<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) February 27, 1997
-----------------
Cotter & Company
----------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
--------
(State or Other Jurisdiction of Incorporation)
2-20910 36-2099896
------- ----------
(Commission File Number) (I.R.S. Employer Identification No.)
8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505
---------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
773-695-5000
------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
The Registrant hereby reports the results for its fiscal year ended
December 28, 1996 set forth in its Financial Statements for such fiscal year,
which are attached hereto as Exhibit 20-1.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibit 20-1 Registrant's audited Financial Statements for the Fiscal
Year ended December 28, 1996.
2
<PAGE> 3
SIGNATURES
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 hereunto duly authorized.
Cotter & Company
----------------
(Registrant)
Date: March 4, 1997 By /s/ Kerry J. Kirby
------------------------------
(Signature)
Name: Kerry J. Kirby
Title: Chief Financial Officer
3
<PAGE> 1
FINANCIAL REVIEW
REVENUES
In fiscal year 1996, Cotter & Company revenues were $2,441,707,000, an
increase of 0.2% from fiscal year 1995. Current year revenues were
influenced by the 1995 phase-out of the V&S Variety and General Power
Equipment divisions. Comparable store revenues increased 4.4% due to improved
member participation. Fiscal year 1996 revenue increases were concentrated in
the core merchandise categories of Electrical and Plumbing, up 4.0%, Painting
and Cleaning, up 5.0%, Farm and Garden, up 3.8% and Lumber and Building
Materials, up 2.4%. Additionally, Cotter & Company continued to pursue
business opportunities such as International, which increased 14.2% and
trueAdvantage, which increased 14.2%. In addition, the Company continued to
expand the Pinpoint Pricing program, which reduced the selling price of many
core hardware and related products.
OPERATIONS
Overall gross margins, as a percentage of revenues, decreased for the
fifth year in a row, to 8.1% from 8.3% last year. This reduction in gross
margin was the result of a more competitive pricing strategy, which included
the expanded Pinpoint Pricing program that resulted in a $7.1 million price
reduction to the Members. Other pricing strategies returned an additional
$2.0 million to the Members, predominately generated from the trueAdvantage
program. Warehouse, general and administrative expenses increased slightly
compared to the prior year, but as a percentage of revenues remained
comparable to 4.7% in 1995, reduced from 5.2% in 1994.
PATRONAGE DIVIDEND AND MEMBER PAYOUT
The annual patronage dividend for fiscal year 1996 was $53,320,000 compared
to $60,140,000 last year. Despite the decrease in the total dividends, the
average patronage dividend return per Member increased over 10.0% for fiscal
year 1996 compared to fiscal year 1995. Total Member payout, which includes
interest paid semi-annually on previously issued promissory (subordinated)
notes in addition to the patronage dividend, totaled $71,780,000 compared to
$80,767,000 last year. Presented in the table below are the sources and
components of Member payout for fiscal years 1996 and 1995.
The patronage dividend paid to each Member will vary depending upon the
volume and type of purchases, the method of shipment and extent of
participation in each of the source programs listed below. As a result, each
Member's patronage dividend will differ slightly from the overall Company
averages. In fiscal year 1996, the average dividend percentages from stock,
relay and direct shipment purchases were 2.7%, 1.5% and 0.4%, respectively.
Purchases of Tru-Test Manufacturing and Baltimore Brush products earned
Members an average manufacturing patronage dividend of 12.5% and 12.3%,
respectively, in fiscal year 1996. In fiscal year 1995, the average dividend
percentages for stock, relay, direct shipment, Tru-Test Manufacturing and
Baltimore Brush purchases were 3.6%, 1.5%, 0.4%, 11.9% and 12.3%,
respectively.
The Company considers promissory (subordinated) notes and Class B common
stock important parts of its patronage dividend. The five-year notes provide
Members a recurring return on their investment and the Class B common stock
provides the Company a source of permanent capital. Reflecting comparable
market interest rates, promissory (subordinated) notes issued as part of the
fiscal year 1996 patronage dividend bear interest at an annual rate of 8.1%
compared to 7.6% in 1995.
