059
Purchase of common stock.......................... (1,740) (216) (470)
Proceeds from sale of Class A common stock........ 168 288 323
------------ ------------ ----------
Net cash and cash equivalents (used
for) financing activities.......... (66,733) (70,025) (28,388)
------------ ------------ ----------
Net increase (decrease) in cash and cash
equivalents....................................... 20,642 517 (36,289)
------------ ------------ ----------
Cash and cash equivalents at beginning of year...... 1,831 1,314 37,603
------------ ------------ ----------
Cash and cash equivalents at end of year............ $ 22,473 $ 1,831 $ 1,314
========== ========== ========
</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 30, 1995
<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 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)
Net margins........................... 59,037
Foreign currency translation
adjustment......................... 73
Patronage dividend.................... 6,422 (60,140)
Stock issued for paid-up
subscriptions...................... 168 (168)
Stock subscriptions................... 156
Stock purchased and retired........... (1,232) (10,023)
------ ------ -------- ------ ------
Balances at December 30, 1995........... $5,271 $ 23 $113,062 $ 2,661 $(842)
====== ====== ======== ====== ======
</TABLE>
- ---------------
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000
at December 30, 1995 and December 31, 1994, $14,000 at January 1, 1994 and
$27,000 at January 2, 1993 (for 240, 360, 590, and 760 shares subscribed,
respectively).
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 26
COTTER & COMPANY
------------------
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.
On January 13, 1995, the Company agreed to 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
sold 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 did not have a material impact on the Company's
results of operation or financial position.
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 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.
Retirement plans. The Company sponsors two noncontributory defined benefit
retirement plans covering substantially all of its employees. Company
contributions to union-sponsored defined contribution plans are based on
collectively bargained rates times hours worked. The Company's policy is to fund
annually all tax-qualified plans to the extent deductible for income tax
purposes.
F-9
<PAGE> 27
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reporting year. The Company's reporting year-end is the Saturday closest to
December 31.
2. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
----------------- -----------------
(000'S OMITTED)
<S> <C> <C>
Manufacturing inventories:
Raw materials......................... $ 2,139 $ 12,986
Work-in-process and finished goods.... 19,407 60,094
-------- --------
21,546 73,080
Merchandise inventories................. 293,765 311,667
-------- --------
$ 315,311 $ 384,747
======== ========
</TABLE>
3. PROPERTIES
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
-------------------- --------------------
OWNED LEASED OWNED LEASED
-------- ------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Buildings and improvements.................... $173,568 $ -- $168,311 $ --
Machinery and warehouse equipment............. 60,197 -- 79,953 --
Office and computer equipment................. 77,340 -- 62,868 --
Transportation equipment...................... 21,076 11,454 22,757 14,556
-------- -------- -------- --------
332,181 11,454 333,889 14,556
Less accumulated depreciation and
amortization................................ 178,793 6,061 181,920 9,865
-------- -------- -------- --------
153,388 5,393 151,969 4,691
Land.......................................... 12,295 -- 12,292 --
-------- -------- -------- --------
$165,683 $ 5,393 $164,261 $ 4,691
======== ======== ======== ========
</TABLE>
F-10
<PAGE> 28
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
----------------- -----------------
(000'S OMITTED)
<S> <C> <C>
Senior note at 8.60%..................... $49,000 $50,000
Term loans:
5.97%.................................. 3,000 --
Canadian prime (7.50% and 8.00%,
respectively)....................... 3,665 3,565
Variable (7.60% and 7.20%,
respectively)....................... 6,200 6,200
Redeemable (subordinated) term notes:
6.85%.................................. 3,328 --
6.97%.................................. 1,131 --
7.00%.................................. 4,363 4,346
7.05%.................................. 3,054 --
7.37%.................................. 1,491 1,512
7.61%.................................. 3,330 3,540
Industrial Revenue Bonds (5.28%):........ 4,000 4,000
----------------- -----------------
82,562 73,163
Less amounts due within one year......... 7,113 1,000
----------------- -----------------
$75,449 $72,163
============= =============
</TABLE>
Principal payments for the 8.60% senior note are due in incrementally
increasing amounts through maturity in 2007. Under the senior note agreement,
the Company is required to meet certain financial ratios and covenants.
Principal payments for the 5.97% term loan are due quarterly beginning in
1996 through maturity in 1999. Payments for the other 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, 1995 and 1994, that
were held by promissory (subordinated) note holders, who do not own the
Company's Class A common stock. The notes are due in 1996, 1997, 1998 and 1999.
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 1996, 1997, 1998, 1999,
2000 and thereafter are $7,113,000, $12,234,000, $9,211,000, $14,004,000,
$4,000,000 and $36,000,000, respectively.
In addition, the Company has various short-term lines of credit available
under informal agreements with lending banks, cancellable by either party under
specific circumstances, which amount to $63,000,000 at December 30, 1995. The
Company pays commitment fees for these lines. The borrowings under these
agreements were $2,657,000 at December 30, 1995 and were at a rate of 7.50%. All
of these borrowings were for the Canadian subsidiary. At December 31, 1994, the
Company had a weighted average interest rate on short-term borrowings of 6.63%
and included both U.S. and Canadian borrowings.
F-11
<PAGE> 29
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouse, office, computer and
transportation 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 30, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(000'S OMITTED)
<S> <C> <C>
Fiscal years
1996................................................. $ 1,984 $ 6,832
1997................................................. 1,409 9,067
1998................................................. 1,135 7,102
1999................................................. 800 5,669
2000................................................. 305 5,134
Thereafter........................................... 306 47,599
------- ---------
Net minimum lease payments............................. 5,939 $81,403
=======
Less amount representing interest...................... 314
-------
Present value of net minimum lease payments............ 5,625
Less amounts due within one year....................... 1,861
-------
$ 3,764
======
</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>
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Minimum rent.................................. $ 9,553 $8,487 $8,174
Contingent rent............................... 510 611 575
------------ ------------ ----------
$ 10,063 $9,098 $8,749
========== ========== ========
</TABLE>
F-12
<PAGE> 30
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(000'S OMITTED)
<S> <C> <C>
Promissory (subordinated) notes -
Due on December 31, 1995--7.50%........................ $ -- $ 20,783
Due on December 31, 1995--10.00%....................... -- 35,355
Due on December 31, 1996--6.00%........................ 23,588 24,888
Due on December 31, 1996--9.50%........................ 27,029 28,436
Due on December 31, 1997--10.00%....................... 16,660 17,579
Due on December 31, 1997--7.87%........................ 15,616 16,793
Due on December 31, 1998--7.47%........................ 16,461 --
Due on December 31, 1998--8.00%........................ 27,048 28,512
Due on December 31, 1999--8.00%........................ 25,470 27,030
Due on December 31, 1999--8.20% (issued in 1995)....... 25,327 27,909
Due on December 31, 2000--6.50%........................ 23,996 25,628
Due on December 31, 2000--7.58% (to be issued)......... 32,047 --
Instalment notes at interest rates of 6.50% to 10.00%
with maturities through 1999........................ 5,753 4,010
------------ ------------
238,995 256,923
Less amounts due within one year......................... 52,660 57,824
------------ ------------
$186,335 $199,099
========== ==========
</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 1996,
1997, 1998, 1999, and 2000 are $52,660,000, $34,007,000, $44,772,000,
$51,514,000, and $56,042,000, respectively.
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.
8. INCOME TAXES
At December 30, 1995, the Company has alternative minimum tax credit
carryforwards of approximately $900,000 which do not expire. The carryforwards
are available to offset future federal tax liabilities.
