<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-20910
COTTER & COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 36-2099896
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<CAPTION>
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
(773) 695-5000
(Registrant's telephone number, including area code)
not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes
of common stock, as of April 26, 1997.
<TABLE>
<S> <C>
Class A Common Stock, $100 Par Value. 48,100 Shares.
Class B Common Stock, $100 Par Value. 1,098,408 Shares.
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COTTER & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(000's Omitted)
<TABLE>
<CAPTION>
March 29, December 28,
1997 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,863 $ 1,662
Accounts and notes receivable 336,733 307,205
Inventories 390,358 347,554
Prepaid expenses 21,915 13,517
------- -------
Total current assets 750,869 669,938
Properties owned,
less accumulated depreciation 168,792 167,331
Properties under capital leases,
less accumulated amortization 3,270 3,680
Other assets 13,578 13,036
-------- --------
TOTAL ASSETS $936,509 $853,985
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 3
COTTER & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(000's Omitted)
<TABLE>
<CAPTION>
March 29, December 28,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable and accrued expenses $394,863 $338,440
Short-term borrowings 116,101 70,594
Current maturities of notes,
long-term debt and lease obligations 43,495 43,458
Patronage dividends payable in cash
(Estimated at March 29, 1997) 1,109 16,142
------- -------
Total current liabilities 555,568 468,634
Long-term debt and obligations under
capital leases 79,673 80,145
------- -------
Capitalization:
Estimated patronage dividends to be distributed
principally by the issuance of Class B nonvoting
common stock and if necessary, promissory
(subordinated) notes 939 --
Promissory (subordinated) and instalment notes 182,972 185,366
Class A common stock and partially
paid subscriptions (Authorized 100,000 shares;
issued and fully paid, 48,030 and 48,480 shares) 4,804 4,876
Class B nonvoting common stock and
paid-in capital (Authorized 2,000,000 shares;
issued and fully paid, 1,107,342 and 1,043,521
shares; issuable as partial payment of patronage
dividends, 84,194 shares as of December 28, 1996) 111,961 114,053
Retained earnings 1,481 1,751
------- -------
302,157 306,046
Foreign currency translation adjustment (889) (840)
------- -------
Total capitalization 301,268 305,206
-------- --------
TOTAL LIABILITIES AND CAPITALIZATION $936,509 $853,985
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 4
COTTER & COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(000's Omitted)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN
WEEKS ENDED
------------------------
March 29, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Revenues $561,696 $578,609
-------- --------
Cost and expenses:
Cost of revenues 518,179 533,025
Warehouse, general and
administrative 35,119 36,698
Interest paid to Members 4,297 4,658
Other interest expense 3,033 2,229
Other income, net (163) (259)
Income tax expense 160 175
------- -------
560,625 576,526
------- -------
Net margins $ 1,071 $ 2,083
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
COTTER & COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
(000's Omitted)
(UNAUDITED)
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net margins $ 1,071 $ 2,083
Adjustments to reconcile net margins to cash and
cash equivalents from operating activities:
Statement of operations components not affecting
cash and cash equivalents 6,307 6,273
Net change in working capital components (28,013) (53,194)
------- -------
Net cash and cash equivalents used for
operating activities (20,635) (44,838)
------- -------
Investing activities:
Additions to properties owned (6,571) (6,580)
Changes in other assets (318) (426)
------- -------
Net cash and cash equivalents used for
investing activities (6,889) (7,006)
------- -------
Financing activities:
Proceeds from short-term borrowings 45,507 51,627
Proceeds from long-term borrowings 1,088 --
Payment of annual patronage dividend (15,435) (17,659)
Payment of notes, long-term debt, lease
obligations and common stock (3,435) (3,112)
------- -------
Net cash and cash equivalents provided by
financing activities 27,725 30,856
------- -------
Net increase (decrease) in cash and cash equivalents 201 (20,988)
Cash and cash equivalents at beginning of the year 1,662 22,473
-------- --------
Cash and cash equivalents at end of the period $ 1,863 $ 1,485
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 6
COTTER & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The condensed consolidated balance sheet, statement of operations
and statement of cash flows at and for the period ended March 29,
1997 and the condensed consolidated statement of operations and
statement of cash flows for the period ended March 30, 1996 are
unaudited and, in the opinion of the management of Cotter & Company
(the "Company"), include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows for the
respective interim periods. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. This financial
information should be read in conjunction with the consolidated
financial statements for the year ended December 28, 1996 included
in the Company's Post-Effective Amendment No. 6 to Form S-2
Registration Statement (No. 33-39477) and in the Company's 1996
Annual Report on Form 10-K.
