COTTER & CO, S-2/A, 1996-03-21

COTTER & CO
S-2/A, 1996-03-21
HARDWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1996

REGISTRATION NO. 33-64669

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------

POST-EFFECTIVE AMENDMENT NO. 1

FORM S-2

REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------

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

<TABLE>
<S> <C>
Delaware 36-2099896
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>

8600 West Bryn Mawr Avenue

Chicago, Illinois 60631-3505

(312) 695-5000

(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

Kerry J. Kirby, Vice President and Chief Financial Officer
Cotter & Company

8600 West Bryn Mawr Avenue

Chicago, Illinois 60631-3505

(312) 695-5000

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

<TABLE>
<S> <C>
Daniel T. Burns, Vice President and Secretary William K. Blomquist, Esq.
Cotter & Company Arnstein & Lehr
8600 West Bryn Mawr Avenue Suite 1200
Chicago, Illinois 60631-3505 120 South Riverside Plaza
(312) 695-5000 Chicago, Illinois 60606
</TABLE>

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

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Post-Effective Amendment

to the
Registration Statement.

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

If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
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- --------------------------------------------------------------------------------
<PAGE> 2

COTTER & COMPANY

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

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
CAPTION IN
ITEM IN FORM S-2 PROSPECTUS
------------------------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Available Information; Reports to
Security Holders; Documents
Incorporated by Reference
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Summary; The Company; Certain Terms
of the Notes
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Outside Front Cover Page of
Prospectus and Plan of Distribution
6. Dilution......................................... Not Applicable
7. Selling Security Holders......................... Not Applicable
8. Plan of Distribution............................. Plan of Distribution
9. Description of Securities to be Registered....... General; Certain Terms of the Notes
10. Interests of Named Experts and Counsel........... Not Applicable
11. Information with Respect to the Registrant....... Summary; The Company; Consolidated
Ratio of Earnings to Fixed Charges
of The Company; Dividends; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Distribution
of Patronage Dividends; Certain
Terms of the Notes; Index to
Consolidated Financial Statements
12. Incorporation of Certain Information by
Reference........................................ Documents Incorporated By Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3

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

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MARCH 21, 1996

PROSPECTUS

COTTER & COMPANY
$30,000,000
VARIABLE DENOMINATION FIXED RATE REDEEMABLE TERM NOTES

These Variable Denomination Fixed Rate Redeemable Term Notes (the "Notes")
are being issued and offered by Cotter & Company (the "Company") pursuant to the
Cotter & Company Investment Program (the "Program"). This Offering (the "Offer")
is being made in reliance on Rule 415 under the Securities Act of 1933.

The Notes are offered exclusively to current Members of Cotter & Company
holding Class A common stock and their immediate family members, current holders
of certain Cotter & Company variable denomination fixed rate redeemable term
notes, and current employees of Cotter & Company and its subsidiaries
(collectively, the "Offerees"). The Program is designed to provide Offerees with
a convenient means of investing funds directly with the Company.

The Notes will be offered through a mailing to all Offerees (See "How to
Invest"). The Notes will have various maturity dates and pay fixed rates of
interest, as stated, for each maturity (See "General"). The Notes are restricted
as to transferability (See "How to Redeem") and are subject to call by the
Company (See "Certain Terms of the Notes"). Investment in a Note will be
represented by a program account ("Account") established for each Offeree who
purchases the Notes (the "Investor") by the agent bank (the "Agent Bank")
appointed by the Company. The Notes will not be represented by a certificate or
any other instrument evidencing the Company's indebtedness (See "Trust
Indenture"). The Company reserves the right to modify, withdraw, or cancel this
Offer at any time.

There is no existing market for the Notes offered hereunder and there is no
expectation that any market will develop.

For further information regarding the Cotter & Company Investment Program,
please call toll-free number 1-800-507-9000.

Please read this Prospectus carefully and retain for future reference.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------

<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Per Unit(1)........................ $1,000 See (2) Below $1,000(3)
Total.............................. $30,000,000 See (2) Below $30,000,000(3)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>

(1) The Notes will be offered only in units of $1,000 and no Investor may
purchase less than one such unit.