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
MEMBER PAYOUT 1996 1995
- ------------- ----------- -----------
(000's omitted)
<S> <C> <C>
Sources of Member payout:
Patronage dividend from:
Stock shipments................................................ $30,108 $37,410
Relay shipments................................................ 3,282 3,473
Direct shipments............................................... 3,463 3,603
Tru-Test Manufacturing......................................... 13,919 13,276
Baltimore Brush................................................ 2,548 2,378
------- -------
Total patronage dividend.......................................... 53,320 60,140
Interest paid to Members.......................................... 18,460 20,627
------- -------
Total Member payout............................................... $71,780 $80,767
======= =======
Components of Member payout:
Cash payout:
Interest paid to Members....................................... $18,460 $20,627
Cash patronage dividend........................................ 16,142 18,315
------- -------
Total Member cash payout.......................................... 34,602 38,942
Promissory (subordinated) notes................................... 25,123 32,047
Class B common stock.............................................. 8,645 6,422
Member indebtedness............................................... 3,410 3,356
------- -------
Total Member payout............................................... $71,780 $80,767
======= =======
</TABLE>
<PAGE> 2
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
(000's omitted)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,662 $ 22,473
Accounts and notes receivable ................................ 307,205 287,888
Inventories .................................................. 347,554 315,311
Prepaid expenses ............................................. 13,517 11,180
-------- --------
Total current assets ........................................ 669,938 636,852
Properties owned, less accumulated depreciation ................. 167,331 165,683
Properties under capital leases, less accumulated amortization .. 3,680 5,393
Other assets..................................................... 13,036 11,648
-------- --------
Total assets ................................................ $853,985 $819,576
======== ========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable ............................................. $287,291 $297,884
Accrued expenses ............................................. 51,149 53,363
Short-term borrowings ........................................ 70,594 2,657
Current maturities of notes, long-term debt and lease
obligations ................................................. 43,458 61,634
Patronage dividend payable in cash ........................... 16,142 18,315
-------- --------
Total current liabilities ................................... 468,634 433,853
Long-term debt .................................................. 77,680 75,449
Obligations under capital leases ................................ 2,465 3,764
Capitalization:
Promissory (subordinated) and instalment notes ............... 185,366 186,335
Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid
48,480 and 52,710 shares) .................................. 4,876 5,294
Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid
1,043,521 and 1,055,700 shares; issuable as partial
payment of patronage dividends, 84,194 and 62,005 shares) .. 114,053 113,062
Retained earnings ............................................ 1,751 2,661
-------- --------
306,046 307,352
Foreign currency translation adjustment ...................... (840) (842)
-------- --------
Total capitalization ........................................ 305,206 306,510
-------- --------
Total liabilities and capitalization ........................ $853,985 $819,576
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 3
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Revenues ................................. $2,441,707 $2,437,002 $2,574,445
------------ --------------- ------------
Cost and expenses:
Cost of revenues ....................... 2,245,071 2,234,934 2,351,114
Warehouse, general and administrative .. 115,457 114,107 132,759
Interest paid to Members ............... 18,460 20,627 22,894
Other interest expense ................. 10,175 9,298 7,493
Gain on sale of properties owned ....... -- -- (692)
Other income, net ...................... (228) (1,177) (604)
Income tax expense ..................... 362 176 1,163
---------- ---------- ----------
2,389,297 2,377,965 2,514,127
---------- ---------- ----------
Net margins .............................. $ 52,410 $ 59,037 $ 60,318
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Operating activities:
Net margins ............................................ $ 52,410 $ 59,037 $ 60,318
Adjustments to reconcile net margins to cash and cash
