<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1997
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
COTTER & COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-2099896
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
(773) 695-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Kerry J. Kirby, Vice President and Chief Financial Officer
Cotter & Company
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
(773) 695-5000
Fax: (773) 695-6563
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
Daniel T. Burns, Vice President and Secretary William K. Blomquist, Esq.
Cotter & Company Arnstein & Lehr
8600 West Bryn Mawr Avenue Suite 1200
Chicago, Illinois 60631-3505 120 South Riverside Plaza
(773) 695-5000 Chicago, Illinois 60606
Fax: (773) 695-5465 (312) 876-7128
Fax: (312) 876-0288
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT* OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Denomination Floating Rate
Demand Notes........................ $50,000,000 100% $50,000,000 $15,152
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
* Estimated solely for the purpose of calculating the registration fee.
<PAGE> 2
COTTER & COMPANY
------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
CAPTION IN
ITEM IN FORM S-2 PROSPECTUS
---------------- ----------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Forepart of Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Available Information; Reports to Security
Holders; Documents Incorporated by
Reference
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Summary; The Company; Certain Terms of the
Notes; Risk Factors, Consolidated Ratio of
Earnings to Fixed Charges of the Company
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Outside Front Cover Page of Prospectus and
Plan of Distribution
6. Dilution......................................... Not Applicable
7. Selling Security Holders......................... Not Applicable
8. Plan of Distribution............................. Plan of Distribution
9. Description of Securities to be Registered....... Certain Terms of the Notes
10. Interests of Named Experts and Counsel........... Not Applicable
11. Information with Respect to the Registrant....... Summary; The Company; Dividends; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Distribution of
Patronage Dividends; Management Certain
Terms of the Notes; Merger; Index to
Consolidated Financial Statements;
Unaudited Pro Forma Consolidated Financial
Statements
12. Incorporation of Certain Information by
Reference........................................ Documents Incorporated By Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject To Completion)
Dated May 8, 1997
COTTER & COMPANY
$50,000,000
VARIABLE DENOMINATION FLOATING RATE DEMAND NOTES
The TruServ Variable Denomination Floating Rate Demand Note Investment
Program (the "Program") is designed to provide investors (the "Investors") with
a convenient means of investing funds directly with Cotter & Company (the
"Company"). The Variable Denomination Floating Rate Demand Notes (the "Notes")
will provide liquidity and will pay interest above the average rate of taxable
U.S. money market funds. This offering (the "Offer") is being made in reliance
on Rule 415 under the Securities Act of 1933.
The Notes are offered exclusively to Members of Cotter & Company holding
Class A common stock, holders of certain Cotter & Company Variable Denomination
Fixed Rate Redeemable Term Notes and to those Members of ServiStar Coast to
Coast Corporation ("SCC") holding SCC Class A common stock who become Members of
the Company on July 1, 1997 by virtue of the Merger described herein
(collectively, the "Offerees"). The Program is designed to provide Offerees with
a convenient means of investing funds directly with the Company.
The Notes will be repayable on demand and will be similar in legal
obligation to the Company's TruServ Variable Denomination Fixed Rate Redeemable
Term Note Program ("Fixed Rate Program").
Investments in the Notes will be represented by a Program account (an
"Account") established for the Investor by the agent bank (the "Agent Bank")
appointed by the Company. The Notes will not be represented by a certificate or
any other instrument evidencing the Company's indebtedness. The Company reserves
the right to modify, withdraw, or cancel the offer made hereby at any time.
AN ACCOUNT IS NOT EQUIVALENT TO A DEPOSIT OR OTHER BANK ACCOUNT AND IS NOT
SUBJECT TO THE PROTECTION OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER INSURANCE. THE PROGRAM IS NOT SUBJECT TO THE REQUIREMENTS OF THE
INVESTMENT COMPANY ACT OF 1940 (INCLUDING DIVERSIFICATION OF INVESTMENTS) OR THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974. ALL INVESTMENTS IN THE NOTES
ARE OBLIGATIONS OF COTTER & COMPANY AND ARE NOT OBLIGATIONS OF OR GUARANTEED BY
THE AGENT BANK OR ANY OTHER COMPANY. THE WEEKLY INTEREST RATE PAID ON
INVESTMENTS IN THE NOTES MAY NOT PROVIDE A BASIS FOR COMPARISON WITH OTHER
INVESTMENTS WHICH USE A DIFFERENT METHOD OF CALCULATING A VARIABLE YIELD OR
WHICH PAY A FIXED YIELD FOR A STATED PERIOD OF TIME.
For information regarding the TruServ Variable Denomination Floating Rate
Demand Note Investment Program, please call 1-800-507-9000.
Please read this Prospectus carefully and retain for future reference.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Variable Denomination Floating Rate Demand
Notes.................................... $50,000,000(1) See (2) Below $50,000,000(3)
==========================================================================================================
</TABLE>
(1) The initial minimum denomination note which may be purchased is $250.
(2) There will be no underwriters. The subject Notes will be sold directly by
the Company at par value.
(3) There is no firm commitment for the sale of the securities offered
hereunder; they will be sold from time to time by the Company. However,
assuming the sale of all securities offered hereunder, and before deduction
of approximately $89,152 for estimated expenses in connection with this
offering, the total proceeds will be as shown above.
------------------
These securities are offered through
COTTER & COMPANY
------------------
THE DATE OF THIS PROSPECTUS IS MAY , 1997.
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained 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 the Company distributes to its stockholder-Members an annual
report containing consolidated financial statements reported upon by a firm of
independent auditors. The Company may, from time to time, also furnish to its
stockholder-Members interim reports, as determined by management.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
28, 1996 and the Current Report on Form 8-K dated February 27, 1997, filed
pursuant to Section 15(d) of the Exchange Act are incorporated herein by
reference. The Company will provide without charge to each person to whom a
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents incorporated by reference in the Registration
Statement (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents that the Registration
Statement incorporates). Requests for such copies should be directed to Kerry J.
Kirby, Vice President and Chief Financial Officer, Cotter & Company, 8600 West
Bryn Mawr Avenue, Chicago, IL 60631-3505, (773) 695-5000. The Company currently
estimates that the Offer will terminate on or about one year from offer date.
2
<PAGE> 5
SUMMARY
This Summary is qualified in its entirety by the detailed information and
the Company's consolidated financial statements and the consolidated financial
statements of ServiStar Coast to Coast Corporation (including the notes thereto)
appearing elsewhere in this Prospectus and in the documents incorporated herein
by reference.
Cotter & Company (the "Company"), is located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois, 60631-3505, telephone number (773) 695-5000. The Company is a
Member-owned wholesaler of hardware and related merchandise. Historically, it
has been the largest cooperative wholesaler of hardware and related merchandise
in the United States. The Company also manufactures paint and paint applicators.
For reporting purposes, the Company operates in a single industry as a
Member-owned wholesaler cooperative.
On April 1, 1997, the stockholders of the Company and the shareholders of
ServiStar Coast to Coast Corporation ("SCC") agreed to merge the two companies
(the "Merger"). SCC is a hardware wholesaler with annual revenue of
$1,700,000,000 and with a strong market presence in retail lumber and building
materials. The transaction is subject to customary closing conditions and is
expected to be completed on July 1, 1997. Following completion of the Merger,
the Company will be renamed TruServ Corporation.
The Notes being offered hereby are offered exclusively to Members of the
Company holding Class A common stock, holders of certain Cotter & Company
Variable Denomination Fixed Rate Redeemable Term Notes and to those Members of
SCC holding SCC Class A common stock who become Members of the Company on July
1, 1997 by virtue of the Merger described herein. Ownership of the Notes can be
issued in one of the following four types of accounts: Single Tenancy, Joint
Tenancy with Right of Survivorship, Tenancy by Custodian (under the Uniform
Gifts to Minors Act) and Living Trust. Sales of Notes are made for cash. The
Investor must have a valid social security or taxpayer identification number.
Interest is compounded monthly and interest payments will be added to the
account balance on a monthly basis.
The Notes are not equivalent to a deposit or other bank account and are not
subject to the protection of the Federal Deposit Insurance Corporation or any
other insurance. The Program is not subject to the requirements of the
Investment Company Act of 1940 (including diversification of investments) or the
Employee Retirement Income Security Act of 1974. All investments in the Notes
are investments in securities of the Company and are not an obligation of The
Northern Trust Company (the "Agent Bank") or any other company.
The Notes being offered hereby are not transferable and may not be pledged
for any debt of an Investor. Additionally, the Company has the option to redeem
the account balance in whole or in part at the principal amount thereof plus
accrued and unpaid interest.
The Notes will be subordinated in right of payment to senior notes,
indebtedness to banking institutions, trade creditors and other indebtedness of
the Company. The Notes are unsecured and rank equally and rateably with all
other unsecured and subordinated indebtedness of the Company.
The Program is not qualified under Section 401 (a) of the Internal Revenue
Code. Accordingly, all interest credited to the notes or paid in any taxable
year is reportable by the Investor as taxable income for Federal income tax
purposes. No part of the taxable interest is excludable from taxable income.
There is no existing secondary market for the Notes offered hereunder and
there is no expectation that any secondary market will develop.
The Company intends to use the proceeds of this offering primarily for
general working capital purposes, including the purchase of merchandise for
resale to Members.
3
<PAGE> 6
THE COMPANY
The Company was organized as a Delaware corporation in 1953. Upon its
organization, it succeeded to the business of Cotter & Company, an Illinois
corporation organized in 1948. The Company's principal executive offices are
located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone
number (773) 695-5000.
The Company is a Member-owned wholesaler of hardware and related
merchandise. Historically, it has been the largest cooperative wholesaler of
hardware and related merchandise in the United States. The Company also
manufactures paint and paint applicators. For reporting purposes, the Company
operates in a single industry as a Member-owned wholesaler cooperative.
On April 1, 1997, the stockholders of the Company and the shareholders of
ServiStar Coast to Coast Corporation agreed to merge the two companies.
ServiStar Coast to Coast is a hardware wholesaler with annual revenue of
$1,700,000,000 and with a strong presence in retail lumber and retail building
materials. The transaction is subject to customary closing conditions and is
expected to be completed on July 1, 1997. Following completion of the merger,
the Company will be renamed TruServ Corporation and as a result both Members of
the Company and ServiStar Coast to Coast Corporation will be eligible for this
program.
The Company serves approximately 5,300 True Value(R) Hardware Stores
throughout the United States. Primary concentrations of Members exist in
California (approximately 8%), Illinois (approximately 6%), New York,
Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin
(approximately 4% each).
CONSOLIDATED RATIO OF EARNINGS TO
FIXED CHARGES OF THE COMPANY
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
2.57 2.78 2.84 2.71 2.73
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed charges
consist of interest expense and the portion of rental expense deemed to
represent interest expense.
4
<PAGE> 7
THE TRUSERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE
INVESTMENT PROGRAM
INTEREST
The principal amount of each Note will be equal to all investments made in
the Notes by the Investor, plus accrued and reinvested interest, less any
redemptions and fees. The Notes will have no stated maturity and will earn
interest at floating rates, to be determined by the TruServ Investment Program
Committee each week, to be effective the following week. The rate of interest on
the Notes will typically be greater than the most recent seven-day average yield
(non-compounded) for taxable money market funds in the United States as
published in the IBC Money Fund Report*. Rates may vary by Account balance or
other factors as determined by the TruServ Investment Program Committee.
Interest on the Notes will accrue daily and will be compounded monthly. The rate
of interest paid for any period on the Notes is not an indication or
representation of future rates. Accrued interest will be credited and
automatically reinvested in additional Notes monthly and will begin to accrue
interest on the first day following the date of such reinvestment. If in any
week the IBC Money Fund Report is not available or publication of such seven-day
average yield is suspended, the seven-day average yield at such time shall be an
approximately equivalent rate determined by the TruServ Investment Program
Committee.