F-13
<PAGE> 31
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 30, 1995 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>
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Current:
Federal..................................... $ (363) $ 486 $ 343
State....................................... 379 462 22
Foreign..................................... 273 278 237
------------ ------------ ----------
Total current............................... 289 1,226 602
------------ ------------ ----------
Deferred:
Federal..................................... (145) (147) 1,582
State....................................... (26) (26) 317
Foreign..................................... 58 110 81
------------ ------------ ----------
Total deferred.............................. (113) (63) 1,980
------------ ------------ ----------
$ 176 $1,163 $2,582
========== ========== ========
</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. The reconciliation of income
tax expense to income tax computed at the U.S. federal statutory tax rate of 35%
in fiscal year 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Tax at U.S. statutory rate.................. $ 20,725 $ 21,518 $ 20,862
Effects of:
Patronage dividend........................ (21,049) (21,147) (19,054)
State income taxes, net of federal tax
benefit................................ 229 283 220
Other, net................................ 271 509 554
------------ ------------ ----------
$ 176 $ 1,163 $ 2,582
========== ========== ========
</TABLE>
F-14
<PAGE> 32
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CASH FLOW
The Company's noncash financing and investing activities in fiscal year
1995 include acquisition of transportation equipment by entering into capital
leases and the acquisition of property for resale. These transactions aggregate
$4,008,000. 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 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Patronage dividend payable in cash......................... $ 18,315 $ 18,383 $ 16,614
Promissory (subordinated) notes............................ 23,536 23,213 20,852
Class B nonvoting common stock............................. (2,592) 5,900 2,086
Instalment notes........................................... 5,972 3,058 2,939
Member indebtedness........................................ 14,909 9,867 11,949
------------ ------------ ----------
$ 60,140 $ 60,421 $ 54,440
========== ========== =======
Note renewals.............................................. $ 23,974 $ 26,191 $ 27,187
========== ========== =======
</TABLE>
Cash paid for interest during fiscal years 1995, 1994 and 1993 totaled
$29,624,000, $30,583,000 and $32,056,000, respectively. Cash paid for income
taxes during fiscal years 1995, 1994 and 1993 totaled $1,012,000, $1,709,000 and
$1,387,000, 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 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Income:
Actual return (loss) on plan assets................. $ 25,564 $ (1,543) $ 7,486
Amortization of excess plan assets.................. 914 920 920
------------ ------------ ----------
26,478 (623) 8,406
------------ ------------ ----------
Expenses:
Service cost-benefits earned during year............ 4,152 4,765 4,556
Interest on projected benefit obligation............ 7,242 6,736 6,266
Deferral of excess (deficiency) of actual over
estimated return on plan assets.................. 18,021 (8,815) 1,042
------------ ------------ ----------
29,415 2,686 11,864
------------ ------------ ----------
Net pension cost...................................... $ 2,937 $ 3,309 $ 3,458
========== ========== =======
</TABLE>
The discount rate and the rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.25% and 4.50%, respectively, in 1995, 8.50% and 4.50%,
respectively, in fiscal year 1994 and 7.50% and 4.50%, respectively, in fiscal
year 1993. These changes in actuarial assumptions did not have a material impact
on net pension cost for fiscal year 1995 and the
F-15
<PAGE> 33
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company does not anticipate that these changes will have a material impact on
net pension cost in future years. In fiscal years 1995, 1994 and 1993, the
expected long-term rate of return on assets was 9.50%. During 1995, the Company
amended its pension plan. This amendment had no material impact on the projected
benefit obligation.
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 30, DECEMBER 31,
1995 1994
------------ ------------
(000'S OMITTED)
<S> <C> <C>
Assets:
Total plan assets at fair value................................. $104,396 $ 80,046
========== ==========
Obligations:
Accumulated benefit obligations:
Vested....................................................... $ 77,435 $ 53,055
Non-vested................................................... 10,830 7,683
Effect of projected compensation increases...................... 21,730 19,924
------------ ------------
Total projected benefit obligations............................. 109,995 80,662
------------ ------------
Net excess assets (liabilities):
Unrecognized:
Unamortized excess assets at original date................... 7,673 8,643
Net actuarial gain (loss).................................... (3,793) 565
Prior service costs.......................................... (4,017) (5,313)
Recognized accrued pension cost................................. (5,462) (4,511)
------------ ------------
Total net excess assets (liabilities)........................... (5,599) (616)
------------ ------------
Total obligations and net excess assets (liabilities)............. $104,396 $ 80,046
========== ==========
</TABLE>
The Company also participates in union-sponsored defined contribution
plans. Pension costs related to these plans were $720,000, $757,000, and
$702,000 for fiscal years 1995, 1994 and 1993, respectively.
F-16
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS NUMBERED
ENCLOSED DESCRIPTION PAGE
-------- ---------------------------------------------------------------- ------------
<C> <S> <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).
4-H Cotter & Company $50,000,000 Private Shelf Agreement with Prudential
Insurance Company of America dated December 29, 1995 incorporating amendment
on existing 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-H to Post-Effective Amendment No. 5 to Registration
Statement on Form S-2 (No. 33-39477).
4-I Trust Indenture between Cotter & Company and First Trust of Illinois
(formerly Bank of America). Incorporated by reference--Exhibit T3C to Cotter
& Company Form T-3 (No. 22-26210).
</TABLE>
E-1
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBITS
INCORPORATED
BY REFERENCE
--------------
<S> <C>
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).
10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended and Restated
Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-C to
Post-Effective Amendment No. 5 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 Cotter & Company Supplemental Retirement Plan between Cotter & Company and
selected executives of the Company (As Amended and Restated January 2, 1996
Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-E to
Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No.
33-39477).
10-F 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-G Cotter & Company Long-Term Incentive Compensation Program for Executive
Management (Amended) dated November 7, 1994. Incorporated by reference--
Exhibit 10-I to Post-Effective Amendment No. 4 to Registration Statement on
Form S-2 (No. 33-39477).
10-H Employment Agreement between Cotter & Company and Daniel A. Cotter dated
October 15, 1984. Incorporated by reference--Exhibit 10-N to Post-Effective
Amendment No. 2 to Registration Statement on Form S-2 (No. 2-82836).
10-I Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel
A. Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by
reference-- Exhibit 10-N to Registration Statement on Form S-2 (No.
33-39477).
10-J Contract between Daniel T. Burns and the Company. Incorporated by
reference--Exhibit 10-J to Post-Effective Amendment No. 5 to Registration
Statement on Form S-2 (No. 33-39477).
10-K Contract between Kerry J. Kirby and the Company. Incorporated by
reference--Exhibit 10-K to Post-Effective Amendment No. 5 to Registration
Statement on Form S-2 (No. 33-39477).
</TABLE>
<TABLE>
<CAPTION>
SEQUENTIALLY
SUPPLEMENTAL NUMBERED
INFORMATION PAGE
- ------------ -------------
<C> <S> <C>
(a) Notice of Annual Meeting of Stockholders on April 2, 1996.
(b) Proxy solicited by the Board of Directors.
(c) Cotter & Company 1995 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., and General Paint and Manufacturing Co.,
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 30, 1995, and December 31, 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
Supplemental Information (a)
COTTER & COMPANY
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 2, 1996
TO THE STOCKHOLDERS OF COTTER & COMPANY:
The Annual Meeting of Stockholders of COTTER & COMPANY, a Delaware Corporation,
will be held at The Stouffer Renaissance Hotel, 3801 Quebec Street, Denver,
Colorado 80207, Tuesday, April 2 1996, 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 1996; and
3. To consider and act upon such further business as may properly come
before the meeting or any adjournment 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:
J.W. (Bill) Blagg Leonard C. Farr
Samuel D. Costa, Jr. Dennis A. Swanson
Daniel A. Cotter
Additionally, John F. Lottes, III has been nominated to serve for a term of one
(1) year to fill the unexpired term of Robert G. Waters, 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
28, 1996. 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
1996 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 1996.
Only holders of record of the Class A Stock of the Company at the close of
business on February 16, 1996, 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, C/O HARRIS TRUST AND
SAVINGS, P.O. BOX 2702, CHICAGO, ILLINOIS 60690-9402.
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 1, 1996
<PAGE> 1
Supplemental Information (b)
PROXY PROXY
COTTER & COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William M. Halterman; Richard L.
Schaefer; and John M. West, Jr., 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 16, 1996, at the Annual Meeting of
Stockholders to be held on Tuesday, April 2, 1996, at The Stouffer Renaissance
Hotel, 3801 Quebec Street, Denver, Colorado 80207, at 10:00 a.m., local time,
and at any adjournments thereof.
A COPY OF THE COMPANY'S 10-K ANNUAL REPORT IS AVAILABLE UPON REQUEST.
PLEASE MARK, SIGN, DATE, AND RETURN THE PROXY BALLOT PROMPTLY
USING THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
COTTER & COMPANY
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
THE BOARD RECOMMENDS A VOTE FOR ALL OF THE FOLLOWING PROPOSALS.
