<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
REGISTRATION NO. 333-18397
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT
NO. 3
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
COTTER & COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
5072
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
36-2099896
(I.R.S. EMPLOYER IDENTIFICATION NO.)
8600 WEST BRYN MAWR AVENUE
CHICAGO, IL 60631-3505
(773) 695-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DANIEL A. COTTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COTTER & COMPANY
8600 WEST BRYN MAWR AVENUE
CHICAGO, IL 60631-3505
(773) 695-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DANIEL T. BURNS, ESQ.
COTTER & COMPANY
8600 WEST BRYN MAWR AVENUE
CHICAGO, IL 60631-3505
(773) 695-6601
(773) 695-5465 (fax)
WILLIAM K. BLOMQUIST, ESQ.
ARNSTEIN & LEHR
120 S. RIVERSIDE PLAZA
SUITE 1200
CHICAGO, IL 60606-3913
(312) 876-7128
(312) 876-0288 (fax)
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 /
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<PAGE> 2
COTTER & COMPANY
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
<TABLE>
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S-4 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.................................... Facing Page of Registration Statement; Cross-Reference
Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................................. Inside Front Cover Page; Available Information;
Incorporation of Certain Documents by Reference;
Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information........................................... Summary; Risk Factors
4. Terms of the Transaction......................................... Summary; Business of TruServ
5. Pro Forma Financial Information.................................. Summary; Unaudited Pro Forma Consolidated Financial
Statements; Notes to Unaudited Pro Forma Consolidated
Financial Statements
6. Material Contacts with the Companies being Acquired.............. Summary; Business of TruServ
7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters....................... Inapplicable
8. Interests of Named Experts and Counsel........................... Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.............................. Inapplicable
10. Information with Respect to S-3 Registrants...................... Inapplicable
11. Incorporation of Certain Information by Reference................ Inapplicable
12. Information with Respect to S-2 or S-3 Registrants............... Summary; Available Information; Incorporation of
Certain Documents by Reference
13. Incorporation of Certain Information by Reference................ Available Information; Incorporation of Documents by
Reference
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants...................................... Inapplicable
15. Information with Respect to S-3 Companies Inapplicable
16. Information with Respect to S-2 or S-3 Companies................. Inapplicable
17. Information with Respect to Companies Other
than S-3 or S-2 Companies................................... Summary - The Companies; Selected Historical Financial
Data; Business of TruServ
18. Information if Proxies, Consents or Authorizations
are to be Solicited......................................... Inapplicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited, or in an Exchange Offer............ Inapplicable
</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 JUNE 27, 1997
PROSPECTUS
TRUSERV CORPORATION
179,880 SHARES CLASS A COMMON STOCK, $100 PAR VALUE
(IN UNITS OF SIXTY SHARES)
THE COMMON STOCK OFFERED HEREUNDER IS OFFERED EXCLUSIVELY TO RETAILERS AND
RENTERS OF HARDWARE, LUMBER AND RELATED PRODUCTS, IN CONNECTION WITH BECOMING
MEMBERS OF THE COMPANY. (SEE "PLAN OF DISTRIBUTION" HEREIN.)
THE COMMON STOCK OFFERED HEREUNDER IS LIMITED AS TO TRANSFERABILITY BY ITS
TERMS. THE COMPANY RETAINS AN AUTOMATIC LIEN AGAINST SUCH COMMON STOCK, AND
DIVIDENDS ACCRUING THEREON, FOR ANY INDEBTEDNESS DUE THE COMPANY. (SEE
"DESCRIPTION OF COMMON STOCK" HEREIN.)
THERE IS NO EXISTING MARKET FOR THE COMMON STOCK OFFERED HEREUNDER AND
THERE IS NO EXPECTATION THAT ANY MARKET WILL DEVELOP.
THIS PROSPECTUS RELATES TO SHARES OF THE CLASS A COMMON STOCK, PAR VALUE
$100 PER SHARE ("CLASS A COMMON STOCK" OR THE "SHARES"), OF TRUSERV CORPORATION,
A DELAWARE CORPORATION ("TRUSERV"), FORMERLY KNOWN AS COTTER & COMPANY
("COTTER"), TO BE ACQUIRED, IN UNITS OF 60 SHARES EACH (SUBJECT TO A MAXIMUM OF
FIVE UNITS PER PERSON), BY PERSONS BECOMING MEMBERS OF TRUSERV AFTER THE MERGER
(THE "MERGER") OF COTTER AND SERVISTAR COAST TO COAST CORPORATION, A
PENNSYLVANIA CORPORATION ("SCC"). THE MERGER WAS APPROVED BY THE STOCKHOLDERS OF
COTTER AND SERVISTAR ON APRIL 1, 1997 AND BECAME EFFECTIVE ON JULY 1, 1997.
COTTER WAS THE SURVIVING CORPORATION AND AS PART OF THE MERGER CHANGED ITS NAME
TO TRUSERV CORPORATION. SEE "SUMMARY," "RISK FACTORS" AND "BUSINESS OF TRUSERV"
HEREIN FOR FURTHER INFORMATION CONCERNING THE MERGER AND EACH OF THE CONSTITUENT
CORPORATIONS.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY ANY PERSON CONTEMPLATING BECOMING A MEMBER OF TRUSERV AND
ACQUIRING ANY OF THE SHARES.
------------------
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>
<CAPTION>
UNDERWRITING
UNIT OF 60 SHARES OF PRICE TO DISCOUNTS AND PROCEEDS TO
CLASS A COMMON STOCK PUBLIC COMMISSIONS COMPANY
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Per Unit(1)............................... $6,000 See (2) Below $6,000(3)
Total..................................... $17,988,000 See (2) Below $17,988,000(3)
</TABLE>
================================================================================
(1) The shares will be offered only in units of 60 Shares and no stockholder may
purchase more than five such units.
(2) There will be no underwriters. The subject stock will be sold directly by
TruServ 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 TruServ. However, assuming
the sale of all securities offered hereunder, and before deduction of
approximately $50,000 for estimated expenses in connection with this
offering, the total proceeds will be as shown above.
------------------
THE DATE OF THIS PROSPECTUS IS JULY , 1997.
<PAGE> 4
AVAILABLE INFORMATION
TruServ (known as Cotter & Company prior to July 1, 1997) has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-4 (including all amendments, exhibits, annexes and schedules
thereto, the "Registration Statement"), pursuant to the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, covering the TruServ Class A Common Stock. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement or incorporated by reference herein, reference is
made to the exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement, including exhibits filed as a part thereof, is
available at the Commission for inspection and copying as set forth below.
TruServ 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 Commission. Such reports
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office,
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Such reports and other information may also be obtained from the
Commission's Web site which is maintained at http://www.sec.gov.
REPORTS TO SECURITY HOLDERS
Each year TruServ distributes to its Members an annual report containing
consolidated financial statements reported upon by a firm of independent
auditors. TruServ may, from time to time, also furnish to its Members interim
reports, as determined by management.
THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS RELATING TO TRUSERV
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. TRUSERV WILL PROVIDE
WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, INCLUDING ANY
BENEFICIAL OWNER OF THE SHARES, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A
COPY OF ANY OR ALL SUCH DOCUMENTS RELATING TO TRUSERV (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED HEREIN BY REFERENCE).
WRITTEN REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO KERRY J. KIRBY,
EXECUTIVE VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER, TRUSERV
CORPORATION, 8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505; AND
TELEPHONE REQUESTS MAY BE MADE TO MR. KIRBY AT 773-695-5000. COPIES OF DOCUMENTS
SO REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID, WITHIN ONE BUSINESS
DAY OF THE RECEIPT OF SUCH REQUEST.
ANNUAL REPORT ON FORM 10-K
This Prospectus is accompanied by a copy of Cotter & Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
i
<PAGE> 5
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents previously filed by TruServ with the Commission
pursuant to the Exchange Act are hereby incorporated by reference into this
Prospectus.
1. Cotter & Company's Annual Report on Form 10-K for the year ended
December 28, 1996; and
2. Cotter & Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROSPECTUS OTHER
THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT
CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
TRUSERV. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, SECURITIES, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF TRUSERV SINCE THE DATE HEREOF OR THAT THE
INFORMATION IN THE PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES HEREOF OR THEREOF.
-------------------------
ii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION................... i
REPORTS TO SECURITY HOLDERS............. i
ANNUAL REPORT ON FORM 10-K.............. i
INCORPORATION OF DOCUMENTS BY
REFERENCE............................. ii
SUMMARY................................. 1
The Companies......................... 1
Common Stock.......................... 2
Risk Factors.......................... 2
Retail Member Agreement............... 3
Franchises and Licenses............... 3
Retail Conversion Funds Agreement..... 3
Comparative Per Share Prices and
Dividend Policies.................. 3
Comparative Per Share Data............ 4
Selected Historical Financial Data.... 5
RISK FACTORS............................ 9
Uncertainties Associated with the
Integration of Cotter and SCC...... 9
Uncertain Impact of Growth............ 9
Impact of Increasing Competition and
Market Changes..................... 9
Potential Loss of Members............. 9
Volatility of Merchandise and
Inventory Prices................... 9
Difficulties in Integrating
Information Management and
Technology
Systems............................ 10
Impact of Environmental Issues........ 10
Difficulties of Combining Distribution
Facilities and Systems
Operations......................... 10
</TABLE>
<TABLE>
<CAPTION>
PAGE
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Regional Variations in Marketing
Opportunities...................... 10
Commonization......................... 10
Impact of Franchising and Licensing
Laws............................... 10
USE OF PROCEEDS......................... 11
PLAN OF DISTRIBUTION.................... 11
DIVIDENDS............................... 11
BUSINESS OF TRUSERV..................... 11
General............................... 11
Retail Member Agreement; Franchise and
License Agreements................. 14
DISTRIBUTION OF PATRONAGE DIVIDENDS..... 15
Payment of Patronage Dividends in
Accordance with the Internal
Revenue Code....................... 15
MANAGEMENT.............................. 17
DESCRIPTION OF COMMON STOCK............. 18
Dividend Rights....................... 18
Voting Rights......................... 18
Liquidation Rights.................... 18
Preemptive Rights..................... 18
Redemption Provisions................. 18
Stockholders.......................... 18
Other Restrictions and Rights......... 18
LEGAL MATTERS........................... 19
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS............................ 20
</TABLE>
iii
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus, the Exhibits hereto and documents incorporated by reference
herein. This summary does not contain a complete statement of any material
information relating to the Merger and the other matters discussed herein and is
subject to, and is qualified in its entirety by, the more detailed information
and financial statements contained or incorporated by reference in this
Prospectus. Prospective Members of TruServ should read carefully this Prospectus
in its entirety. Certain capitalized terms used in this summary are defined
elsewhere in this Prospectus.
This Prospectus and the documents incorporated herein by reference contain
forward-looking statements about future results that are subject to risks and
uncertainties. TruServ's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
On April 1, 1997, the stockholders of Cotter and the shareholders of SCC
agreed to merge the two companies pursuant to an Agreement and Plan of Merger
(the "Merger Agreement"). The transaction was completed on July 1, 1997.
Following completion of the Merger, the Company was renamed TruServ Corporation
("TruServ"). The following is a brief summary of the two constituent
corporations to the Merger, Cotter and SCC.
THE COMPANIES
Cotter & Company (now TruServ Corporation). Cotter 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.
TruServ's principal executive offices are located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois, 60631-3505. The telephone number is (773) 695-5000. Cotter is
a Member-owned wholesaler of hardware and related merchandise. It was
historically and is now the largest cooperative wholesaler of hardware and
related merchandise in the United States. Cotter manufactures paint and paint
applicators. For reporting purposes, Cotter operates in a single industry as a
Member-owned wholesaler cooperative.
At the time of the Merger, Cotter served approximately 5,300 True Value(R)
Hardware Stores throughout the United States. Primary concentrations of Members
existed 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). SCC served approximately 4,800 Members
throughout the United States and abroad. Primary concentrations of Members were
in Pennsylvania and New York (approximately 10% each), Florida (approximately
4%) and Minnesota and Virginia (approximately 3%). As a result of the Merger,
TruServ serves approximately 10,100 Members throughout the United States.
Primary concentrations of Members exist in New York and Pennsylvania
(approximately 8% each), California, Illinois and Texas (approximately 4% each).
TruServ's Class A Common Stock $100.00 par value per share ("Class A Common
Stock") being offered hereby is exclusively offered to retailers of hardware,
lumber and related merchandise, in connection with becoming Members of TruServ.
The Class A Common Stock (which is the sole voting stock) is offered only in
sixty (60) share units and no party may acquire more than five units (at the
rate of one unit per store). Sales of Class A Common Stock are made for cash.
TruServ Class B Common Stock, par value $100 per share ("Class B Common
Stock"), which is non-voting stock, is issuable only in connection with the
Members' patronage dividends (see "Distribution of Patronage Dividends" below).