ACCOUNT INFORMATION
The Investor will receive regular quarterly statements showing a summary of
all transactions made in the Investor's Account. Redemption checks on which
payment has been made will not be returned to the Investor, but the check number
and the amount of each check will be indicated on the Investor's statement.
ELIGIBLE INVESTORS
The Notes being offered hereby are offered exclusively to Members of the
Company holding Class A common stock, holders of certain Cotter & Company
Variable Denomination Fixed Rate Redeemable Term Notes and to those Members of
SCC holding SCC Class A common stock who become Members of the Company on July
1, 1997 by virtue of the Merger described herein. All sales of the Notes will be
made for cash.
HOW TO INVEST
To open an Account, complete the Application accompanying this Prospectus
and enclose a check made payable to "TruServ Investment Program" for the initial
investment (minimum investment -- $250). After the Account is opened, additional
investments may be made at any time without charge by check or by wire transfer:
BY CHECK MAILED TO AGENT BANK. Your investment will be credited and
interest will begin to accrue on the first business day after the Agent Bank
receives your check. Funds will be available for withdrawal the morning of the
sixth business day following deposit. Investments made by check cannot be
redeemed for five
- ---------------
*IBC Money Fund Report is a registered trademark of IBC Financial Data, Inc.
and is published weekly and is currently published on Thursday in The Wall
Street Journal. IBC Money Fund Report states that the yield information obtained
from money market funds is screened by the publisher, but no guarantee of the
accuracy of the information contained therein is made by the Company.
5
<PAGE> 8
business days after the check is first credited to your Account or, if later,
until the check clears. Checks must be payable only to "TruServ Investment
Program". No third party checks will be accepted.
All investments must be made in U.S. dollars drawn on a U.S. bank. Accounts
may be opened only by U.S. Citizens providing valid U.S. Federal Identification
numbers. You may terminate your investments at any time.
BY WIRE TRANSFER. You may wire transfer your investment to the Program.
Wire transfers received by 10:00 a.m. CST will be processed same day. Wire
transfers received after 10:00 a.m. CST will be credited to your Account the
following business day.
Wire investments should be wired to:
ABA 071000152
The Northern Trust Company, Chicago, Illinois
TruServ Investment Program
Further Advice -- (Your Account Number)
HOW TO REDEEM
You may redeem any part of your Account at any time as described below.
Interest on redeemed investments will accrue to, but not including, the date of
redemption. You may close your Account only by use of the written redemption
option.
REDEMPTION BY CHECK. You may make redemption checks payable to anyone in
the amount of $250 or more. If the amount of the redemption check is greater
than the balance in your Account or less than $250, the check will not be
honored. Your redemption will be made on the day the Agent Bank receives your
redemption check for payment. If your Account is held jointly with someone else,
only one signature will be required on a redemption check unless otherwise
specified. The check redemption feature does not create a deposit or a banking
relationship with the Agent Bank, or with the Company.
WRITTEN REDEMPTION. You may redeem all or any part of your Account, subject
to a $250 minimum, by written request, including the signatures of all
registered owners (including joint owners) of the Account. A check for the
requested amount (or in an amount equal to the balance of your Account if the
Account is being closed) will be mailed to the registered account address.
WIRE REDEMPTION. You can redeem any part of your Account, subject to a
$2,500 minimum, by wire transfer if you have authorized the wire redemption
option. Wire redemption proceeds can only be wired to the U.S. bank account you
have designated on your Application. To change this designation, a written
request signed by all registered owners (including joint owners) of the Account,
with all signatures guaranteed by a financial institution, must be submitted to
the Agent Bank. Funds will be wired no later than the next business day after
receipt of your wire redemption request, provided your request is received by
2:00 p.m. Eastern Time on any business day. If your designated bank is not a
member of the Federal Reserve system, there may be a delay in wiring funds. Each
wire transfer will incur a processing charge from the Agent Bank, and may also
incur an additional charge from other institutions handling the transfer. The
Agent Bank's records of the wire instructions are binding.
REDEMPTION DUE TO BALANCE BELOW MINIMUM INVESTMENT. If your Account balance
falls below the $250 minimum, you will receive notice that the Account is below
the minimum and will be closed at the end of the
6
<PAGE> 9
next monthly cycle. If additional investments increasing the Account balance to
at least $250 are not made, the Account will then be closed at the end of the
next cycle and an official bank check issued for the balance plus interest.
FEES
There are no account maintenance fees or charges for checks or check
redemptions, no sales loads, and no charges for investing or ongoing management
other then as described herein. Fees for checks returned for insufficient funds,
wire redemptions, stop payment requests and other unusual services will be
directly debited from your Account, as follows:
<TABLE>
<S> <C>
Additional fees (Subject to change)
Wire transfer fee - per wire transfer ($2,500 minimum).... $ 15.00
Non sufficient funds (NSF) deposit-per check.............. $ 10.00
Stop payment.............................................. $ 15.00
Overnight delivery........................................ $ 12.00
</TABLE>
TRUSERV INVESTMENT PROGRAM COMMITTEE
The TruServ Investment Program Committee consists of officers of the
Company designated by the Company's Board of Directors. The Committee has the
full power and authority to amend the Program as described under "Termination,
Suspension, or Modification". The Committee may also interpret Program
provisions, adopt Program rules and regulations and make certain determinations
regarding the Program. The members of the Committee are the Company's Chief
Financial Officer, Vice President-Treasurer and Assistant Treasurer. Members of
the Committee receive no additional compensation for Committee services.
TERMINATION, SUSPENSION OR MODIFICATION
The Company expects that the Program will continue indefinitely, but the
Company reserves the right at any time to suspend or terminate the Program
entirely, or from time to time to modify the Program in part. The Company also
reserves the right to modify, suspend or terminate any of the investment options
and redemption options described above. Written notice of any material
modification, suspension or termination will be provided to Investors at least
fifteen days prior to the effective date. See "Certain Terms of the
Notes--Modification of the Indenture."
USE OF PROCEEDS
The proceeds from the sale of the Notes will be made available for general
working capital purposes, including the purchase of merchandise for resale to
Members.
ARBITRATION
This Program shall be enforced and interpreted under the laws of the State
of Illinois. Any controversy or claims arising out of or relating to this Offer,
or any breach thereof, including, without limitation, any claim that this Offer
or any portion thereof is invalid, illegal or otherwise voidable, shall be
submitted to arbitration before and in accordance with the rules of the American
Arbitration Association unless another extra judicial dispute resolution process
has been agreed to in writing by the parties, Judgment upon the award may be
7
<PAGE> 10
entered in any court having jurisdiction thereof. The location of the
arbitration proceedings shall be at the American Arbitration Association office
geographically or physically located closest to the Investor's domicile, unless
otherwise agreed upon in writing by the parties.
CERTAIN TERMS OF THE NOTES
The Notes are issued under an Indenture (the "Indenture") dated as of May
8, 1997, as amended, between the Company and First Trust National Association,
as trustee (the "Trustee"). The statements under this heading are subject to the
detailed provisions of the Indenture, a copy of which is filed as an exhibit to
the Registration Statement covering the offering of the Notes. Wherever
particular provisions of the Indenture or terms defined therein are referred to,
such provisions or definitions are incorporated by reference as a part of the
statements made and the statements are qualified in their entirety by such
reference.
GENERAL
The Notes are initially issuable in a minimum amount of $250 and thereafter
in investments of at least $50 and will mature on the demand of the Investor.
The Notes are unsecured and rank equally and ratably with all other unsecured
debt and subordinated indebtedness of the Company. Neither the Indenture nor any
other instrument to which the Company is a party limits the principal amount of
the Notes or any other indebtedness of the Company that may be issued. The Notes
will not be subject to any sinking fund. The Notes will be issued in
uncertificated form (i.e. "Book Entry") and Investors will not receive any
certificate or other instrument evidencing the Company's indebtedness. All funds
invested in Notes together with interest accrued thereon, and redemptions, if
any, will be recorded on a register maintained by the Agent Bank.
OPTIONAL REDEMPTION BY THE COMPANY
The Company may redeem, at any time at its option, all or any part of the
Notes. Any partial redemption of Notes will be effected by lot or pro rata or by
any other method that is deemed fair and appropriate by the Trustee, except that
the Company may redeem all of the Notes held in an Account not meeting
guidelines established by the TruServ Investment Program Committee. The Company
will give at least 30 days prior written notice to an Investor whose Note is to
be redeemed. The Note (or portion thereof) being so redeemed, plus accrued and
unpaid interest thereon to, but not including, the date of redemption, will be
paid by check to the registered holder of the Note. Interest on the redeemed
amount shall cease to accrue on and after the effective date of redemption.
MODIFICATION OF THE INDENTURE
The Indenture permits the Company and the Trustee, with the consent of the
holders of not less than 66 2/3% in aggregate principal amount of the Notes at
the time outstanding, to add any provisions to or change in any manner or
eliminate any of the provisions of the Indenture or modify in any manner the
rights of the holders of the Notes, provided that no such addition or
modification shall, among other things (i) change the character of the Notes
from being payable upon demand, (ii) reduce the principal amount of any Note or
(iii) reduce the aforesaid percentage of principal amount of such Notes, the
consent of the holders of which is required for any addition or modification,
without in each case the consent of the holder of each such Note so affected.
8
<PAGE> 11
EVENTS OF DEFAULT
An Event of Default with respect to the Notes is defined in the Indenture
as being: default in payment of any principal or interest on any Note when due
and continuance of such default for a period of 20 days, provided that an
administrative error shall not be considered an Event of Default unless such
error shall have continued uncorrected for a period of 60 days after written
notice to the Agent Bank or the Trustee (with a copy to the Company), the
Trustee to be the sole judge of whether the error has been corrected; default
for 60 days after written notice to the Company in the performance of any other
covenant in the respect of the Notes; or certain events in bankruptcy,
insolvency or reorganization. The Indenture requires the Company to file with
the Trustee annually a written statement as to the presence or absence of
certain defaults under the terms thereof. The Trustee shall, within 90 days
after the occurrence of a default in respect of the Notes, give to the holders
thereof notice of all uncured and unwaived defaults known to it (the term
"default" to mean the events specified above without grace periods); provided
that, except in the case of default in the payment of principal or interest on
any of the Notes, the Trustee shall be protected in withholding such notice if
it in good faith determines that the withholding of such notice is in the
interests of the holders of the Notes. The Indenture provides that during the
continuance of an Event of Default, either the Trustee thereunder or the holders
of 50% in aggregate principal amount of the outstanding Notes may declare the
principal of all such Notes to be due and payable immediately, but under certain
conditions such declaration may be annulled by the holders of a majority in
principal amount of such Notes then outstanding. The Indenture provides that
past defaults with respect to the Notes (except, unless theretofore cured, a
default in payment of principal of or interest on any of the Notes) may be
waived on behalf of the holders of all Notes by the holders of a majority in
principal amount of such Notes then outstanding.
CONCERNING THE TRUSTEE
The Trustee acts as trustee under one other indenture with the Company,
pursuant to which a number of series of senior, unsecured notes of the Company
are presently outstanding.
PLAN OF DISTRIBUTION
The availability of the Program will be communicated through a mailing to
all Offerees. An Offeree, upon request of an application package will receive
the Prospectus, IRS W-9 Certification Form and application form to be returned
to the address as specified on the application form. The application will
include the Investor's registration form. By signing and returning the
application form and IRS W-9 Certification Form, together with a check made
payable to the "TruServ Investment Program" for the invested amount to the
address as specified on the application form, an Investor shall consent to be
bound by the terms of the Program, as described in the Prospectus, as amended
from time to time by the Company.
AGENT BANK AND ADMINISTRATION
The Company has engaged The Northern Trust Company as the Agent Bank to
service the Program. The Agent Bank will send the following to the Investor:
-- Investment confirmation,
-- Quarterly statements listing all balances, transactions and
year-to-date interest, and
-- Form 1099INT.
9
<PAGE> 12
Additionally, the Agent Bank will provide an automated voice response
system, at toll-free number 1-800-507-9000, to allow Investors to call and
obtain aggregate account information. The Agent Bank will also process
redemption requests, respond to inquiries and provide to Investors Account
information. Additional or other inquiries from Investors to the Agent Bank will
be forwarded to the Company.