On April 1, 1997, the stockholders of the Company and the
shareholders of ServiStar Coast to Coast Corporation ("SCC") agreed
by a majority vote to merge the two companies effective July 1,
1997. SCC is a hardware wholesaler with annual revenues of
$1,700,000,000 and with a strong market presence in retail lumber
and building materials. Following completion of the merger, the
Company will be renamed TruServ Corporation.
NOTE 2 - ESTIMATED PATRONAGE DIVIDENDS
Patronage dividends are declared and paid by the Company after the
close of each fiscal year. The 1996 annual patronage dividend was
distributed through a payment of 30% of the total distribution in
cash, with the balance being paid through the issuance of the
Company's Class B nonvoting common stock and five-year promissory
(subordinated) notes. Such patronage dividends, consisting of
substantially all of the Company's patronage source income, have
been paid since 1949. Effective in 1997, the Board of Directors
changed the patronage dividend policy to increase the Class B
nonvoting common stock requirements after payment of at least 20%
in cash and any further distribution in cash versus promissory
notes. The estimated patronage dividend for the thirteen weeks
ended March 29, 1997 is $1,341,000 compared to $2,064,000 for the
corresponding period in 1996. Patronage dividends for the period
December 29, 1996 to June 28, 1997 will be paid in the third
quarter of 1997, in accordance with the new patronage dividend
policy noted above.
NOTE 3 - INVENTORIES
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<CAPTION>
Inventories consisted of: March 29, December 28,
1997 1996
---------- -----------
(UNAUDITED)
(000's Omitted)
<S> <C> <C>
Manufacturing inventories:
Raw materials $ 4,291 $ 2,797
Work-in-process and finished goods 30,333 24,558
------- -------
34,624 27,355
Merchandise inventories 355,734 320,199
-------- --------
$390,358 $347,554
======== ========
</TABLE>
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 30, 1996
RESULTS OF OPERATIONS:
Revenues decreased by $16,913,000 or 2.9% compared to the same
period last year. The decrease was due to seasonal merchandise
departments mostly affected by adverse weather. These decreases
were concentrated in the seasonal merchandise categories of Farm
and Garden and Sporting Goods and Toys. Comparable store sales
decreased 1.7%.
Gross margins decreased by $2,067,000 or 4.5% and, as a percentage
of revenues, declined from 7.9% to 7.7% for the same period last
year. The reduction resulted from decreased sales volume and a
change in sales mix. The lower margin "direct shipments sales" was
the only category to show an increase in the quarter.
Warehouse, general and administrative expenses decreased by
$1,579,000 or 4.3% and, as a percentage of revenues, remained
comparable with the same period last year. The decrease was
attributed to the Company's continued efforts to reduce operating
costs.
Interest paid to Members decreased by $361,000 or 7.8% due to a
lower principal balance and lower average interest rates. Other
interest expense increased $804,000 or 36.1% due to higher short-
term borrowings compared to the same period last year.
Net margins were $1,071,000 compared to $2,083,000 for the same
period last year.
THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED WITH THE YEAR ENDED
DECEMBER 28, 1996
LIQUIDITY AND CAPITAL RESOURCES:
The Company has a seasonal need for cash. During the first quarter
of the year, as seasonal inventories are purchased for resale or
manufacture and shipment, cash and cash equivalents are used for
operating activities. In subsequent quarterly periods, the Company
anticipates that cash and cash equivalents will be provided by
operating activities and financing activities, if necessary.
During the first quarter of 1997, inventories increased by
$42,804,000 to support anticipated future orders of seasonal
merchandise. Accounts and notes receivable increased by
$29,528,000 due to the seasonal payment terms extended to the
Company's Members. Short-term borrowings increased by $45,507,000
and accounts payable and accrued expenses increased by $56,423,000
in support of the increased inventories and favorable seasonal
terms obtained from vendors which were passed on to the Company's
Members.
