-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, K0E4vTLAVK4qvLTfSmtulvglu5fa6uRKTcRsRcCb4+hyl3J5sdxQNqT/99dq++sa M3opXUxJlP8kWuldsR3Acg== 0000950124-95-000751.txt : 19950615 0000950124-95-000751.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950124-95-000751 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950317 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTTER & CO CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 002-20910 FILM NUMBER: 95521671 BUSINESS ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 BUSINESS PHONE: 3129752700 MAIL ADDRESS: STREET 2: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 10-K405 1 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR / /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO ----------------- COMMISSION FILE NUMBER 2-20910 COTTER & COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 36-2099896 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2740 NORTH CLYBOURN AVENUE, CHICAGO, ILLINOIS 60614 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 975-2700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES 'X' . NO . INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ['X'] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. THERE IS NO PUBLIC MARKET FOR REGISTRANT'S CLASS A COMMON STOCK. SUCH SHARES ARE OFFERED BY THE REGISTRANT IN TEN-SHARE UNITS, EXCLUSIVELY TO RETAILERS OF HARDWARE AND RELATED MERCHANDISE, IN CONNECTION WITH BECOMING MEMBERS OF THE COMPANY. SAID STOCK IS LIMITED AS TO TRANSFERABILITY BY ITS TERMS. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT FEBRUARY CLASS 25, 1995 ---------------------------------------------------- --------- CLASS A COMMON STOCK, $100 PAR VALUE................ 62,970 CLASS B COMMON STOCK, $100 PAR VALUE................ 1,147,815
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. Cotter & 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 2740 North Clybourn Avenue, Chicago, Illinois, 60614. Its telephone number is (312) 975-2700. The Company is a Member-owned wholesaler of hardware and related merchandise. It is the largest wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. The Company currently manufactures outdoor power equipment, heaters and hardware related products. In January 1995, the Company agreed to sell certain assets of this manufacturing division to a nationally recognized company and secured a favorable supply agreement from the purchaser. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. 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 6,200 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), New York, Illinois and Texas (approximately 6% each), Pennsylvania (approximately 5%) and Michigan and Ohio (approximately 4% each). Also, the Company currently serves approximately 1,000 V&S(R) Variety Stores. The Company announced in January 1995 the sale of certain inventory of its domestic V&S(R) Variety division to a national wholesaler who has also agreed to supply the majority of the V&S(R) stores. The Company's total sales of merchandise to its U.S. Members were divided among the following general classes of merchandise:
DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ------------ ------------ Hardware Goods....................... 20.1% 20.0% 20.8% Electrical and Plumbing Supplies..... 15.8% 16.3% 16.3% Painting and Cleaning Supplies....... 14.4% 14.9% 14.7% Variety and Related Goods............ 13.9% 13.9% 14.2% Lumber and Building Materials........ 12.9% 12.3% 10.8% Farm and Garden Supplies............. 12.5% 12.3% 11.7% Appliances and Housewares............ 10.4% 10.3% 11.5%
The Company serves its Members by purchasing products in quantity lots and selling them to Members in smaller lots, passing along any savings to Members in the form of lower prices and/or patronage dividends. The Company holds conventions and meetings for its Members in order to keep them better informed as to industry trends and the availability of new merchandise. The Company also provides each of its Members with an illustrated price catalog showing the products available from the Company. The Company's sales to its Members are divided into three categories, as follows: (1) warehouse shipment sales (approximately 46% of total sales); (2) direct shipment sales (approximately 42% of total sales); and (3) relay sales (approximately 12% of total sales). Warehouse shipment sales are sales of products purchased, warehoused, and resold by the Company upon orders from the Members. Direct shipment sales are sales of products purchased by the Company but delivered directly to Members from manufacturers. Relay sales are sales of products purchased by the Company in response to the requests of several Members for a product which is not normally held in inventory and is not susceptible to direct shipment. Generally, the Company will give notice to all Members of its intention to purchase products for relay shipment and then purchases only so many of such products as the Members order. When the product shipment arrives at the Company, it is not warehoused; rather, the Company breaks up the shipment and "relays" the appropriate quantities to the Members who placed orders. 