TAXES
The Program is not qualified under Section 401(a) of the Internal Revenue
Code. Accordingly, all interest credited to the Notes or paid in any taxable
year is reportable by the Investor as taxable income for Federal income tax
purposes. No part of the taxable interest is excludable from taxable income.
The December statement to each Investor from the Agent Bank each year will
state the full amount reportable as taxable income. The Agent Bank also will
file tax information returns as required by law. State and local income taxes
and tax reporting also may be applicable. Investors are individually responsible
for complying with applicable federal, state, and local tax laws and should
consult their individual tax advisors with respect to tax consequences which may
be applicable to their particular situation.
RISK FACTORS
The business of the Company and SCC after the Merger will be subject to a
number of risks, including: uncertainties associated with the integration of the
business of SCC with the Company; the uncertain impact of the growth in the
hardware, 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 anticipate 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; 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 the
Company's operations following the Merger.
The Notes are unsecured obligations and will be subordinated in right of
payment to senior notes, indebtedness to banking institutions, trade creditors
and other indebtedness of the Company.
MERGER
At the Company's Annual Meeting, holders of Class A common stock approved
the merger of the Company and SCC, including the issuance of the shares of
common stock pursuant to the Merger Agreement, dated December 9, 1996, amendment
and restatement of the Certificate of Incorporation as set forth in the Merger
Agreement, ratification of revised By-Laws for TruServ Corporation ("TruServ"),
and ratification of the revised form of the Retail Member Agreement as set forth
in the Merger Agreement. The transaction is subject to customary closing
conditions and is expected to be completed on July 1, 1997. The Amended and
Restated Certificate of Incorporation will, among other things, increase the
number of authorized shares of Class A common stock to 750,000 shares and the
number of Class B common stock to 4,000,000 shares, eliminate cumulative voting,
eliminate the requirement that all stockholders own the same number of shares
10
<PAGE> 13
of Class A common stock and change the name of the Company to TruServ. At the
same meeting, holders of Class B common stock approved the increase in the
number of authorized shares of Class B common stock to 4,000,000 shares.
CONVERSION OF SECURITIES
Upon consummation of the transactions contemplated by the Merger Agreement,
(i) SCC will be merged with and into the Company, with the Company being the
surviving corporation (and thereafter known as TruServ Corporation), and (ii)
each outstanding share of SCC common stock and SCC Series A stock (excluding
those shares thereof canceled pursuant to Article III of the Merger Agreement)
will be converted into the right to receive one fully paid and nonassessable
share of TruServ Class A common stock and each two outstanding shares of SCC
preferred stock will be converted into the right to receive one fully paid and
non-assessable share of TruServ Class B common stock. No fractional shares of
TruServ stock will be issued in connection with such exchange. Cash will be
delivered in lieu of fractional or cancelable shares. Based on the number of
shares of SCC stock outstanding on the SCC record date, it is expected that
approximately 262,348 and 1,083,752 shares of TruServ Class A common stock and
Class B common stock, respectively, will be issued in connection with the
Merger. It is anticipated that an additional approximately 250,000 shares of
TruServ Class A common stock will be purchased by those pre-Merger stockholders
of the Company to satisfy the new Class A common stock ownership requirement
applicable to such Members as contemplated by the Merger Agreement.
RETAIL MEMBER AGREEMENT
After the Effective Time of the Merger, all the Company's Members, and
those SCC Members who voted in favor of the Merger Agreement, will be governed
by the form of Retail Member Agreement attached to the Merger Agreement as
Exhibit 3.8. Such Retail Member Agreement is an amendment and restatement of the
existing Retail Member Agreement. All the Company's stockholders, regardless of
their vote for or against the Merger or their abstention from such vote, will be
deemed to be bound by the agreement, as amended. A vote to approve the Merger
Agreement by an SCC Member was deemed to constitute that Member's agreement to
accept and be bound by the terms of the Retail Member Agreement, in cancellation
and replacement of such SCC Member's existing Retailers/Distributors
Agreement(s) with SCC. The Hardware/Lumber Operations of such Member will after
the Effective Time be conducted as part of the cooperative activities of TruServ
and be governed by the Certificate of Incorporation, By-Laws and Retail Member
Agreement of TruServ as in effect from time to time. 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,
shall be assigned by SCC to TruServ without further action, subject to any
terminations and replacements as may be agreed upon between each such SCC Member
and TruServ. Whether or not an individual Member voted for, against or abstained
from the Merger going forward all Members will belong to and be a part of
TruServ, sharing in the benefits and advantages of membership in the new
cooperative.
11
<PAGE> 14
DIVIDENDS
Other than the payment of patronage dividends, including the redemption of
some nonqualified written notices of allocation, the Company has not paid
dividends on its Class A common stock or Class B common stock. The Board of
Directors does not plan to pay dividends on either class of stock. Dividends
(other than patronage dividends) on the Class A common stock and Class B common
stock, subject to the provisions of the Company's Certificate of Incorporation,
may be declared out of gross margins of the Company, other than gross margins
from operations with or for Members and other patronage source income, after
deduction for expenses, reserves and provisions authorized by the Board of
Directors. Dividends may be paid in cash, in property, or in shares of the
common stock, subject to the provisions of the Certificate of Incorporation. See
"Distribution of Patronage Dividends."
SELECTED FINANCIAL DATA
<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.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
In fiscal year 1996, the Company'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, the Company continued to pursue business opportunities such as
International and trueAdvantage, which both increased 14.2%. Also, the Company
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 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, the Company 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, the Company'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, the Company expanded the
Pinpoint Pricing program which reduced the selling price of many core hardware
and related products.
Overall merchandise gross margins, as a percentage of revenues, decreased
for the fourth year in a row. This reduction in gross margin percentage was the
result of an expanded Pinpoint Pricing program and the
13
<PAGE> 16
withdrawal from the resigned businesses of V&S(R) Variety division and General
Power Equipment manufacturing division.
Warehouse, general and administrative expenses decreased by $18,652,000 or
14.0% compared to the prior year. As a percentage of revenue, these expenses
were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses
was attributable to continued efforts to reduce operating costs, an expense
recovery associated with prior years' favorable risk loss experience and
efficiencies derived from the resigned businesses.
Interest paid to Members decreased by $2,267,000 or 9.9% primarily due to a
lower average principal balance and a decrease in the average interest rate.
Other interest increased due to the increase in the Cotter & Company term
note program.
Net margins were $59,037,000 for the year ended December 30, 1995 compared
to $60,318,000 for the year ended December 31, 1994.
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.
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 Company 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, the Company has a private shelf agreement with available borrowings up
to $50,000,000.
The Company's capital is primarily derived from Class A common stock and
retained earnings, together with promissory (subordinated) notes and nonvoting
Class B common stock issued in connection with the Company's annual patronage
dividend. 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.
14
<PAGE> 17
BUSINESS
The Company is a Member-owned wholesaler of hardware and related
merchandise. Historically, it has been the largest cooperative wholesaler of
hardware and related merchandise in the United States. The Company also
manufactures paint and paint applicators. For reporting purposes, the Company
operates in a single industry as a Member-owned wholesaler cooperative.
On April 1, 1997, the stockholders of the Company and the shareholders of
SCC agreed to merge the two companies pursuant to the Merger Agreement. SCC 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
and is expected to be completed on July 1, 1997. Following completion of the
Merger, the Company will be renamed TruServ Corporation.
Membership entitles a Member to use certain Company trademarks and trade
names, including the federally registered collective membership trademark
indicating membership in "True Value(R) Hardware Stores". The "True Value(R)"
collective membership mark has a present expiration date of January 2, 2003.
The Company serves approximately 5,300 True Value(R) Hardware Stores
throughout the United States. Primary concentrations of Members exist in
California (approximately 8%), Illinois (approximately 6%), New York,
Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin
(approximately 4% each).
The Company's total sales of merchandise to its U.S. Members were divided
among the following general classes of merchandise:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
---------------------
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>
The Company serves its Members by functioning as a low cost distributor of
goods and maximizing its volume purchasing abilities, primarily through 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. The Company 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 the Company's ability to conduct its business.
The goods and services purchased by the Company from these suppliers are
generally available from a wide variety of sources. The Company is not dependent
upon any one supplier or group of suppliers and has not experienced a problem in
obtaining necessary goods. The Company holds conventions and meetings for its
Members in order to keep them better informed as to industry trends and the
availability of new merchandise. The Company also provides each of its Members
with an illustrated price catalog showing the products available from the
Company. The Company's sales to its Members are divided into three categories,
as follows: (1) warehouse shipment sales (approximately 49% of total sales); (2)
direct shipment sales (approximately 41% of total sales); and (3) relay sales
(approximately 10% of total sales). Warehouse
15
<PAGE> 18
shipment sales are sales of products purchased, warehoused, and resold by the
Company upon orders from the Members. Direct shipment sales are sales of
products purchased by the Company but delivered directly to Members from
manufacturers. Relay sales are sales of products purchased by the Company in
response to the requests of several Members for a product which is not normally
held in inventory and is not susceptible to direct shipment. Generally, the
Company will give notice to all Members of its intention to purchase products
for relay shipment and then purchase only so many of such products as the
Members order. When the product shipment arrives at the Company, it is not
warehoused; rather, the Company breaks up the shipment and "relays" the
appropriate quantities to the Members who placed orders.
The Company also manufactures paint and paint applicators. The principal
raw materials used by the Company are chemicals 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 the Company from these vendors are generally available
from a variety of sources. The Company is not dependent upon any one supplier
and has not experienced a problem in obtaining necessary raw materials.
The Company annually sponsors two "markets" (one in the Spring and one in
the Fall). In fiscal year 1997, these markets will be held in Atlanta and New
Orleans. Members are invited to the markets and generally place substantial
orders for delivery during the period prior to the next market. During such
markets, new merchandise and seasonal merchandise for the coming season is
displayed to attending Members.
As of February 22, 1997 and February 24, 1996, the Company had a backlog of
firm orders (including relay orders) of approximately $16,000,000 and
$23,000,000, respectively. The Company's backlog at any given time is made up of
two principal components: (i) normal resupply orders and (ii) market orders for
future delivery. Resupply orders are orders from Members for merchandise to keep
inventories at normal levels. Generally, such orders are filled the day
following receipt, except that relay orders for future delivery (which are in
the nature of resupply orders) are not intended to be filled for several months.
Market orders for future delivery are Member orders for new or seasonal
merchandise placed at the Company's two markets, for delivery during the several
months subsequent to the markets. Thus, the Company will have a relatively high
backlog at the end of each market which will diminish in subsequent months until
the next market.
The retail hardware industry is characterized by intense competition.
Independent retail hardware businesses served by the Company continue to face
intense competition from chain stores, discount stores, home centers and
warehouse operations. Increased operating expenses for the retail stores,
including increased costs due to longer open-store hours and higher rental costs
of retail space, have cut into operating margins and brought pressures for lower
merchandise costs, to which the Company has been responsive through a retail
oriented competitive pricing strategy on high turnover, price sensitive items
(Pinpoint Pricing program). The trueAdvantage(TM) program was introduced 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 Cotter 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. Over 1,000 Members have committed to the
trueAdvantage(TM) program.
16
<PAGE> 19
The Company competes with other Member-owned and non-member-owned
wholesalers as a source of supply and merchandising support for independent
retailers. Competitive factors considered by independent retailers in choosing a
source of supply include 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.
The Company, through a Canadian subsidiary, owns a majority equity interest
in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler
of hardware, variety and related merchandise. This cooperative serves 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 the
Company's consolidated revenue in fiscal year 1996.
The Company operates several other subsidiaries, most of which are engaged
in businesses providing additional services to the Company's Members. In the
aggregate, these subsidiaries are not significant to the Company's results of
operations.