equivalents from operating activities:
Depreciation and amortization ........................ 20,561 20,706 21,613
Provision for losses on accounts and notes
receivable ......................................... 3,201 3,741 4,233
Changes in operating assets and liabilities:
Accounts and notes receivable ...................... (38,581) (13,921) (33,112)
Inventories ........................................ (32,243) 69,436 (49,145)
Accounts payable ................................... (10,593) (36,584) 79,957
Accrued expenses ................................... (2,563) 7,552 6,022
Other adjustments, net ............................. (1,801) (3,327) (1,223)
-------- -------- --------
Net cash and cash equivalents provided by
(used for) operating activities .................. (9,609) 106,640 88,663
-------- -------- --------
Investing activities:
Additions to properties owned .......................... (23,530) (24,904) (21,427)
Proceeds from sale of properties owned ................. 3,151 5,022 2,174
Changes in other assets ................................ (1,388) 617 1,132
-------- --------- ---------
Net cash and cash equivalents (used for)
investing activities ............................. (21,767) (19,265) (18,121)
-------- --------- ---------
Financing activities:
Payment of annual patronage dividend ................... (18,315) (18,383) (16,614)
Payment of notes, long-term debt and lease
obligations .......................................... (40,271) (43,106) (39,632)
Proceeds from long-term borrowings ..................... 1,693 3,000 --
Increase (decrease) in short-term borrowings ........... 67,937 (6,672) (13,851)
Purchase of common stock .............................. (660) (1,740) (216)
Proceeds from sale of Class A common stock ............. 181 168 288
-------- --------- ---------
Net cash and cash equivalents provided by (used for)
financing activities ............................. 10,565 (66,733) (70,025)
-------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ....................................... (20,811) 20,642 517
-------- --------- ---------
Cash and cash equivalents at beginning of year ............ 22,473 1,831 1,314
-------- --------- ---------
Cash and cash equivalents at end of year .................. $ 1,662 $22,473 $1,831
======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS
For the Three Years Ended December 28, 1996
<TABLE>
<CAPTION>
Common Stock, $100 Par Value
---------------------------------------
Class A Class B
---------------------- ---------------
Issued Foreign
and Currency
to be Retained Translation
Issued Subscribed Issued Earnings Adjustment
---------- ---------- --------------- -------- -----------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Balances at January 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)
Net margins ................... 52,410
Foreign currency translation
adjustment ................... 2
Patronage dividend ............ 8,645 (53,320)
Stock issued for paid-up
subscriptions ................ 184 (184)
Stock subscriptions ........... 189
Stock purchased and retired ... (607) (7,654)
-------- -------- ----------- ------- -------
Balances at December 28, 1996 .. $4,848 $28 $114,053 $1,751 $(840)
======== ======== =========== ======= =======
</TABLE>
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000
at December 28, 1996, December 30, 1995 and December 31, 1994 and $14,000 at
January 1, 1994 (for 290, 240, 360 and 590 shares subscribed, respectively).
See Notes to Consolidated Financial Statements.
<PAGE> 5
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. All members are entitled to receive
patronage dividend distributions from the Company on the basis of gross
margins of merchandise and/or services purchased by each member. In
accordance with the Company's By-laws, the annual patronage dividend is paid
to Members out of gross margins from operations and other patronage source
income, after deduction for expenses and provisions authorized by the Board
of Directors.
On December 9, 1996, the Boards of Directors of the Company and ServiStar
Coast to Coast Corporation agreed to merge the two companies. ServiStar
Coast to Coast is a $1,700,000,000 hardware wholesaler with a strong presence
in retail lumber and building materials. The transaction is subject to
customary closing conditions, including approval by the stockholders of both
companies, and is expected to be completed on July 1, 1997. Following
completion of the merger, the Company will be renamed TruServ Corporation.
The significant accounting policies of the Company are summarized below:
Consolidation
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries. The consolidated financial statements also
include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc.,
a Canadian Member-owned wholesaler of hardware, variety and related
merchandise, in which the Company has a majority equity interest.