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

(3) There is no firm commitment for the sale of the securities offered
hereunder; they will be sold from time to time by the Company. However,
assuming the sale of all securities offered hereunder, and before deduction
of approximately $71,000 for estimated expenses in connection with this
offering, the total proceeds will be as shown above.

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

THE DATE OF THIS PROSPECTUS IS APRIL , 1996.

<PAGE> 4

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission, Washington, D.C. 20549 at prescribed rates.

REPORTS TO SECURITY HOLDERS

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

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Annual Report on Form 10-K for the fiscal year ended December
30, 1995 filed pursuant to Section 15(d) of the Exchange Act are incorporated
herein by reference. All documents filed by the Company pursuant to Section
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offer shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing such documents.
The Company will provide without charge to each person to whom a Prospectus is
delivered, upon written or oral request of such person, a copy of any and all of
the documents incorporated by reference in the Prospectus (other than exhibits
to such documents unless such exhibits are specifically incorporated by
reference into the documents that the Prospectus incorporates). Requests for
such copies should be directed to Kerry J. Kirby, Vice President and Chief
Financial Officer, Cotter & Company, located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois 60631-3505, telephone number 312-695-5000. The Company
currently estimates that the Offer will terminate on or about one year from
offer date.

2
<PAGE> 5

SUMMARY

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

Cotter & Company (the "Company"), is located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois, 60631-3505, telephone number (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.

The Notes being offered hereby are offered exclusively to current Members
of the Company holding Class A common stock and their immediate family members,
current holders of certain Cotter & Company variable denomination fixed rate
redeemable term notes and current employees of the Company and its subsidiaries.
The Notes are offered only in units of $1,000. Ownership of the Notes can be
issued in one of the following four types of accounts: Single Tenancy, Joint
Tenancy with Right of Survivorship, Tenancy by Custodian (under the Uniform
Gifts to Minors Act) and Living Trust. Notes are issued quarterly in two-year
terms; in three-year terms; and in four-year terms. Sales of Notes are made for
cash.

Investors will have the option to elect to receive the interest payments or
to have the interest payments added to the Note on a semi-annual basis.

The Notes are not equivalent to a deposit or other bank account and are not
subject to the protection of the Federal Deposit Insurance Corporation or any
other insurance. The Program is not subject to the requirements of the
Investment Company Act of 1940 (including diversification of investments) or the
Employee Retirement Income Security Act of 1974. All investments in the Notes
are investments in securities of the Company and are not an obligation of the
Agent Bank or any other company.

The Notes being offered hereby are not transferable and may not be pledged
as collateral for any debt of the Investor. Additionally, the Company has the
option to redeem the Notes in whole or in part at the principal amount thereof
plus accrued and unpaid interest to the redemption date.

The Notes will be subordinated in right of payment to senior notes,
indebtedness to banking institutions, trade creditors and other indebtedness of
the Company.

There is no existing market for the Notes offered hereunder and there is no
expectation that any market will develop.

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

3
<PAGE> 6

THE COMPANY

The Company was organized as a Delaware corporation in 1953. Upon its
organization, it succeeded to the business of Cotter & Company, an Illinois
corporation organized in 1948. The Company's principal executive offices are
located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone
number 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.

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).

CONSOLIDATED RATIO OF EARNINGS TO
FIXED CHARGES OF THE COMPANY

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
- ----------------------------------------
1995 1994 1993 1992 1991
- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
2.78 2.84 2.71 2.73 2.96
</TABLE>

The ratio of earnings to fixed charges has been computed by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed charges
consist of interest expense and the portion of rental expense deemed to
represent interest expense.

4
<PAGE> 7

USE OF PROCEEDS

The proceeds from the sale of the Notes will be made available for general
working capital purposes, including the purchase of merchandise for resale to
Members.