1 3 The Company also manufactures paint and paint applicators. The principal raw materials used by the Company are chemicals. All raw materials are purchased from outside sources. The Company has been able to obtain adequate sources of raw materials and other items used in production and no shortages of such materials which will materially impact operations are currently anticipated. The Company annually sponsors two "markets" (one in the Spring and one in the Fall). In fiscal year 1995, these markets will be held in St. Louis, Missouri. Members are invited to the markets and generally place substantial orders for delivery during the period prior to the next market. During such markets, new merchandise and seasonal merchandise for the coming season is displayed to attending Members. As of February 25, 1995 and February 26, 1994, the Company had a backlog of firm orders (including relay orders) of approximately $21,000,000 and $23,000,000 respectively. It is anticipated the entire backlog existing at February 25, 1995 will be filled by April 30, 1995. The Company's backlog at any given time is made up of two principal components: (i) normal resupply orders and (ii) market orders for future delivery. Resupply orders are orders from Members for merchandise to keep inventories at normal levels. Generally, such orders are filled the day following receipt, except that relay orders for future delivery (which are in the nature of resupply orders) are not intended to be filled for several months. Market orders for future delivery are Member orders for new or seasonal merchandise given at the Company's two markets, for delivery during the several months subsequent to the markets. Thus, the Company will have a relatively high backlog at the end of each market which will diminish in subsequent months until the next market. The retail hardware industry is characterized by intense competition. Independent retail hardware businesses served by the Company continue to face intense competition from chain stores, discount stores, home centers, and warehouse operations. Increased operating expenses for the retail stores, including increased costs due to longer open-store hours and higher rental costs of retail space, have cut into operating margins and brought pressures for lower merchandise costs, to which the Company has been responsive through a retail oriented competitive pricing strategy on high turnover, price sensitive items (Pinpoint Pricing program). The Company competes with other Member-owned and non-member-owned wholesalers as a source of supply and merchandising support for independent retailers. Competitive factors considered by independent retailers in choosing a source of supply include pricing, servicing capabilities, promotional support and merchandise selection and quality. Increased operating expenses and decreased margins have resulted in the withdrawal from business of several non-member-owned wholesalers. During fiscal year 1992, the Company acquired through a Canadian subsidiary, a majority equity interest in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. This cooperative serves 391 True Value(R) and V&S(R) Stores, all located in Canada. The cooperative has approximately 330 employees and generated less than 5% of the Company's consolidated revenue in fiscal year 1994. 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 4,200 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 39% 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 2 4 margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Patronage dividends are usually paid to Members within 60 days after the close of the Company's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of the Company's fiscal year, and the Company may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. The Company's By-Laws provide for the payment of year-end patronage dividends, after payment of at least 20% of such patronage dividends in cash, in qualified written notices of allocation including (i) Class B nonvoting Common Stock based on book value thereof, to a maximum of 2% of the Member's net purchases of merchandise from the Company for the year (except in unusual circumstances of individual hardships, in which case the Board of Directors reserves the right to make payments in cash), (ii) Promissory (Subordinated) Notes, or (iii) other property. The Company may also issue nonqualified written notices of allocation to its Members as part of its annual patronage dividend. In determining the form of the annual patronage dividend, a Member's required investment in Class B Common Stock of the Company had been limited by the Board of Directors to an amount in the aggregate not exceeding an amount (computed on the basis of par value thereof and to the nearest multiple of $100) equal to (i) two percent (2%) of a Member's net purchases of direct shipment sales from the Company and