Membership, depending on the terms of the Member's Retail Member Agreement
with TruServ (the "Retail Member Agreement"), entitles TruServ Members to use
certain TruServ trademarks and trade names, including the federally registered
ServiStar(R), Coast to Coast(R) and True Value(R) trademarks, service marks and
collective membership marks. Generally speaking, former Cotter Members and
former SCC Members will continue to conduct their businesses under the same
retail banners as before the Merger, except
1
<PAGE> 8
to the extent permitted by TruServ on a case by case basis. As soon as permitted
by anticipated operating synergies, those Members and new Members joining
TruServ after the Merger will have access to all private labels, except with
respect to paint, mower and outdoor power equipment, the private labels of which
will be limited to use by their respective retail organizations. Membership also
entitles the Member to receive annual patronage dividends based upon the
Member's purchases from TruServ. In accordance with TruServ'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.
SERVISTAR COAST TO COAST Corporation. SERVISTAR COAST TO COAST Corporation
(hereinafter "SCC" shall refer to SERVISTAR COAST TO COAST Corporation and its
subsidiaries) began operations in 1910 in Pittsburgh, Pennsylvania as American
Hardware Supply Company. It was incorporated on February 15, 1935 under the laws
of the Commonwealth of Pennsylvania. SCC had distribution centers at Brookings,
South Dakota; East Butler, Pennsylvania; Charleston, Illinois; Ft. Smith,
Arkansas; Greenville, South Carolina; Parkesburg, Pennsylvania; Springfield,
Oregon; and Westfield, Massachusetts.
SCC was a $1,700,000,000 hardware wholesaler with a strong presence in
retail lumber and building materials. SCC operated substantially in one industry
segment, as a marketing and purchasing cooperative for its approximately 4,800
Member-dealers. Effective as of July 1, 1996, SERVISTAR Corporation merged with
Coast to Coast Stores, Inc., also a hardware purchasing cooperative, to form SCC
as the surviving corporation, integrating those two companies which had been
affiliated since 1990. SCC's subsidiaries provided trucking and warehousing
support through Advocate Services, Inc., provided convention exhibitor services
through Total Exposition Concepts, Inc., and manufactured paints and coatings
through KCI Coatings, Inc.
Member-dealers of SCC operated SERVISTAR Hardware Stores, SERVISTAR
Lumberyards, SERVISTAR Home Centers, Coast to Coast Hardware Stores, Coast to
Coast Home & Auto Stores, Grand Rental Stations, Taylor Rental Centers, Home &
Garden Showplaces and INDUSERVE Supply Distributors throughout the United
States. Such operations are continuing as part of TruServ.
COMMON STOCK
The Class A Common Stock being offered hereby is limited as to
transferability in that TruServ has a ninety (90) day right of first refusal to
repurchase, at par value, a Member's stock before such stock can otherwise be
disposed of. Historically, the Company has always exercised the right to
repurchase. Additionally, TruServ retains an automatic lien on the Class A
Common Stock, and dividends accruing thereon, for any indebtedness due TruServ.
TruServ is obligated to repurchase a Member's Class A Common Stock and the
Member is obligated to sell such stock, at par value, in accordance with the
terms and conditions set forth in TruServ's By-Laws upon termination of the
Retail Member Agreement. The Agreement may be terminated by either TruServ or
the Member upon sixty (60) days written notice. Termination by TruServ requires
approval by a two-thirds vote of the Board of Directors, except in the following
circumstances where TruServ has the right to immediately terminate the
Agreement: the Member becomes insolvent, commits any act of bankruptcy, files a
voluntary petition in bankruptcy, is adjudicated as bankrupt, or commits a
breach of any obligation under the Agreement, which breach is not cured within
ten (10) days after written notice to the Member by TruServ.
There is no existing market for the Class A Common Stock offered hereunder
and there is no expectation that any market will develop.
TruServ intends to use the proceeds of this offering primarily for general
working capital purposes, including the purchase of merchandise for resale to
Members.
RISK FACTORS
The business of TruServ is subject to a number of risks, including: the
uncertainties associated with the integration of the business of SCC and Cotter;
the uncertain impact of the growth in the hardware,
2
<PAGE> 9
lumber/building materials, home center, do-it-yourself, rental and
industrial/commercial industries; the impact of increasingly intense competition
and market changes; the potential impact of future litigation; the impact of
various environmental issues; the volatility of merchandise and inventory
prices; the failure to achieve anticipated economies of scale and operating
efficiencies of the post-Merger cooperative; difficulties in integrating
merchandise ordering and purchasing systems, difficulties in integrating
wholesale technology and technical support, the difficulties of combining
logistic/distribution facilities and systems operations; regional variations in
marketing opportunities; the combination of disparate pricing strategies and the
potential impact of franchising and licensing laws on TruServ's operations.
RETAIL MEMBER AGREEMENT
All TruServ Members who were previously Cotter Members, TruServ Members
joining TruServ after the Merger, and those SCC Members who voted in favor of
the Merger, will be governed by the then current form of TruServ Retail Member
Agreement. Such Retail Member Agreement is an amendment and restatement of the
existing Cotter Retail Member Agreement. The SCC Membership Agreement of each
SCC Member voting against the Merger, or abstaining with respect thereto,
together with any related license or franchise agreements, has been assigned by
SCC to TruServ without further action.
FRANCHISES AND LICENSES
TruServ will review any retail activities which continue to be carried out
as franchises. It is anticipated that additional licenses may be entered into
periodically with respect to the Taylor Rental Centers and Grand Rental
Stations. It is less likely that any additional franchise or license agreements
will be entered into with respect to the other retail programs operated as
franchises by SCC prior to the Merger. These programs will initially be operated
as part of the cooperative activities of TruServ.
RETAIL CONVERSION FUNDS AGREEMENT
In connection with the Merger, TruServ will make available to those Members
who were Members at the time of Merger an aggregate amount of $40,000,000 to
assist those store owners in defraying various conversion costs associated with
the Merger, and costs associated with certain upgrades and expansions of stores.
Of this aggregate amount, $14,000,000 will be made available to former SCC
Members to assist in defraying the costs of converting to certain TruServ
wholesale ordering and retail systems. In addition, the amount of $10,000,000
will be available to former Cotter Members and former SCC Members (one-half
thereof to each such group) to assist in defraying a portion of the costs of
software consolidation of the businesses. Finally, the amount of $16,000,000
will be made available to former Cotter Members and former SCC Members (one-half
thereof to each such group) to assist in defraying a portion of the costs of
certain retrofitting and expansion projects at stores which are preapproved by
TruServ. Members requesting disbursements from these Funds will agree to remain
Members in good standing of TruServ for a period of five years, without material
reductions in purchases, and, should they fail to do so, a prorated portion of
any disbursement from the funds must be repaid by the Member to TruServ.
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES
TruServ Class A Common Stock is not listed or traded on any national
securities exchange or on Nasdaq. It is offered exclusively to retailers or
renters of hardware, lumber and related products, in connection with becoming
Members of TruServ, at a purchase price equal to its par value. The TruServ
Class A Common Stock is restricted as to transferability and no public market
for such stock exists or is anticipated to develop in the future. TruServ does
not pay dividends with respect to its Class A Common Stock. For information with
respect to payment of patronage dividends, see "Distribution of Patronage
Dividends" below.
3
<PAGE> 10
COMPARATIVE PER SHARE DATA
Because of the absence of any public market for either the Cotter stock or
the SCC stock, and the sale or issuance thereof at its par value and any
repurchase thereof at par, earnings per share is inapplicable.
The following table sets forth certain book value per share data for Cotter
and SCC on a historical and pro forma combined basis. The pro forma per share
data is derived from the Unaudited Pro Forma Consolidated Financial Statements
appearing elsewhere in this Prospectus. The information set forth below should
be read in conjunction with the Selected Historical Financial Data of Cotter and
SCC and the Unaudited Pro Forma Consolidated Financial Statements, including the
notes thereto, appearing elsewhere in this Prospectus and the consolidated
financial statements of Cotter and SCC included or incorporated by reference in
this Prospectus.
<TABLE>
<CAPTION>
COTTER
---------------------------
PRO FORMA
HISTORICAL COMBINED
---------- ---------
<S> <C> <C>
Book value per share as of:
March 29, 1997........................................ $101.58 $100.27
December 28, 1996..................................... 101.89 N/A
</TABLE>
<TABLE>
<CAPTION>
SCC
---------------------------
PRO FORMA
HISTORICAL EQUIVALENT(1)
---------- -------------
<S> <C> <C>
Book value per share as of(2):
March 31, 1997........................................ $ 76.60(3) $100.27
June 30, 1996(4)...................................... 33.65(5) N/A
</TABLE>
- -------------------------
(1) The equivalent pro forma book value per share for SCC is computed by
multiplying Cotter's pro forma per share information by 1.0, the assumed
conversion factor.
(2) The determination of book value per common share is based on the outstanding
common series A and common shares.
(3) Book value includes $14,629,522 of SCC Common Stock subscriptions.
(4) Adjusted to reflect the conversion of Coast to Coast Corporation Common
Stock to SCC Common Stock and SCC Series A Stock in connection with the
Merger of SCC and Coast to Coast Corporation on July 1, 1996.
(5) Book value includes $550,000 of SCC Common Stock subscriptions.
4
<PAGE> 11
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Cotter and SCC have
been derived from their respective historical financial statements and should be
read in conjunction with such financial statements and the notes thereto
included or incorporated by reference herein.
SELECTED HISTORICAL FINANCIAL DATA
COTTER
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<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
Patronage dividends......................... 53,320 60,140 60,421 54,440 60,901
Total assets................................ 853,985 819,576 868,785 803,528 833,372
Long-term debt and obligations under capital
leases.................................... 80,145 79,213 75,756 69,201 72,749
Promissory (subordinated) and instalment
notes payable............................. 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
Book value per share of Class A common stock
and Class B common stock(a)............... 101.89 102.68 103.57 103.85 101.42
</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.
SERVISTAR COAST TO COAST
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000'S OMITTED)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $1,729,908 $1,802,103 $1,734,905 $1,619,001 $1,417,716
Gross Margins............................... 118,734 122,488 121,648 116,433 115,832
Net Margins................................. 19,034 23,370 25,432 23,208 29,518
Total Assets................................ 467,782 466,830 476,711 472,373 454,027
Long-term debt and obligations under capital
leases.................................... 118,476 108,592 96,147 133,352 129,374
Common Stock................................ 8,487 8,754 8,806 8,551 7,601
Preferred Stock............................. 118,359 117,306 113,421 107,329 99,309
</TABLE>
5
<PAGE> 12
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 shipment 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 Cotter'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.
LIQUIDITY AND CAPITAL RESOURCES
Cotter 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, Cotter 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 Cotter'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 Cotter'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 Cotter established a $125,000,000 five-year revolving
credit facility with a group of banks. In addition, Cotter 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. Borrowings under the short-term credit facility were
$116,101,000 at March 29, 1997.
Cotter'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 Cotter's annual patronage
dividend. Cotter 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.
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. Cotter is in the process of assessing
and renegotiating its long-term and short-term capital needs in connection with
the Merger.
6
<PAGE> 13
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
In fiscal year 1996, Cotter's 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(R) 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 continued to pursue business opportunities such as
International and trueAdvantage(TM), which both increased 14.2%. Also, Cotter
further expanded the Pinpoint Pricing program to further reduce the selling
price of many core hardware and related products.
Overall gross margins, as a percent of revenues, decreased for the fifth
year in a row to 8.1% from 8.3% in fiscal year 1995. The reduction in gross
margin was the result of a more competitive pricing strategy, which included the
expanded Pinpoint Pricing program that resulted in a $7,100,000 price reduction
to the Members. Other strategies, predominantly the trueAdvantage(TM) program,
returned an additional $2,000,000 to the Members.
Warehouse, general and administrative expenses increased slightly compared
to the prior year, but as a percent of revenues remained comparable at 4.7% with
the prior year, due to management's continued effort to control operating
expense and an expense recovery associated with prior years' favorable risk loss
experience.
Certain estimates of warehouse, general and administrative expenses are
recorded throughout the year including expenses related to incurred but not
reported healthcare claims, premiums for comprehensive insurance, capitalizable
inventory related costs and other expense items. During the fourth quarter of
fiscal 1996, Cotter recorded approximately $11 million of net reductions in
warehouse, general and administrative expenses relating to the refinement of
these estimates recorded in the prior three quarters, a refund of insurance
premiums of approximately $7 million and cost recoveries from manufacturers of
approximately $5 million related to the Fall market.
Interest paid to Members decreased by $2,167,000 or 10.5% primarily due to
a lower principal balance and lower average interest rates.
Other interest expense increased by $877,000 or 9.4% compared to last year
primarily due to higher short-term borrowings partially offset by a lower
average interest rate.
Net margins were $52,410,000 for the year ended December 28, 1996 compared
to $59,037,000 for the year ended December 30, 1995.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
In fiscal year 1995, Cotter's 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, Cotter expanded the Pinpoint
Pricing program which reduced the selling price of many core hardware and
related products.