PLAN OF DISTRIBUTION

The availability of the Program will be communicated through a mailing to
all Offerees. An Offeree, upon request of an application package will receive
the Prospectus, the Program Description, IRS W-9 Certification Form and
application form to be returned to the Company. The application will include the
Investor's registration form for Two-Year Notes, Three-Year Notes, or Four-Year
Notes. By signing and returning the application form and IRS W-9 Certification
Form, together with a check for the invested amount to the Company's designated
lockbox bank account, an Investor shall consent to be bound by the terms of the
Program, as described in the Program Description, as amended from time to time
by the Company.

5
<PAGE> 8

GENERAL

The Program is designed to provide Investors with a convenient means of
investing funds directly with the Company. The Notes are available in units of
$1,000.

NOTE TERMS

The Notes will be issued quarterly and will be offered in two-year terms;
in three-year terms; and in four-year terms.

INTEREST RATE

The Notes will bear interest at a rate determined by the Company. The fixed
interest rate on the Notes will be set for each quarter by the Company as a
spread of 1% over the comparable Treasury Notes rate. Information concerning the
interest rate on the Notes will be available by calling toll free number
1-800-507-9000.

Investors will have the option to elect to receive interest payments or to
have the interest payments added to the Note on a semi-annual basis. Interest is
calculated on a 365 day year and will be paid on a semi-annual basis. Interest
payments and principal at maturity will be paid by check and mailed on the next
business day.

The Investor can change the interest payment option between payment or
reinvestment by notifying the Agent Bank in writing.

TYPES OF ACCOUNTS

Investors may hold ownership of the Notes in one of the following four
types of accounts: Single Tenancy, Joint Tenancy with Right of Survivorship,
Tenancy by Custodian (under the Uniform Gifts to Minors Act) and Living Trust.
The Notes are not transferable and may not be pledged as collateral for any debt
of the Investor.

If an Investor's legal name changes, Form W-9 and a signature guarantee
will be needed to change the name of the Investor on an account.

The Notes cannot be held by a retirement savings plan described in Section
4975(e)(1) of the Internal Revenue Code of 1986, as amended.

ACCOUNT INFORMATION

For current Account Information, Investors may call toll-free number
1-800-507-9000.

HOW TO INVEST

The availability of the Program will be communicated through a mailing to
all Offerees. An Offeree, upon request of an application package will receive
the Prospectus, the Program Description, IRS W-9 Certification Form and an
application form to be returned to the Company. The application will include the
Investor's registration form for Two-Year Notes, Three-Year Notes, or Four-Year
Notes. By signing and returning the application form and IRS W-9 Certification
Form, together with a check for the invested amount to the Company's designated
lockbox bank account, an Investor shall consent to be bound by the terms of the
Program, as described in the Program Description, as amended from time to time
by the Company. THIS COMPLETED APPLICATION, THE IRS W-9 CERTIFICATION FORM AND
THE CHECK FOR

6
<PAGE> 9

THE INVESTED AMOUNT MUST BE RECEIVED BY THE COMPANY AT THE COMPANY'S DESIGNATED
LOCKBOX BANK ACCOUNT ON OR BEFORE THE LAST BUSINESS DAY BEFORE THE START OF EACH
CALENDAR YEAR QUARTER (MARCH 31ST FOR APRIL 1ST; JUNE 30TH FOR JULY 1ST;
SEPTEMBER 30TH FOR OCTOBER 1ST AND DECEMBER 31ST FOR JANUARY 1ST).

HOW TO REDEEM

The Notes may be redeemed prior to maturity subject to a penalty (the
"Penalty") consisting of the loss of 120 days of interest as calculated on the
most recent quarterly stated principal balance. This Penalty may result in a
reduction of the Investor's principal balance.

Investors may not transfer ownership of the Notes. In cases of probate or
court decree, the Notes will be redeemed and will be subject to Penalty. The
Investors will not be able to break the Notes into smaller denominations at any
time during the life of the Notes.

CERTAIN TERMS OF THE NOTES

TRUST INDENTURE

The Notes will be issued under an indenture (the "Indenture"), between the
Company and First Trust of Illinois (formerly Bank of America Illinois) (the
"Trustee"). The statements under this heading are subject to the detailed
provisions of the Indenture, a copy of which will be provided without charge to
each person to whom a Prospectus is delivered, upon written or oral request.
Such request should be directed to Kerry J. Kirby, Vice President and Chief
Financial Officer, Cotter & Company, located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois 60631-3505, telephone number 312-695-5000.