1. ELECTION OF DIRECTORS FOR WITHHOLD FOR ALL (Except Nominee(s)
Nominees: J.W. (Bill) Blagg, / / / / / / __________________
Samuel D. Costa, Jr., Daniel
A. Cotter, Leonard C. Farr,
and Dennis A. Swanson, for a
term of three years.
2. To vote for the election of FOR AGAINST ABSTAIN
John F. Lottes, III, to / / / / / /
serve for a term of one
year to fill the unexpired
term of Robert G. Waters,
retired.
3. Proposal to approve the FOR AGAINST ABSTAIN
appointment of Ernst & / / / / / /
Young, independent
public accountants, as
auditors of the Company
for the fiscal year 1996.
4. In their discretion, the FOR AGAINST ABSTAIN
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.
Dated: _________________, 1996
Signature(s) __________________________________
_______________________________________________
Please sign exactly as 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.
<PAGE> 1
EXHIBIT 99.C
description: - Supplement C
COVER:
Cotter & Company 1995 Annual Report
[Picture of Cotter & Company's old headquarters and new headquarters]
PAGE 1:
"I will go anywhere as long as it is forward." David Livingstone
1995 saw True Value as a company
on the move. Moving forward...
and moving ahead. We made
great advances in all areas, from
our products to our programs.
Now, as we head toward the 21st
century, we are ready to not only
face the future, but lead the way.
[Picture of Cotter & Company's new headquarters]
PAGE 2&3:
To Our Members:
We believe the measure of a company's success in any given period has two
components. One is actual performance, as measured against financial and
service goals; the other is how well the company prepared for the year and
years ahead.
By both those standards, 1995 was one of the most successful years in the
history of Cotter & Company.
Not every goal was met; sales have been soft throughout our industry, with the
weather having a big impact, and your company showed a decline in gross sales.
However, by lowering our warehouse prices and eliminating non-profitable
segments of our business, we voluntarily gave up $155 million in sales, or
we would have shown an increase comparable to most in our industry.
Our list of major accomplishments for 1995 is long, indeed:
- - We positioned all True Value Members and Cotter & Company for a great
future in the hardware/home center industry
- - Substantially reduced everyday warehouse pricing on more than 13,000
items
- - Added 6,000-plus SKUs, primarily national branded items, in hardware
and lumber/building materials
- - Filled orders with the highest service level ever
- - Introduced the most far-reaching growth program in our industry with
the highly successful start of trueAdvantage
- - Successfully delivered a new statement to replace the cumbersome and
time-consuming Listment
- - Developed the best communications with Members ever through the
Marketing, Merchandising and Corporate Advisors
- - Started the biggest ad initiative in company history with the NFL
sponsorship
- - Moved your National Headquarters to serve you better
- - And while doing all this, and more, reduced operating expenses.
We take special pride--as should all committed Members--in the extraordinary
acceptance of the new trueAdvantage program because of the impact it will have
on the market position of True Value stores in the years ahead. At year-end,
1,014 Members have committed to the trueAdvantage program, and 188 applicants
have received final approval by the trueAdvantage committee at National
Headquarters. Like every successful program at Cotter & Company, trueAdvantage
involves teamwork of all departments and Members.
Total company sales were $2.44 billion for 1995, down 5.3%, or $137
million, from the previous year. However, we "gave away" roughly $155 million
in sales when we sold the variety division and General Power and canceled
nearly 400 under-performing Members. Additionally, we reduced the prices you
paid on more than 13,000 SKUs, giving up millions of dollars that you could use
all year long instead of getting it in your patronage dividend check.
The company's total payout in patronage dividends is approximately the same as
the year before, over $60.1 million. However, with V&S and under-performing
Members now gone, only 5,700 stores will get the lion's share of this refund,
instead of the 7,100 a year earlier. The average patronage dividend of active
Members is up.
Your company's manufacturing operations have changed dramatically, with the
sale of General Power, and the combining of the paint and brush manufacturing
divisions to achieve greater operating efficiencies. Paint sales were down
about 1%, primarily because of poor weather conditions, and our experience was
no different from that of our competitors. Brush sales were up 4.4%. Patronage
dividends from the two product categories were consistent with previous years.
Your company's growing presence in international markets continues, and in 1995
we opened the True Value International Division Headquarters and Consolidation
Center in Peachtree City, Georgia, to enhance our capability of growth through
outstanding service. As always in international operations, business is never
equally good everywhere. Right now opportunities in Mexico are limited, but the
fastest growing markets, like the Far East and Eastern Europe, are doing
extremely well. At the end of 1995, we served 150 stores in 40 foreign
countries and U.S. territories, not including Canada.
Cotter Canada still operates in a troubled national economy, and sales
in the second half of the year were not as strong as in the first six months.
Nevertheless, Cotter Canada finished with sales up 5.4%, to $135 million
(Canadian), and membership grew to 450 stores at year-end. Most of the new
Members were True Value Hardware stores.
Before we close, we'd like to add just a few words about your company's move
to its new headquarters. The benefits are great: it will be uplifting for
employee spirits, increase productivity, give workers more pride in their
company and their job--and it will reduce operating expenses. Your company will
serve you better!
This past year, a year of the greatest change in the proud history of your
company, was successful because of the understanding and cooperation of
Members, and the loyalty and support of all the management, staff and employees
of Cotter & Company. We thank you all, from the bottom of our hearts.
<PAGE> 2
Jerrald T. Kabelin
Chairman of the Board
Daniel A. Cotter
President and Chief Executive Officer
[Graph showing operating expenses as a percent of sales]
CAPTION 2A:
Operating Expenses as a Percent of Sales
[Picture of Chairman of the Board and President]
CAPTION 2B:
Jerry Kabelin, Chairman of the Board
Dan Cotter, President and Chief Executive Officer
[Graph showing total member returns]
CAPTION 3A:
Total Member Returns (in millions)
PAGE 4&5:
trueAdvantage
The kickoff of Cotter & Company's trueAdvantage program at the 1995 Spring
Market marked a new point in programs for independent retail hardware stores.
This voluntary program was the first ever developed to meet the wants and needs
of the customer coming into hardware stores rather than to satisfy the desires
of the wholesaler presenting the program.
Each of the twelve "standards" of the trueAdvantage program are aimed at
customers. Included are state-of-the-art, high-tech standards like in-store
computerization and participation in the Cotter Satellite Network and "low-
tech" essentials like well-trained salespeople. More than a year of research
and development with stores
participating in Cotter & Company's Strategy 21 study preceded the roll
out of trueAdvantage. Commitments to the program at the Spring Market where it
was introduced were beyond even the most optimistic projections. By August the
first qualifying Members were approved and eligible for benefits of being
trueAdvantage Members: free retail marketing and operating analyses, below
market-rate business improvement financing and a 5% year-end discount on
increases in their warehouse purchases.
At year-end, 1,014 stores have committed to the and 188 applicants have
received final approval from National Headquarters.
[Picture of customer checking out of True Value store.]
CAPTION 4A:
All trueAdvantage Members follow a "True Help" return policy. Not only does it
build good will, it strengthens customer confidence and creates a positive
image for all True Value stores.
[Picture of a contractor with True Value merchandise]
CAPTION 4B:
"When I go to a True Value store, there are professionals there who understand
that I'm a professional, too, and I can't afford to waste time."
Tom Victor
True Value customer
since 1978
[Picture of the front of a True Value store]
CAPTION 5A:
An attractive storefront, with good True Value identification, welcomes the
customer to a familiar shopping experience, and this is more important than
ever in today's highly mobile society.
[Picture of a product sold by True Value in the 1950's]
CAPTION 5B:
The True Value logo, shown here on razor blades from the 1950s, has been known
and trusted for two generations. Cotter & Company acquired the True Value name
from Hibbard, Spencer, Bartlett in 1963 for a mere $2,500.
[Picture of a customer leaving a True Value store]
CAPTION 5C:
Nothing makes as strong a statement about a retailer's desire to give customers
what they want as store hours that meet their needs. trueAdvantage Members all
operate with store hours comparable to their major competitors, so customers
can shop when it is convenient for them.