At March 29, 1997, net working capital decreased to $195,301,000
from $201,304,000 at December 28, 1996. The current ratio
decreased to 1.35 at March 29, 1997 compared to 1.43 at December
28, 1996.
In March of 1996 the Company established a $125,000,000 five-year
revolving credit facility with a group of banks. In addition, the
Company has a $50,000,000 private shelf agreement and various short-
term lines of credit available under informal agreements with
lending banks, cancelable by either party under specific
circumstances. Borrowing under the short-term credit facility were
$116,101,000 at March 29, 1997.
The Company's capital is primarily derived from Class A common
stock and retained earnings, together with promissory
(subordinated) notes and nonvoting Class B common stock issued in
connection with the Company's annual patronage dividend. The
Company believes the funds derived from these capital resources, as
well as operations and the credit facilities noted above, will be
sufficient to satisfy capital needs.
<PAGE> 8
Total capital expenditures, including those made under capital
leases, were $6,571,000 for the thirteen weeks ended March 29, 1997
compared to $6,580,000 during the comparable period in 1996. These
capital expenditures relate to additional equipment and
technological improvements at the regional distribution centers and
at the National Headquarters. The Company is in the process of
assessing and renegotiating its long-term and short-term capital
needs in connection with the Merger which will be consummated
July 1, 1997.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on April 1,
1997, the Stockholders approved the Agreement and Plan of Merger
dated as of December 9, 1996, providing for the merger of ServiStar
Coast to Coast Corporation with and into Cotter & Company,
thereafter known as TruServ Corporation. The Agreement and Plan of
Merger addressed, among other things, the following items:
(a) Additional capital requirements;
(b) New form of Retail Member Agreement;
(c) Revised By-Laws and
(d) Restatement of Certificate of Incorporation, including without
limitation:
1) Authorizing an increase in the maximum outstanding Class A
Common Stock to 750,000 shares and Class B Common Stock to
4,000,000 shares;
2) Elimination of cumulative voting;
3) Elimination of required uniform ownership of Class A Common
Stock and
4) Changing the corporate name.
The approval of the new form of Retail Member Agreement
automatically superseded all prior Cotter & Company Retail Member
Agreements.
The number of affirmative votes cast for the above items were
37,520, the number of negative votes cast were 2,100 and the number
of abstentions were 540.
In addition, the Stockholders of Class B common stock voted to
increase the number of authorized shares of Class B Common Stock to
4,000,000 shares. The number of affirmative votes were 927,296,
the number of negative votes cast were 47,881, and the number of
abstentions were 6,904.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4. Instruments defining the rights of security holders,
including indentures; incorporated herein by reference those
items included as Exhibits 4A through 4G, inclusive, in the
Company's Post-Effective Amendment No. 6 to Form S-2
Registration Statement (No. 33-39477) filed with the Securities
and Exchange Commission on April 3, 1997.
(b) Reports on Form 8-K
1) Current Report on Form 8-K, dated as of March 5, 1997.
2) Form 8K/A Amendment to Current Report on Form 8-K, dated as of
March 26, 1997.
<PAGE> 9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
COTTER & COMPANY
Date: May 12, 1997 By /s/ KERRY J. KIRBY
Vice President, Treasurer
and Chief Financial Officer
(Mr. Kirby is the principal accounting officer and has been duly
authorized to sign on behalf of the Registrant.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 1,863
<SECURITIES> 0
<RECEIVABLES> 336,733
<ALLOWANCES> 0
<INVENTORY> 390,358
<CURRENT-ASSETS> 750,869
<PP&E> 358,630
<DEPRECIATION> 186,568
<TOTAL-ASSETS> 936,509
<CURRENT-LIABILITIES> 555,568
<BONDS> 79,673
0
0
<COMMON> 116,762
<OTHER-SE> 184,506
<TOTAL-LIABILITY-AND-EQUITY> 936,509
<SALES> 561,696
<TOTAL-REVENUES> 561,696
<CGS> 518,179
<TOTAL-COSTS> 518,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,330
<INCOME-PRETAX> 1,231
<INCOME-TAX> 160
<INCOME-CONTINUING> 1,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,071
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