NOTE SUBORDINATION/RISK FACTORS

The Notes will be subordinated in right of payment to senior notes,
indebtedness to banking institutions, trade creditors and other indebtedness of
the Company.

OPTIONAL REDEMPTION BY THE COMPANY

The Notes will be redeemable at the Company's option at any time, in whole
or in part, at 100% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date. Any partial redemption of the Notes will be
effected by lot or pro rata or by any other method that is deemed fair and
appropriate by the Trustee.

Any Notes redeemed at the Company's option, plus accrued and unpaid
interest thereon to the date of redemption, will be paid by check to the
Investor. Interest on all redeemed Notes shall cease to accrue on and after the
effective date of redemption.

7
<PAGE> 10

DIVIDENDS

Other than the payment of patronage dividends, including the redemption of
some nonqualified written notices of allocation, the Company has not paid
dividends on its Class A common stock or Class B common stock. The Board of
Directors does not plan to pay dividends on either class of stock. Dividends
(other than patronage dividends) upon the Class A common stock and Class B
common stock, subject to the provisions of the Company's Certificate of
Incorporation, may be declared out of gross margins of the Company, other than
gross margins from operations with or for Members and other patronage source
income, after deduction for expenses, reserves and provisions authorized by the
Board of Directors. Dividends may be paid in cash, in property, or in shares of
the common stock, subject to the provisions of the Certificate of Incorporation.
See "Distribution of Patronage Dividends".

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
instalment 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.

8
<PAGE> 11

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.

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.

9
<PAGE> 12

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.

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.

10
<PAGE> 13

BUSINESS

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'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.

11
<PAGE> 14

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.

12
<PAGE> 15

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.

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

13
<PAGE> 16

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.

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.

In order to avoid the administrative inconvenience and expense of issuing
separate certificates representing shares of Class B common stock and separate
promissory (subordinated) notes to each Member, the

14
<PAGE> 17

Company deposits a bulk certificate and a bulk promissory (subordinated) notes
with Harris Trust and Savings Bank, Chicago, Illinois for safekeeping for and on
behalf of its Members and sends a written notice to each Member of these
deposits and the allocation thereof to such Member. Each Member is, and is shown
on the books of the Company as, the registered owner of his allocation of Class
B common stock and promissory (subordinated) notes. Upon written request to the
Company, a Member can obtain a certificate for all or any portion of his Class B
common stock and a Note or Notes for all or any portion of the amount allocated
to his account.

MANAGEMENT

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

<TABLE>
<CAPTION>
NAME (AGE) OFFICE
-------------------------------------------------- -------------------------------------
<S> <C>
Karen M. Agnew (53)............................... Vice President and Assistant
Secretary
Joe W. Blagg (46)................................. Director
Daniel T. Burns (45).............................. Vice President and Secretary
Danny R. Burton (49).............................. Vice President
David W. Christmas (47)........................... Vice President
William M. Claypool, III (73)..................... Director
Samuel D. Costa, Jr. (54)......................... Director
Daniel A. Cotter (61)............................. President, Chief Executive Officer
and Director
Leonard C. Farr (74).............................. Director
William M. Halterman (48)......................... Director
Robert F. Johnson (52)............................ Vice President
Jerrald T. Kabelin (58)........................... Director
Kerry J. Kirby (49)............................... Vice President, Chief Financial
Officer and Treasurer
Charles L. Kremers (45)........................... Vice President
Robert J. Ladner (49)............................. Chairman of the Board and Director
John F. Lottes III (55)........................... Director
Lewis W. Moore (83)............................... Director
Kenneth M. Noble (38)............................. Director
Steven J. Porter (43)............................. Executive Vice President and Chief
Operating Officer
Richard L. Schaefer (66).......................... Director
John P. Semkus (49)............................... Vice President
George V. Sheffer (43)............................ Director
Dennis A. Swanson (56)............................ Director
John M. West, Jr. (43)............................ Director
</TABLE>