purchases of direct shipment sales of 'Competitive Edge Program Lumber' materials computed separately at one percent (1%), (ii) four percent (4%) of a Member's net purchases of relay sales from the Company and (iii) eight percent (8%) of a Member's net warehouse purchases from the Company in the year of the highest total net purchases of the three preceding years. In 1995, the Board of Directors adopted a plan to continue to adequately capitalize the Company and to more equitably divide the responsibility for capitalizing the Company among its Members. As a result, it is anticipated that these percentages will be changed. In that each Member has equal voting power (voting rights being limited to Class A Common Stock), acquisition of Class B Common Stock as patronage dividends generally results in the larger-volume Members having greater Common Stock equity in the Company but a lesser proportionate voting power per dollar of Common Stock owned than smaller-volume Members. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as the Company) and their patrons (such as the Company's Members) so as to ensure that the business earnings of cooperatives are currently taxable either to the cooperatives or to the patrons. The shares of Class B Common Stock and the Promissory (Subordinated) Notes distributed by the Company to its Members as partial payment of the patronage dividend are "written notices of allocation" within the meaning of that phrase as used in the Code. In order that such written notices of allocation shall be deducted from earnings in determining taxable income of the Company, it is necessary that the Company pay 20% or more of the annual patronage dividend in cash and that the Members consent to having the allocations (at their stated dollar amount) treated as being constructively received by them and includable in their gross income. These conditions being met, the shares of Class B Common Stock and the Promissory (Subordinated) Notes distributed in payment of patronage dividends become "qualified written notices of allocation" as that phrase is used in the Code. Section 1385(a) of the Code provides, in substance, that the amount of any patronage dividend which is paid in money or in qualified written notices of allocation shall be included in the gross income of the patron (Member) for the taxable year in which it receives such money or such qualified written notices of allocation. Thus, every year each Member may receive, as part of the Member's patronage dividend, non-cash "qualified written notices of allocation", which may include Class B Common Stock or Promissory (Subordinated) Notes, the stated dollar amount of which must be recognized as gross income for the taxable year in which received. The portion of the patronage dividend paid in cash (at least 20%) may be insufficient, depending on the tax bracket in each Member's case, to provide funds for the payment of income taxes for 3 5 which the Member will be liable as a result of the receipt of the entire patronage dividend, including cash, Class B Common Stock and Promissory (Subordinated) Notes. In response to the provisions of the Code, the Company's By-Laws provide for the treatment of the shares of Class B Common Stock, Promissory (Subordinated) Notes and such other notices as the Board of Directors may determine, distributed in payment of patronage dividends as "qualified written notices of allocation." The By-Laws provide in effect: (i) for payment of patronage dividends partly in cash, partly in qualified written notices of allocation (including the Class B Common Stock and Promissory (Subordinated) Notes as described above), other property or in nonqualified written notices of allocation, and (ii) that membership in the organization (i.e. the status of being a Member of the Company) shall constitute consent by the Member to take the qualified written notices of allocation or other property into account in the Member's gross income as provided in Section 1385(a) of the Code. Under the provisions of the Code, persons who become or became Members of the Company or who retained their status as Members after adoption of the By-Laws providing that membership in the organization constitutes consent, and after receiving written notification and a copy of the By-Laws are deemed to have consented to the tax treatment of the cash and the qualified written notices of allocation in which the patronage dividends are paid, in accordance with Section 1385(a) of the Code. Written notification of the adoption of the By-Laws and its significance, and a copy of the By-Laws, were sent to each then existing Member and have been, and will continue to be, delivered to each party that became, or becomes a Member thereafter. Such consent is then effective except as to patronage occurring after the distributee ceases to be a Member of the organization or after the By-Laws of the organization cease to contain the provision with respect to the above described consent. Each year since 1978, the Company has paid its Members 30% of the annual patronage dividend in cash in respect to patronage (excluding nonqualified written notices of allocation) occurring in the preceding year. It is the judgment of management that the payment of 30% or more of patronage dividends in cash will not have a material adverse effect on the operations of the Company or its ability to maintain adequate working capital for the normal requirements of its business. However, the Company is obligated to distribute only 20% of the annual patronage dividend (excluding nonqualified written notices of allocation) in cash and it may distribute this lesser percentage in future years. 