[Graphics promoting True Advantage]
CAPTION 5D:
Because customers respond to in-store ads and a controlled music ambience, all
trueAdvantage stores will be connected to, and operate at all times, Cotter &
Company's Communications Satellite Network. CSN also provides internal
marketing and merchandising updates, instant message delivery service and
regularly scheduled presentations from the trueAdvantage training library.
PAGE 6&7:
Marketing
The industry leader in advertising since the firm was founded in 1948, Cotter &
Company took its marketing to new heights in 1995 with the kickoff of its
NFL(TM) sponsorship program.
<PAGE> 3
Months later, another milestone was reached, when agreements were signed
making True Value the official hardware store of Major League Baseball(R) for
three years, starting with opening day extravaganzas in 1996. Funding for NFL
and MLB programs comes from key manufacturers, who have special programs for
such unique ad projects so there is no affect on the price Members pay for
their merchandise.
Now True Value has an unmatched year-round sports sponsorship program.
The strong tie between True Value stores and the American Red Cross in 1995
demonstrated at the local level True Value's commitment as an "activist" in
serving communities all over the nation.
During 1995, a refocusing of the product selection process has brought major
improvements to direct mail advertising, with research on what actually is
selling in Member stores leading the way. Special emphasis on items that are
already included in the basic planograms of core departments reduce the amount
of "special" merchandise Members must buy to support direct mail.
[Picture of an Advertising Insert]
CAPTION 6A:
In 1995, advertising inserts in major newspapers all over the country were
extremely successful, leading Members to look forward eagerly to continuation
and expansion of this program in 1996.
[Graphics of True Value Advertising]
CAPTION 6B:
trueAdvantage Members support True Value advertising, using direct mail
circulars and backing national newspaper and "bargain of the month"
promotions. Their customers know advertised items will be available.
[True Value customer reading a True Value Advertisement]
CAPTION 6C:
"My whole family looks through the True Value ads at our house. Their prices
are always low but we love finding even better bargains."
Martha Jacobs
True Value customer
since 1981
[Pictures from True Value Television Advertisements]
CAPTION 7A:
True Value television advertising created memorable moments for millions of
viewers, ranging from dogs to professional athletes, from a crashing-through-
the-roof Santa to football officials who know the rules on where to
get basic hardware bargains!
[Graphics of Country Showdown]
CAPTION 7B:
Nationwide talent contests for new stars in America's most popular music style
spread the True Value name across the country.
[Graphics for the American Red Cross]
CAPTION 7C:
True Value's support for the American Red Cross proves "Help Is Just Around the
Corner" is truth, not just a slogan.
[Picture of a television set from 1969]
CAPTION 7D:
This console television set is similar to the ones used back in 1969, when
thousands of viewers in the Green Bay, Wisconsin, area were exposed to the
first True Value TV commercials.
[Picture from an NFL football game]
CAPTION 7E:
Sports fans, people who score high in hardware purchases, learned to look for
True Value advertising as they watched NFL football this past fall.
[Picture from a Major League Baseball game]
CAPTION 7F:
Major League Baseball will be a prime stage for True Value advertising through
much of 1996.
Our Products
True Value Members will remember 1995 as a year that saw great progress in
improved merchandising, with the best product selection ever accompanied by the
best pricing in company history.
Some 6,000 SKUs were added to warehouse stock, and most of these were national
branded items that met Member needs in core hardware and building materials
areas. At the same time, private label offerings were improved in quality and
in price, through re-evaluation of whether each private label product offered a
significant price or competitive advantage over national brand products and a
review of every private label supplier.
By year end, 1,500 items were included in the Pinpoint Pricing program, more
than double the number a year earlier. Pinpoint Pricing, along with stronger
negotiations of prices with suppliers and reduced markups taken by Cotter &
Company, saved True Value stores millions of dollars in merchandise costs in
1995.
When Cotter & Company sold its outdoor power equipment manufacturing business,
True Value stores wound up with a stronger line of mowers and related products
at a lower price because of higher technology and greater product development
opportunities. One of the most important benefits of the overall teamwork
throughout Cotter & Company--teamwork by merchandising, management information
and distribution managers and staff--is the continued improvement in service
levels, now the best in the industry.
[Graphics promoting Pinpoint Pricing]
CAPTION 8A:
Pinpoint Pricing meets the everyday needs of customers who focus on value, so
all trueAdvantage Members identify and promote these 1,500-plus
price-sensitive items. The result is a better image for all True Value stores,
and more repeat customers.
<PAGE> 4
[Picture of merchandise sold at True Value stores]
CAPTION 8B:
National brand names are an important part of the product mix at every True
Value store, giving knowledgeable sales personnel an opportunity to meet the
needs of every customer, from the most quality-conscious professional to the
budget-oriented do-it-yourselfer.
[Picture of a can of paint from 1964]
CAPTION 9A:
Customers recognize that private label paint in True Value stores offers the
very essence of "value"--high quality and low price. This can holds paint sold
in True Value stores in 1964, 12 years before Tru-Test manufacturing opened its
Cary factory.
[Picture of a True Value Marketing Advisor]
CAPTION 9B:
It's quick, easy to use and reliable information that lets True Value stores
capitalize on the great prices and buying opportunities available... information
they get monthly from the Merchandising, Marketing, and Corporate Advisors.
They used this information to save millions of dollars in 1995 as a result of
reduced regular warehouse prices on thousands of items.
[A Graph showing the service levels for shipments to the True
Value stores]
CAPTION 9C:
The adage "you can't do business from an empty wagon" was never truer than with
today's busy customers, who expect stores to have what they want, when they
want it. Improving service levels year after year has provided a major
competitive edge for True Value stores.
[A picture of a customer holding plumbing merchandise]
CAPTION 9D:
"If I'm looking for a tool, I want choices in brands,in quality and in price.
That's what I get at my True Value store."
Marty Lindberg
True Value customer
since 1975
PAGE 10&11:
Merchandising
Programs
Continuing as the most successful program in the recent history of True Value
stores is Just Ask Rental, which soared another 50% in 1995. With 250 stores
now open and operating, 30 awaiting the arrival of equipment and merchandise
and another 40 stores starting the training process, Just Ask Rental is now the
second-largest rental chain in the nation.
Opening stock orders for 1995 start-ups rose 37% over the year before, but the
most telling indication of the value of Just Ask Rental is the advantage it
gives True Value stores in the most competitive retailing climate in history.
Similar success is being shown by The Paint Shop, an advanced merchandising
concept for paint and decorating products. With only a handful of test sites
in operation at the end of 1994, there were 135 Paint Shops operating at the
end of 1995. The Paint Shop is a "store within a store" giving increased sales
and turnover through disciplined merchandising. Participants reported a 27%
sales increase in these products in 1995.
An expanded and improved planogram program saw 325 planograms offered in
seven departmental books in 1995. Just over 15,000 of these books were
distributed to True Value stores. Another 200 promotional end cap planograms
were distributed to thousands of stores.
[A picture showing equipment for rent at True Value]
CAPTION 10A:
While the rental business is profitable in itself, Just Ask Rental stores find
their profits are being leveraged by the add-on sales that accompany the
rentals themselves.
[A picture of a True Value customer and his purchases]
CAPTION 10B:
"My True Value store has more than just products. They've got a completely
programmed approach to meeting all my needs, from rentals to credit to one-stop
shopping."
Tim O'Holleran
True Value customer
since 1974
[A picture of a True Value customer inside the store]
CAPTION 11A:
Planograms play a vital role in building store success by helping the customer
find what he needs. All True Value planograms are offered in various sizes and
configurations to help different sizes and types of stores increase turnover
and reduce lost sales because of out-of-stock conditions.
[A picture of a LawnChief lawn mower]
CAPTION 11B:
Always seeking improvement, True Value has moved from manufacturing mowers-like
this 1971 model, built the year Cotter & Company opened the Lawn Chief
factory--to joining with MTD to offer the best Lawn Chief mowers in history.
[A Graphics promoting True Advantage]
CAPTION 11C:
trueAdvantage Members feature basic assortments-and use planograms--for six
primary core departments and selected categories in two others.