15
<PAGE> 18

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

DESCRIPTION OF REDEEMABLE TERM NOTES

These Variable Denomination Fixed Rate Redeemable Term Notes are being
issued and offered by Cotter & Company pursuant to the Cotter & Company
Investment Program. The Notes will be made available to current Members of
Cotter & Company holding Class A common stock and their immediate family
members, current holders of certain Cotter & Company variable denomination fixed
rate redeemable term notes, and to current employees of Cotter & Company and its
subsidiaries. The Program is designed to provide investors with a means of
investing funds directly with the Company.

AGENT BANK AND ADMINISTRATION

The Company has engaged the Northern Trust Bank of Chicago as the Agent
Bank to service the Program. The Agent Bank will send the following to the
Investor:

-- Investment confirmation,

-- Quarterly statements listing all notes held and all transaction
information on a year-to-date basis,

-- Advance maturity notices with renewal forms,

-- Form 1099INT and

-- Form 1099B (if applicable).

Additionally, the Agent Bank will provide an automated voice response
system, at toll-free number 1-800-507-9000, to allow Investors to call and
obtain aggregate account and individual Note information. The Agent Bank will
also process early redemption requests, respond to inquiries and provide to
Investors information on Notes and accounts. Additional or other inquiries from
Investors to the Agent Bank will be forwarded to the Company.

TAXES

The Program is not qualified under Section 401(a) of the Internal Revenue
Code. Accordingly, all interest credited to the Notes or paid in any taxable
year is reportable by the Investor as taxable income for Federal income tax
purposes. No part of the taxable interest is excludable from taxable income.

The December statement to each Investor from the Agent Bank each year will
state the full amount reportable as taxable income. The Agent Bank also will
file tax information returns as required by law. State and local income taxes
and tax reporting also may be applicable. Investors are individually responsible
for complying with applicable federal, state, and local tax laws and should
consult their individual tax advisors with respect to tax consequences which may
be applicable to their particular situation.

LEGAL MATTERS

The legality of the Notes will be passed upon for the Company by Messrs.
Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606.

16
<PAGE> 19

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED
BY REPORT OF INDEPENDENT AUDITORS

<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Auditors...................................................... 19
Consolidated Balance Sheet at December 30, 1995 and December 31, 1994............... 20-21
Consolidated Statement of Operations for each of the three years in the period ended
December 30, 1995................................................................. 22
Consolidated Statement of Cash Flows for each of the three years in the period ended
December 30, 1995................................................................. 23
Consolidated Statement of Capital Stock and Retained Earnings for each of the three
years in the period ended December 30, 1995....................................... 24
Notes to Consolidated Financial Statements.......................................... 25-33
</TABLE>

17
<PAGE> 20

-------------------------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
-------------------------------------

18
<PAGE> 21

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

19
<PAGE> 22

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.

20
<PAGE> 23

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.

21
<PAGE> 24

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.

22
<PAGE> 25

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.

23
<PAGE> 26

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.

24
<PAGE> 27

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;

25
<PAGE> 28

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

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>

26
<PAGE> 29

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.

27
<PAGE> 30

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

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:

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.

28
<PAGE> 31

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Rent expense under operating leases was as follows:

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

29
<PAGE> 32

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>

30
<PAGE> 33

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>

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.

31
<PAGE> 34

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 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

32
<PAGE> 35

COTTER & COMPANY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 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.