4 6 ITEM 2. PROPERTIES. The Company's national headquarters is located in Chicago, Illinois. Information with respect to the Company's owned and leased warehousing and office facilities is set forth below:
SQUARE FEET OF WAREHOUSE AND LOCATION OFFICE AREA INTEREST -------- ------------- -------- Chicago, Illinois........................................ 980,000 Owned Corsicana, Texas......................................... 450,000 Owned Denver, Colorado......................................... 360,000 Leased Fogelsville (Allentown), Pennsylvania.................... 600,000 Owned Harvard, Illinois........................................ 640,000 Owned Henderson, North Carolina................................ 300,000 Owned Indianapolis, Indiana.................................... 420,000 Owned Jonesboro (Atlanta), Georgia............................. 360,000 Owned Kansas City, Missouri.................................... 415,000 Owned Kingman, Arizona......................................... 375,000 Owned Manchester, New Hampshire................................ 525,000 Owned Mankato, Minnesota....................................... 320,000 Owned Ocala, Florida........................................... 375,000 Owned Portland, Oregon......................................... 405,000 Owned Westlake (Cleveland), Ohio............................... 405,000 Owned Winnipeg, Manitoba....................................... 432,000 Owned Woodland, California..................................... 350,000 Owned
No location owned by the Company is subject to a mortgage. In December 1983, the Company completed construction of a 150,000 square foot addition to its regional distribution center in Manchester, New Hampshire. This addition was financed with the proceeds from the sale of $4,000,000 State of New Hampshire Industrial Development Authority Revenue Bonds (Cotter & Company Project) Series 1982. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at either the option of the Company or the bondholders at each interest reset date through maturity in 2003. In February 1993, the Company completed the sale of a facility that it previously owned in Pomona, California. The Company's facility in Denver, Colorado is currently leased through June 30, 2004. Information with respect to the Company's manufacturing facilities is set forth below:
SQUARE FEET OF MANUFACTURING PRINCIPAL LOCATION AREA PRODUCT INTEREST -------- ------------- ----------------- -------- Chicago, Illinois............................. 105,000 Paint Owned Cary, Illinois................................ 580,000 Paint and Owned Paint Applicators Harvard, Illinois............................. 830,000 Heaters and Owned Outdoor Power Equipment
5 7 The Company's facilities are suitable for their respective uses and are, in general, adequate for the Company's present needs. In January 1995, the Company agreed to sell certain assets of its outdoor power equipment manufacturing division which the Company operated at the Harvard, Illinois facility. The Company will continue to manufacture at the Harvard, Illinois facility through August 1995 and is developing plans for the future use of this manufacturing facility. The Company owns and leases transportation equipment for use at its regional distribution centers for the primary purpose of delivering merchandise from the Company's regional distribution centers to its Members. Additional information concerning these leases can be found in Notes 3 and 5 to the consolidated financial statements included elsewhere herein. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no existing market for the Common Stock of the Company and there is no expectation that any market will develop. The Company's Class A Common Stock is owned almost exclusively by retailers of hardware and related products each of whom is a Member of the Company and purchases ten shares of the Company's Class A Common Stock (the only class of voting stock) upon becoming a Member. The Company is organized as a Delaware stock corporation and operates as a Member-owned wholesaler cooperative corporation. The shares of the Company's Class B Common Stock now outstanding were issued to Members in partial payment of the annual patronage dividend to which they became entitled as a result of patronage business done by such Members with the Company. In accordance with the Company's By-Laws, 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. The number of holders of record (as of February 25, 1995) of each class of stock of the Company is as follows:
NUMBER OF HOLDERS OF TITLE OF CLASS RECORD -------------- ----------- Class A Common Stock, $100 Par Value............................ 6,297 Class B Common Stock, $100 Par Value............................ 6,244
Dividends (other than patronage dividends) upon the Class A Common Stock and Class B Common Stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of the Company, other than gross margins from operations with or for Members and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the Common Stock, subject to the provisions of the Certificate of Incorporation. Other than the payment of patronage dividends, including the redemption of all 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 classes of stock. See the discussion of patronage dividends under Item 1--Business. 6 8 ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED ------------------------------------------------------------------------ DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28, DECEMBER 29, 1994 1994 1993 1991 1990 ------------ ---------- ---------- ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.......................... $2,574,445 $2,420,727 $2,356,468 $2,139,887 $2,135,120 Net margins....................... $ 60,318 $ 57,023 $ 60,629 $ 59,425 $ 54,847 Patronage dividends............... $ 60,421 $ 54,440 $ 60,901 $ 60,339 $ 56,269 Total assets...................... $ 868,785 $ 803,528 $ 833,372 $ 763,109 $ 709,895 Long-term debt and obligations under capital leases............ $ 75,756 $ 69,201 $ 72,749 $ 13,335 $ 15,077 Promissory (subordinated) and instalment notes payable........ $ 199,099 $ 217,996 $ 235,695 $ 235,289 $ 215,452 Redeemable Class A Common Stock... $ 6,370 $ 6,633 $ 6,857 $ 7,077 $ 7,362 Redeemable Class B Common Stock... $ 116,663 $ 110,773 $ 108,982 $ 104,151 $ 101,398 Book value per share of Class A Common Stock and Class B Common Stock(a)........................ $ 103.57 $ 103.85 $ 101.42 $ 102.50 $ 103.38
- --------------- (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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 In fiscal year 1994, the Company's revenues increased $153,718,000 from last year. Total revenues grew to $2,574,445,000, an increase of 6.4%. The improvement resulted from increased merchandise shipments to existing Members. Classes of merchandise with the strongest percentage increases in fiscal year 1994 were Lumber and Building Materials, up 11.9%; Farm and Garden Supplies, up 8.9%; Hardware Goods, up 7.3%; Appliances and Housewares, up 7.0%; and Variety and Related Goods, up 6.4%. The South Central region of the United States showed the largest growth at 9.4%. Other regions showing strong growth were the Southeast at 8.1%; the Northeast at 7.2%; and North Central at 7.1%. Consolidated gross margins increased by $5,410,000 or 2.5% but as a percentage of revenues decreased to 8.7% from 9.0% reflecting a change in the Company's sales mix from warehouse to direct shipments, combined with the new Pinpoint Pricing program and more promotionally oriented merchandising programs. Warehouse, general and administrative expenses remained comparable with the previous year but expressed as a percentage of revenues decreased to 5.2% from 5.5% due to the Company's continuing efforts to reduce operating costs. Interest paid to Members decreased by $1,564,000 or 6.4% primarily due to a lower average interest rate. 7 9 Net margins were $60,318,000 for the year ended December 31, 1994 compared to $57,023,000 for the year ended January 1, 1994. The fiscal year 1993 net margins include a one-time gain on the sale of properties of $5,985,000 offset by the related income tax of $2,162,000. FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992 Revenues increased $64,259,000 or 2.7% compared to the previous year. The majority of this revenue gain resulted from increased direct shipment sales to Members. Contributing to the increased direct shipments were strong increases of 15.6% from Lumber and Building Materials and a 20.5% increase from the Company's manufacturing division, General Power Equipment Company. Another significant portion of the Company's revenue increase was due to Cotter Canada Hardware and Variety Cooperative, Inc. ("Cotter Canada"). With its growth in membership and its first full year of operations, Cotter Canada shipments to Canadian members increased by 36.4%. Consolidated gross margins increased $1,313,000 but as a percentage of revenue decreased to 9.0% from 9.2% reflecting the change in sales mix from warehouse to direct shipments. Warehouse, general and administrative expenses increased by $9,430,000 or 7.7% due to higher manufacturing and logistic costs, increases associated with a full year of operations at Cotter Canada and non-recurring expenses related to the decentralization of functions previously performed at the Company's National Headquarters. Interest paid to Members decreased $1,258,000 or 