On January 13, 1995, the Company agreed to the sale of certain inventory of
its V&S Variety division to a national wholesaler who agreed to supply the
majority of the V&S Stores. Also, on January 31, 1995, the Company sold
certain assets of its outdoor power equipment manufacturing division to a
nationally recognized company and secured a favorable supply agreement for
such equipment. These transactions did not have a material impact on the
Company's results of operation or financial position.
Capitalization
The Company's capital (Capitalization) is derived from Class A voting common
stock and retained earnings, together with promissory (subordinated) notes
and 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 $100 par value Class B common
stock.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Membership may be terminated without cause by either the Company or the
Member upon sixty days' written notice. In the event membership is
terminated, the Company undertakes to purchase, and the Member is required to
sell to the Company, all of the Member's Class A common stock and Class B
common stock at book value. Payment for the Class A common stock will be in
cash. Payment for the Class B common stock will be a note payable in five
equal annual instalments bearing interest at the same rate per annum as the
promissory (subordinated) notes most recently issued as part of the Company's
patronage dividend.
Cash equivalents
The Company classifies its temporary investments in highly liquid debt
instruments, with an original maturity of three months or less, as cash
equivalents.
Inventories
Inventories are stated at the lower of cost, determined on the `first-in,
first-out' basis, or market.
Properties
Properties are recorded at cost. Depreciation and amortization are computed
by using the straight-line method over the following estimated useful lives:
buildings and improvements - 10 to 40 years; machinery and warehouse, office
and computer equipment - 5 to 10 years; transportation equipment - 3 to 7
years; and leasehold improvements - the life of the lease without regard to
options for renewal.
Revenue Recognition
The Company recognizes revenue when merchandise is shipped or services are
rendered.
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
<TABLE>
<CAPTION>
Inventories consisted of:
December 28, December 30,
1996 1995
-------------- --------------
(000's omitted)
<S> <C> <C>
Manufacturing inventories:
Raw materials ........... $ 2,797 $ 2,139
Work-in-process and
finished goods ......... 24,558 19,407
-------- --------
27,355 21,546
Merchandise inventories .. 320,199 293,765
-------- --------
$347,554 $315,311
======== ========
</TABLE>
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTIES
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
-------------- --------------
Owned Leased Owned Leased
------ ------ ------ ------
(000's omitted)
<S> <C> <C> <C> <C>
Buildings and improvements ...................... $179,206 $ -- $173,568 $ --
Machinery and warehouse equipment ............... 61,183 -- 60,197 --
Office and computer equipment ................... 74,065 -- 77,340 --
Transportation equipment ........................ 16,561 11,202 21,076 11,454
-------- ------ -------- ------
331,015 11,202 332,181 11,454
Less accumulated depreciation and amortization .. 175,730 7,522 178,793 6,061
-------- ------ -------- ------
155,285 3,680 153,388 5,393
Land ............................................ 12,046 -- 12,295 --
-------- ------ -------- ------
$167,331 $3,680 $165,683 $5,393
======== ====== ======== ======
</TABLE>
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
<TABLE>
<CAPTION>
Long-term debt consisted of:
December 28, December 30,
1996 1995
------------ -----------
(000's omitted)
<S> <C> <C>
Senior note at 8.60% ................................ $47,000 $49,000
Term loans:
5.97% ............................................. 2,437 3,000
Variable (7.33% and 7.60%, respectively) .......... 6,200 6,200
Canadian prime at 7.50% ........................... -- 3,665
Redeemable (subordinated) term notes:
Fixed Interest rates ranging from 6.85% to 7.61% .. 26,683 16,697
Industrial Revenue Bonds (5.28%) .................... 4,000 4,000
------- -------
86,320 82,562
Less amounts due within one year .................... 8,640 7,113
------- -------
$77,680 $75,449
======= =======
</TABLE>
Principal payments for the 8.60% senior note are due quarterly in
incrementally increasing amounts through maturity in 2007.
Principal payments for the 5.97% term loan are due quarterly beginning in
1996 through maturity in 1999. Payment for the variable term loan is due in
1999.