The Company employs approximately 3,500 persons in the United States on a
full-time basis. Due to the widespread geographical distribution of the
Company's operations, employee relations are governed by the practices
prevailing in the particular area and are generally dealt with locally.
Approximately 34% of the Company's hourly-wage employees are covered by
collective bargaining agreements which are generally effective for periods of
three or four years. In general, the Company considers its relationship with its
employees to be good.
DISTRIBUTION OF PATRONAGE DIVIDENDS
The Company operates on a cooperative basis with respect to business done
with or for Members. All Members are entitled to receive patronage dividend
distributions from the Company on the basis of gross margins of merchandise
and/or services purchased by each Member. In accordance with the Company's
By-Laws and Retail Member Agreement; the annual patronage dividend is paid to
Members out of the gross margins from operations and other patronage source
income, after deduction for expenses, reserves and provisions authorized by the
Board of Directors.
Patronage dividends are usually paid to Members within 60 days after the
close of the Company's fiscal year; however, the Internal Revenue Code (the
"Code") permits distribution of patronage dividends as late as the 15th day of
the ninth month after the close of the Company's fiscal year, and the Company
may elect to distribute the annual patronage dividend at a later time than usual
in accordance with the provisions of the Code.
The Company's By-Laws provide for the payment of year-end patronage
dividends, after payment of at least 20% of such patronage dividends in cash, in
qualified written notices of allocation including (i) Class B common stock based
on book value thereof, to a maximum of 2% of the Member's net purchases of
merchandise from the Company for the year (except in unusual circumstances of
individual hardships, in which case the Board of Directors reserves the right to
make payments in cash), (ii) promissory (subordinated) notes, or (iii) other
property. 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 the Company. The Company 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."
17
<PAGE> 20
In determining the form of the annual patronage dividend, a Member's
required investment in Class B common stock of the Company had been limited by
the Board of Directors to an amount in the aggregate not exceeding an amount
(computed on the basis of par value thereof and to the nearest multiple of $100)
equal to (i) two percent (2%) of a Member's net purchases of direct shipment
sales from the Company and purchases of direct shipment sales of "Competitive
Edge Program Lumber" materials computed separately at one percent (1%), (ii)
four percent (4%) of a Member's net purchases of relay sales from the Company
and (iii) eight percent (8%) of a Member's net warehouse purchases from the
Company in the year of the highest total net purchases of the three preceding
years. In 1996, the Board of Directors adopted a plan to continue to adequately
capitalize the Company. The percentage method described in items (i) through
(iii) has been superseded by the Board of Director's 1996 plan, which plan is
set forth in the Merger Agreement. The annual application of the requirements
set forth in the Merger Agreement results in the issuance of a number of shares
of Class B common stock, the cumulative value of which will not exceed two
percent (2%) of the Member's net purchases of merchandise from the Company. In
that each Member currently has equal voting power (voting rights being limited
to Class A common stock), acquisition of Class B common stock as patronage
dividends generally results in the larger-volume Members having greater common
stock equity in the Company but a lesser proportionate voting power per dollar
of common stock owned than smaller-volume Members. See the Merger Agreement for
the amounts of Class B common stock a Member is required to acquire through his
or her patronage dividend. The indicated percentages are multiplied by the
Member's purchase levels of the merchandise categories set forth in the Merger
Agreement. 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 the Company, 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.
PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE
The Code specifically provides for the taxation of cooperatives (such as
the Company) and their patrons (such as the Company's Members) so as to ensure
that the business earnings of cooperatives are currently taxable either to the
cooperatives or to the patrons.
The shares of Class B common stock, the promissory (subordinated) notes and
other written notices, which disclose to the recipient the stated amount
allocated to him by the Company and the portion thereof which is a patronage
dividend, distributed by the Company 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 the Company pay 20% or more of the
annual patronage dividend in cash and that the Members consent to having the
allocations (at their stated dollar amount) treated as being constructively
received by them and includable in their gross income. Such written notices that
do not meet these requirements are "nonqualified written notices of allocation"
within the 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 the Company 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
18
<PAGE> 21
nonqualified written notices of allocation, no amounts are deductible by the
Company or includable in gross income of the patron (Member) until redeemed by
the Company.
Thus, every year each Member may receive, as part of the Member's patronage
dividend, non-cash "qualified written notices of allocation", which may include
Class B common stock or promissory (subordinated) notes, the stated dollar
amount of which must be recognized as gross income for the taxable year in which
received. The portion of the patronage dividend paid in cash (at least 20%) may
be insufficient, depending on the tax bracket in each Member's case, to provide
funds for the payment of income taxes for which the Member will be liable as a
result of the receipt of the entire patronage dividend, including cash, Class B
common stock and promissory (subordinated) notes.
In response to the provisions of the Code, the Company's By-Laws provide
for the treatment of the shares of Class B common stock, promissory
(subordinated) notes and such other notices as the Board of Directors may
determine, distributed in payment of patronage dividends as "qualified written
notices of allocation." The By-Laws provide in effect:
(i) for payment of patronage dividends partly in cash, partly in
qualified written notices of allocation (including the Class B common stock
and promissory (subordinated) notes as described above), other property or
in nonqualified written notices of allocation, and
(ii) that membership in the organization (i.e. the status of being a
Member of the Company) shall constitute consent by the Member to take the
qualified written notices of allocation or other property into account in
the Member's gross income as provided in Section 1385(a) of the Code.
Under the provisions of the Code, persons who become or became Members of
the Company or who retained their status as Members after adoption of the
By-Laws providing that membership in the organization constitutes consent, and
after receiving written notification and a copy of the By-Laws are deemed to
have consented to the tax treatment of the cash and the qualified written
notices of allocation in which the patronage dividends are paid, in accordance
with Section 1385(a) of the Code. Written notification of the adoption of the
By-Laws and its significance, and a copy of the By-Laws, were sent to each then
existing Member and have been, and will continue to be, delivered to each party
that became, or becomes a Member thereafter. Such consent is then effective
except as to patronage occurring after the distributee ceases to be a Member of
the organization or after the By-Laws of the organization cease to contain the
provision with respect to the above described consent. Such consent may be
revoked by the Member only by terminating its membership in the Company in the
manner provided in its Retail Member Agreement.
Each year since 1978, the Company has paid its Members 30% of the annual
patronage dividend in cash in respect to patronage (excluding nonqualified
written notices of allocation) occurring in the preceding year. It is the
judgment of management that the payment of 30% or more of patronage dividends in
cash will not have a material adverse effect on the operations of the Company or
its ability to maintain adequate working capital for the normal requirements of
its business. However, the Company is obligated to distribute only 20% of the
annual patronage dividend (excluding nonqualified written notices of allocation)
in cash and it may distribute this lesser percentage in future years.
In order to avoid the administrative inconvenience and expense of issuing
separate certificates representing shares of Class B common stock and separate
promissory (subordinated) notes to each Member, the Company 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
19
<PAGE> 22
notice to each Member of these deposits and the allocation thereof to such
Member.
MANAGEMENT
The directors and principal executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME (AGE) OFFICE
---------- ------
<S> <C>
Karen M. Agnew (55)............................... Vice President and Assistant Secretary
Joe W. Blagg (47)................................. Director
Daniel T. Burns (46).............................. Vice President, General Counsel and Secretary
Danny R. Burton (50).............................. Vice President
William M. Claypool, III (74)..................... Director
Samuel D. Costa, Jr. (55)......................... Director
Daniel A. Cotter (62)............................. President, Chief Executive Officer and
Director
Leonard C. Farr (75).............................. Director
William M. Halterman (49)......................... Director
Robert F. Johnson (53)............................ Vice President
Jerrald T. Kabelin (59)........................... Director
Kerry J. Kirby (50)............................... Vice President, Chief Financial Officer and
Treasurer
Robert J. Ladner (50)............................. Chairman of the Board and Director
Paul Lemerise (52)................................ Vice President
Robert M. Liebgott (46)........................... Vice President
John F. Lottes III (56)........................... Director
Kenneth M. Noble (39)............................. Director
Robert Ostrov (47)................................ Senior Vice President
Richard L. Schaefer (68).......................... Director
John P. Semkus (50)............................... Vice President
George V. Sheffer (44)............................ Director
Dennis A. Swanson (58)............................ Director
John M. West, Jr. (44)............................ Director
</TABLE>
During the past five years, the principal occupation of each director of
the Company, other than Daniel A. Cotter, was the operation of retail hardware
stores.
LEGAL MATTERS
The legality of the Notes will be passed upon for the Company by Messrs.
Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606.
20
<PAGE> 23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
COTTER & COMPANY
Report of Independent Auditors............................ 23
Consolidated Balance Sheet at December 28, 1996 and
December 30, 1995...................................... 24-25
Consolidated Statement of Operations for each of the three
years in the period ended
December 28, 1996...................................... 26
Consolidated Statement of Cash Flows for each of the three
years in the period ended
December 28, 1996...................................... 27
Consolidated Statement of Capital Stock and Retained
Earnings for each of the three years in the period
ended December 28, 1996................................ 28
Notes to Consolidated Financial Statements................ 29-38
SERVISTAR COAST TO COAST CORPORATION
Consolidated Balance Sheets at December 31, 1996 and June
30, 1996............................................... 39
Consolidated Statements of Operations for the three months
and six months ended December 31, 1996 and 1995........ 40
Consolidated Statements of Cash Flows for the six months
ended December 31, 1996 and 1995....................... 41
Report of Independent Accountants......................... 42
Consolidated and Combined Balance Sheets at June 30, 1996
and 1995............................................... 43-44
Consolidated and Combined Statements of Operations for
each of the three years in the period ended June 30,
1996................................................... 45
Consolidated and Combined Statements of Cash Flows for
each of the three years in the period ended June 30,
1996................................................... 46
Notes to Consolidated and Combined Financial Statements... 47-54
</TABLE>
21
<PAGE> 24
-------------------------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
-------------------------------------
22
<PAGE> 25
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
23
<PAGE> 26
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.
24
<PAGE> 27
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.
25
<PAGE> 28
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.
26
<PAGE> 29
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.
27
<PAGE> 30
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.
28
<PAGE> 31
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
29
<PAGE> 32
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
will be a note payable in five equal annual instalments bearing interest at the
same rate per annum as the promissory (subordinated) notes most recently issued
as part of the Company's patronage dividend.
Cash equivalents. The Company classifies its temporary investments in
highly liquid debt instruments, with an original maturity of three months or
less, as cash equivalents.
Inventories. Inventories are stated at the lower of cost, determined on the
"first-in, first-out" basis, or market.
Properties. Properties are recorded at cost. Depreciation and amortization
are computed by using the straight-line method over the following estimated
useful lives: buildings and improvements--10 to 40 years; machinery and
warehouse, office and computer equipment--5 to 10 years; transportation
equipment--3 to 7 years; and leasehold improvements--the life of the lease
without regard to options for renewal.
Revenue Recognition. The Company recognizes revenue when merchandise is
shipped or services are rendered.
Retirement plans. The Company sponsors two noncontributory defined benefit
retirement plans covering substantially all of its employees. Company
contributions to union-sponsored defined contribution plans are based on
collectively bargained rates times hours worked. The Company's policy is to fund
annually all tax-qualified plans to the extent deductible for income tax
purposes.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reporting year. The Company's reporting year-end is the Saturday closest to
December 31.
2. INVENTORIES
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>
30
<PAGE> 33
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
31
<PAGE> 34
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
32
<PAGE> 35
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>
33
<PAGE> 36
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.
34
<PAGE> 37
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
At December 28, 1996, the Company has alternative minimum tax credit
carryforwards of approximately $900,000 which do not expire. The carryforwards
are available to offset future federal tax liabilities.