Overall merchandise gross margins, as a percentage of revenues, decreased
for the fourth year in a row. This reduction in gross margin percentage was the
result of an expanded Pinpoint Pricing program and the withdrawal from the
resigned businesses of V&S(R) Variety division and General Power Equipment
manufacturing division.
Warehouse, general and administrative expenses decreased by $18,652,000 or
14.0% compared to the prior year. As a percentage of revenue, these expenses
were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses
was attributable to continued efforts to reduce operating costs, an expense
recovery associated with prior years' favorable risk loss experience and
efficiencies derived from the resigned businesses.
7
<PAGE> 14
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $22,473,000 at December 30, 1995,
to $1,662,000 at December 28, 1996. This decrease was primarily due to cash flow
used for operating activities. Cash used for operating activities was $9,609,000
for the year ended December 28, 1996, compared to cash flow provided by
operating activities of $106,640,000 for the year ended December 30, 1995. The
decrease in cash flow from operating activities resulted from increased
inventory levels to better service the needs of Members with expanded inventory
selection and improved service levels. Inventory levels increased by $32,243,000
in fiscal year 1996 compared to a $69,436,000 decrease in fiscal year 1995.
Additionally, accounts and notes receivables used cash flow from operating
activities of $38,581,000 due to seasonal payment terms extended to Members.
Cash flows of $21,767,000 used for investing activities increased slightly
from the previous fiscal year.
These uses of cash flows were funded by financing activities which provided
cash flow of $10,565,000 in fiscal year 1996.
At December 28, 1996, net working capital decreased slightly to
$201,304,000 from $202,999,000 at December 30, 1995. The current ratio decreased
to 1.43 at December 28, 1996 from 1.47 at December 30, 1995.
Cotter has established a $125,000,000 five-year revolving credit facility
with a group of banks. In addition, Cotter has various short-term lines of
credit available under informal agreements with lending banks, cancelable by
either party under specific circumstances. Cotter pays commitment fees for these
lines. The borrowings under these agreements were $70,594,000 at December 28,
1996 and $2,657,000 at December 30, 1995. In addition, Cotter has a private
shelf agreement with available borrowings up to $50,000,000.
Cotter'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 Cotter'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
$23,708,000 in fiscal year 1996 compared to $28,912,000 in fiscal year 1995 and
$21,427,000 in fiscal year 1994. 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 1997 is anticipated to come from operations and external sources,
if necessary.
8
<PAGE> 15
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. TruServ's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below. Such
factors, together with the other information in this Prospectus, should be
considered carefully.
UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF COTTER AND SCC
The Merger involves the integration of SCC and Cotter's business
activities. Among the factors considered by the Cotter Board of Directors and
SCC Board of Directors in connection with their approval of the Merger Agreement
were the opportunities for operating efficiencies that they expect will
ultimately result from the Merger. The integration of TruServ's operations will
require the dedication of management resources in order to achieve the
anticipated operating efficiencies of the Merger. No assurance can be given that
difficulties encountered in integrating TruServ's on-going operations will be
overcome or that the benefits expected from such integration will be realized.
The difficulties of combining the SCC operations and Cotter's are increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures. Difficulties encountered in connection with the
Merger and the integration of the operations of SCC and Cotter could have an
adverse effect on the business, results of operations or financial condition of
TruServ. Loss of key employees may also adversely affect TruServ.
UNCERTAIN IMPACT OF GROWTH
TruServ is unable to predict the impact anticipated growth in the hardware,
DIY and rental industries may have on its future business activities. While
TruServ believes such growth will be beneficial to the new cooperative and its
Members, no assurances can be given as to whether, when or at what cost these
benefits may be achieved.
IMPACT OF INCREASING COMPETITION AND MARKET CHANGES
In recent years, the hardware, DIY and rental businesses have become
increasingly competitive. TruServ will continue to experience intense
competition from so-called "Big Box" stores such as Home Depot, Menards,
Builders Square and Lowes, as well as from additional emphasis on directly
competitive lines of business by diversified retailers such as Sears. In many
instances, these competitors have greater resources, larger market shares and
more widespread presence than TruServ has. While TruServ believes that because
of its structure as a cooperative, it represents the best opportunity for its
Members to compete with the Big Boxes and general retailers, no assurances can
be given that such competition will be successful in any individual case or as a
whole.
POTENTIAL LOSS OF MEMBERS
If either a significant number of Members or Members representing a
disproportionate amount of the Members' aggregate purchases choose to terminate
their memberships as a result of dissatisfaction with the Merger, the effect on
TruServ could be adverse. Management has projected that approximately 300 former
SCC Members may leave the membership within the first 12 months following the
Merger. Such loss of members is not expected to have a material impact on
TruServ. TruServ does not expect any material loss of former Cotter Members due
to the Merger. TruServ believes that various competing cooperative organizations
will attempt to persuade former Members of SCC and Cotter to terminate their
relationships and become members of such competing organizations. To the extent
these recruitment efforts are successful, the effect on TruServ and its Members
could be adverse.
VOLATILITY OF MERCHANDISE AND INVENTORY PRICES
Merchandise and inventory prices in the lumber and building material
businesses can change rapidly and as a result of such fluctuations may have
periodic adverse effects on TruServ's profit margins and competitive
9
<PAGE> 16
abilities. Generally speaking, prices for goods are higher when purchased in
smaller lots. While TruServ believes its cooperative structure presents the best
opportunity for Members to maximize their purchasing power and acquire
merchandise for their Members at lower prices, no assurances can be given that
such will be the case for any individual Member or as a whole.
DIFFICULTIES IN INTEGRATING INFORMATION MANAGEMENT AND TECHNOLOGY SYSTEMS
The Management Information Systems and other technological aspects of the
pre-Merger businesses of Cotter and SCC, such as ordering systems, differing
types of SKU's, and Member communication systems, among others, are not
compatible. TruServ expects to integrate these systems as rapidly as possible,
but it is possible that currently unanticipated delays in time and increased
costs in achieving such systems integration may be encountered as the business
of TruServ goes forward.
IMPACT OF ENVIRONMENTAL ISSUES
Certain aspects of TruServ's business activities, such as the manufacture
of paint and related products, are carried on in environmentally sensitive
areas. TruServ is unable to predict whether, or to what extent, such business
activities may result in future costs or liabilities which are not currently
known. In addition, the environmental area is under constant review and scrutiny
by governmental authorities at the federal, state and local levels. No
assurances can be given that such governmental scrutiny may not have a material
adverse effect on TruServ.
DIFFICULTIES OF COMBINING DISTRIBUTION FACILITIES AND SYSTEMS OPERATIONS
Because of the disparate nature of existing distribution facilities and
methods, TruServ expects to spend significant time, effort and funds in
commonizing those activities. While TruServ has no reason to expect that such
commonization will not be achieved over time, the cost of doing so may be
material.
REGIONAL VARIATIONS IN MARKETING OPPORTUNITIES
Because TruServ will transact business nationwide, there may from time to
time be significant variations in marketing opportunities available to its
Members depending on economic conditions in the specific geographic region in
which that Member conducts his or her primary business. To the extent that
specific geographic regions experience more favorable or unfavorable economic
conditions than other areas of the country, the business of Members in those
regions would be affected accordingly. TruServ is not able to predict whether
the effect of such regional variations might be material to any individual
Member.
COMMONIZATION
Prior to the Merger, Members of SCC and Cotter utilized different pricing
strategies in the conduct of their separate businesses, disparate merchandise
assortments and merchandise identification systems, procurement and distribution
methods, vendor selection rationales, and stock keeping unit systems. These
various items will be commonized over time for all Members. TruServ is not
currently able to predict the costs of such commonization, except as itemized in
the "Unaudited Pro Forma Consolidated Financial Statements", which may be
material, or the effect on anticipated operating synergies resulting from the
Merger.
IMPACT OF FRANCHISING AND LICENSING LAWS
Prior to the Merger, SCC conducted a portion of its business in the form of
franchise and license arrangements with Members. As part of this process, SCC
complied with various franchise registration and related laws in approximately
fifteen states. Cotter did not conduct any portion of its business as a
franchise prior to the Merger. To the extent that additional business activities
of TruServ are required to comply with various franchise or licensing laws,
rules or regulations, additional costs would be incurred. TruServ cannot
currently quantify the potential cost of such compliance. Furthermore, such
franchise and license compliance issues could adversely impact the relationship
between TruServ and its Members, as well as the manner in
10
<PAGE> 17
which TruServ is expected to conduct its operations, and lead to loss of
management flexibility and related synergies.
USE OF PROCEEDS
The proceeds to be received from this offering of Class A Common Stock will
be used by TruServ primarily for general working capital purposes, including the
purchase of merchandise for resale to Members and the maintenance of adequate
inventory levels. Until used as provided herein, the net proceeds of the sale of
the Class A Common Stock may be invested in short-term commercial paper, bank
certificates of deposit, government securities, repurchase agreements, or other
similar short-term investments.
TruServ will use its best efforts to sell the Class A Common Stock being
offered hereunder but can give no assurances that all such Class A Common Stock
will be sold. As a result, TruServ may not receive the entire amount of
estimated proceeds from the sale of said Class A Common Stock.
PLAN OF DISTRIBUTION
TruServ's Class A Common Stock being offered hereby is offered exclusively
to retailers of hardware, lumber and related merchandise, in connection with
becoming Members of TruServ. Each independent retailer who applies to become a
stockholder-Member must subscribe for sixty (60) shares of TruServ's Class A
Common Stock, $100 par value, having a total purchase price of $6,000, for each
retail store (up to a maximum of 300 shares at $30,000 for five or more stores).
All sales of the Class A Common Stock will be made for cash.
Sales of Class A Common Stock are primarily made through TruServ's
registered securities agent(s) but only after the executive officers of TruServ
approve the admission of a new Member. Neither TruServ executive officers nor
its agent(s) receive any special or separate compensation or commission in
connection with the admission of new Members and concomitant sales of Class A
Common Stock. Although TruServ's retail support representatives frequently are
TruServ's initial contact with potential new Members, they do not, and are not
empowered to, admit new Members to TruServ.
DIVIDENDS
Other than the payment of patronage dividends, including the redemption of
some nonqualified written notices of allocation, TruServ 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) on the Class A Common Stock and Class B Common Stock,
subject to the provisions of the Company's Certificate of Incorporation, may be
declared out of gross margins of TruServ, 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" and "Description of Common Stock".
BUSINESS OF TRUSERV
GENERAL
TruServ is a Member-owned wholesaler of hardware, lumber and related
merchandise. Historically, Cotter was the largest and SCC the third largest
cooperative wholesaler of hardware and related merchandise in the United States.
TruServ also manufactures paint and paint applicators. For reporting purposes,
TruServ operates in a single industry as a Member-owned wholesaler cooperative.
On April 1, 1997, the stockholders of Cotter and the shareholders of SCC
agreed to merge the two companies pursuant to the Merger Agreement. SCC was a
$1,700,000,000 hardware wholesaler with a strong
11
<PAGE> 18
presence in retail lumber and building materials. The transaction was completed
on July 1, 1997. Following completion of the Merger, the Company was renamed
TruServ Corporation.
Membership entitles a Member to use certain TruServ trademarks and trade
names, including the federally registered collective membership trademark True
Value(R), indicating membership in "True Value(R) Hardware Stores", SERVISTAR(R)
and Coast to Coast(R). The "True Value(R)" collective membership mark has a
present expiration date of January 2, 2003; the SERVISTAR(R) mark has a present
expiration date of September 13, 1997 and Coast to Coast(R) expires on November
3, 2004. The precise names and marks entitled to be used are set forth in a
Member's Retail Member Agreement.
COTTER & COMPANY (PRIOR TO THE MERGER)
Cotter served approximately 5,300 True Value(R) Hardware Stores throughout
the United States. Primary concentrations of Members were 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). SCC served approximately 4,800 Members throughout the
United States and abroad. Primary concentrations of Members were in Pennsylvania
(approximately 10%), New York (approximately 10%), Florida (approximately 4%)
and Minnesota and Virginia (approximately 3%). TruServ serves approximately
10,100 Members throughout the United States. Primary concentrations of Members
exist in New York and Pennsylvania (approximately 8% each) and California,
Illinois and Texas (approximately 4% each).
Cotter'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
---------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Hardware Goods..................................... 22.4% 22.3% 20.1%
Electrical and Plumbing............................ 18.2% 17.7% 15.8%
Painting and Cleaning.............................. 14.0% 13.3% 14.4%
Farm and Garden.................................... 13.8% 13.3% 12.5%
Lumber and Building Materials...................... 12.8% 12.7% 12.9%
Appliances and Housewares.......................... 11.2% 11.7% 10.4%
Sporting Goods and Toys............................ 7.6% 9.0% 13.9%
</TABLE>
TruServ serves its Members by functioning as a low cost distributor of
goods and maximizing its volume purchasing abilities, primarily through lower
prices and vendor rebates and discount programs, for the benefit of its Members.