4.9% primarily due to a lower average interest rate. Other interest expense increased by $156,000 or 2.1% due to a long-term financing agreement entered into by the Company during the second quarter of fiscal year 1992 to finance the expansion of the Company's distribution network and entry into Canada. This increase was partially offset by a decrease in short-term borrowings and the average rate of interest compared to the corresponding period last year. The gain on sale of properties owned of $5,985,000 and the corresponding increase in income tax expense of $2,193,000 resulted primarily from the disposition of a regional distribution center in Pomona, California and real estate located in Chicago, Illinois. Net margins were $57,023,000 for the year ended January 1, 1994 compared to $60,629,000 for the year ended January 2, 1993. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents in 1994 remained comparable to the previous year. Cash flows for the year ended December 31, 1994 of $88,663,000 were provided by operating activities through shipment of inventories to True Value(R) and V&S(R) Members, which were purchased or manufactured by the Company. Cash flows of $18,121,000 were used for investing activities and cash flows of $70,025,000 were used for financing activities. At the end of fiscal year 1994, inventories increased by $48,681,000, to support anticipated future orders of seasonal merchandise. Short-term borrowings decreased by $13,958,000, but accounts payable increased by $79,252,000 in support of the increased inventories for anticipated future orders of seasonal merchandise and favorable seasonal terms obtained from vendors. Since the favorable seasonal terms were passed on to the Company's Members, accounts and notes receivable increased by $18,078,000. At December 31, 1994, net working capital decreased to $221,054,000 from $225,206,000 at January 1, 1994. The current ratio decreased to 1.47 at December 31, 1994 compared to 1.57 at January 1, 1994. Short-term lines of credit available under informal agreements with lending banks, cancellable by either party under specific circumstances, amounted to $67,800,000 at December 31, 1994. Borrowings under these agreements were $9,329,000 at December 31, 1994 compared to $23,287,000 at January 1, 1994. The Company's capital is primarily derived from redeemable Class A Common Stock and retained earnings, together with Promissory (Subordinated) Notes and redeemable nonvoting Class B Common Stock 8 10 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 $21,427,000 in fiscal year 1994 compared to $13,382,000 in fiscal year 1993 and $30,398,000 in fiscal year 1992. 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 1995 is anticipated to come from operations and external sources, if necessary. The effects of all recent tax legislation have not had a material effect on the Company's financial position and results of operations. Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". As permitted under the new rules, prior years' financial statements have not been restated. The cumulative effect of this adoption did not have a material effect on the consolidated financial statements. Additionally, the Company has reviewed the impact of all new accounting standards issued as of the filing date of this report, that will be adopted at a future date, and has determined that these will not have a material impact on the Company's results of operations or financial position. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements and report of independent auditors are listed on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company are:
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- ------------------------------------------------- Karen M. Agnew...................... 52 Vice President since February, 1992. Director of National Headquarters Support from July, 1991 to February, 1992. Prior position from April, 1986 was Executive Assistant to the President. Daniel T. Burns..................... 44 Secretary since February, 1995. Vice President since November, 1990. General Counsel from April, 1988 to February, 1995. Danny R. Burton..................... 48 Vice President since May, 1992. National Member Development Manager from July, 1990 to May, 1992. Prior position from September, 1985 to June, 1990 was Sales Manager. David W. Christmas.................. 46 Vice President of Merchandising since July, 1994. Prior position was Vice President of Sales and Marketing of a manufacturing company based in North Carolina. William M. Claypool, III............ 72 Director since March, 1970. Term expires April, 1997. Samuel D. Costa, Jr. ............... 53 Director since July, 1988. Term expires April, 1996. Daniel A. Cotter.................... 60 President, Chief Executive Officer and Director. President since January, 1978, Chief Executive Officer since January, 1983 and Director since September, 1989. Term expires April, 1996. Leonard C. Farr..................... 73 Director since March, 1972. Term expires April, 1996.