Significant components of the Company's deferred tax assets and liabilities
as of December 28, 1996 resulted primarily from alternative minimum tax credit
carryforwards and temporary differences between income tax and financial
reporting for depreciation, inventory capitalization, bad debts, vacation pay
and contributions to fund retirement plans.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(000'S OMITTED)
<S> <C> <C> <C>
Current:
Federal................................... $ -- $ (363) $ 486
State..................................... 237 379 462
Foreign................................... 275 273 278
----- ------ ------
Total current............................. 512 289 1,226
----- ------ ------
Deferred:
Federal................................... (147) (145) (147)
State..................................... (26) (26) (26)
Foreign................................... 23 58 110
----- ------ ------
Total deferred............................ (150) (113) (63)
----- ------ ------
$ 362 $ 176 $1,163
===== ====== ======
</TABLE>
35
<PAGE> 38
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company operates as a nonexempt cooperative and is allowed a deduction
in determining its taxable income for amounts paid as patronage dividend based
on margins from business done with or for Members. The reconciliation of income
tax expense to income tax computed at the U.S. federal statutory tax rate of 35%
in fiscal year 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>
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.
36
<PAGE> 39
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RETIREMENT PLANS
The components of net pension cost for the Company administered pension
plans consisted of:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------------
DECEMBER 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 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
37
<PAGE> 40
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Social Security retirement benefits. Trusteed net assets and actuarially
computed benefit obligations for the Company administered pension plans are
presented below:
<TABLE>
<CAPTION>
DECEMBER 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.
38
<PAGE> 41
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,715 $ 5,172
Accounts and notes receivable............................. 158,636 192,299
Merchandise inventory..................................... 160,955 171,976
Prepaid expenses.......................................... 7,355 8,314
-------- --------
Total current assets.............................. 335,661 377,761
Properties owned, less accumulated depreciation............. 80,384 78,414
Other assets................................................ 13,850 11,607
-------- --------
Total assets...................................... $429,895 $467,782
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $185,614 $212,612
Current maturities of long-term debt...................... 5,679 5,645
Patronage dividends payable in cash....................... 3,338 9,656
-------- --------
Total current liabilities......................... 194,631 227,913
-------- --------
Long-term debt.............................................. 113,514 118,476
-------- --------
Owners' equity:
Preferred stock........................................... 115,935 118,359
Common stock.............................................. 12,432 8,487
Retained deficit.......................................... (6,617) (5,453)
-------- --------
Total owners' equity......................... 121,750 121,393
-------- --------
Total liabilities and owners' equity......... $429,895 $467,782
======== ========
</TABLE>
39
<PAGE> 42
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
------------------------------ ------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $424,509 $406,097 $888,992 $820,987
-------- -------- -------- --------
Cost and expenses:
Cost of goods sold..................... 392,170 373,741 819,100 754,115
Distribution, selling and
administrative...................... 28,083 28,920 60,194 61,250
Interest expense....................... 2,437 2,620 4,937 5,164
Other income, net...................... (551) (1,166) (1,372) (3,888)
Income tax expense..................... 99 99 198 198
-------- -------- -------- --------
422,238 404,214 883,057 816,839
-------- -------- -------- --------
Net margins.............................. $ 2,271 $ 1,883 $ 5,935 $ 4,148
======== ======== ======== ========
</TABLE>
40
<PAGE> 43
SERVISTAR COAST TO COAST CORPORATION
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net margins............................................... $ 5,935 $ 4,148
Adjustments to reconcile net margins to net cash from
operating activities:
Depreciation........................................... 3,566 3,581
Amortization........................................... 1,420 1,236
(Gain) loss on disposition............................. (38) 295
Increase (decrease) from changes in:
Receivables.......................................... 33,663 42,482
Merchandise inventory................................ 11,021 6,511
Prepaid expenses..................................... 959 (746)
Accounts payable and accrued expenses................ (26,998) (40,958)
-------- --------
Net cash provided by operating activities.... 29,528 16,549
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment........... 42 0
Purchases of property and equipment.................... (5,540) (2,046)
(Increase) decrease in other assets.................... (3,663) 3,220
-------- --------
Net cash (used in) provided by investing
activities................................. (9,161) 1,174
-------- --------
Cash flows from financing activities:
Repayment of long-term debt, net.......................... (4,928) (466)
Proceeds from issuance of capital stock................... 3,602 131
Repurchase of capital stock............................... (5,842) (4,732)
Payment of cash portion of patronage dividends............ (9,656) (11,139)
-------- --------
Net cash used in financing activities........ (16,824) (16,206)
-------- --------
Net increase in cash........................................ 3,543 1,517
Cash at beginning of period................................. 5,172 5,833
-------- --------
Cash at end of period....................................... $ 8,715 $ 7,350
======== ========
</TABLE>
41
<PAGE> 44
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
42
<PAGE> 45
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.
43
<PAGE> 46
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.
44
<PAGE> 47
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.
45
<PAGE> 48
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.
46
<PAGE> 49
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.
47
<PAGE> 50
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
48
<PAGE> 51
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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%,
49
<PAGE> 52
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
50
<PAGE> 53
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
51
<PAGE> 54
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 delayed recognition method. The accumulated postretirement benefit
obligation (APBO) was $5,700 at
52
<PAGE> 55
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
53
<PAGE> 56
SERVISTAR CORPORATION
------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
54
<PAGE> 57
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 will be the surviving corporation
and will thereafter be known as TruServ Corporation ("TruServ"). The unaudited
pro forma consolidated balance sheet as of December 28, 1996 has been prepared
as if the Merger had occurred on December 28, 1996. 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 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
is not expected to be 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 proposed terms of the
Merger, SCC members will exchange 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.
55
<PAGE> 58
COTTER & COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 28, 1996
<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.................... $ 1,662 $ 8,715 $ 10,377
Accounts and notes receivable................ 307,205 158,636 $ (5,000)(1) 460,841
Inventories.................................. 347,554 160,955 (6,000)(2) 502,509
Prepaid expenses............................. 13,517 7,355 20,872
-------- -------- -------- ----------
Total current assets................. 669,938 335,661 (11,000) 994,599
Properties owned, less accumulated
depreciation................................. 167,331 80,384 247,715
Properties under capital leases, less
accumulated amortization..................... 3,680 -- 3,680
Unallocated purchase price..................... -- -- 48,117(3) 48,117
Other assets................................... 13,036 13,850 (1,000)(4) 25,886
-------- -------- -------- ----------
Total assets......................... $853,985 $429,895 $ 36,117 $1,319,997
======== ======== ======== ==========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable and accrued expenses........ $338,440 $185,614 $ 29,500(5) $ 553,554
Short-term borrowings........................ 70,594 -- 17,000(6) 87,594
Current maturities of notes, long-term debt
and lease obligations..................... 43,458 5,679 49,137
Patronage dividends payable in cash.......... 16,142 3,338 19,480
-------- -------- -------- ----------
Total current liabilities............ 468,634 194,631 46,500 709,765
-------- -------- -------- ----------
Long-term debt and obligations under capital
leases....................................... 80,145 113,514 193,659
-------- -------- -------- ----------
Capitalization:
Promissory (subordinated) and instalment
notes..................................... 185,366 -- 10,000(7) 195,366
Class A common stock and partially paid
subscriptions and common stock of SCC..... 4,876 12,432 25,100(8) 42,408
Class B nonvoting common stock and paid-in
capital and preferred shares of SCC....... 114,053 115,935 (52,100)(9) 177,888
Retained earnings (deficit).................. 1,751 (6,617) 6,617(10) 1,751
-------- -------- -------- ----------
306,046 121,750 (10,383) 417,413
Foreign currency translation adjustment........ (840) -- (840)
-------- -------- -------- ----------
Total capitalization................. 305,206 121,750 (10,383) 416,573
-------- -------- -------- ----------
Total liabilities and
capitalization..................... $853,985 $429,895 $ 36,117 $1,319,997
======== ======== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
56
<PAGE> 59
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.
57
<PAGE> 60
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 1,203(1) 215,216
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 2,938 4,141,286
---------- ---------- ------- ----------
Net margins.................................... $ 52,410 $ 20,821 $(2,938) $ 70,293
========== ========== ======= ==========
</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%.
58
<PAGE> 61
=========================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................... 2
Reports to Security Holders............... 2
Documents Incorporated by Reference....... 2
Summary................................... 3
The Company............................... 4
Consolidated Ratio of Earnings to Fixed
Charges of the Company.................. 4
The TruServ Variable Denomination Floating
Rate Demand Note Investment Program..... 5
Use of Proceeds........................... 7
Arbitration............................... 7
Certain Terms of the Notes................ 8
Plan of Distribution...................... 9
Agent Bank and Administration............. 9
Taxes..................................... 9
Merger.................................... 10
Dividends................................. 12
Selected Financial Data................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 13
Management................................ 20
Legal Matters............................. 20
Index to Consolidated Financial Statements
Covered by Report of Independent
Auditors................................ 21
Unaudited Pro Forma Consolidated Financial
Statements.............................. 55
</TABLE>
=========================================================
=========================================================
$50,000,000
COTTER & COMPANY
VARIABLE DENOMINATION
FLOATING RATE
DEMAND NOTES
FOR INFORMATION CONCERNING
THE TRUSERV
INVESTMENT PROGRAM,
WRITE TO:
THE TRUSERV INVESTMENT PROGRAM
P.O. BOX 75928
CHICAGO, ILLINOIS 60675-7598
OR CALL:
TOLL FREE NUMBER 1-800-507-9000
PROSPECTUS
------------------------
DATED MAY , 1997
=========================================================
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the actual or estimated expenses in connection with the
issuance and distribution of the Variable Denomination Floating Rate Demand
Notes being registered:
<TABLE>
<S> <C>
Registration Fee............................................ $15,152
Printing of Registration Statement and Prospectus........... 16,000
Accounting Fees and Expenses................................ 10,000
Legal Fees.................................................. 10,000
Trustee Fee................................................. 3,000
Fees and Expenses for Qualifying Securities under "Blue Sky"
Laws of
Various States............................................ 35,000
-------
Total....................................................... $89,152
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as amended, provides that the
Company shall indemnify, in accordance with and to the full extent permitted by
the Delaware General Corporation Law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, an action by or in the right of the Company), by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise, against any liability or expense actually
and reasonably incurred by such person in respect thereof. Such indemnification
is not exclusive of any other right of such director, officer, or employee to
indemnification provided by law or otherwise.
Additionally, pursuant to Section 145(a)-(g) of the Delaware General
Corporation Law which empowers a corporation to indemnify its directors,
officers, employees and agents, the Board of Directors of the Company on July
23, 1973 adopted a By-Law (Article XII, Indemnification of Directors, Officers
and Employees--Exhibit 3-A to the Company's Form 10-K Annual Report for the year
ended January 1, 1994 and incorporated herein by reference) providing for such
indemnification. The following is a summary of the most significant provisions
of said By-Law:
As against third parties, the Company shall indemnify any director,
officer, employee or agent for any expenses (including attorneys' fees,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred in defending any threatened, pending or completed suit or proceeding,
whether civil, criminal, administrative or investigative brought against such
person by reason of the fact that he was or is a director, officer, employee or
agent, if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of the Company, and with respect to
any criminal action or proceeding if he had no reasonable cause to believe his
conduct unlawful.
In any action or suit by or in the right of the Company, the Company shall
indemnify any director, officer, employee or agent who is or was a party or
threatened to be made a party to such threatened, pending or completed action or
suit, for expenses (including attorney's fees and amounts paid in settlement)
reasonably
S-1
<PAGE> 63
and actually incurred in connection with the defense or settlement of such suit
or action, if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Company, except
that no indemnification shall be made if such person has been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Company unless and only to the extent that the Court of Chancery of Delaware or
the court where the suit was brought finds that in view of all the circumstances
of the case, such person is entitled to indemnification.
Any indemnification, unless ordered by a court, shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the party to be
indemnified has met the applicable standard of conduct. Such determination shall
be made by the Board of Directors by a majority vote of a quorum, consisting of
directors who were not parties of such action, suit or proceeding, or if such a
quorum is not obtainable, or even if obtainable, if a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or by
the stockholders.