The redeemable (subordinated) term notes have two to four year terms and are
issued in exchange for promissory (subordinated) notes that were held by
promissory note holders, who do not own the Company's Class A Common Stock.
Also, effective October 1, 1996 the term notes were opened for purchase by
investors that are affiliated with the Company.
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 the option of either the
Company or the bondholders at each interest reset date through maturity in
2003.
Total maturities of long-term debt for fiscal years 1997, 1998, 1999, 2000,
2001 and thereafter are $8,640,000 $16,481,000, $11,374,000, $13,825,000,
$4,000,000 and $32,000,000, respectively.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has established a $125,000,000 five-year revolving credit
facility with a group of banks. In addition, the Company has various
short-term lines of credit available under informal agreements with lending
banks, cancelable by either party under specific circumstances. The
borrowings under these agreements were $70,594,000 at December 28,1996 and
were at a weighted average interest rate of 5.5%. At December 30, 1995,
the Company's Canadian subsidiaries had short- term borrowings at an interest
rate of 7.5%.
The Company is required to meet certain financial ratios and covenants
pertaining to certain debt arrangements.
5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouses, office, computer and
transportation equipment under operating and capital leases. The following
is a schedule of future minimum lease payments under long-term non-cancelable
leases, together with the present value of the net minimum lease payments, as
of December 28, 1996:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
(000's omitted)
<S> <C> <C>
Fiscal years
- ------------
1997 ....................................... $1,433 $ 9,662
1998 ....................................... 1,144 8,439
1999 ....................................... 809 6,898
2000 ....................................... 296 6,114
2001 ....................................... 184 5,504
Thereafter ................................. 108 45,651
------ -------
Net minimum lease payments ................... 3,974 $82,268
=======
Less amount representing interest ............ 145
-------
Present value of net minimum lease payments .. 3,829
Less amounts due within one year ............. 1,364
------
$2,465
======
</TABLE>
Capital leases expire at various dates and generally provide for purchase
options but not renewals. Purchase options provide for purchase prices at
either fair market value or a stated value which is related to the lessor's
book value at expiration of the lease term.
<TABLE>
<CAPTION>
Rent expense under operating leases was as follows:
For the Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Minimum rent ...................................... $14,476 $ 9,553 $8,487
Contingent rent ................................... 495 510 611
------- ------- ------
$14,971 $10,063 $9,098
======= ======= ======
</TABLE>
6. CAPITALIZATION
<TABLE>
<CAPTION>
Promissory (subordinated) and instalment notes consisted of:
December 28, December 30,
1996 1995
------------ ------------
(000's omitted)
<S> <C> <C>
Promissory (subordinated) notes -
Due on December 31, 1996--6.00% ......................... $ -- $ 23,588
Due on December 31, 1996--9.50% ......................... -- 27,029
Due on December 31, 1997-10.00% ......................... 16,037 16,660
Due on December 31, 1997--7.87% ......................... 14,832 15,616
Due on December 31, 1998--7.47% ......................... 14,886 16,461
Due on December 31, 1998--8.00% ......................... 25,684 27,048
Due on December 31, 1999--7.86% ......................... 15,349 --
Due on December 31, 1999--8.00% ......................... 24,254 25,470
Due on December 31, 1999--8.20% ......................... 23,431 25,327
Due on December 31, 2000--6.50% ......................... 23,010 23,996
Due on December 31, 2000--7.58%(issued in 1996) ......... 29,315 32,047
Due on December 31, 2001--8.06%(to be issued) ........... 25,123 --
Instalment notes at interest rates of
6.50% to 8.20% with maturities through 2000 ........... 6,899 5,753
-------- --------
218,820 238,995
Less amounts due within one year ......................... 33,454 52,660
-------- --------
$185,366 $186,335
======== ========
</TABLE>
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The promissory notes are issued principally in payment of the annual
patronage dividend. Promissory notes are subordinated to indebtedness to
banking institutions, trade creditors and other indebtedness of the Company
as specified by its Board of Directors. Notes to be issued relate to the
patronage dividend which is distributed after the end of the year. Prior
experience indicates that the maturities of a significant portion of the
notes due within one year are extended, for a three year period, at interest
rates substantially equivalent to competitive market rates of comparable
instruments. The Company anticipates that this practice will continue.