These benefits are passed along to its Members in the form of lower prices
and/or patronage dividends. TruServ has numerous individual agreements or
commitments from its suppliers, virtually all of which are terminable by such
suppliers without cause. Such provisions, either individually or in the
aggregate, have not had any material adverse effect on TruServ's ability to
conduct its business. The goods and services purchased by TruServ from these
suppliers are generally available from a wide variety of sources. TruServ is not
dependent upon any one supplier or group of suppliers and has not experienced a
problem in obtaining necessary goods. TruServ holds conventions and meetings for
its Members in order to keep them better informed as to industry trends and the
availability of new merchandise. TruServ also provides each of its Members with
an illustrated price catalog showing the products available from TruServ. Prior
to the Merger, Cotter's sales to its Members were divided into three categories,
as follows: (1) warehouse shipment sales (approximately 49% of total sales); (2)
direct shipment sales (approximately 41% of total sales); and (3) relay sales
(approximately 10% of total sales). Warehouse shipment sales are sales of
products purchased, warehoused, and resold by Cotter upon orders from the
Members. Direct shipment sales are sales of products purchased by Cotter but
delivered directly to Members from manufacturers. Relay sales are sales of
products purchased by Cotter 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, TruServ will give notice to all Members of its
intention to purchase products for relay shipment and then purchase only so many
of such products as the Members order. When the product shipment arrives at
TruServ, it is not warehoused; rather, TruServ breaks up the shipment and
"relays" the appropriate quantities to the Members who placed orders.
12
<PAGE> 19
TruServ also manufactures paint and paint applicators. The principal raw
materials used by TruServ are chemicals including among other ingredients,
resins, solvents, coalescent extenders and pigments. All raw materials are
purchased from outside sources. There are no minimum/maximum purchase
obligations with the vendors and they have the right to terminate their
agreements at any time. Currently, there is no shortage, nor is any anticipated,
of such raw materials which would materially impact operations. The raw
materials purchased by TruServ from these vendors are generally available from a
variety of sources. TruServ is not dependent upon any one supplier and has not
experienced a problem in obtaining necessary raw materials.
TruServ annually sponsors four "markets" (two in the Spring and two in the
Fall). 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 May 24, 1997 and May 25, 1996, Cotter had a backlog of firm orders
(including relay orders) of approximately $32,907,000 and $36,229,000,
respectively. TruServ'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 placed at TruServ's four markets, for delivery during the several
months subsequent to the markets. Thus, TruServ 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 TruServ 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 TruServ has been responsive through a retail
oriented competitive pricing strategy on high turnover, price sensitive items
(Pinpoint Pricing program for Cotter and the Everyday Value Pricing program for
SCC). The trueAdvantage(TM) program was introduced by Cotter in 1995 to promote
higher retail standards in order to build consumer loyalty and create a positive
image for all True Value(R) stores. The trueAdvantage(TM) program is a voluntary
program developed to help Members meet the wants and needs of the retail
customer coming into hardware stores. The program establishes twelve standards
to be met for the benefit of the retail customer. Included are state-of-the-art,
high-tech standards like in-store computerization and participation in the
TruServ Satellite Network as well as various "low-tech" essentials. The benefits
of being a trueAdvantage(TM) Member include below market-rate business
improvement financing and a 5% year-end discount on increases in their warehouse
purchases. Prior to the Merger, over 1,000 Members had committed to the
trueAdvantage(TM) program.
TruServ 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 price, service 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.
TruServ, 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 505 True
Value(R) Hardware and V&S(R) Variety Stores, all located in Canada. The
cooperative has approximately 325 employees and generated less than 5% of
TruServ's consolidated revenue in fiscal year 1996.
TruServ operates several other subsidiaries, most of which are engaged in
businesses providing additional services to TruServ's Members. In the aggregate,
these subsidiaries are not significant to TruServ's results of operations.
13
<PAGE> 20
TruServ employs approximately 5,500 persons in the United States on a
full-time basis. Due to the widespread geographical distribution of TruServ's
operations, employee relations are governed by the practices prevailing in the
particular area and are generally dealt with locally. Approximately 22% of
TruServ's hourly-wage employees are covered by collective bargaining agreements
which are generally effective for periods of three or four years. In general,
TruServ considers its relationship with its employees to be good.
RETAIL MEMBER AGREEMENT; FRANCHISE AND LICENSE AGREEMENTS
The TruServ Retail Member Agreement provides, among other things, that each
Member:
(i) will be required to own 60 shares of Class A Common Stock of
TruServ for each store owned by such Member (up to a maximum of 300 shares
for five or more stores);
(ii) will conduct its businesses under the True Value(R), SERVISTAR(R)
or Coast to Coast(R) names (or other affiliated names or marks) subject to
the terms of the Retail Member Agreement;
(iii) will conduct a retail hardware, lumber, building materials, home
center, rental or industrial/ commercial operation at a designated
location;
(iv) will comply with TruServ's By-Laws as in effect from time to
time;
(v) will accept patronage dividends in a form complying with the
requirement of the Internal Revenue Code for deduction from gross income by
TruServ;
(vi) may receive different services and pay different charges based on
the volume of merchandise purchased by the Member;
(vii) agrees to have its Retail Member Agreement terminated in certain
circumstances by unilateral action by TruServ's Board of Directors;
(viii) agrees to have its Retail Member Agreement automatically
modified upon notice to the Member by TruServ of any change in its
Certificate of Incorporation or By-Laws or any resolution of the Board of
Directors;
(ix) agrees to have its Retail Member Agreement governed by Illinois
law, and enforced or interpreted only in courts located in Cook County,
Illinois or any contiguous county; and
(x) may terminate the Retail Member Agreement upon 60 days written
notice to TruServ.
Some of the licenses and franchise agreements of former SCC Members have
been assigned by TruServ to a new wholly-owned limited liability company which
has been created for the purpose of continuing to operate any license or
franchise activities which may be continued in that format after July 1. TruServ
will review any retail activities which continue to be carried out as
franchises. It is anticipated that additional licenses may be entered into
periodically with respect to the Taylor Rental Centers and Grand Rental
Stations. It is less likely that any additional franchise or license agreements
will be entered into with respect to the other retail programs operated as
franchises by SCC prior to the Merger. Rather, it is contemplated that these
programs will initially be operated as part of the cooperative activities of
TruServ.
14
<PAGE> 21
DISTRIBUTION OF PATRONAGE DIVIDENDS
TruServ operates on a cooperative basis with respect to business done with
or for Members. All Members are entitled to receive patronage dividend
distributions from TruServ on the basis of gross margins of merchandise and/or
services purchased by each Member. In accordance with TruServ'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 TruServ'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 TruServ's fiscal year, and TruServ may elect to
distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.
TruServ'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 Common Stock based on par
value thereof, to a maximum of 2% of the Member's net purchases of merchandise
from TruServ 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. Such promissory (subordinated) notes are for a five year term, bear
interest at a fixed rate based on a premium spread above comparable U.S.
Treasury notes as approved by the Board of Directors, and are subordinated to
all other debt of TruServ. TruServ may also issue nonqualified written notices
of allocation to its Members as part of its annual patronage dividend. See
"Payment of Patronage Dividends in Accordance with the Internal Revenue Code."
In determining the form of the annual patronage dividend, a Member's
required investment in Class B Common Stock of TruServ had historically been
limited by the Board of Directors to an amount, the cumulative value of which
will not exceed two percent (2%) of the Member's net purchases of merchandise
from the Company. Commencing in 1996, the Board established minimum Class B
ownership requirements (currently $25,000 for hardware stores and $15,000 for
lumber stores) which may be varied from time to time and is comprised of the
aggregate of a Member's various types of annual purchases multiplied by a
specific percentage, that varies from 14% to 1%, decreasing as total dollar
purchases by category increase. The amount of such required investment is
determined by majority vote of the Board of Directors, and may be increased or
decreased by such vote. The basis for determining the necessity of an increase
or decrease is through evaluation of the financial needs of TruServ, keeping in
mind the needs of the membership. The consideration and method of payment for
such shares is by way of the required amount being calculated as part of the
annual patronage dividend distribution amount.
Until at least July 1, 1998, new Members who join TruServ will have their
patronage dividend computed and distributed in accordance with the method used
prior to the Merger by the constituent corporation thereof offering the retail
program (e.g., True Value(R), ServiStar(R) or Coast to Coast(R)) chosen by such
new Members.
PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE
The Code specifically provides for the taxation of cooperatives (such as
TruServ) and their patrons (such as TruServ'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, the promissory (subordinated) notes and
other written notices, which disclose to the recipient the stated amount
allocated to him by TruServ and the portion thereof which is a patronage
dividend, distributed by TruServ to its Members are "written notices of
allocation" within the meaning of that phrase as used in the Code. For such
written notices to be "qualified written notices of allocation" within the
meaning of the Code, it is necessary that TruServ pay 20% or more of the annual
patronage dividend in cash and that the Members consent to having the
allocations (at their stated dollar amount) treated as being constructively
received by them and includable in their gross income. Such written notices that
do not meet these requirements are "nonqualified written notices of allocation"
within the
15
<PAGE> 22
meaning of the Code. Cash, qualified written notices, and other property (except
nonqualified written notices of allocation) are currently deducted from earnings
in determining the taxable income of TruServ and, accordingly such qualified
written notices of allocation are includable in gross income of the patron
(Member). Section 1385(a) of the Code provides, in substance, that the amount of
any patronage dividend which is paid in cash, qualified written notices of
allocation or other property (except nonqualified written notices of allocation)
shall be included in the gross income of the patron (Member) for the taxable
year in which it receives such cash or such qualified written notices of
allocation. In general, with respect to nonqualified written notices of
allocation, no amounts are deductible by TruServ or includable in gross income
of the patron (Member) until redeemed by TruServ.
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, TruServ'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 TruServ) 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
TruServ 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. Such consent may be
revoked by the Member only by terminating its membership in TruServ in the
manner provided in its Retail Member Agreement.
Each year since 1978, TruServ 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 TruServ or its
ability to maintain adequate working capital for the normal requirements of its
business. However, TruServ 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, TruServ deposits a bulk
certificate and a bulk promissory (subordinated) note 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.
16
<PAGE> 23
MANAGEMENT
The directors and principal executive officers of TruServ are as follows:
J.W. (BILL) BLAGG -- 47
Director
WILLIAM M. CLAYPOOL, III -- 74
Director
DANIEL A. COTTER -- 61
Director, Chief Executive Officer and Chairman of the Board
JAY FEINSOD -- 53
Director
DAVE GUTHRIE -- 44
Director
WILLIAM M. HALTERMAN -- 49
Director
WILLIAM HOOD -- 57
Director
JAMES HOWENSTINE -- 53
Director
DONALD J. HOYE -- 48
Executive Vice President -- Business Development
JERRALD T. KABELIN -- 59
Director
PETER G. KELLY -- 53
Director
KERRY J. KIRBY -- 50
Executive Vice President & Chief Financial Officer
ROBERT J. LADNER -- 50
Director
EUGENE J. O'DONNELL -- 50
Executive Vice President -- Merchandising
PAUL E. PENTZ -- 56
Director, President & Chief Operating Officer
GEORGE V. SHEFFER -- 44
Director
DENNIS A. SWANSON -- 57
Director
JOHN WAKE, JR. -- 41
Director
JOHN M. (MITCH) WEST, JR. -- 44
Director
17
<PAGE> 24
BARBARA B. WILKERSON -- 48
Director
During the past five years, the principal occupation of each director of
the Company, other than Daniel A. Cotter and Paul E. Pentz, was the operation of
retail hardware stores.
DESCRIPTION OF COMMON STOCK
DIVIDEND RIGHTS. Dividends (other than patronage dividends) upon the Class
A Common Stock (which is being registered herein) and Class B Common Stock,
subject to the provisions of TruServ's Certificate of Incorporation, may be
declared out of gross margins of TruServ, 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
"Dividends").
VOTING RIGHTS. The Class A Common Stock, which is the sole voting stock, is
offered only in sixty (60) share units, and no party may acquire more than five
units. The holders of Class A Common Stock have the exclusive voting power upon
all questions submitted to stockholders (including the election of Directors),
being entitled to one vote per share. Pursuant to the Certificate of
Incorporation and By-Laws of TruServ, the Board of Directors consists of
directors who are elected for staggered three-year terms.
LIQUIDATION RIGHTS. Upon dissolution, liquidation or winding up of the
Company, voluntary or involuntary, the assets are to be divided among and
distributed ratably to the holders of shares of Class A Common Stock and Class B
Common Stock pro rata in accordance with their holdings and without preference
as between the classes.
PREEMPTIVE RIGHTS. Each shareholder has the right to purchase, and must
purchase when he becomes a stockholder-Member, sixty (60) shares of Class A
Common Stock per store, up to a maximum of 300 shares for five or more stores.
No shares of Class A Common Stock shall be issued or sold except in such units
and under such circumstances. No shares of Class B Common Stock shall be issued
or sold except to parties who are, at the time of issuance, a holder of shares
of Class A Common Stock.
REDEMPTION PROVISIONS. The Retail Member Agreement (the "Agreement") may be
terminated by either TruServ or the Member on sixty (60) days' written notice.