Additionally, the shareholders of the Company have approved an amendment to
the Certificate of Incorporation to eliminate personal liability of directors to
the Company or its shareholders for monetary damages for breach of fiduciary
duty of care. The amendment provides that a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability
or limitation thereof is not permitted under the Delaware General Corporation
Law as the same exists or may hereafter be amended.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 is concerned, see Item 17 "Undertakings" below.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2-A Agreement and Plan of Merger dated as of December 9, 1996 between the Company and
ServiStar Coast to Coast Corporation ("SCC"). Incorporated by Reference--Exhibit 2-A to
Registration Statement on Form S-4 (No. 333-18397).
4-A Article Fourth of the Certificate of Incorporation of the Company, setting forth the
designations and the powers, preferences and rights, and the qualifications, limitations and
restrictions of the Class A common stock and Class B common stock of the Company. Article
Twelfth of the Certificate of Incorporation of the Company, setting forth certain limitations on
the rights of shareholders to bring an action against directors for breach of the duty of care.
Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual Report for the year
ended January 1, 1994.
4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to: certain qualifications,
limitations and restrictions on the common stock of the Company; the Member agreement between the
Company and its shareholders; the payment of patronage dividends; dividends; qualifying
shares; and valuation of Class B common stock of the Company issued as part of the annual patronage
dividend. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K Annual Report for the
year ended January 1, 1994 .
4-C Specimen certificate of Class A common stock. Incorporated by reference--Exhibit 4-A to Registration
Statement on Form S-2 (No. 2-82836).
4-D Specimen certificate of Class B common stock. Incorporated by reference--Exhibit 4-B to Registration
Statement on Form S-2 (No. 2-82836).
</TABLE>
S-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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).
4-K Trust Indenture between Cotter & Company and First Trust
National Association. Incorporated by reference--Exhibit T3C
to Cotter & Company Form T-3 (No.) .
*5 Opinion of Messrs. Arnstein & Lehr.
10-A Current Form of "Retail Member Agreement with Cotter &
Company" between the Company and its Members that offer
primarily hardware and related items. Incorporated by
reference--Exhibit 10-A to the Company's Registration
Statement on Form S-4 (No. 333-18397).
10-B Current form of "Subscription to Shares of Cotter &
Company". Incorporated by reference--Exhibit 10-H to
Registration Statement on Form S-2 (No. 2-82836).
10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended
and Restated Effective As Of January 1, 1996). Incorporated
by reference--Exhibit 10-C to Post-Effective Amendment No. 5
to Registration Statement on Form S-2 (No. 33-39477).
10-D Cotter & Company Employees' Savings and Compensation
Deferral Plan (As Amended and Restated Effective April 1,
1994). Incorporated by reference--Exhibit 10-D to
Post-Effective Amendment No. 4 to Registration Statement on
Form S-2 (No. 33-39477).
10-E Cotter & Company Supplemental Retirement Plan between Cotter
& Company and selected executives of the Company (As Amended
and Restated January 2, 1996 Effective As Of January 1,
1996). Incorporated by reference--Exhibit 10-E to
Post-Effective Amendment No. 5 to Registration Statement on
Form S-2 (No. 33-39477).
10-F Annual Incentive Compensation Program and Long-Term
Incentive Compensation Program between Cotter & Company and
selected executives of the Company. Incorporated by
reference--filed as Exhibits A and B to Exhibit 10-N to
Registration Statement on Form S-2 (No. 33-39477).
</TABLE>
S-3
<PAGE> 65
<TABLE>
<S> <C>
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).
*12 Statement of Computation of Consolidated Ratio of earnings to fixed charges of the Company for the
Fiscal Years Ended 1996, 1995, 1994, 1993, and 1992.
*23-A Consent of Arnstein & Lehr (included in Exhibit 5 to this Registration Statement).
*23-B Consent of Ernst & Young LLP (included on page S-8).
*23-C Consent of Coopers & Lybrand LLP (included on page S-9).
*25 Statement of Eligibility of Trustee. Incorporated by reference to Exhibit T3G to the Company's
Application for Qualification of Indenture on Form T-3 filed May 8, 1997 (File No. 22-22271)
*99-A Application Form and Related Materials for TruServ Variable Denomination Floating Rate Demand Note
Investment Program--SCC Members.
*99-B Application Form for TruServ Variable Denomination Floating Rate Demand Note Investment
Program--Cotter Members.
</TABLE>
* Filed herewith.
S-4
<PAGE> 66
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions described in Item 15, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
S-5
<PAGE> 67
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE DAY OF MAY 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 AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DANIEL A. COTTER President, Chief Executive May , 1997
- ----------------------------------------------------- Officer and Director
Daniel A. Cotter
/s/ KERRY J. KIRBY Vice President, Treasurer, May , 1997
- ----------------------------------------------------- Chief Accounting Officer and
Kerry J. Kirby Chief Financial Officer
/s/ ROBERT J. LADNER Chairman of the Board May , 1997
- ----------------------------------------------------- and Director
Robert J. Ladner
/s/ JOE W. BLAGG Director May , 1997
- -----------------------------------------------------
Joe W. Blagg
/s/ WILLIAM M. CLAYPOOL, III Director May , 1997
- -----------------------------------------------------
William M. Claypool, III
/s/ SAMUEL D. COSTA, JR. Director May , 1997
- -----------------------------------------------------
Samuel D. Costa, Jr.
/s/ LEONARD C. FARR Director May , 1997
- -----------------------------------------------------
Leonard C. Farr
/s/ WILLIAM M. HALTERMAN Director May , 1997
- -----------------------------------------------------
William M. Halterman
/s/ JERRALD T. KABELIN Director May , 1997
- -----------------------------------------------------
Jerrald T. Kabelin
/s/ JOHN F. LOTTES, III Director May , 1997
- -----------------------------------------------------
John F. Lottes, III
</TABLE>
S-6
<PAGE> 68
<TABLE>
<C> <S> <C>
/s/ KENNETH M. NOBLE Director May , 1997
- ------------------------------------------------------
Kenneth M. Noble
/s/ RICHARD L. SCHAEFER Director May , 1997
- ------------------------------------------------------
Richard L. Schaefer
/s/ GEORGE V. SHEFFER Director May , 1997
- ------------------------------------------------------
George V. Sheffer
/s/ DENNIS A. SWANSON Director May , 1997
- ------------------------------------------------------
Dennis A. Swanson
/s/ JOHN M. WEST, JR. Director May , 1997
- ------------------------------------------------------
John M. West, Jr.
</TABLE>
S-7
<PAGE> 69
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 the Registration Statement on
Form S-2 and related Prospectus of Cotter & Company for the registration of
$50,000,000 of Variable Denomination Floating Rate Demand Notes. 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
May 8, 1997
S-8
<PAGE> 70
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement (Form S-2) and
related Prospectus of Cotter & Company for the registration of $50,000,000 of
Variable Denomination Floating Rate Demand Notes 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
May 8, 1997
S-9
<PAGE> 71
INDEX TO EXHIBITS FILED
TO REGISTRATION STATEMENT ON
FORM S-2 OF COTTER & COMPANY
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
5 Opinion and Consent of Messrs. Arnstein & Lehr.
12 Statement of Computation of Consolidated Ratio of earnings
to fixed charges of the Company for the Fiscal Years Ended
1996, 1995, 1994, 1993 and 1992.
23-B Consent of Ernst & Young LLP (included on page S-8).
23-C Consent of Coopers & Lybrand LLP (included on page S-9).
99-A Application Form and Related Materials for TruServ Variable
Denomination Floating Rate Demand Note Investment Program --
SCC Members
99-B Current Application Form for TruServ Variable Denomination
Floating Rate Demand Note Investment Program -- Cotter
Members
</TABLE>
Exhibits incorporated by reference are listed on Pages S-2, S-3 and S-4 of
this Registration Statement on Form S-2 of Cotter & Company.
S-10
<PAGE> 1
EXHIBIT 5
[ARNSTEIN & LEHR LETTERHEAD]
May 8, 1997
Cotter & Company
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
Re: Registration Statement on Form S-2
Gentlemen:
We refer to the Registration Statement on Form S-2 being filed by Cotter &
Company, a Delaware corporation (hereinafter referred to as the "Company"),
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended, pertaining to the registration of $50,000,000 principal amount of
the Company's Variable Denomination Floating Rate Demand Notes (the "Notes").
The Notes will be issued and sold directly by the Company in the minimum
amount of $250 for cash. Notes will be sold only to members of the Company
holding Class A Common Stock and holders of certain Variable Denomination Fixed
Rate Redeemable Term Notes of the Company.
Based upon our examination, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.
2. The proposed offering of $50,000,000 principal amount of the Notes
has been duly authorized and when sold as contemplated the Notes
will be legally issued, valid and binding obligations of the
Company.
<PAGE> 2
Cotter & Company
May 8, 1997
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the related Prospectus as counsel for the Company
who have passed upon the legalities of the securities registered thereunder.
Sincerely,
Amstein & Lehr
<PAGE> 1
EXHIBIT 12
COTTER & COMPANY
SCHEDULE OF COMPUTATION FOR FIXED CHARGES RATIO TO EARNINGS
FOR THE FISCAL YEARS ENDED 1996, 1995, 1994, 1993, AND 1992
(000'S OMITTED)
<TABLE>
<CAPTION>
YEAR END
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET EARNINGS AFTER TAX $52,410 $59,037 $60,318 $57,023 $60,629
ADD: TAX PROVISION 362 176 1,163 2,582 389
------- ------- ------- ------- -------
PRETAX INCOME 52,772 59,213 61,481 59,605 61,018
------- ------- ------- ------- -------
ADD: FIXED CHARGES
INTEREST PAID TO MEMBERS 18,460 20,627 22,894 24,458 25,716
OTHER INTEREST PAID 10,175 9,298 7,493 7,429 7,273
----- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 28,635 29,925 30,387 31,887 32,989
------- ------- ------- ------- -------
RENTAL EXPENSES 14,971 10,063 9,098 8,749 6,850
% OF RENTAL EXPENSES 33.33% 33.33% 33.33% 33.33% 33.33%
------- ------- ------- ------- -------
APPLICABLE RENTAL EXPENSES 4,990 3,354 3,032 2,916 2,283
------- ------- ------- ------- -------
TOTAL FIXED CHARGES 33,625 33,279 33,419 34,803 35,272
------- ------- ------- ------- -------
PRETAX EARNINGS BEFORE
FIXED CHARGES $86,397 $92,492 $94,900 $94,408 $96,290
======= ======= ======= ======= =======
PRETAX EARNINGS
RATIO TO FIXED CHARGES 2.57 2.78 2.84 2.71 2.73
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 99-A
SC(SM)
SERVISTAR COAST TO COAST Corporation
PO Box 1510 Butler PA 16003 1510
412 283 4567 PLEASE READ...!
...ACTION REQUIRED BY JUNE 16TH....
ANNOUNCING NEW TRU*SERV INVESTMENT PROGRAM....AN
ATTRACTIVE, CONVENIENT PROGRAM THAT PAYS MONEY MARKET
RATES ON YOUR EXCESS CASH....!
June 1, 1997
NAME
STORE NAME
STREET
ADDRESS
Dear SERVISTAR COAST TO COAST Member:
OVERVIEW
Thank you for your participation in the SERVISTAR COAST TO COAST Owner Deposit
Program. While we will be terminating this program, we are introducing a new,
exciting, Tru*Serv investment program that you will find attractive and
convenient!
With the merger on July 1, 1997 of SERVISTAR COAST TO COAST and Cotter &
Company, you will need to make a choice about your money in the Owner Deposit
Program.
WHAT ARE MY TWO CHOICES?
By Monday, June 16, 1997, you must choose one of the following options:
(1) Roll over your total deposit, with interest through June 30,
1997, into the new Tru*Serv "Variable Denomination Floating Rate
Demand Note" investment program (See attached Prospectus), or
(2) Request that your total deposit, with interest through June 30,
1997, be refunded to you.
If you do not let us know your choice by Monday, June 16, 1997, we will
automatically refund your total deposit, with interest through June 30, 1997.
<PAGE> 2
HOW MUCH IS MY DEPOSIT?