33
<PAGE> 36

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

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................... 2
Reports to Security Holders............... 2
Documents Incorporated by Reference....... 2
Summary................................... 3
The Company............................... 4
Consolidated Ratio of Earnings to Fixed
Charges of the Company.................. 4
Use of Proceeds........................... 5
Plan of Distribution...................... 5
General................................... 6
Note Terms................................ 6
Interest Rate............................. 6
Types of Accounts......................... 6
Account Information....................... 6
How to Invest............................. 6
How to Redeem............................. 7
Certain Terms of the Notes................ 7
Trust Indenture........................... 7
Note Subordination/Risk Factors........... 7
Optional Redemption by the Company........ 7
Dividends................................. 8
Selected Financial Data................... 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 9
Business.................................. 11
Distribution of Patronage Dividends....... 13
Management................................ 15
Description of Redeemable Term Notes...... 16
Agent Bank and Administration............. 16
Taxes..................................... 16
Legal Matters............................. 16
Index to Consolidated Financial Statements
Covered by Report of Independent
Auditors................................ 17
</TABLE>

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

$30,000,000

COTTER & COMPANY

VARIABLE DENOMINATION
FIXED RATE
REDEEMABLE TERM NOTES

FOR INFORMATION CONCERNING
THE COTTER & COMPANY
INVESTMENT PROGRAM,

WRITE TO:
THE COTTER & COMPANY INVESTMENT PROGRAM
P.O. BOX 75933
CHICAGO, ILLINOIS 60675-5933

OR CALL:

TOLL FREE NUMBER 1-800-507-9000

PROSPECTUS
------------------------

DATED APRIL , 1996

---------------------------------------------------------
---------------------------------------------------------
<PAGE> 37

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the actual or estimated expenses in connection with the
issuance and distribution of the Variable Denomination Fixed Rate Redeemable
Term Notes being registered:

<TABLE>
<S> <C>
Registration Fee.................................................... $ --
Printing of Registration Statement and Prospectus................... 16,000
Accounting Fees and Expenses........................................ 10,000
Legal Fees.......................................................... 10,000
Fees and Expenses for Qualifying Securities under "Blue Sky" Laws of
Various States.................................................... 35,000
-------
Total............................................................... $71,000
=======
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

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

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

Any indemnification, unless ordered by a court, shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the party to be

S-1
<PAGE> 38

indemnified has met the applicable standard of conduct. Such determination shall
be made by the Board of Directors by a majority vote of a quorum, consisting of
directors who were not parties of such action, suit or proceeding, or if such a
quorum is not obtainable, or even if obtainable, if a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or by
the stockholders.

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

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

ITEM 16. EXHIBITS.

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

S-2
<PAGE> 39

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----- -------------------------------------------------------------------------------
<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 No. 5 to Registration Statement in
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 No. 5 to Registration Statement on
Form S-2 (No. 33-39477).
12 Statement of Computation of Consolidated Ratio of earnings to fixed charges of
the Company for the Fiscal Years Ended 1995, 1994, 1993, 1992 and 1991.
23-A Consent of Arnstein & Lehr is included in Exhibit 5 to this Registration
Statement.
23-B Consent of Independent Auditors (included on page S-6).
99 Current Application Package for Cotter & Company Investment Program.
Incorporated by reference--Exhibit 99 to Registration Statement on Form S-2
(No. 33-64669).
</TABLE>

S-3
<PAGE> 40

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

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

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

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

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

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

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

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

S-4
<PAGE> 41

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 19TH DAY OF
MARCH 1996.

COTTER & COMPANY

By: /s/ DANIEL A. COTTER

------------------------------------
Daniel A. Cotter
President, Chief Executive Officer
and Director

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
<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>

S-5
<PAGE> 42

CONSENT OF INDEPENDENT AUDITORS

We consent to the use of our report dated February 12, 1996, in the
Post-Effective Amendment No. 1 to the Registration Statement (Form S-2 No.
33-64669) and related Prospectus of Cotter & Company for the registration of
$30,000,000 of Variable Denomination Fixed Rate Redeemable Term Notes. We also
consent to the incorporation by reference therein of our report with respect to
the consolidated financial statements of Cotter & Company for each of the three
years in the period ended December 30, 1995 included in the Annual Report (Form
10-K) of Cotter & Company for the year ended December 30, 1995, filed with the
Securities and Exchange Commission.