Termination by TruServ requires approval by a two-thirds vote of the Board of
Directors, except in the following circumstances where TruServ has the right to
immediately terminate the Agreement: the Member becomes insolvent, commits any
act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated as
bankrupt, or commits a breach of any obligation under the Agreement, which
breach is not cured within sixty (60) days after written notice to the Member by
TruServ. In the event the Agreement is terminated, TruServ undertakes to
purchase and the Member is required to sell all of his Class A Common Stock and
Class B Common Stock at a price equal to the par value thereof. 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 which bears interest at the
same rate per annum as the promissory (subordinated) notes most recently issued
as part of TruServ's annual patronage dividend.
STOCKHOLDERS. As of July 1, 1997, there were approximately 9,600
stockholders of Class A Common Stock and approximately 9,500 stockholders of
Class B Common Stock.
OTHER RESTRICTIONS AND RIGHTS. (a) There are no conversion rights, sinking
fund provisions, or liability to further calls or assessment by TruServ in
regard to the Class A Common Stock.
(b) TruServ is given an automatic lien to secure the payment of any
indebtedness due TruServ from any stockholder of record upon the Class A Common
Stock and Class B Common Stock shares of such stockholder and upon any declared
and unpaid dividends thereon.
(c) There is no existing market for the Class A Common Stock being offered.
Whenever any stockholder may desire to dispose in any manner, by sale, gift or
otherwise, of all or any part of his shares of either class of common stock, and
whenever any stockholder dies or suffers any other event giving rise to
voluntary or involuntary transfer, by operation of law or otherwise, of all or
part of his said shares, TruServ is given the option, exercisable within ninety
(90) days following the date upon which it receives written notice from the
18
<PAGE> 25
stockholder, his heirs, executors, personal representatives or other party in
interest, as the case may be, of the intended disposition or of the death of the
stockholder or other event giving rise to voluntary or involuntary transfer of
the shares, to repurchase all shares referred to in the notice. The option price
in the case of either class of common stock is the par value thereof. Any
disposition or attempted disposition or transfer, voluntary or involuntary, of
common stock of TruServ is null and void and confers no rights upon the
transferee unless and until TruServ has been given the required notice and has
failed to exercise its option to purchase within the specified time. The above
restrictions do not apply, in the case of a pledge by a stockholder of any of
his shares in a bona fide transaction as security for a debt, until the pledge
or lienholder forecloses the pledge or lien. The above restrictions do not apply
at all in the case of a Class B Common Stock disposition to a person who is the
owner of shares of Class A Common Stock of TruServ.
LEGAL MATTERS
The legality of the issuance of the Class A Common Stock offered hereby
will be passed upon for TruServ by Messrs. Arnstein & Lehr, Suite 1200, 120
South Riverside Plaza, Chicago, Illinois 60606.
19
<PAGE> 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
COTTER & COMPANY
Condensed Consolidated Balance Sheet at March 29, 1997 and
December 28, 1996...................................... 22-23
Condensed Consolidated Statement of Operations for the
thirteen weeks ended March 29, 1997 and March 30,
1996................................................... 24
Condensed Consolidated Statement of Cash Flows for the
thirteen weeks ended March 29, 1997 and March 30,
1996................................................... 25
Notes to Condensed Consolidated Financial Statements...... 26-27
Report of Independent Auditors............................ 28
Consolidated Balance Sheet at December 28, 1996 and
December 30, 1995...................................... 29-30
Consolidated Statement of Operations for each of the three
years in the period ended
December 28, 1996...................................... 31
Consolidated Statement of Cash Flows for each of the three
years in the period ended
December 28, 1996...................................... 32
Consolidated Statement of Capital Stock and Retained
Earnings for each of the three years in the period
ended December 28, 1996................................ 33
Notes to Consolidated Financial Statements................ 34-41
SERVISTAR COAST TO COAST CORPORATION
Consolidated Balance Sheets at March 31, 1997 and June 30,
1996................................................... 42
Consolidated Statements of Operations for the three months
and nine months ended March 31, 1997 and 1996.......... 43
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1997 and 1996.......................... 44
Report of Independent Accountants......................... 45
Consolidated and Combined Balance Sheets at June 30, 1996
and 1995............................................... 46-47
Consolidated and Combined Statements of Operations for
each of the three years in the period ended June 30,
1996................................................... 48
Consolidated and Combined Statements of Cash Flows for
each of the three years in the period ended June 30,
1996................................................... 49
Notes to Consolidated and Combined Financial Statements... 50-56
</TABLE>
20
<PAGE> 27
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LEFT BLANK
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21
<PAGE> 28
COTTER & COMPANY
------------------
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1997 1996
--------- ------------
(000'S OMITTED)
(UNAUDITED)
<S> <C> <C>
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.
22
<PAGE> 29
COTTER & COMPANY
------------------
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1997 1996
--------- ------------
(000'S OMITTED)
(UNAUDITED)
<S> <C> <C>
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.
23
<PAGE> 30
COTTER & COMPANY
------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THIRTEEN WEEKS ENDED
------------------------
MARCH 29, MARCH 30,
1997 1996
--------- ---------
(000'S OMITTED)
(UNAUDITED)
<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.
24
<PAGE> 31
COTTER & COMPANY
------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THIRTEEN WEEKS ENDED
---------------------------
MARCH 29, MARCH 30,
1997 1996
--------- ---------
(000'S OMITTED)
(UNAUDITED)
<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.
25
<PAGE> 32
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 Form
S-2 Registration Statement (No. 333-26727) 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.
26
<PAGE> 33
COTTER & COMPANY
------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 3--INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1997 1996
--------- ------------
(000'S OMITTED)
(UNAUDITED)
<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>
27
<PAGE> 34
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, except for Note 11
as to which the date is April 1, 1997
28
<PAGE> 35
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(000'S OMITTED)
<S> <C> <C>
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
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE> 36
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(000'S OMITTED)
<S> <C> <C>
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.
30
<PAGE> 37
COTTER & COMPANY
------------------
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.
31
<PAGE> 38
COTTER & COMPANY
------------------
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.
32
<PAGE> 39
COTTER & COMPANY
------------------
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 FOREIGN
------------------- ---------------- CURRENCY
ISSUED AND RETAINED TRANSLATION
ISSUED SUBSCRIBED TO BE 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.
33
<PAGE> 40
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. 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(R) Variety division to a national wholesaler who 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
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.
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.
34
<PAGE> 41
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 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>
3. PROPERTIES
Properties owned or leased under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 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>
35
<PAGE> 42
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 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, $17,574,000, $7,625,000,
$4,000,000 and $32,000,000, respectively.
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
subsidiary 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.
36
<PAGE> 43
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS
The Company rents buildings and warehouse, office, computer and
transportation equipment under operating and capital leases. The following is a
schedule of future minimum lease payments under 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 $10,387
1998................................................. 1,144 9,126
1999................................................. 809 7,411
2000................................................. 296 6,221
2001................................................. 184 5,509
Thereafter........................................... 108 45,651
------ -------
Net minimum lease payments............................. 3,974 $84,305
=======
Less amounts 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.
Rent expense under operating leases was as follows:
<TABLE>
<CAPTION>
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>
37
<PAGE> 44
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
<TABLE>
<CAPTION>
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>
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
38
<PAGE> 45
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
39
<PAGE> 46
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CASH FLOW
The Company's noncash 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 noncash operating and financing activities 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>
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 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>
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
40
<PAGE> 47
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company does not anticipate that these changes will have a material impact on
net pension cost in future years. In fiscal years 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.
11. SUBSEQUENT EVENT
On April 1, 1997, the stockholders of the Company and the shareholders of
ServiStar Coast to Coast Corporation voted to merge the two companies effective
July 1, 1997.
41
<PAGE> 48
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
--------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,454 $ 5,172
Accounts and notes receivable............................. 196,075 192,299
Merchandise inventory..................................... 174,889 171,976
Prepaid expenses.......................................... 3,534 8,314
-------- --------
Total current assets.............................. 375,952 377,761
Properties owned, less accumulated depreciation............. 79,933 78,414
Other assets................................................ 16,214 11,607
-------- --------
Total assets...................................... $472,099 $467,782
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $220,611 $212,612
Current maturities of long-term debt...................... 5,568 5,645
Patronage dividends payable in cash....................... 3,699 9,656
-------- --------
Total current liabilities......................... 229,878 227,913
-------- --------
Long-term debt.............................................. 123,428 118,476
-------- --------
Owners' equity:
Preferred stock........................................... 112,857 118,359
Common stock.............................................. 12,718 8,487
Retained deficit.......................................... (6,782) (5,453)
-------- --------
Total owners' equity......................... 118,793 121,393
-------- --------
Total liabilities and owners' equity......... $472,099 $467,782
======== ========
</TABLE>
42
<PAGE> 49
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
------------------------ --------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................................... $405,477 $440,641 $1,294,469 $1,261,628
-------- -------- ---------- ----------
Cost and expenses:
Cost of goods sold......................... 374,629 406,079 1,193,729 1,158,510
Distribution, selling and administrative... 27,721 30,380 87,915 91,630
Interest expense........................... 2,649 2,562 7,586 7,726
Other income, net.......................... (661) (1,289) (2,033) (3,493)
Income tax expense......................... 99 99 297 297
-------- -------- ---------- ----------
404,437 437,831 1,287,494 1,254,670
-------- -------- ---------- ----------
Net margins.................................. $ 1,040 $ 2,810 $ 6,975 $ 6,958
======== ======== ========== ==========
</TABLE>
43
<PAGE> 50
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net margins............................................... $ 6,975 $ 6,958
Adjustments to reconcile net margins to net cash from
operating activities:
Depreciation........................................... 5,311 5,690
Amortization........................................... 2,155 1,855
(Gain) loss on disposition............................. (38) (128)
Increase (decrease) from changes in:
Receivables.......................................... (3,776) (3,431)
Merchandise inventory................................ (2,913) (18,603)
Prepaid expenses..................................... 4,780 (2,803)
Accounts payable and accrued expenses................ 7,726 16,909
-------- --------
Net cash provided by operating activities.... 20,220 6,447
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment........... 41 721
Purchases of property and equipment.................... (6,830) (8,383)
(Increase) decrease in other assets.................... (6,762) 2,069
-------- --------
Net cash (used in) provided by investing
activities................................ (13,551) (5,593)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt, net.......................... 4,875 14,590
Proceeds from issuance of capital stock................... 4,755 215
Repurchase of capital stock............................... (10,361) (8,844)
Payment of cash portion of patronage dividends............ (9,656) (11,140)
-------- --------
Net cash used in financing activities........ (10,387) (5,179)
-------- --------
Net decrease in cash........................................ (3,718) (4,325)
Cash at beginning of period................................. 5,172 5,833
-------- --------
Cash at end of period....................................... $ 1,454 $ 1,508
======== ========
</TABLE>
44
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of
SERVISTAR Corporation:
We have audited the accompanying consolidated and combined balance sheets of
SERVISTAR Corporation and Coast to Coast Stores, Inc. as described in Note B to
the financial statements as of June 30, 1996 and 1995 and the related statement
of operations and cash flows for each of the three years in the period ended
June 30, 1996. These financial statements are the responsibility of the
Corporation'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 financial position of SERVISTAR Corporation as of
June 30, 1996 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended June 30, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
July 26, 1996, except for Note J
as to which the date is April 1, 1997
45
<PAGE> 52
SERVISTAR CORPORATION
---------------
CONSOLIDATED AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30
--------------------
1996 1995
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,172 $ 5,833
Receivables, less allowance for doubtful accounts of
$1,557 in 1996 and $1,547 in 1995...................... 192,299 193,001
Merchandise inventory..................................... 171,976 173,706
Prepaid expenses.......................................... 8,314 7,653
-------- --------
Total current assets......................... 377,761 380,193
Property and equipment, at cost:
Buildings................................................. 81,272 77,365
Office and warehouse equipment............................ 62,013 57,520
-------- --------
143,285 134,885
Less accumulated depreciation............................. 70,276 63,872
-------- --------
73,009 71,013
Land...................................................... 5,405 4,674
-------- --------
78,414 75,687
Other assets................................................ 11,607 10,950
-------- --------
Total assets................................. $467,782 $466,830
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE> 53
SERVISTAR CORPORATION
---------------
CONSOLIDATED AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30
--------------------
1996 1995
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.......................................... $183,357 $191,981
Accrued liabilities....................................... 29,255 27,513
Patronage dividends payable -- SERVISTAR.................. 7,172 7,957
Patronage dividends payable -- Coast to Coast Stores,
Inc. .................................................. 2,484 3,182
Current portion of long-term debt......................... 5,645 6,171
-------- --------
Total current liabilities.................... 227,913 236,804
Long-term debt, less current portion........................ 118,476 108,592
-------- --------
Total liabilities............................ 346,389 345,396
Owners' equity:
Capital stock:
Preferred (as to assets only) nonparticipating, $50 par
value; authorized shares, 3,000,000; outstanding
shares: 1996, 1,858,940; 1995, 1,813,480.............. 92,947 90,674
Common, $100 par value; authorized shares, 300,000;
outstanding shares: 1996, 31,840; 1995, 32,072........ 3,184 3,207
Common preference redeemable, $100 par value;
authorized shares, 5,000; outstanding shares: 1995,
1,000................................................. -- 100
Amounts due owners in preferred stock -- SERVISTAR........ 8,269 9,439
Amounts due owners in preferred stock -- Coast to Coast
Stores, Inc. .......................................... 2,138 2,947
Capital stock of subsidiary............................... 819 790
Capital stock of Coast to Coast Stores, Inc.:
Preferred (as to assets only) nonparticipating, $50 par
value; authorized shares, 3,000,000; outstanding
shares: 1996, 300,100; 1995, 284,920.................. 15,005 14,246
Common, $600 par value; authorized shares, 300,000;
outstanding shares: 1996, 8,390; 1995, 8,450 (net of
stock subscriptions receivable of: 1996, $550; 1995,
$413)................................................. 4,484 4,657
Retained earnings (deficit):
Parent................................................. 76 76
Subsidiaries........................................... (5,529) (4,702)
-------- --------
Total owners' equity......................... 121,393 121,434
-------- --------
Total liabilities and owners' equity......... $467,782 $466,830
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE> 54
SERVISTAR CORPORATION
------------------
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
----------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues......................................... $1,729,908 $1,802,103 $1,734,905
Costs and expenses:
Cost of goods sold................................. 1,611,174 1,679,615 1,613,257
Distribution, selling and administrative
expenses........................................ 93,080 95,179 93,006
Interest expense................................... 10,091 10,825 10,076
Other income, net.................................. (3,471) (6,886) (6,866)
---------- ---------- ----------
Total costs and expenses................... 1,710,874 1,778,733 1,709,473
---------- ---------- ----------
Net margins.......................................... $ 19,034 $ 23,370 $ 25,432
========== ========== ==========
Retained deficit at beginning of year................ $ (4,626) $ (4,675) $ (4,043)
Net margins.......................................... 19,034 23,370 25,432
Patronage dividends.................................. (19,861) (23,321) (26,064)
---------- ---------- ----------
Retained deficit at end of year...................... $ (5,453) $ (4,626) $ (4,675)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 55
SERVISTAR CORPORATION
------------------
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
--------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net margins............................................. $ 19,034 $ 23,370 $ 25,432
Adjustments to reconcile net margins to net cash
provided by operating activities:
Depreciation......................................... 7,187 7,110 6,285
Amortization......................................... 2,343 3,698 3,048
Gain on disposition of property and equipment........ (410) (152) --
Increase (decrease) from changes in:
Receivables........................................ 702 5,627 (4,108)
Merchandise inventory.............................. 1,730 2,443 (4,406)
Prepaid expenses................................... (661) 655 (211)
Accounts payable and accrued expenses.............. (6,882) (24,183) 41,150
Other adjustments, net............................. 15 (3,028) 317
-------- -------- --------
Net cash provided by operating activities..... 23,058 15,540 67,507
Cash flows from investing activities:
Proceeds from sale of property and equipment............ 1,507 431 56
Purchases of property and equipment..................... (11,011) (7,518) (2,714)
(Increase) decrease in other assets..................... (3,014) (236) 842
-------- -------- --------
Net cash used in investing activities......... (12,518) (7,323) (1,816)
Cash flows from financing activities:
Proceeds from long-term debt............................ 20,245 34,400 (12,800)
Payments on long-term debt.............................. (10,887) (22,453) (35,974)
Proceeds from issuance of capital stock................. 333 333 597
Repurchase of capital stock............................. (9,963) (8,539) (7,770)
Payment of cash portion of patronage dividends.......... (10,929) (12,803) (9,419)
-------- -------- --------
Net cash used in financing activities......... (11,201) (9,062) (65,366)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents...... (661) (845) 325
Cash and cash equivalents at beginning of year............ 5,833 6,678 6,353
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 5,172 $ 5,833 $ 6,678
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................. $ 9,430 $ 10,049 $ 8,639
======== ======== ========
Non-cash financing activities:
SERVISTAR preferred stock patronage dividend............ $ 9,439 $ 8,631 $ 9,777
======== ======== ========
Coast to Coast Stores, Inc. preferred stock patronage
dividends............................................ $ 2,947 $ 4,914 $ 4,549
======== ======== ========
Deferred acquisition payments in conjunction with the
acquisition.......................................... -- -- $ 3,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE> 56
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
A. ORGANIZATION:
SERVISTAR Corporation (SERVISTAR) and Coast to Coast Stores, Inc. (CTC) are
marketing and purchasing cooperatives. SERVISTAR/Coast to Coast Corporation
(SCC) is a hardlines wholesaler. SERVISTAR's wholly-owned subsidiaries include
SCC, KCI Coatings, Inc. (Kurfees), Speer Hardware Company, Taylor Rental
Corporation (Taylor), and Advocate Services, Inc. and its subsidiaries, Total
Exposition Concepts, Inc. and Advocate Retail Services, Inc. SERVISTAR, its
wholly-owned subsidiaries and CTC are collectively referred to as the
Corporation.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The financial statements include the consolidated accounts of SERVISTAR and
its wholly-owned subsidiaries combined with the accounts of CTC. These
consolidated and combined statements have been presented to reflect the common
management of, and the interlocking business arrangements between, SCC and CTC.
All intercompany balances and transactions have been eliminated. On July 1,
1996, SCC and CTC were merged into SERVISTAR on a tax free basis as described in
Note C.
Estimates:
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
Cash and Cash Equivalents:
The Corporation considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Merchandise Inventory:
Merchandise inventory is stated at the lower of cost or market, with cost
determined on the first-in, first-out method.
Property and Equipment:
Depreciation is taken over the estimated useful lives of the assets using
the straight-line method. When properties are retired or otherwise disposed of,
the cost and the related accumulated depreciation are removed from the accounts,
and gains and losses resulting from such transactions are reflected in
operations. Included in property and equipment are certain costs, net of
amortization, associated with the capitalization of internally developed
software totaling $5,317, and $5,461 in 1996, and 1995, respectively.
Other Assets:
Other assets include prepaid pension costs and amortized costs related to
various projects which benefit future periods. Amortization of other assets,
excluding the amount related to Taylor, is computed using the straight-line
method over a five year period.
50
<PAGE> 57
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Credit Concentration:
Customers of the Corporation are not concentrated in any specific
geographic region, but are concentrated in the retail hardware store, lumber and
building supply industries. No single customer accounted for a significant
amount of the Corporation's sales and receivables.
Income Taxes:
SERVISTAR and CTC operate as cooperatives under the Internal Revenue Code
and distribute substantially all of their earnings to their owners through
patronage dividends.
SERVISTAR and its wholly-owned subsidiaries constitute a consolidated group
for federal income tax purposes and file a consolidated federal income tax
return. CTC files a separate federal income tax return.
The Corporation provides for deferred income taxes on all amounts which are
reported in different time periods for income tax and financial reporting
purposes. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The Corporation's principal
temporary differences relate to receivable reserves, depreciation of property
and equipment and pension costs.
Revenue Recognition:
Revenues are recognized in the period inventory is shipped to owners.
Reclassifications:
Certain amounts in the 1995 financial statements have been reclassified for
comparative purposes.
C. MERGER:
In March 1996, SERVISTAR, SCC and CTC entered into a Plan and Agreement of
Merger (the Merger), which provided for the merger of SCC and CTC into
SERVISTAR. The merger was completed on July 1, 1996 and resulted in SERVISTAR
changing its name to SERVISTAR COAST TO COAST Corporation (the Surviving
Corporation). All assets and liabilities of SCC and CTC were transferred to the
Surviving Corporation, which continues to operate as a marketing and purchasing
cooperative. The Merger was accounted for as a reorganization of companies under
common control in a manner similar to a pooling of interests.
Common and preferred stock of CTC was converted to common and preferred
stock of the Surviving Corporation. All other stock of CTC and SCC was canceled
and retired.
Patronage dividends for 1996 will be determined in a manner consistent with
prior years based on the separate operations of SERVISTAR and CTC and will be
paid subsequent to June 30, 1996.
In connection with the Merger, the borrowing facilities of SCC described in
Note D were retired on July 1, 1996 and replaced by increased credit lines
available to the Surviving Corporation.
As a result of the Merger, the Corporation incurred a restructuring charge
of $2,113 in 1996. Included in this restructuring charge were costs pertaining
to severance, relocation, facility closure and professional fees. These costs
were shared by SERVISTAR and CTC in a plan that was reviewed by the respective
Boards of Directors.
51
<PAGE> 58
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
D. LONG-TERM DEBT:
Long-term debt at June 30, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
SERVISTAR revolving credit agreement..................... $ 18,000 $ 12,000
SERVISTAR uncollateralized lines of credit............... 19,000 18,000
SCC revolving credit agreements.......................... 43,200 30,900
Notes, due September 1, 2000............................. 40,950 44,350
Notes, due December 1, 1998.............................. -- 6,286
IDA bonds, due October 1, 1997........................... 540 1,090
Other loans and notes with interest rates of 6.0% with
due dates ranging from 1997 to 2001.................... 2,431 2,137
-------- --------
124,121 114,763
Less current portion..................................... 5,645 6,171
-------- --------
$118,476 $108,592
======== ========
</TABLE>
SERVISTAR and certain subsidiaries maintain a revolving credit agreement
with a group of banks which provides a revolving line of credit of $87,500 until
January 31, 1999. The expiration date of the revolving line of credit may be
extended by mutual consent. SERVISTAR may select among various interest rate
options on outstanding borrowings during the term of the revolving credit
agreement. The weighted average interest rate on amounts outstanding at June 30,
1996 and 1995 was 6.4% and 7.2%, respectively. SERVISTAR is required to pay a
commitment fee of 1/4 of 1% per annum on the daily unborrowed amount. On July 1,
1996, this facility was amended to increase the line of credit to $115,000.
SERVISTAR has uncollateralized lines of credit with banks providing for
borrowings of up to $29,000 with interest at variable rates as determined
periodically by the banks. The amounts under these borrowings are classified as
long-term debt as SERVISTAR has the ability and the intent to refinance the debt
on a long-term basis. Borrowings under these facilities were $19,000 and $18,000
at June 30, 1996 and 1995, respectively. The interest rate on amounts
outstanding at June 30, 1996 and 1995 was 6.4% and 7.0%, respectively. In
connection with the Merger, available uncollateralized lines of credit were
increased to $40,000 effective July 1, 1996.
SCC's $40,000 revolving credit agreement, as amended, was retired on July
1, 1996 in conjunction with the Merger. The weighted average interest rate on
amounts outstanding at June 30, 1996 and 1995 was 6.7% and 7.4%, respectively.
This revolving line of credit is guaranteed by CTC. Borrowings under this
facility were $33,200 and $27,500 at June 30, 1996 and 1995, respectively.
SCC also has a $5,000 revolving line of credit and a $5,000 uncommitted
short-term borrowing agreement which were retired effective July 1, 1996. The
borrowings under these agreements are classified as long-term debt since the
Surviving Corporation has the ability and the intent to refinance the debt on a
long-term basis. Borrowings under the $5,000 revolving line of credit facility
were $5,000 and $3,400 at June 30, 1996 and 1995, respectively. The effective
rate on outstanding borrowings was 6.4% and 7.0% at June 30, 1996 and 1995,
respectively. Outstanding borrowings on the uncommitted borrowing facilities
were $5,000 and -0-at June 30, 1996 and 1995, respectively. The effective
interest rate on outstanding borrowings was 6.4% at June 30, 1996.
The notes due September 1, 2000 were issued in September 1990, and bear
interest at a fixed interest rate of 10.23% per annum. Interest is payable
semi-annually on the first day of March and September through
52
<PAGE> 59
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
maturity. Annual principal payments commenced on September 1, 1993 and will
continue through September 1, 1999 in amounts varying between $2,250 and $4,550.
A final balloon payment of $22,750 is due September 1, 2000.
The notes due December 1, 1998 were issued in December 1988, and bore
interest at an amended rate of 10.57%. Annual principal payments of $1,571
commenced on December 1, 1992. The notes were paid in full December 1, 1995.
Interest on the IDA bonds reflects a variable tax-free interest rate which
changes based on market conditions. The bonds can be tendered at any time at the
option of the holder, at a purchase price equal to 100% of the principal amount
of the bonds plus accrued interest. The bonds may be remarketed at the time of
such tender. At June 30, 1996, the interest rate was 3.38%. The bonds are backed
by an irrevocable letter of credit of $567. The letter of credit fee is 1 3/8%.
During 1995, the expiration date of the irrevocable letter of credit was
extended to December 15, 1996.