Your total deposit, with interest through June 30, 1997, is:
TOTAL AMT
WHAT DO I NEED TO DO?
First - Please read the attached "Question and Answer" summary
Second - Please read the attached Prospectus
Third - If you want your money returned to you, you can do nothing, or
simply fill out the half sheet form and return it in the
self-addressed return envelope
Fourth - If you want to roll over your money into the new program, please
fill out the application form, W-9 tax information, and Corporate
Resolution and return them in the self-addressed return envelope
SUMMARY
After you read the attachments, I'm sure you will conclude that this is an
attractive, convenient program in which to invest your excess cash!
If you have questions on the Owner Deposit Program, please call JoAnn Russin at
412-284-6280. If you have questions on the new, TruServ Investment Program,
please contact Liz Odle at 773-695-5388.
Again, thanks for your participation in the Owner Deposit Program. Please read
the attachments and let us know your decision by June 16, 1997.
Sincerely,
Patrick T. Kameen
Operating Officer & Treasurer
PTK:jr
Attachments
<PAGE> 3
TRU*SERV CORPORATION
QUESTIONS AND ANSWERS
FOR OWNER DEPOSIT PROGRAM
(1) Why is SERVISTAR COAST TO COAST terminating the Owner Deposit
Program?
We feel that the Tru*Serv Investment program can best serve both
memberships.
(2) What do I need to do to have my money refunded to me?
You can do nothing, or you can fill out the half sheet form
(attached) and return it in the self-addressed return envelope.
You will receive a check by July 15, 1997.
(3) What happens if I do not respond by June 16, 1997?
We will assume that you want your money refunded to you. We will
mail you a check by July 15, 1997.
(4) Will I receive credit for the interest that I have earned on my
money?
Yes. Whether you roll it over or have it refunded to you, you
will receive credit for accrued interest through June 30, 1997.
(5) Can I roll some of the money over and ask for some of it to be
refunded to me now?
No. You can roll it all over, or ask for it all to be refunded to
you now.
(6) If I choose to roll my money over into this new investment
program, when will my interest begin accruing?
On July 1, 1997.
(7) If I roll my money over into the new program, what will I receive
to confirm my decision?
First, by July 15, 1997, you will receive a "Welcome Letter and a
Confirmation of Deposit" from The Northern Trust Company, the bank
administering this program for Tru*Serv.
Second, by early October, you will receive your first regular
quarterly statement for the quarter ending September 30, 1997.
<PAGE> 4
(8) In what name can I register my roll over money?
It must continue to be registered in the name of your
corporation, partnership, or business entity, just as it is
today.
(9) Can non-U.S. citizens participate?
No. Only U.S. citizens who provide a valid Federal Identification
Number (e.g. Social Security Number for sole proprietorships, or
Tax Payer Identification Number ("TIN") for corporations or
partnerships) may participate in this program.
(10) If I choose to roll over my money into this new program, why must
I fill out the attached Corporate Resolution?
Regulations require that programs such as this have on file the
Corporate Resolution of the entity in whose name the money is
registered.
(11) What happens if I want to roll over my money but do not fill out
the Corporate Resolution?
We will have to refund your money to you, rather than roll over
your money into the new program.
(12) If I have my money refunded to me, will I be taxed on the refund?
You will be taxed only on the interest on your money. You will
receive a 1099 INT in early 1998 for filing your taxes for 1997.
(13) Who can I call if I have questions?
If your question is about the new program, please call Liz Odle
at Cotter & Company at 773-695-5388.
If your question is about the old program (Owner Deposit
Program), please call JoAnn Russin at 412-284-6280.
(14) What is the minimum investment?
$250.00. If you currently have less than $250.00 in the Owner
Deposit Program, you will automatically receive your total
deposit, with interest through June 30, 1997, in the form of a
check by July 15, 1997.
<PAGE> 5
(15) Give me some quick information about the new Tru*Serv Variable
Denomination Floating Rate Demand Notes?
You must carefully read the attached Prospectus to fully
understand the program and the risks. Below are some highlights
of the program:
- The Notes are registered under the federal Securities Act of
1933
- It is not insured by the FDIC
- It is an obligation of Tru*Serv Corporation, and is not an
obligation of a bank
- It is administered by The Northern Trust Company
- It provides a quarterly statement of all activity
- It provides you a checkbook to write checks against, at a
minimum check size of $250.00
(16) How is the variable interest rate set?
The interest rate is set each week. A Tru*Serv Committee will
determine the rate. Typically, the rate will exceed the yield on
the average Money Market Fund, as reported by IBC's Money Fund
report, which is published weekly each Thursday in The Wall
Street Journal.
(17) What would be the rate if this Committee were setting the weekly
rate today?
It would be about 5.10% per annum.
(18) Is there any penalty for withdrawal?
No.
(19) How often is interest compounded?
Interest is compounded monthly. Obviously, you earn interest
every day. Your daily interest is accumulated at the end of each
month and is added to your investment. Then, you begin earning
interest on your interest.
<PAGE> 6
APPLICATION FOR TRU*SERV
VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE
INVESTMENT PROGRAM
APPLICATION FOR CORPORATIONS, PARTNERSHIPS OR OTHER BUSINESS ENTITIES
Please print or type all items except signature. Complete this application and
the attached Resolution. Mail both in the enclosed self-addressed envelope
================================================================================
ACCOUNT INFORMATION
================================================================================
- --------------------------------------------------------------------------------
Entity Name
- ----------------------------------------- -------------------------------
Mailing Address Tax I.D. Number
- ----------------------------------------- -------------------------------
City State Zip Telephone Number
INITIAL INVESTMENT
- ------------------
[ ] PLEASE ROLL OVER MY TOTAL DEPOSIT FROM THE SCC "OWNER DEPOSIT PROGRAM"
[ ] $ _______ ($250 minimum)
================================================================================
SUBSEQUENT INVESTMENTS
================================================================================
By Wire Transfer Subsequent Investments can be made by wire to:
The Northern Trust Company, Chicago, Illinois
ABA # 071000152
After your initial investment, you will be assigned an
account number. For subsequent investments, please
provide this account number in your wire transfer
instructions. The minimum amount for subsequent
investments is $50.00
By Check Investments can be mailed to:
Tru*Serv Investment Program
P.O. Box 75970
Chicago, Il 60675-5070
The minimum amount for subsequent investments is $50.00
<PAGE> 7
================================================================================
REDEMPTIONS (YOU MUST CHECK ONE OR BOTH)
================================================================================
[ ] By Wire Transfer If you want to make redemptions by wire transfer, please
complete the "Designated Bank" information below and
attach a voided blank check (minimum by wire transfer
redemption of $2,500). You can wire funds to your
designated bank account If you call The Northern Trust
Company before 2:00 p.m. EST, you will receive a wire
transfer no later than the next business day.
[ ] By Check The Northern Trust Company will mail you your free
supply of checks shortly after your account is opened
(minimum check redemption of $250).
Written Redemption: Subject to the terms of the Program as amended, you may
also redeem any (but not less than $250 at a time) or all of your account by
writing: Cotter & Company Investment Program, Investor Services Attn: Agent of
Issuer, P.O. Box 75933, Chicago, IL 60675-5933. All Signatures of registered
owners are required. Checks will be sent only to your registered account
address.
================================================================================
DESIGNATED BANK
================================================================================
If you elected "Bank Wire Transfer Redemption," you must complete this section
and attach a voided blank check.
<TABLE>
<S> <C> <C>
Checking [ ]
- -------------------------------------- ---------------------------------------------------- Savings [ ]
Name of Bank Account Bank Account Number
- -------------------------------------- ----------------------------------------------------
Bank Name/Branch ABA Bank Routing Number (9-digit number)
- ----------------------------------------------------------------------------------------------
Bank Address
</TABLE>
================================================================================
W-9 TAX INFORMATION
================================================================================
[ ] W-9 Information must be completed or application
will not be processed. Unless the box is checked, I
am not subject to backup withholding because I have
X Box If Applicable not been notified by the IRS that I am subject to
such withholding, or the IRS has notified me that I
am no longer subject to backup withholding.
[ ] I am subject to backup withholding under provisions
of selection 340(a)(1)(c) of the Internal Revenue
Code. The Social Security or Taxpayer ID number
provided on this form is correct.
Instructions for Completing Payees Request for Taxpayers Identification
Certification: Under Federal tax law, you must provide your correct Social
Security Number or other Taxpayer ID Number, a certification that the number
provided is correct and a certification that you are not subject to backup
withholding. Failure to furnish your correct Social Security or Taxpayer ID
Number or to so certffy will result in 31% of interest paid to your account
being withheld and paid to the IRS. In addition, you may be subject to a
penalty imposed by the IRS if you fail to provide your correct Social Security
or Taxpayer ID Number or if you make an incorrect certification.
================================================================================
ARBITRATION
================================================================================
This Program shall be enforced and interpreted under the laws of the State
of Illinois. Any controversy or claims arising out of or relating ot this
Offer, or any breach thereof, including, without limintation, any claim that
this Offer or any portion thereof is invalid, illegal or otherwise voidable,
shall be submitted to arbitration before and in accordance with the rules of
the American Arbitration Association unless another extra judicial dispute
resolution process has been agreed to in writing by the parties. Judgment upon
the award may be entered in any court having jurisdiction thereof. The
location of the arbitration proceedings hsall be at the American Arbitration
Association office geographically or physically located closest to teh
investor's domicile, unless otherwise agreed upon in writing by the parties.
<PAGE> 8
I/We jointly and severally hereby agree to defend, indemnify, reimburse,
exonerate, save and hold harmless Cotter & Company and its agents for, from and
against any and all losses, damages, claims, demands, and expenses including
reasonable attorneys fees of any and every nature actually or allegedly arising
in whole or in part out of the written information, tax identification number,
certifications, notice or instructions provided by me/us or out of my/our bad
faith, negligence, willful misconduct, strict liability of breach of this
agreement/application.
================================================================================
YOUR SIGNATURE
================================================================================
The Notes will be subordinated in right of payment to senior notes, indebtedness
to banking institutions, trade creditors and other indebtedness of the Company.
The Notes are unsecured and rank equally and rateably with all other unsecured
and subordinated indebtedness of the Company.
By signing below, I certify that I have received the prospectus and agree to be
bound by its terms, as may be amended from time to time, and that (1) the
information on this application and accompanying resolution, including Tax
Identification Number, is correct and complete and (2) the Entity is not
currently subject to IRS backup withholding unless box on W-9 information has
been checked.
- -------------------------------------- -------------------------------------
Authorized Signature Date Entity Name
Remember: Please complete and return the accompanying resolution with this
application.
<PAGE> 9
TRU*SERV CORPORATION
REQUEST FOR REFUND OF OWNER DEPOSIT PROGRAM MONEY
STORE NO:
-----------------------------------------
STORE NAME:
---------------------------------------
[ ] I want my Owner Deposit money refunded to me. (I
(Please check) understand that, by July 15, 1997, 1 will receive a check
for my total deposit, with interest through June 30, 1997.)
--------------------------------------
Print Name
- ----------------------------------- --------------------------------------
Date Signature
Note: Please return to SERVISTAR COAST TO COAST
in the enclosed self-addressed envelope
<PAGE> 10
TRUSERV VARIABLE DENOMINATION
FLOATING RATE DEMAND NOTE
INVESTMENT PROGRAM
Resolution for Corporations, Partnerships, and Other Business Entities
To: TruServ
c/o The Northern Trust Company as Agent Bank
P.O. Box 75928
Chicago, IL 60675-5928
And: The Current And Any Successor Agent Bank
NOTE: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. ANY MODIFICATION OF
THE INFORMATION BELOW WILL REQUIRE AN AMENDMENT TO THIS FORM. THIS DOCUMENT IS
IN FULL FORCE AND EFFECT UNTIL ANOTHER DULY EXECUTED FORM IS RECEIVED BY THE
AGENT BANK.