ERNST & YOUNG LLP

Chicago, Illinois

March 19, 1996

S-6
<PAGE> 43

INDEX TO EXHIBITS FILED

TO POST-EFFECTIVE AMENDMENT NO. 1

TO REGISTRATION STATEMENT ON
FORM S-2 OF COTTER & COMPANY

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ----------------------------------------------------------------------------------
<S> <C>
5 Opinion of Messrs. Arnstein & Lehr.
12 Statement of Computation of Consolidated Ratio of earnings to fixed charges of the
Company for the Fiscal Years Ended 1995, 1994, 1993, 1992 and 1991.
23-B Consent of Independent Auditors (included on page S-6).
</TABLE>

Exhibits incorporated by reference are listed on Pages S-2 and S-3 of
Post-Effective Amendment No. 1 to Registration Statement on Form S-2 of Cotter &
Company.

S-7

<PAGE> 1
EXHIBIT 5

[ARNSTEIN & LEHR LETTERHEAD]

March 19, 1996

Cotter & Company
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505

Re: Post Effective Amendment No. 1 to Registration
Statement on Form S-2 (No. 33-64669)

Gentlemen:

We refer to the Post Effective Amendment No. 1 to Registration Statement
on Form S-2 (No. 33-64669) being filed by Cotter & Company, a Delaware
corporation (hereinafter referred to as the "Company"), with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, pertaining to
the registration of $30,000,000 principal amount of the Company's Variable
Denomination Fixed Rate Redeemable Term Notes (the "Notes").

The Notes will be issued and sold directly by the Company in the minimum
amount of $1,000 and integral multiples thereof for cash. Notes will be sold
only to current members of the Company holding Class A Common Stock and their
immediate family members, current holders of certain variable denomination
fixed rate redeemable term notes of the Company, and current employees of the
Company and its subsidiaries.

Based upon our examination, we are of the opinion that:

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

2. The Company has an authorized capital consisting of 100,000 shares
of Class A Common Stock, $100 par value and 2,000,000 shares of
Class B Common Stock, $100 par value. As of February 24, 1996,
there were 52,220 Class A Common shares issued and outstanding and
1,111,143 Class B Common shares issued and outstanding. All of said
shares were legally issued, fully paid and non-assessable as of
said date.

3. The proposed offering of $30,000,000 principal amount of the Notes
has been duly authorized and when sold as contemplated the Notes
will be duly issued, valid and binding obligations of the Company.
<PAGE> 2
Cotter & Company
March 19, 1996
Page 2

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

Sincerely,

Amstein & Lehr

<PAGE> 1
EXHIBIT 12

COTTER & COMPANY

SCHEDULE OF COMPUTATION FOR FIXED CHARGES RATIO TO EARNINGS

FOR THE FISCAL YEARS ENDED 1995, 1994, 1993, 1992 AND 1991

(000'S OMITTED)

<TABLE>
<CAPTION>
YEAR END
-------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET EARNINGS AFTER TAX $59,037 $60,318 $57,023 $60,629 $59,425

ADD: TAX PROVISION 176 1,163 2,582 389 153
------- ------- ------- ------- -------
PRETAX INCOME 59,213 61,481 59,605 61,018 59,578
------- ------- ------- ------- -------
ADD: FIXED CHARGES

INTEREST PAID TO MEMBERS 20,627 22,894 24,458 25,716 26,006
OTHER INTEREST PAID 9,298 7,493 7,429 7,273 2,466
------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 29,925 30,387 31,887 32,989 28,472
------- ------- ------- ------- -------
RENTAL EXPENSES 10,063 9,098 8,749 6,850 5,583
% OF RENTAL EXPENSES 33.33% 33.33% 33.33% 33.33% 33.33%
------- ------- ------- ------- -------
APPLICABLE RENTAL EXPENSES 3,354 3,032 2,916 2,283 1,861
------- ------- ------- ------- -------
TOTAL FIXED CHARGES 33,279 33,419 34,803 35,272 30,333
------- ------- ------- ------- -------
PRETAX EARNINGS BEFORE
FIXED CHARGES $92,492 $94,900 $94,408 $96,290 $89,911
======= ======= ======= ======= =======
PRETAX EARNINGS
RATIO TO FIXED CHARGES 2.78 2.84 2.71 2.73 2.96
======= ======= ======= ======= =======
</TABLE>