The SERVISTAR revolving credit agreement and various note agreements
require SERVISTAR and certain subsidiaries to maintain certain specified
financial ratios. The most restrictive of these provisions requires SERVISTAR
and those subsidiaries to maintain a ratio of net income before interest expense
to interest expense of 2.6 at June 30, 1996 for which the ratio was 3.45 at June
30, 1996. The SCC revolving credit agreement also requires SCC and CTC to
maintain certain specified financial ratios.
The prime rate at June 30, 1996 was 8.25%.
Principal payments on long-term debt become due in the years ending June 30
as follows: 1997--$5,645; 1998--$5,272; 1999--$85,281; 2000--$4,951;
2001--$22,943; and thereafter--$29.
The carrying value of long-term debt approximates fair value since the
interest rates on existing debt approximate the rates at which the Corporation
believes it could obtain new debt.
E. LEASES:
The Corporation has various noncancelable lease agreements which provide
for basic rent over a specified period. Rent expense for the years ended June
30, 1996, 1995 and 1994 was $7,859, $8,435, and $8,072, respectively.
Future minimum rental commitments for years ending June 30 are:
1997--$6,564; 1998--$6,058; 1999--$5,019; 2000--$3,256; 2001--$1,110; and
thereafter--$2,144.
F. EMPLOYEE BENEFIT PLANS:
SERVISTAR has a noncontributory, defined benefit pension plan covering
substantially all employees. Effective June 30, 1996, the plan has been amended
to a cash balance plan, where the benefit formula in effect prior to June 30,
1996 was frozen. The plan amendment provides for contributions based upon length
of service and percent of compensation. Interest earned on cash balance
contributions is based on the 30-year treasury maturity rate set each April for
the following year. Pension costs accrued are funded on a current basis, as
required by statutory funding standards.
53
<PAGE> 60
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pension expense included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned....................... $ 3,077 $ 2,259 $ 1,848
Interest cost on projected benefit obligations..... 5,588 4,857 4,088
Actual investment income earned on assets.......... (7,728) (6,382) 300
Net amortization and deferral...................... 3,152 1,787 (5,730)
------- ------- -------
Net pension expense................................ $ 4,089 $ 2,521 $ 506
======= ======= =======
</TABLE>
The funded status of the plan and the prepaid pension cost follow:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated benefit obligations, including vested
benefits of $53,776 in 1996 and $50,020 in 1995........ $ 59,400 $ 54,844
======== ========
Plan assets at fair value, primarily commingled funds,
corporate and government debt securities, marketable
equity securities and privately placed debt............ 62,946 56,029
Projected benefit obligation for participants' service
rendered to date....................................... 59,400 70,854
-------- --------
Plan assets greater than (less than) projected benefit
obligation............................................. 3,546 (14,825)
Unrecognized net loss and effects of changes in actuarial
assumptions............................................ 19,611 21,399
Unrecognized prior service costs......................... (18,841) 1,174
Remaining unrecognized net assets being recognized over
participants' average remaining service period......... (4,211) (4,679)
-------- --------
Prepaid pension cost..................................... $ 105 $ 3,069
======== ========
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 8% in 1996 and 1995 and 9% in 1994. The assumed rate of increase in
future compensation was 4.75% for 1996, 1995 and 1994. The expected long-term
rate of return on plan assets was 9% in 1996, 1995 and 1994. The decrease in the
projected benefit obligation and unrecognized prior service charge relates to
the cash balance plan amendment effective June 30, 1996.
The discount rate on the long-term rate of return can have a significant
effect on the accumulated benefit obligation and pension cost. A 1% decrease in
the discount rate would have increased the accumulated benefit obligation by
$9,007 at June 30, 1996. A 1% decrease in the discount rate and the long-term
rate of return would have increased the pension cost by $1,890 at June 30, 1996.
SERVISTAR also has a defined contribution profit-sharing plan which covers
substantially all employees. Contributions are based on a fixed yearly
percentage of participating employee compensation adjusted by performance under
SERVISTAR's annual profit goals. Additional contributions may be made to the
plan on a discretionary basis. Profit-sharing expense was -0- in 1996, $1,934 in
1995 and $1,813 in 1994.
In addition to providing pension benefits, SERVISTAR provides certain
health care and life insurance benefits for retired employees. SERVISTAR adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions" in the first quarter of 1996 using
the
54
<PAGE> 61
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
delayed recognition method. The accumulated postretirement benefit obligation
(APBO) was $5,700 at July 1, 1995, which is being amortized over a 20 year
period. Postretirement benefit cost was approximately $850 in 1996.
The health care cost trend rate assumption can have a significant effect on
the APBO, health care and death benefit liabilities and net periodic benefit
costs. For 1996, a 1% increase in the trend rate for health care costs would
have increased the APBO by 11% and the service and interest costs by 10%.
SCC has adopted a profit-sharing 401(k) plan covering substantially all
employees. Employees may contribute up to 16% of their compensation to the plan,
which remains fully vested with the employee. The plan provides for a
discretionary annual contribution by SCC based on its profits and an annual
matching contribution based on the achievement of various profit targets for
SCC. Employees vest in discretionary contributions of SCC over a five-year
period and in the matching contributions immediately, if profit targets are met.
SCC accrued total contributions of $555, $673, and $788 to the plan in 1996,
1995 and 1994, respectively. Contributions for 1994 were paid in August 1994.
Contributions for 1995 were paid in August 1995 and payment for 1996
contributions will be made subsequent to June 30, 1996. This plan was combined
with SERVISTAR's defined contribution plan in July 1996 in connection with the
Merger.
G. CAPITAL STOCK:
An analysis of the changes in issued shares of capital stock follows:
<TABLE>
<CAPTION>
SERVISTAR
-------------------------------------------
PREFERRED STOCK COMMON STOCK
-------------------- -------------------
NUMBER OF PAR NUMBER OF PAR
SHARES VALUE SHARES VALUE
--------- ------- --------- ------
(000'S)
<S> <C> <C> <C> <C>
Balance, June 30, 1994................... 1,785 $89,239 32 $3,220
Shares issued.......................... 169 8,450 3 268
Shares acquired........................ (141) (7,015) (3) (281)
----- ------- -- ------
Balance, June 30, 1995................... 1,813 90,674 32 3,207
Shares issued.......................... 189 9,450 3 280
Shares acquired........................ (143) (7,177) (3) (303)
----- ------- -- ------
Balance, June 30, 1996................... 1,859 $92,947 32 $3,184
===== ======= == ======
</TABLE>
In connection with the acquisition of Taylor, SERVISTAR issued 5,000 shares
of redeemable common preference stock during the year ended June 30, 1993.
SERVISTAR redeemed 1,000 and 3,000 shares during 1995 and 1994, respectively, at
par value. During fiscal year 1996 SERVISTAR redeemed, at par value, the
remaining 1,000 shares.
Shares of CTC common stock issued during the years ended June 30, 1996 and
1995 were 1,090 and 630, respectively. Shares of CTC common stock redeemed
during the years ended June 30, 1996 and 1995 were 1,150 and 740, respectively.
Amounts due owners in preferred stock represent the portion of the
patronage dividend to be distributed to the owners in preferred stock in the
following fiscal year.
Preferred and common shares of SERVISTAR and CTC stock are redeemable at
their respective par values. Payment of the redemption price can be made by
issuing a note to the member-owner maturing over an extended period, normally
five years, or in cash immediately upon termination of membership, as defined
55
<PAGE> 62
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
by SERVISTAR's and CTC's Membership Termination Policies. On July 1, 1996,
substantially all of the preferred and common stock of CTC was converted into
stock of the Surviving Corporation effective with the Merger.
Capital stock of subsidiary shown on the accompanying balance sheets of
$819 for 1996 and $790 for 1995 represents the common preference stock and the
preferred stock held by the owners of Speer Hardware Company.
H. INCOME TAXES:
The Corporation has minimal expense for income taxes for financial
reporting purposes for the years ended June 30, 1996, 1995 and 1994, because the
volume rebate owed to CTC eliminates all of SCC's income and all of SERVISTAR's
and CTC's incomes are distributed to their owners in the form of patronage
dividends.
I. CONTINGENCIES:
SERVISTAR is involved in various litigation arising in the ordinary course
of business. Although the final outcome of these legal matters cannot be
determined, it is management's opinion that these matters will not have a
material adverse effect on SERVISTAR's financial condition or results of
operations.
J. SUBSEQUENT EVENT
On April 1, 1997, the members of the Corporation voted to merge with Cotter
& Company effective July 1, 1997.
56
<PAGE> 63
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are
based on the historical financial statements of Cotter & Company ("Cotter") and
ServiStar Coast to Coast Corporation ("SCC") adjusted to give effect to the
merger of SCC with and into Cotter (the "Merger"), pursuant to the Agreement and
Plan of Merger dated December 9, 1996. Cotter is the surviving corporation and
will be known as TruServ Corporation ("TruServ"). The unaudited pro forma
consolidated balance sheet as of March 29, 1997 has been prepared as if the
Merger had occurred on March 29, 1997. The unaudited pro forma consolidated
statement of operations for the year ended December 28, 1996 has been prepared
as if the Merger had occurred on December 31, 1995. The unaudited pro forma
consolidated statement of operations for the three months ended March 29, 1997
has been prepared as if the Merger had occurred on December 29, 1996.
The Merger will be accounted for using the purchase method of accounting.
The pro forma adjustments reflect the preliminary allocation of purchase price
based on the estimated fair value of the assets and liabilities of SCC and are
based upon currently available information and certain assumptions that
management believes are reasonable. While management does not expect the nature
of the purchase accounting adjustments to change significantly, it is likely
that the amount of the actual purchase accounting adjustments will differ from
the adjustments set forth in the pro forma financial statements because
management has not completed appraisals of the SCC assets and because the Merger
was not consummated until July 1, 1997. The actual purchase price adjustments
and other Merger related adjustments will be determined based on the fair value
of the assets and liabilities acquired and may differ from the amounts reflected
in the pro forma adjustments. Under the terms of the Merger, SCC members
exchanged their SCC common stock and SCC preferred stock for TruServ stock at a
par value of $100.00 per share. SCC shareholders owning in excess of 40 shares
of SCC common stock (representing five stores), will have those excess shares
purchased by Cotter, at their $100 per share par value, in exchange for cash or
by a credit against amounts owed by those shareholders to SCC in respect of
shares of SCC common stock and SCC Series A stock.
The unaudited pro forma consolidated statement of operations does not
include the effects of certain cost savings that are expected to be realized as
a result of the actions TruServ management plans to take following the Merger.
When fully implemented, such cost savings are estimated to be approximately $50
million annually and include savings from reductions in employees and duplicate
facilities following the Merger as well as from increased vendor credits and
lower merchandise costs based on increased purchasing volumes.
The unaudited pro forma consolidated financial statements are intended for
informational purposes only and are not necessarily indicative of the financial
position or results of operations which would have been achieved had the Merger
occurred on the indicated dates, nor are they necessarily indicative of the
results of future operations. The unaudited pro forma consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto of Cotter and SCC included or incorporated by reference herein.
57
<PAGE> 64
COTTER & COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 29, 1997
<TABLE>
<CAPTION>
AS REPORTED
-------------------- PRO FORMA PRO FORMA
COTTER SCC ADJUSTMENTS CONSOLIDATED
------ --- ----------- ------------
(000'S OMITTED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 1,863 $ 1,454 $ -- $ 3,317
Accounts and notes receivable....................... 336,733 196,075 (5,000)(1) 527,808
Inventories......................................... 390,358 174,889 (6,000)(2) 559,247
Prepaid expenses.................................... 21,915 3,534 -- 25,449
-------- -------- -------- ----------
Total current assets......................... 750,869 375,952 (11,000) 1,115,821
Properties owned, less accumulated depreciation....... 168,792 79,933 -- 248,725
Properties under capital leases, less accumulated
amortization........................................ 3,270 -- -- 3,270
Unallocated purchase price............................ -- -- 48,282(3) 48,282
Other assets.......................................... 13,578 16,214 (1,000)(4) 28,792
-------- -------- -------- ----------
Total assets................................. $936,509 $472,099 $ 36,282 $1,444,890
======== ======== ======== ==========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable and accrued expenses............... $394,863 $220,611 $ 29,500(5) $ 644,974
Short-term borrowings............................... 116,101 -- 17,000(6) 133,101
Current maturities of notes, long-term debt and
lease obligations................................. 43,495 5,568 -- 49,063
Patronage dividends payable in cash................. 1,109 3,699 -- 4,808
-------- -------- -------- ----------
Total current liabilities.................... 555,568 229,878 46,500 831,946
-------- -------- -------- ----------
Long-term debt and obligations under capital leases... 79,673 123,428 -- 203,101
-------- -------- -------- ----------
Capitalization:
Estimated patronage dividends to be distributed
principally by the issuance of promissory
(subordinated) notes and Class B nonvoting common
stock............................................. 939 -- -- 939
Promissory (subordinated) and instalment notes...... 182,972 -- 10,000(7) 192,972
Class A common stock and partially paid
subscriptions and common stock of SCC............. 4,804 12,718 25,100(8) 42,622
Class B nonvoting common stock and paid-in capital
and preferred shares of SCC....................... 111,961 112,857 (52,100)(9) 172,718
Retained earnings (deficit)......................... 1,481 (6,782) 6,782(10) 1,481
-------- -------- -------- ----------
302,157 118,793 (10,218) 410,732
Foreign currency translation adjustment............. (889) -- -- (889)
-------- -------- -------- ----------
Total capitalization......................... 301,268 118,793 (10,218) 409,843
-------- -------- -------- ----------
Total liabilities and capitalization......... $936,509 $472,099 $ 36,282 $1,444,890
======== ======== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
58
<PAGE> 65
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Adjustment to reflect potential added risk of collectibility of
receivables resulting from Members withdrawing subsequent to the Merger.