<PAGE> 5
[A customer & True Value employee in the stores paint shop]
CAPTION 11D:
The Paint Shop grew from virtually zero to 135 in 1995, and by year-end 1996
there will be four times that many. Complete with factory-trained experts and
the Tru-Test(R) Color Computer Matching System, Paint Shops will help paint a
colorful picture for the future of True Value.
PAGE 12&13:
Distribution and Technology
Today it is difficult to separate technology and distribution. One of the
greatest accomplishments of 1995 in these two areas was installation of the
major components of the Advanced Distribution System at the Corsicana
Distribution Center. ADS benefits Members with improved shipping accuracy,
which ultimately can eliminate check in of shipments at stores.
ADS gives Cotter & Company an advantage in operational efficiency and serving
Members, and roll out will begin in additional distribution centers in 1996.
Information Services also replaced the Listment with the new easier-to-use
statement, developed new and expanded features for both Tru-Trac and Triad
systems and installed Just Ask Rental on both Tru-Trac and Triad platforms.
Tru-Trac grew by 15%, and today more than 2,500 True Value stores are
computerized. MIS helped develop Electronic Data Interchange connections with
more than 1,700 vendors. Orders for 85% of all items are now placed by EDI.
Productivity has increased in distribution centers and transportation, saving
Members more than $3 million in 1995. Reworking truck routes after the sale of
the V&S division was an important factor, as tractors now run 10% fewer miles
pulling heavier loads.
[a graphics highlighting True Value's modern computer system]
CAPTION 12A;
Today's customers expect greater check-out speed and accuracy and inventory
control that keeps the products they want in stock, so trueAdvantage Members
all have modern retail computer systems.
[a picture inside of Cotter & Company's computer room]
CAPTION 12B;
Computers are no longer unique or glamorous in the 90s, but the incredible
computer system at Cotter & Company national headquarters is the base on which
the entire chain of True Value stores builds its worldwide reputation for
customer satisfaction.
[a picture of a True Value customer with garden merchandise]
CAPTION 13A;
"I don't know how they do it, but my True Value store always has what I need
when I need it!"
Aida Aguado
True Value customer
since 1990
[A picture of a Cash Register]
CAPTION 13B;
Less than a generation ago, cash registers like these were in every True Value
store, but then less sophisticated customers had fewer shopping choices and
were easier to satisfy.
[A picture of a bar code scanner]
CAPTION 13C;
Cotter & Company's new Advanced Distribution System uses the most modern
technology, like this laser scanner, to speed shipments with near-perfect
accuracy.
[A picture of a True Value truck]
CAPTION 13D;
Re-identification of the truck fleet is more than half complete, with larger
True Value logos and manufacturer advertisements on trailer sides, and rear
doors featuring signs about promotions.
PAGE 14&15:
Retail Development
Developing and implementing the trueAdvantage program may have been the biggest
1995 accomplishment in the area of Retail Services, but it was far from the
only major achievement of the year.
Completion of the sales force automation program has given True Value hardware
stores a support staff unparalleled in the history of Cotter & Company.
Culminating three years of extensive training, the Cotter field staff in 1995
was equipped with personal computers to serve Members more professionally and
more productively. Sales and expense guidelines that once took two hours to
complete now are accomplished in five or ten minutes.
Departmental productivity analyses that have been offered for years took hours
to perform, but now are done in minutes. This new professionalism helps the
field staff meet Members' desires for education and training, a desire
evidenced by the extraordinary increase in attendance at Friday Market
seminars. Total attendance at Friday seminars at the Fall Market topped 4,500,
more than double the attendance at previous Markets.
Another new program meeting this need is the PREP (Professional Retail
Education Program) conducted jointly with Purdue University and the National
Retail Hardware Association. The first class was graduated in August and four
classes are scheduled for 1996.
[A picture of a Cotter & Company employee]
CAPTION 14A:
True Value stores get tremendous assistance in store layout and modernization
from store planners at National Headquarters.
<PAGE> 6
[A Graphics of a True Value Performance Report]
CAPTION 14B:
trueAdvantage Members report details on sales,
margins, expenses and more to Cotter & Company, and in return get a
confidential analysis of how their store compares with other similar Members.
[A Graphic for True Advantage]
CAPTION 14C:
One of the key roles of the Retail Development and Operations field staff has
been to carry the message of trueAdvantage to Members, emphasizing the benefits
the store gains in satisfying customer expectations.
[A Picture of a True Value owner and a Cotter & Company retail support
representative]
CAPTION 15A:
When an owner or manager needs expert help in solving problems or beating the
competition, that help is as close as his retail support representative, who
brings experience and training, augmented by the versatility of his laptop
computer.
[A picture of Peter Glen speaking at a market]
CAPTION 15B:
Markets are made exciting by dynamic speakers like Peter Glen, respected
throughout retailing as a consultant on customer service and a regular panelist
on CNBC business television.
[A picture of a True Value customer]
CAPTION 15C:
"I shop at True Value because I know I'll find salespeople who can guide me to
the right product and help me solve any repair or maintenance problem."
Cathy Matheis
True Value customer
since 1994
[A picture of an early Cotter & Company market]
CAPTION 15D:
Members see the most modern products at their twice-a-year buying markets. This
early 1950s photo of a Market at North Pier Terminal depicts the interest
generated even in the early years.
PAGE 16:
Cotter & Company 1995 Annual Report
Directors and Officers
Board of Directors
William M. Claypool, III1,2
Claypool True Value Hardware
Needles, CA
(619) 326-2110
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) 695-5000
Director since 1989
Term expires 1996
Leonard C. Farr3
Farr's True Value Hardware
Coos Bay, OR
(503) 267-2137
Director since
1972
Term expires 1996
<PAGE> 7
William M. Halterman3
Halterman's True Value Hardware
Petersburg, WV
(304) 257-4552
Director since 1990
Term expires 1998
Jerrald T. Kabelin, Chairman* Kabelin True Value Hardware
LaPorte, IN
(219) 324-5251
Director since 1985
Term expires 1997
Robert J. Ladner3
Ladner's True Value Hardware
Granite Falls, MN
(612) 564-3130
Director since 1994
Term expires 1997
Lewis W. Moore1,4
Moore's True Value Hardware
Rochelle, IL
(815) 562-7682
Director since 1948
Term expires 1997
Kenneth M. Noble1,4
Noble True Value Hardware
South Glens Falls, NY
(518) 761-6777
Director since 1995
Term expires 1998
Richard L. Schaefer3
Carroll-Ames True Value Hardware
Bryan, OH
(419) 636-1149
Director since 1976
Term expires 1998
George V. Sheffer2,4
Murdale True Value Hardware
Carbondale, IL
(618) 529-3400
Director since 1994
Term expires 1998
Dennis A. Swanson1
Steamboat True Value Hardware
Steamboat Springs, CO
(303) 879-8014
Director since 1995
Term expires 1998
Robert G. Waters1
Waters True Value Hardware
Junction City, KS
(913) 238-3114
Director since 1973
Term expires 1997
John M. West, Jr.2
<PAGE> 8
Gulf Coast True Value Hardware
Englewood, FL
(813) 474-1807
Director since 1991
Term expires 1998
Donald E. Yeager2
Yeager True Value Hardware
Van Buren, AR
(501) 474-5278
Director since 1993
Term expires 1996
Corporate Officers
Daniel A. Cotter
President;
Chief Executive Officer
Steven J. Porter
Executive Vice President;
Chief Operating Officer
Kerry J. Kirby
Vice President, Finance;
Treasurer;
Chief Financial Officer
Karen M. Agnew
Vice President,
Management Services;
Assistant Secretary
Daniel T. Burns
Vice President, Legal
and Human Resources;
Secretary
Danny R. Burton
Vice President, Retail
Development and
Operations/Markets
David W. Christmas
Vice President, Merchandising
Robert F. Johnson
Vice President,
Information Services
Charles L. Kremers
Vice President,
Advertising and Marketing
John P. Semkus
Vice President, Distribution and Transportation
Committee Memberships:
<PAGE> 9
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
[A picture of Cotter & Company's Board of Directors]
CAPTION 16A:
(Front, left to right) Ed Yeager, Dan Cotter, Jerry Kabelin, Lew Moore, Dick
Schaefer (Center) Sam Costa, Will Halterman, Bob Ladner, Ken Noble, Bob Waters
(Rear) Denny Swanson, Len Farr, Mitch West, Bill Claypool, George Sheffer
FINANCIALS:
Cotter & Company
Financial Review
Revenues
In fiscal year 1995, Cotter & Company revenues were $2,437,002,000, a decrease
of 5.3% from fiscal year 1994. This decrease was attributable to the phase-out
of the V&S# Variety division and the sale of the General Power Equipment
manufacturing division. Comparable sales categories were flat with the prior
year due to the soft economy and unusual weather in the United States, combined
with the declining sales in Mexico. In addition, the Company expanded the
Pinpoint Pricing program which reduced the selling price of many core hardware
and related products.