Total maturities of promissory and instalment notes for fiscal years 1997,
1998, 1999, 2000 and 2001 are $33,454,000, $42,690,000, $64,603,000,
$52,950,000 and $25,123 ,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 28, 1996, 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 28,1996 resulted primarily from alternative minimum tax credit
carryforwards and temporary differences between income tax and financial
reporting for depreciation, inventory capitalization, bad debts, 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 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Current:
Federal ......... $ -- $ (363) $ 486
State ........... 237 379 462
Foreign ......... 275 273 278
----- ------ ------
Total current ... 512 289 1,226
----- ------ ------
Deferred:
Federal ......... (147) (145) (147)
State ........... (26) (26) (26)
Foreign ......... 23 58 110
----- ------ ------
Total deferred .. (150) (113) ( 63)
----- ------ ------
$ 362 $ 176 $1,163
===== ====== ======
</TABLE>
The Company operates as a nonexempt cooperative and is allowed a deduction in
determining its taxable income for amounts paid as patronage dividend based
on margins from business done with or for Members. The reconciliation of
income tax expense to income tax computed at the U.S. federal statutory tax
rate of 35% in fiscal year 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Tax at U.S. statutory rate ........................ $18,470 $20,725 $21,518
Effects of:
Patronage dividend .............................. (18,662) (21,049) (21,147)
State income taxes, net of federal tax benefit .. 137 229 283
Other, net ...................................... 417 271 509
------- ------- -------
$ 362 $ 176 $ 1,163
======= ======= =======
</TABLE>
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CASH FLOW
The Company's non-cash financing and investing activities in fiscal year 1996
and 1995 include acquisition of transportation equipment by entering into
capital leases and the acquisition of property for resale. These transactions
aggregate $178,000 and $4,008,000 in fiscal years 1996 and 1995,
respectively. In addition, the annual patronage dividend and promissory
(subordinated) note renewals relating to non-cash operating and financing
activities are as follows:
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Patronage dividend payable in cash .. $16,142 $18,315 $18,383
Promissory (subordinated) notes ..... 15,354 23,536 23,213
Class B nonvoting common stock ...... 1,248 (2,592) 5,900
Instalment notes .................... 4,605 5,972 3,058
Member indebtedness ................. 15,971 14,909 9,867
------- ------- -------
$53,320 $60,140 $60,421
======= ======= =======
Note renewals ....................... $27,938 $23,974 $26,191
======= ======= =======
</TABLE>
Cash paid for interest during fiscal years 1996, 1995 and 1994 totaled
$28,694,000, $29,624,000 and $30,583,000, respectively. Cash paid for income
taxes during fiscal years 1996, 1995 and 1994 totaled $694,000, $1,012,000
and $1,709,000, respectively.
10. RETIREMENT PLANS
The components of net pension cost for the Company administered pension plans
consisted of:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ --------------- ------------
(000's omitted)
<S> <C> <C> <C>
Income:
Actual return (loss) on plan assets .................... $13,007 $25,564 $ (1,543)
Amortization of excess plan assets ..................... 914 914 920
------- ------- --------
13,921 26,478 (623)
------- ------- --------
Expenses:
Service cost-benefits earned during the year ........... 4,851 4,152 4,765
Interest on projected benefit obligation ............... 7,623 7,242 6,736
Deferral of excess (deficiency) of actual
over estimated return on plan assets ................ 4,223 18,021 (8,815)
------- ------- --------
16,697 29,415 2,686
------- ------- --------
Net pension cost.............................................. $ 2,776 $ 2,937 $ 3,309
======= ======= ========
</TABLE>
<PAGE> 11
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
respectively, 7.75% and 4.50% in fiscal year 1996, 7.25% and 4.50%, in fiscal
year 1995 and 8.50% and 4.50% in fiscal year 1994. These changes in actuarial
assumptions did not have a material impact on net pension cost for fiscal years
1996 and 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 1996, 1995
and 1994, the expected long-term rate of return on assets was 9.50%. During
1995, the Company amended its pension plan, and such amendment had no material
impact on the projected benefit obligation or pension expense. During 1996, the
Company settled $8,520,000 of pension obligations under it's amended plan that
resulted in a reduction of $798,000 in pension expense for fiscal year 1996.