Dated and effective as of
----------------------------
[ ] New [ ] Amendment to Form Dated
------------------------------
Name of Registered Owner
------------------------------------------------------
Registered Owner is a: [ ] Corporation
[ ] Partnership
[ ] Other:
--------------------------------------------
(Sole proprietorship, etc.)
The undersigned does hereby certify that (s)he is authorized to furnish
this Certificate on behalf of the above-named Registered Owner and that the
following named persons are currently officers/general partners/other
authorized signatories of the Registered Owner, and any __* of them ("Authorized
Person(s)") is/are currently authorized under the applicable governing
documents and law to act for and on behalf of the Registered Owner with respect
to TruServ Variable Denomination Floating Rate Demand Note Accounts, including
without limitation the purchase and redemption thereof and disposition of any
proceeds thereof, and to execute and deliver any instrument deemed necessary or
appropriate by the Agent Bank to effectuate the authority hereby conferred or
confirmed:
Name (Please print or type) Title Specimen Signature
- --------------------------- ---------------------- -------------------------
- --------------------------- ---------------------- -------------------------
- --------------------------- ---------------------- -------------------------
- --------------------------- ---------------------- -------------------------
*INSERT A NUMBER, UNLESS OTHERWISE INDICATED, THE AGENT BANK MAY HONOR
INSTRUCTIONS FROM ANY ONE OF THE PERSONS ABOVE,
<PAGE> 11
For and on behalf of the Registered Owner the undersigned hereby (a)
confirms that TruServ Corporation, the Agent Bank and their respective
successors and assigns shall be entitled to rely without inquiry or
investigation of any kind upon the instruction of any person(s) purporting to
be (an) Authorized Person(s) as named in the Certificate form last received by
the Agent Bank until the Agent Bank has received an amended Certificate form
and has had a reasonable opportunity to act thereon; and (b) agrees to
indemnify, hold harmless and reimburse TruServ Corporation, the Agent Bank and
their respective successors and assigns for, from and against any and all
losses, damages, claims, demands, and attorneys' fees Incurred or paid as a
result of such reliance by any of them upon this Certificate.
Signed:
--------------------------------------
Type or Print Name:
-------------------------
Title:
---------------------------------------
INVESTMENTS IN THE TRU*SERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE
ACCOUNTS DO NOT CONSTITUTE DEPOSITS OF ANY TYPE WITH THE AGENT BANK.
REFERENCE IS HEREBY MADE TO THE PROSPECTUS AND ANY SUPPLEMENTS OR REPLACEMENTS
AS WELL AS ANY OTHER DOCUMENTS REFERRED TO THEREIN, FOR A FULL STATEMENT OF
TRU*SERV CORPORATION'S AND THE AGENT BANK'S DUTIES. SUCH DOCUMENTS SHALL
PREVAIL OVER THIS FORM TO THE EXTENT OF ANY CONFLICT OR INCONSISTENCY.
<PAGE> 1
EXHIBIT 99-B
AGREEMENT AND APPLICATION FOR TRU*SERV
VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE
INVESTMENT PROGRAM
Please print or type all items except signature. Complete this application and
mail in the enclosed self-addressed envelope.
================================================================================
ACCOUNT INFORMATION
================================================================================
Name 1
----------------------------------------------------------------------
FIRST MIDDLE LAST SSN OR TAX I.D. NO.
Name 2 (Joint Tenancy Partner 1)
----------------------------------------------------------------------
FIRST MIDDLE LAST SSN OR TAX I.D. NO.
Registered Address
---------------------------------------------------------
City, State, and Zip Code
---------------------------------------------------
Area Code
Telephone ( )
------------------------------------------------------------------
Name 3 (Joint Tenancy Partner 2)
--------------------------------------------
FIRST MIDDLE LAST SSN OR TAX I.D. NO.
Name 4 (Joint Tenancy Partner 3)
---------------------------------------------
FIRST MIDDLE LAST SSN OR TAX I.D. NO.
================================================================================
PLEASE CHECK ONE AND COMPLETE THE REQUIRED INFORMATION:
================================================================================
/ / Cotter & Company Member/Investor - Member Number: -
------- -------
/ / Current Cotter & Company Investment Program - Investor Account
Number:942----------
================================================================================
INITIAL INVESTMENT (By Check Only): $___________ ($250 minimum)
================================================================================
PLEASE ENTER ALL THE FOLLOWING INFORMATION BELOW:
W-9 INFORMATION MUST BE COMPLETED OR APPLICATION WILL NOT BE PROCESSED.
TYPE OF ACCOUNT: (SELECT ONE)
/ / Individual Ownership
/ / Joint Tenancy With Rights of Survivorship
/ / Tenancy of Custodian (Under the Uniform Gift to Minor Act)*
/ / Living Trust (A copy of the first & last page of Trust Agreement)
*A minor is the beneficial owner of the account. An adult Custodian manages the
account until the minor comes of age as specified in the Uniform Gift to Minors
Act in the applicable state of residence. Custodian's signature is required
for all transactions.
================================================================================
SUBSEQUENT INVESTMENTS (Not less than $50)
================================================================================
By Wire Transfer Subsequent Investments can be made by wire to:
The Northern Trust Company, Chicago, Illinois
ABA # 071000152
After your initial investment, you will be assigned an
account number. For subsequent investments, please
provide this account number in your wire transfer
instructions. The minimum amount for subsequent
investments is $50.00
By Check Investments can be mailed to:
Tru*Serv Investment Program
P.O. Box 75970
Chicago, Il 60675-5070
The minimum amount for subsequent investments is $50.00
<PAGE> 2
================================================================================
REDEMPTIONS (YOU MUST CHECK ONE OR BOTH)
================================================================================
[ ] By Bank Wire If you want to make redemptions by wire transfer, please
Transfer complete the "Designated Bank" information below and
attach a voided blank check (minimum by wire transfer
redemption of $2,500). You can wire funds to your
designated bank account If you call The Northern Trust
Company before 2:00 p.m. EST, you will receive a wire
transfer no later than the next business day.
[ ] By Check The Northern Trust Company will mail you your free
supply of checks shortly after your account is opened
(minimum check redemption of $250).
Written Redemption: Subject to the terms of the Program as amended, you may
also redeem any (but not less than $250 at a time) or all of your account by
writing: Cotter & Company Investment Program, Investor Services Attn: Agent of
Issuer, P.O. Box 75933, Chicago, IL 60675-5933. All Signatures of registered
owners are required. Checks will be sent only to your registered account
address.
================================================================================
DESIGNATED BANK
================================================================================
If you elected "Bank Wire Transfer Redemption," you must complete this section
and attach a voided blank check.
<TABLE>
<S> <C> <C>
Checking [ ]
- -------------------------------------- ---------------------------------------------------- Savings [ ]
Name of Bank Account Bank Account Number
- -------------------------------------- ----------------------------------------------------
Bank Name/Branch ABA Bank Routing Number (9-digit number)
- ----------------------------------------------------------------------------------------------
Bank Address
</TABLE>
================================================================================
W-9 TAX INFORMATION
================================================================================
[ ] W-9 Information must be completed or application
will not be processed. Unless the box is checked, I
am not subject to backup withholding because I have
X Box If Applicable not been notified by the IRS that I am subject to
such withholding, or the IRS has notified me that I
am no longer subject to backup withholding.
[ ] I am subject to backup withholding under provisions
of selection 340(a)(1)(c) of the Internal Revenue
Code. The Social Security or Taxpayer ID number
provided on this form is correct.
Instructions for Completing Payees Request for Taxpayers Identification
Certification: Under Federal tax law, you must provide your correct Social
Security Number or other Taxpayer ID Number, a certification that the number
provided is correct and a certification that you are not subject to backup
withholding. Failure to furnish your correct Social Security or Taxpayer ID
Number or to so certify will result in 31% of interest paid to your account
being withheld and paid to the IRS. In addition, you may be subject to a
penalty imposed by the IRS if you fail to provide your correct Social Security
or Taxpayer ID Number or if you make an incorrect certification.
- --------------------------------------------------------------------------------
I/We agree to all terms and conditions of the Cotter & Company TruServ Variable
Denomination Floating Rate Demand Note Investment Program (the "Program") as set
forth in the Prospectus. I/We acknowledge that I/we have received and reviewed
the Prospectus and have reviewed and approved all schedules, including IRS W-9
Taxpayer Certification Form. I/We agree that Cotter & Company may amend the
Program from time to time and that such amendments shall be binding upon me/us.
I/We agree that Cotter & Company may comply with any levies, garnishments and
court orders at the sole and absolute discretion of Cotter & Company.
I/We jointly and severally hereby agree to defend, indemnify, reimburse,
exonerate, save and hold harmless Cotter & Company and its agents for, from and
against any and all losses, damages, claims, demands, and expenses including
reasonable attorneys fees of any and every nature actually or allegedly arising
in whole or in part out of the written information, tax identification number,
certifications, notice or instructions provided by me/us or out of my/our bad
faith, negligence, willful misconduct, strict liability of breach of this
agreement/application.
I/We agree that this Agreement and Application may be terminated by Cotter &
Company at any time upon Cotter & Company's written notice mailed to me/us at
the address stated herein.
I/We understand that the Program is administered by The Northern Trust Company
on behalf of Cotter & Company. The Northern Trust Company is not a
co-principal of the Program and no investment dollars will be held by The
Northern Trust Company. First Trust National Association is the acting
indenture trustee of the Cotter & Company Investment Program pursuant to a
written trust indenture between Cotter & Company and First Trust National
Association.
Additional copies of the Prospectus are available upon request by writing to:
Cotter & Company Investment Program, Investor Services Attn: Agent of Issuer,
P.O. Box 75933, Chicago, IL 60675-5933.
This form is intended for the sole use of Investors in the Cotter & Company
Investment Program. INCOMPLETE FORMS, MISSING SUPPORTING DOCUMENTATION FOR THE
PURCHASE OF NOTE OR NOTES, WILL RESULT IN THE RETURN OF YOUR INVESTMENT.
Summary of Key Features of the Program include, (full Program provisions are
detailed in the Prospectus):
- - The Notes are registered under the Federal Securities Act of 1933
- - It is not insured by the FDIC
- - It is an obligation of Tru*Serv Corporation, and is not an obligation of any
bank. The Notes will be subordinated in right of payment to senior notes,
indebtedness to banking institutions, trade creditors and other indebtedness
of the Company. The Notes are unsecured and rank equally and rateably with
all other unsecured and subordinated indebtedness of the Company.
- - It is administered by The Northern Trust Company
- - It provides a quarterly statement of all activity
- - It provides you a checkbook to write checks against, in the minimum amount
of $250.00
ARBITRATION
This Program shall be enforced and interpreted under the laws of the State
of Illinois. Any controversy or claims arising out of or relating to this
Offer, or any breach thereof, including, without limitation, any claim that
this Offer or any portion thereof is invalid, illegal or otherwise voidable,
shall be submitted to arbitration before and in accordance with the rules of
the American Arbitration Association unless another extra judicial dispute
resolution process has been agreed to in writing by the parties. Judgment upon
the award may be entered in any court having jurisdiction thereof. The
location of the arbitration proceedings shall be at the American Arbitration
Association office geographically or physically located closest to the
Investor's domicile, unless otherwise agreed upon in writing by the parties.
By signing below, I/We certify that I/We have received the Prospectus and agree
to be bound by its terms, and that (1) the information on this application,
including Social Security or Tax Identification Number, is correct and complete
and (2) I/We are not currently subject to IRS backup withholding unless the
box on W-9 information has been checked.
APPLICATIONS WILL BE REJECTED IF THIS FORM IS NOT COMPLETE. ALL APPLICANTS
SIGNATURES ARE REQUIRED.
PLEASE SIGN HERE
PRIMARY SIGNATURE DATE
-------------------------- ---------------------
CO-APPLICANT SIGNATURE
--------------------
CO-APPLICANT SIGNATURE DATE
----------------------- ---------------------
CO-APPLICANT SIGNATURE
----------------------- DATE
---------------------
11/95 NM