Operations
Overall merchandise gross margins, as a percentage of revenues, decreased for
the fourth year in a row. This reduction in gross margin percentage was the
result of an expanded Pinpoint Pricing program and the withdrawal from the
resigned businesses of V&S# Variety division and General Power Equipment
manufacturing division. Warehouse, general and administrative expenses
decreased $18,700,000 or 14.0% compared to the prior year. As a percentage of
revenue, these expenses were 4.7% in 1995 compared to 5.2% in 1994. The
decrease in operating expenses was attributable to continued efforts to reduce
operating costs, an expense recovery associated with prior years' favorable
risk loss experience and efficiencies derived from the resigned businesses.
Patronage dividend and Member payout
The annual patronage dividend for fiscal year 1995 was $60,140,000 compared to
$60,421,000 last year. Despite the slight decrease, active Members will see a
significantly higher average patronage dividend return over last year. This is
due to the cancellation of V&S# Variety and underperforming Members, which had
limited Member participation with the Company during the year. Total Member
payout, which includes interest paid semi-annually on previously issued
promissory (subordinated) notes in addition to the patronage dividend, totalled
$80,767,000 compared to $83,315,000 last year. The sources and components of
Member payout for fiscal years 1995 and 1994 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 source programs listed below. As a result, each Member's patronage
dividend will differ slightly from the overall Company averages. In fiscal year
1995, the average dividend percentages from stock, relay and direct shipment
purchases were 3.6% (the highest since 1989), 1.5% and 0.4%, respectively.
Purchases of Tru-Test Manufacturing and Baltimore Brush products earned Members
a manufacturing patronage dividend of 11.9% and 12.3%, respectively, in fiscal
year 1995. In fiscal year 1994, the average dividend percentages for stock,
relay, direct shipment, Tru-Test Manufacturing and Baltimore Brush purchases
were 3.3%, 1.5%, 0.4%, 12.3% and 12.6%, respectively.
The Company considers promissory (subordinated) notes and Class B common stock
important parts of its patronage dividend. The 5-year notes provide Members a
recurring return on their investment and the Class B common stock provides the
Company a source of permanent capital. Reflecting comparable market interest
rates, promissory (subordinated) notes issued as part of the fiscal year 1995
patronage dividend bear interest at an annual rate of 7.6% compared to 8.2% in
1994.
MEMBER PAYOUT
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1995 1994
----------- -----------
(000's omitted)
<S> <C> <C>
Sources of Member payout:
Patronage dividend from:
Stock shipments....................... $37,410 $36,008
Relay shipments....................... 3,473 4,269
Direct shipments...................... 3,603 3,916
Tru-Test Manufacturing................ 13,276 13,890
Baltimore Brush....................... 2,378 2,338
------- -------
Total patronage dividend.............. 60,140 60,421
Interest paid to Members.............. 20,627 22,894
------- -------
</TABLE>
<PAGE> 10
COMPONENTS OF MEMBER PAYOUT
<TABLE>
<CAPTION>
<S> <C> <C>
Total Member payout.............................................................. $80,767 $83,315
======= =======
Components of Member payout:
Cash payout:
Interest paid to Members................................................. $20,627 $22,894
Cash patronage dividend.................................................. 18,315 18,383
------- -------
Total Member cash payout......................................................... 38,942 41,277
Promissory (subordinated) notes.................................................. 32,047 27,909
Class B common stock............................................................. 6,422 10,829
Member indebtedness.............................................................. 3,356 3,300
------- -------
Total Member payout.............................................................. $80,767 $83,315
======= =======
</TABLE>
Cotter & Company
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
(000's omitted)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................ $ 22,473 $ 1,831
Accounts and notes receivable............................................ 287,888 294,663
Inventories.............................................................. 315,311 384,747
Prepaid expenses......................................................... 11,180 7,861
-------- --------
Total current assets............................................. 636,852 689,102
Properties owned, less accumulated depreciation.................................. 165,683 164,261
Properties under capital leases, less accumulated amortization................... 5,393 4,691
Other assets..................................................................... 11,648 10,731
-------- --------
Total assets..................................................... $819,576 $868,785
======== ========
Liabilities and Capitalization
Current liabilities:
Accounts payable......................................................... $297,884 $334,468
Accrued expenses......................................................... 53,363 45,304
Short-term borrowings.................................................... 2,657 9,329
Current maturities of notes, long-term debt and lease
obligations ..................................................... 61,634 60,564
Patronage dividend payable in cash....................................... 18,315 18,383
-------- --------
Total current liabilities........................................ 433,853 468,048
Long-term debt................................................................... 75,449 72,163
Obligations under capital leases................................................. 3,764 3,593
Capitalization:
Promissory (subordinated) and instalment notes........................... 186,335 199,099
Redeemable Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid
52,710 and 63,350 shares)....................................... 5,294 6,370
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid
</TABLE>
<PAGE> 11
<TABLE>
<S> <C> <C>
1,055,700 and 1,047,756 shares; issuable as partial
payment of patronage dividends, 62,005 and 104,275 shares) ..................................... 113,062 116,663
Retained earnings .................................................................................... 2,661 3,764
-------- --------
307,352 325,896
Foreign currency translation adjustment ............................................................. (842) (915)
-------- --------
Total capitalization 306,510 324,981
-------- --------
Total liabilities and capitalization $819,576 $868,785
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Cotter & Company
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
----------------------------
December 30, December 31, January 1,
1995 1994 1994
----------- ----------- ---------
(000's omitted)
<S> <S> <C> <C>
Revenues ........................................................................ $2,437,002 $2,574,445 $2,420,727
---------- ---------- ----------
Cost and expenses:
Cost of revenues ........................................................... 2,234,934 2,351,114 2,202,806
Warehouse, general and administrative ...................................... 114,107 132,759 132,674
Interest paid to Members ................................................... 20,627 22,894 24,458
Other interest expense ......................................................... 9,298 7,493 7,429
Gain on sale of properties owned ........................................... -- (692) (5,985)
Other income, net ......................................................... (1,177) (604) (260)
Income tax expense ......................................................... 176 1,163 2,582
---------- ---------- ----------
2,377,965 2,514,127 2,363,704
---------- ---------- ----------
Net margins ..................................................................... $ 59,037 $ 60,318 $ 57,023
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
Cotter & Company
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
----------------------------
December 30, December 31, January 1,
1995 1994 1994
----------- ----------- ---------
(000's omitted)
<S> <C> <C> <C>
Operating activities:
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Net margins .................................................................. $59,037 $60,318 $57,023
Adjustments to reconcile net margins to cash and cash
equivalents from operating activities:
Depreciation and amortization .............................................. 20,706 21,613 21,566
Provision for losses on accounts and notes
receivable .............................................................. 3,741 4,233 4,057
Changes in operating assets and liabilities:
Accounts and notes receivable ............................................. (13,921) (33,112) (38,605)
Inventories ................................................................ 69,436 (49,145) 183
Accounts payable .......................................................... (36,584) 79,957 (45,070)
Accrued expenses .......................................................... 7,552 6,022 (1,143)
Other adjustments, net ..................................................... (3,327) (1,223) (2,679)
------- ------- -------
Net cash and cash equivalents provided by
(used for) operating activities ....................................... 106,640 88,663 (4,668)
------- ------- -------
Investing activities:
Additions to properties owned ................................................ (24,904) (21,427) (13,382)
Proceeds from sale of properties owned ....................................... 5,022 2,174 13,999
Changes in other assets ...................................................... 617 1,132 (3,850)
------- ------- -------
Net cash and cash equivalents (used for)
investing activities .................................................. (19,265) (18,121) (3,233)
------- ------- -------
Financing activities:
Payment of annual patronage dividend ......................................... (18,383) (16,614) (18,570)
Payment of notes, long-term debt and lease
obligations ................................................................ (43,106) (39,632) (32,730)
Proceeds from long-term borrowings .......................................... 3,000 -- --
Increase (decrease) in short-term borrowings ................................. (6,672) (13,851) 23,059
Purchase of Class A common stock ............................................ (1,740) (216) (470)
Proceeds from sale of Class A common stock ................................... 168 288 323
------- ------- -------
Net cash and cash equivalents (used for)
financing activities ................................................. (66,733) (70,025) (28,388)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents ............................................................ 20,642 517 (36,289)
------- ------- -------
Cash and cash equivalents at beginning of year ................................... 1,831 1,314 37,603
------- ------- -------
Cash and cash equivalents at end of year ........................................ $22,473 $ 1,831 $ 1,314
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 13
Cotter & Company
Consolidated Statement of Capital Stock
and Retained Earnings
For the Three Years Ended December 30, 1995
<TABLE>
<CAPTION>
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 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)
Net margins.................................. 59,037
Foreign currency translation
adjustment 73
Patronage dividend .......................... 6,422 (60,140)
Stock issued for paid-up
subscriptions.............................. 168 (168)
Stock subscriptions.......................... 156
Stock purchased and retired.................. (1,232) (10,023)
-------- ----- ------- ------- -----
Balances at December 30, 1995 $5,271 $ 23 $113,062 $2,661 $(842)
======== ===== ======= ======= =====
</TABLE>
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at
December 30, 1995 and December 31, 1994, $14,000 at January 1, 1994 and $27,000
at January 2, 1993 (for 240, 360, 590, and 760 shares subscribed,
respectively).