Plan assets are composed primarily of corporate equity and debt securities.
Benefits are based on years of service and the employee's compensation during
the last ten years of employment, offset by a percentage of Social Security
retirement benefits. Trusteed net assets and actuarially computed benefit
obligations for the Company administered pension plans are presented below:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
(000's omitted)
<S> <C> <C>
Assets:
Total plan assets at fair value ...................... $107,954 $104,396
======== ========
Obligations:
Accumulated benefit obligations -
Vested ............................................ $ 70,593 $ 77,435
Non-vested ........................................ 13,369 10,830
Effect of projected compensation increases ........... 21,015 21,730
-------- --------
Total projected benefit obligations .................. 104,977 109,995
-------- --------
Net excess assets (liabilities):
Unrecognized -
Unamortized excess assets at original date ........ 6,170 7,673
Net actuarial gain (loss) ......................... 5,702 (3,793)
Prior service costs ............................... (3,424) (4,017)
Recognized accrued pension cost ...................... (5,471) (5,462)
-------- --------
Total net excess assets (liabilities) ................ 2,977 (5,599)
-------- --------
Total obligations and net excess assets (liabilities) .. $107,954 $104,396
======== ========
</TABLE>
The Company also participates in union-sponsored defined contribution plans.
Pension costs related to these plans were $641,000, $720,000 and $757,000 for
fiscal years 1996, 1995 and 1994, respectively.
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 28, 1996 and December 30, 1995, 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
28, 1996. 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 28, 1996 and December 30, 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 28, 1996 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 10, 1997
<PAGE> 12
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Fiscal Years
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------------- ---------- ----------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Revenues $2,441,707 $2,437,002 $2,574,445 $2,420,727 $2,356,468
Gross margins $ 196,636 $ 202,068 $ 223,331 $ 217,921 $ 216,608
Net margins $ 52,410 $ 59,037 $ 60,318 $ 57,023 $ 60,629
Total assets $ 853,985 $ 819,576 $ 868,785 $ 803,528 $ 833,372
Member payout:
Patronage dividend $ 53,320 $ 60,140 $ 60,421 $ 54,440 $ 60,901
Interest paid to Members 18,460 20,627 22,894 24,458 25,716
---------- ---------- ---------- ---------- ----------
$ 71,780 $ 80,767 $ 83,315 $ 78,898 $ 86,617
---------- ---------- ---------- ---------- ----------
Member cash payout:
Patronage dividend in cash $ 16,142 $ 18,315 $ 18,383 $ 16,614 $ 18,570
Interest paid to Members 18,460 20,627 22,894 24,458 25,716
---------- ---------- ---------- ---------- ----------
$ 34,602 $ 38,942 $ 41,277 $ 41,072 $ 44,286
---------- ---------- ---------- ---------- ----------
Member investment:
Promissory (subordinated) and
instalment notes $ 185,366 $ 186,335 $ 199,099 $ 217,996 $ 235,695
Class A common stock 4,876 5,294 6,370 6,633 6,857
Class B common stock 114,053 113,062 116,663 110,773 108,982
---------- ---------- ---------- ---------- ----------
$ 304,295 $ 304,691 $ 322,132 $ 335,402 $ 351,534
========== ========== ========== ========== ==========
</TABLE>