(2) Represents the resulting adjustments from anticipated mark-downs in
commonizing the inventory mix and inventory that will be sold at reduced prices
due to the closure of certain SCC distribution centers. Other commonization
expenses are anticipated but are not reflected due to the uncertainty as to
amount.
(3) Represents a preliminary estimate of the excess of cost over the fair
value of the net assets of SCC. At each balance sheet date following the Merger,
TruServ will evaluate potential impairment of any goodwill created as a result
of the Merger using undiscounted future cash flows.
(4) Adjustment to other intangibles.
(5) Represents accrual of certain expenses and purchase accounting
adjustments as set forth below:
<TABLE>
<CAPTION>
(000'S OMITTED)
---------------
<S> <C>
Employee benefits:
Principally to adjust for the effect of recording SCC's
postretirement benefit obligation...................... $ 7,200
Adjustment of SCC's vacation pay accrual to conform to
Cotter's vacation pay policy........................... 2,800
Closure of facilities--severance payments, lease and asset
disposal costs associated with the closure of SCC's Butler
office facility, paint plant and certain distribution
centers................................................... 9,300
Legal, accounting and other transaction costs............... 7,000
Other....................................................... 3,200
-------
$29,500
=======
</TABLE>
(6) Adjustment to reflect short-term borrowings for redemption of Cotter
Class B common stock at par value.
(7) Adjustment to reflect promissory notes issued to SCC members in
connection with the redemption of SCC preferred stock. Such redemption relates
to certain SCC members with preferred stock investments in excess of the
proposed TruServ investment requirements.
(8) Represents the conversion of Cotter Class B common stock to Class A
common stock to meet additional required investment level. Under the proposed
terms of the Merger, additional Class A common stock investment is required for
Cotter Members to increase their investment to $6,000 per store for up to five
stores.
(9) Items (6), (7) and (8).
(10) Acquisition of SCC's capital stock through exchange of TruServ shares
and elimination of SCC's retained deficit.
59
<PAGE> 66
COTTER & COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1997
<TABLE>
<CAPTION>
AS REPORTED
-------------------- PRO FORMA PRO FORMA
COTTER SCC ADJUSTMENTS CONSOLIDATED
------ --- ----------- ------------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Revenues.......................................... $561,696 $405,477 $ -- $967,173
-------- -------- ----- --------
Cost and expenses:
Cost of revenues................................ 518,179 374,629 -- 892,808
Warehouse, general and administrative........... 35,119 27,721 302(1) 63,142
Interest paid to Members........................ 4,297 -- 200(2) 4,497
Other interest expense.......................... 3,033 2,649 233(3) 5,915
Other income, net............................... (163) (661) -- (824)
Income tax expense.............................. 160 99 -- 259
-------- -------- ----- --------
560,625 404,437 735 965,797
-------- -------- ----- --------
Net margins....................................... $ 1,071 $ 1,040 $(735) $ 1,376
======== ======== ===== ========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operation
60
<PAGE> 67
COTTER & COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
AS REPORTED
------------------------ PRO FORMA PRO FORMA
COTTER SCC ADJUSTMENTS CONSOLIDATED
------ --- ----------- ------------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Revenues....................................... $2,441,707 $1,769,872 $ -- $4,211,579
---------- ---------- ------- ----------
Cost and expenses:
Cost of revenues............................. 2,245,071 1,645,080 -- 3,890,151
Warehouse, general and administrative........ 115,457 98,556 1,207(1) 215,220
Interest paid to Members..................... 18,460 -- 800(2) 19,260
Other interest expense....................... 10,175 9,765 935(3) 20,875
Other income, net............................ (228) (4,210) -- (4,438)
Income tax expense (benefit)................. 362 (140) -- 222
---------- ---------- ------- ----------
2,389,297 1,749,051 2,942 4,141,290
---------- ---------- ------- ----------
Net margins.................................... $ 52,410 $ 20,821 $(2,942) $ 70,289
========== ========== ======= ==========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
- ---------------
(1) Adjustment for amortization of the excess of cost over the fair value of the
net assets of SCC. Amortization has been calculated using the straight-line
method over an estimated useful life of 40 years.
(2) Adjustment for interest expense on promissory notes to be issued in
connection with the Merger. Such interest was calculated at an assumed
interest rate of 8%.
(3) Adjustment for interest expense on short-term borrowings to be issued in
connection with the Merger. Such interest calculated at an assumed interest
rate of 5.5%.
61
<PAGE> 68
=========================================================
THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE
REGISTRATION STATEMENT, AND THE EXHIBITS AND SCHEDULES RELATING THERETO, WHICH
THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON,
D. C. UNDER THE SECURITIES ACT OF 1933 AND TO WHICH REFERENCE IS HEREBY MADE FOR
FURTHER INFORMATION WITH RESPECT TO THE COMPANY AND THE SECURITIES OFFERED
HEREBY.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Available Information.................... i
Reports to Security Holders.............. i
Annual Report on Form 10-K............... i
Incorporation of Documents by
Reference.............................. ii
Summary.................................. 1
Selected Historical Financial Data....... 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 6
Risk Factors............................. 9
Use of Proceeds.......................... 11
Plan of Distribution..................... 11
Dividends................................ 11
Business of TruServ...................... 11
Distribution of Patronage Dividends...... 15
Management............................... 17
Description of Common Stock.............. 18
Legal Matters............................ 19
Index to Consolidated Financial
Statements............................. 20
Unaudited Pro Forma Consolidated
Financial Statements................... 57
</TABLE>
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY.
=========================================================
=========================================================
TRUSERV CORPORATION
179,880 SHARES
CLASS A COMMON STOCK
$100 PAR VALUE
(IN UNITS OF 60 SHARES)
------------------
PROSPECTUS
------------------
DATED JULY , 1997
=========================================================
<PAGE> 69
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 Class A Common Stock being registered:
<TABLE>
<S> <C>
Registration Fee............................................ $ 0
Printing of Registration Statement and Prospectus........... 15,000
Accounting Fees and Expenses................................ 10,000
Legal Fees.................................................. 10,000
Fees and Expenses for Qualifying Securities under "Blue Sky"
Laws of
Various States............................................ 15,000
-------
Total....................................................... $50,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
TruServ's Certificate of Incorporation, as amended, provides that TruServ
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 TruServ), by
reason of the fact that such person is or was a director, officer, employee or
agent of TruServ, or is or was serving at the request of TruServ 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, on July 23, 1973 the Board of Directors adopted
a By-Law (Article XII, Indemnification of Directors, Officers and
Employees--Exhibit 3-A to 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, TruServ 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 TruServ, 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 TruServ, TruServ 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 TruServ,
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 TruServ
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 TruServ
only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the party to be
II-1
<PAGE> 70
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 TruServ have approved an amendment to the
Certificate of Incorporation to eliminate personal liability of directors for
monetary damages for breach of fiduciary duty of care. The amendment provides
that a director of TruServ shall not be liable to TruServ 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
------- -----------
<C> <S>
</TABLE>
2-A Agreement and Plan of Merger dated as of December 9, 1996
between the Company and ServiStar Coast to Coast Corporation
("SCC"). Previously Filed.
4-A Amended and Restated Certificate of Incorporation of the
Company, effective July 1, 1997. Incorporated by reference
-- Exhibit 2-A to Registration Statement on Form S-4 (No.
333-18397).
4-B By-laws of the Company, effective July 1, 1997. Incorporated
by reference -- Exhibit 2-A to Registration Statement on
Form S-4 (No. 333-18397).
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).
4-J Credit Agreement dated March 29, 1996 for $125,000,000
revolving credit between Cotter & Company, various Financial
institutions, and Bank of America. Incorporated by
Reference--
Exhibit 4-J to the Company's Registration Statement on Form
S-2 (No. 33-39477).
II-2
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4-K Amended and Restated Trust Indenture between Cotter &
Company and First Trust National Association for $50,000,000
principal amount of Variable Denomination Floating Rate
Demand Notes. Incorporated by Reference--Exhibit 4-K to the
Company's Registration Statement on Form S-2 (No.
333-26727).
5 Opinion of Arnstein & Lehr.
10-A Current Form of Retail Member Agreement with TruServ
Corporation between the Company and its Members that offer
primarily hardware and related items. Incorporated by
reference--Exhibit 2-A to the Company's Registration
Statement on Form S-4 (No. 333-18397).
10-B 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).
10-L Retail Conversion Funds Agreement dated as of December 9,
1996 between the Company and SCC. Incorporated by
reference--Exhibit 10-L to Registration Statement on Form
S-4 (No. 333-18397).
*23-A Consent of Arnstein & Lehr (included on page II-7).
*23-B Consent of Ernst & Young LLP (included on page II-7).
*23-C Consent of Coopers & Lybrand LLP (included on page II-8).
</TABLE>
* Filed herewith.
II-3
<PAGE> 72
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.
II-4
<PAGE> 73
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-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 27TH DAY OF JUNE,
1997.
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
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 June 27, 1997
- ----------------------------------------------------- Officer and Director
Daniel A. Cotter
/s/ KERRY J. KIRBY Vice President, Treasurer, Chief June 27, 1997
- ----------------------------------------------------- Accounting Officer and Chief
Kerry J. Kirby Financial Officer
/s/ ROBERT J. LADNER* Chairman of the Board June 27, 1997
- ----------------------------------------------------- and Director
Robert J. Ladner
/s/ JOE W. BLAGG* Director June 27, 1997
- -----------------------------------------------------
Joe W. Blagg
/s/ WILLIAM M. CLAYPOOL, III* Director June 27, 1997
- -----------------------------------------------------
William M. Claypool, III
/s/ SAMUEL D. COSTA, JR.* Director June 27, 1997
- -----------------------------------------------------
Samuel D. Costa, Jr.
/s/ LEONARD C. FARR* Director June 27, 1997
- -----------------------------------------------------
Leonard C. Farr
/s/ WILLIAM M. HALTERMAN* Director June 27, 1997
- -----------------------------------------------------
William M. Halterman
/s/ JERRALD T. KABELIN* Director June 27, 1997
- -----------------------------------------------------
Jerrald T. Kabelin
/s/ JOHN F. LOTTES, III* Director June 27, 1997
- -----------------------------------------------------
John F. Lottes, III
/s/ KENNETH M. NOBLE* Director June 27, 1997
- -----------------------------------------------------
Kenneth M. Noble
/s/ RICHARD L. SCHAEFER* Director June 27, 1997
- -----------------------------------------------------
Richard L. Schaefer
</TABLE>
II-5
<PAGE> 74
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGE V. SHEFFER Director June 27, 1997
- -----------------------------------------------------
George V. Sheffer
/s/ DENNIS A. SWANSON Director June 27, 1997
- -----------------------------------------------------
Dennis A. Swanson
/s/ JOHN M. WEST, JR. Director June 27, 1997
- -----------------------------------------------------
John M. West, Jr.
*By: /s/ DANIEL P. BURNS
------------------------------------------------
Daniel P. Burns
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 75
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 10, 1997, except for
Note 11 as to which the date is April 1, 1997, in Post-Effective Amendment No. 3
to Registration Statement on Form S-4 (File No. 333-18397) and related
Prospectus of TruServ Corporation (Cotter & Company prior to July 1, 1997) for
the registration of 179,880 shares of Class A Common Stock. We also consent to
the incorporation by reference therein of our report dated February 10, 1997
with respect to the consolidated financial statements of Cotter & Company
included in its Annual Report (Form 10-K) for the year ended December 28, 1996,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Chicago, Illinois
June 27, 1997
CONSENT OF COUNSEL
We hereby consent to the use of our opinion dated December 20, 1996 as an
exhibit to Post-Effective Amendment No. 3 to Registration Statement on Form S-4
(File No. 333-18397) of Cotter & Company and the reference to us under the
caption "Legal Matters" in the related Prospectus as counsel for the Company who
have passed upon the legality of the securities registered thereunder.
ARNSTEIN & LEHR
June 27, 1997
II-7
<PAGE> 76
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 3 to
Registration Statement on Form S-4 (File No. 333-18397) and related Prospectus
of Cotter & Company for the registration of 179,880 shares of Class A Common
Stock of our report dated July 26, 1996, except for Note J as to which the date
is April 1, 1997, on our audits of the consolidated and combined financial
statements of SERVISTAR Corporation and Coast to Coast Stores, Inc.
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
June 27, 1997
II-8