See Notes to Consolidated Financial Statements.
<PAGE> 14
Cotter & Company
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.
On January 13, 1995, the Company agreed to 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 sold
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 did not have a material impact on the Company's
results of operation or financial position.
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 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.
Retirement plans
The Company sponsors two noncontributory defined benefit retirement plans
covering substantially all of its employees. Company contributions to
union-sponsored defined contribution plans are based on collectively bargained
rates times hours worked. The Company's policy is to fund annually all
tax-qualified plans to the extent deductible for income tax purposes.
<PAGE> 15
Cotter & Company
Notes to Consolidated Financial Statements
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reporting year
The Company's reporting year-end is the Saturday closest to December 31.
2. Inventories
<TABLE>
<CAPTION>
Inventories consisted of:
December 30, December 31,
1995 1994
----------- ------------
(000's omitted)
<S> <C> <C>
Manufacturing inventories:
Raw materials.......................... $ 2,139 $ 12,986
Work-in-process and
finished goods........................ 19,407 60,094
-------- --------
21,546 73,080
Merchandise inventories................... 293,765 311,667
-------- --------
$315,311 $384,747
======== ========
</TABLE>
3. Properties
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ -------------
Owned Leased Owned Leased
-------- -------- -------- --------
(000's omitted)
<S> <C> <C> <C> <C>
Buildings and improvements $173,568 $168,311 $ --
Machinery and warehouse equipment 60,197 -- 79,953 --
Office and computer equipment 77,340 -- 62,868 --
Transportation equipment 21,076 11,454 22,757 14,556
-------- ------- -------- -------
332,181 11,454 333,889 14,556
Less accumulated depreciation and amortization 178,793 6,061 181,920 9,865
-------- ------- -------- -------
153,388 5,393 151,969 4,691
Land 12,295 -- 12,292 --
-------- ------- -------- -------
$165,683 $ 5,393 $164,261 $ 4,691
======== ======= ======== =======
</TABLE>
<PAGE> 16
Cotter & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. Long Term Debt and Borrowing Arrangements
Long term debt consisted of:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ -------------
(000's omitted)
<S> <C> <C>
Senior note at 8.60% . . . . . . . . . . . . . . . . . . $49,000 $50,000
Term loans:
5.97% . . . . . . . . . . . . . . . . . . . . . . . 3,000 --
Canadian prime (7.50% and 8.00%, respectively) . . . 3,665 3,565
Variable (7.60% and 7.20%, respectively) . . . . . 6,200 6,200
Redeemable (subordinated) term notes:
6.85% . . . . . . . . . . . . . . . . . . . . . . . 3,328 --
6.97% . . . . . . . . . . . . . . . . . . . . . . . 1,131 --
7.00% . . . . . . . . . . . . . . . . . . . . . . . 4,363 4,346
7.05% . . . . . . . . . . . . . . . . . . . . . . . 3,054 --
7.37% . . . . . . . . . . . . . . . . . . . . . . . 1,491 1,512
7.61% . . . . . . . . . . . . . . . . . . . . . . . 3,330 3,540
Industrial Revenue Bonds (5.28%): . . . . . . . . . . . 4,000 4,000
------- -------
82,562 73,163
Less amounts due within one year . . . . . . . . . . . 7,113 1,000
------- -------
$75,449 $72,163
======= =======
</TABLE>
Principal payments for the 8.60% senior note are due in incrementally
increasing amounts through maturity in 2007. Under the senior note agreement,
the Company is required to meet certain financial ratios and covenants.
Principal payments for the 5.97% term loan are due quarterly beginning in 1996
through maturity in 1999. Payments for the other 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, 1995 and 1994, that were held by
promissory (subordinated) note holders, who do not own the Company's Class A
Common Stock. The notes are due in 1996, 1997, 1998 and 1999.
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 1996, 1997, 1998, 1999,
2000 and thereafter are $7,113,000, $12,234,000, $9,211,000, $14,004,000,
$4,000,000 and $36,000,000, 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 $63,000,000 at December 30, 1995. The
Company pays commitment fees for these lines. The borrowings under these
agreements were $2,657,000 at December 30, 1995 and were at a rate of 7.50%.
All of these borrowings were for the Canadian subsidiary. At December 31, 1994,
the Company had a weighted average interest rate on short-term borrowings of
6.63% and included both U.S. and Canadian borrowings.
<PAGE> 17
Cotter & Company
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouse, office, computer and transportation
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 30, 1995:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
(000's omitted)
<S> <C> <C>
Fiscal years
1996 . . . . . . . . . . . . . . . . . . . $1,984 $6,832
1997 . . . . . . . . . . . . . . . . . . . 1,409 9,067
1998 . . . . . . . . . . . . . . . . . . . 1,135 7,102
1999 . . . . . . . . . . . . . . . . . . . 800 5,669
2000 . . . . . . . . . . . . . . . . . . . 305 5,134
Thereafter . . . . . . . . . . . . . . . . 306 47,599
------ -------
Net minimum lease payments . . . . . . . . . . 5,939 $81,403
=======
Less amount representing interest . . . . . . . 314
------
Present value of net minimum lease payments . . 5,625
Less amounts due within one year . . . . . . . 1,861
------
$3,764
======
</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.
<TABLE>
<CAPTION>
Rent expense under operating leases was as follows:
December 30, December 31, January 1,
1995 1994 1994
----------- ------------ ----------
(000's omitted)
<S> <C> <C> <C>
Minimum rent . . . . . . . . . . $ 9,553 $8,487 $8,174
Contingent rent . . . . . . . . 510 611 575
------- ------ ------
$10,063 $9,098 $8,749
======= ====== ======
</TABLE>
6. CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
----------- ------------
(000's omitted)
<S> <C> <C>
Promissory (subordinated) notes -
Due on December 31, 1995--7.50% . . . . . . . . . . . . . $ -- $ 20,783
Due on December 31, 1995--10.00% . . . . . . . . . . . . -- 35,355
Due on December 31, 1996--6.00% . . . . . . . . . . . . 23,588 24,888
Due on December 31, 1996--9.50% . . . . . . . . . . . . 27,029 28,436
Due on December 31, 1997--10.00% . . . . . . . . . . . . 16,660 17,579
Due on December 31, 1997--7.87% . . . . . . . . . . . . 15,616 16,793
Due on December 31, 1998--7.47% . . . . . . . . . . . . 16,461 --
Due on December 31, 1998--8.00% . . . . . . . . . . . . 27,048 28,512
Due on December 31, 1999--8.00% . . . . . . . . . . . . 25,470 27,030
Due on December 31, 1999--8.20% (issued in 1995) . . . . 25,327 27,909
Due on December 31, 2000--6.50% . . . . . . . . . . . . 23,996 25,628
Due on December 31, 2000--7.58% (to be issued) . . . . . 32,047 --
Instalment notes at interest rates of
6.50% to 10.00% with maturities through 1999 . . 5,753 4,010
-------- ---------
238,995 256,923
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C>
Less amounts due within one year.............. 52,660 57,824
-------- --------
$186,335 $199,099
======== ========
</TABLE>
Cotter & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1996,
1997, 1998, 1999 and 2000 are $52,660,000, $34,007,000, $44,772,000,
$51,514,000 and $56,042,000, respectively.
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.
8. INCOME TAXES
At December 30, 1995, the Company has alternative minimum tax credit
carryforwards of approximately $900,000 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 30,1995 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>
For the Years Ended
--------------------------------------
December 30, December 31, January 1,
1995 1994 1994
------------ ------------ ----------
(000's omitted)
<S> <C> <C> <C>
Current:
Federal........... $(363) $ 486 $ 343
State............. 379 462 22
Foreign........... 273 278 237
------ ------ -------
Total current..... 289 1,226 602
------ ------ -------
Deferred:
Federal........... (145) (147) 1,582
State............. (26) (26) 317
Foreign........... 58 110 81
------ ------ -------
Total deferred.... (113) ( 63) 1,980
------ ------ -------
$176 $1,163 $2,582
====== ====== =======
</TABLE>
Cotter & Company
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 1995, 1994 and 1993 is as follows:
<PAGE> 19
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
December 30, December 31, January 1,
1995 1994 1994
------------ ------------ ----------
(000's omitted)
<S> <C> <C> <C>
Tax at U.S. statutory rate...................... $20,725 $21,518 $20,862
Effects of:
Patronage dividend...................... (21,049) (21,147) (19,054)
State income taxes, net of federal
tax benefit........................... 229 283 220
Other, net.............................. 271 509 554
-------- -------- --------
$ 176 $ 1,163 $ 2,582
======== ======== ========
</TABLE>
9. CASH FLOW
The Company's noncash financing and investing activities in fiscal year 1995
include acquisition of transportation equipment by entering into capital leases
and the acquisition of property for resale. These transactions aggregate
$4,008,000. 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 30, December 31, January 1,
1995 1994 1994
------------ ------------ ----------
(000's omitted)
<S> <C> <C> <C>
Patronage dividend payable in cash............. $18,315 $18,383 $ 16,614
Promissory (subordinated) notes................ 23,536 23,213 20,852
Class B nonvoting common stock................. (2,592) 5,900 2,086
Instalment notes............................... 5,972 3,058 2,939
Member indebtedness............................ 14,909 9,867 11,949
-------- -------- --------
$60,140 $60,421 $54,440
======== ======== ========
Note renewals.................................. $23,974 $26,191 $27,187
======== ======== ========
</TABLE>
Cash paid for interest during fiscal years 1995, 1994 and 1993 totaled
$29,624,000, $30,583,000 and $32,056,000, respectively. Cash paid for income
taxes during fiscal years 1995, 1994 and 1993 totaled $1,012,000, $1,709,000
and $1,387,000, respectively.
Cotter & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS
The components of net pension cost for the Company administered pension plans
consisted of:
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
December 30, December 31, January 1,
1995 1994 1994
------------ ------------ ----------
(000's omitted)
<S> <C> <C> <C>
Income:
Actual return (loss) on plan assets....... $25,564 ($1,543) $7,486
Amortization of excess plan assets........ 914 920 920
-------- -------- --------
26,478 (623) 8,406
-------- -------- --------
Expenses:
Service cost-benefits earned during year.. 4,152 4,765 4,556
Interest on projected benefit obligation.. 7,242 6,736 6,266
Deferral of excess (deficiency) of actual
over estimated return on plan assets.... 18,021 (8,815) 1,042
-------- -------- --------
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
29,415 2,686 11,864
-------- -------- --------
Net pension cost.......................... $ 2,937 $ 3,309 $ 3,458
======== ======== ========
</TABLE>
The discount rate and the rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligation
were 7.25% and 4.50%, respectively, in 1995, 8.50% and 4.50%, respectively, in
fiscal year 1994 and 7.50% and 4.50%, respectively, in fiscal year 1993. These
changes in actuarial assumptions did not have a material impact on net pension
cost for fiscal year 1995 and the Company does not anticipate that these
changes will have a material impact on net pension cost in future years. In
fiscal years 1995, 1994 and 1993, the expected long-term rate of return on
assets was 9.50%. During 1995, the Company amended its pension plan. This
amendment had no material impact on the projected benefit obligation.
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.
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
(000's omitted)
<S> <C> <C>
Assets:
Total plan assets at fair value........................................ $104,396 $80,046
======== =======
Obligations:
Accumulated benefit obligations -
Vested......................................................... $ 77,435 $53,055
Non-vested..................................................... 10,830 7,683
Effect of projected compensation increases............................. 21,730 19,924
-------- -------
Total projected benefit obligations.................................... 109,995 80,662
-------- -------
Net excess assets (liabilities):
Unrecognized -
Unamortized excess assets at original date..................... 7,673 8,643
Net actuarial gain (loss)...................................... (3,793) 565
Prior service costs............................................ (4,017) (5,313)
Recognized accrued pension cost ....................................... (5,462) (4,511)
-------- -------
Total net excess assets (liabilities).................................. (5,599) (616)
-------- -------
Total obligations and net excess assets (liabilities).......................... $104,396 $80,046
======== =======
</TABLE>
The Company also participates in union-sponsored defined contribution plans.
Pension costs related to these plans were $720,000, $757,000, and $702,000 for
fiscal years 1995, 1994 and 1993, respectively.
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
To the Members and the Board of Directors
Cotter & Company
Cotter & Company
We have audited the accompanying consolidated balance sheets of Cotter &
Company as of December 30, 1995 and December 31, 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 30,
1995. 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 30, 1995 and December 31, 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 30, 1995 in conformity with generally accepted accounting
principles.
(ERNST & YOUNG STAMP HERE)
Chicago, Illinois
February 12, 1996
Cotter & Company
Selected Financial Data
<TABLE>
<CAPTION>
For the Fiscal Years
----------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Revenues $2,437,002 $2,574,445 $2,420,727 $2,356,468 $2,139,887
Gross margins $ 202,068 $ 223,331 $ 217,921 $ 216,608 $ 197,745
Net margins $ 59,037 $ 60,318 $ 57,023 $ 60,629 $ 59,425
Total assets $ 819,576 $ 868,785 $ 803,528 $ 833,372 $ 763,109
Member payout:
Patronage dividend $ 60,140 $ 60,421 $ 54,440 $ 60,901 $ 60,339
Interest paid to Members 20,627 22,894 24,458 25,716 26,006
---------- ---------- ---------- ---------- ----------
$ 80,767 $ 83,315 $ 78,898 $ 86,617 $ 86,345
---------- ---------- ---------- ---------- ----------
Member cash payout:
Patronage dividend in cash $ 18,315 $ 18,383 $ 16,614 $ 18,570 $ 18,423
Interest paid to Members 20,627 22,894 24,458 25,716 26,006
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C> <C>
$ 38,942 $ 41,277 $ 41,072 $ 44,286 $ 44,429
--------- --------- --------- --------- ---------
Member investment:
Promissory (subordinated) and
instalment notes $186,335 $199,099 $217,996 $235,695 $235,289
Redeemable Class A
common stock 5,294 6,370 6,633 6,857 7,077
Redeemable Class B
common stock 113,062 116,663 110,773 108,982 104,151
--------- --------- --------- --------- ---------
$304,691 $322,132 $335,402 $351,534 $346,517
========= ========= ========= ========= =========
</TABLE>
INSIDE BACK COVER:
Our Vision: To be the best company our Members can do business with by
consistently exceeding their expectations. Our Mission: To maximize our
participating Members' profitability and growth by aggressively providing
cost-effective, innovative products, programs and services.
BACK COVER:
(Cotter & Company logo) 8600 West Bryn Mawr Avenue, Chicago, Illinois
60631-3505