9 11
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- ------------------------------------------------- William M. Halterman................ 47 Director since June, 1990. Term expires April, 1995. Nominated by the Board of Directors for reelection to a three-year term. Robert F. Johnson................... 51 Appointed Vice President in January, 1994. Director of Corporate Planning and Information Services since March, 1992. Prior position was Distribution Industry Consulting Manager of a corporation in Illinois. Jerrald T. Kabelin.................. 57 Chairman of the Board since April, 1993. Director since April, 1985. Term expires April, 1997. Kerry J. Kirby...................... 48 Vice President and Chief Financial Officer since November, 1990. Treasurer (Principal Financial and Accounting Officer) since April, 1989. Secretary from April, 1989 to February, 1995. Controller from April, 1988 to October, 1990. Robert J. Ladner.................... 48 Director since April, 1994. Term expires April, 1997. Lewis W. Moore...................... 82 Director since June, 1948. Term expires April, 1997. Kenneth W. Noble.................... 37 Nominated by the Board of Directors for election as a Director to a three-year term to replace Jeremiah J. O'Connor, whose term expires April, 1995. Jeremiah J. O'Connor................ 52 Director since July, 1984. Term expires April, 1995. Steven J. Porter.................... 42 Executive Vice President and Chief Operating Officer since August, 1993. Prior position was Vice President of Merchandising of a retail building materials and hardware company based in Missouri. Richard L. Schaefer................. 65 Director since May, 1976. Term expires April, 1995. Nominated by the Board of Directors for reelection to a three-year term. John P. Semkus...................... 48 Vice President, Distribution and Transportation since February 1992. Appointed Vice President in June, 1988. Prior position was Operating Manager of a regional distribution center. George V. Sheffer................... 42 Director since July, 1994. Replaced Kenneth O. Cayce, Jr. Term expires April, 1995. Nominated by the Board of Directors for reelection to a three-year term. Dennis A. Swanson................... 55 Nominated by the Board of Directors for election to a one-year term to replace Michael P. Cole, who resigned and whose unexpired term will expire April, 1996. Robert G. Waters.................... 74 Director since March, 1973. Term expires April, 1997. John M. West, Jr.................... 42 Director since October, 1991. Term expires April, 1995. Nominated by the Board of Directors for reelection to a three-year term. Donald E. Yeager.................... 52 Director since April, 1993. Term expires April, 1996.
- --------------- 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. 10 12 ITEM 11. EXECUTIVE COMPENSATION. PENSION AND COMPENSATION COMMITTEE The Management Development and Compensation Committee of the Board of Directors (the "Committee") consists of three non-employee directors: Samuel D. Costa, Jr. (Chairman), Lewis W. Moore and Jeremiah J. O'Connor. In addition, Jerrald T. Kabelin, Chairman of the Board of Directors, and Daniel A. Cotter, President and Chief Executive Officer, served as ex-officio members of the Committee. The Committee assists the Board of Directors in fulfilling its responsibilities for setting and administering the policies which govern annual compensation and monitoring the Company's pension and certain other benefit plans. It meets in executive session and with ex-officio members and the Chief Financial Officer concerning executive compensation matters. The Committee calls upon outside consultants for assistance, as necessary. The Committee meets at least annually. In fiscal year 1994, the Committee met on three occasions. Primary responsibilities of the Committee include: - Establishing the President's salary and annual and long-term incentive opportunities. - Approving other executive officer salaries recommended by the President. - Setting performance goals for the annual and long-term incentive plans. - Assessing performance achievement relative to goals and approving incentive payments. The Committee makes recommendations to the Board of Directors regarding compensation of the Company's executive officers. The philosophy of the Committee is to maintain an executive compensation program to help the Company attract, retain and motivate the executive resources needed to maintain industry leadership, provide high levels of service to Members, and achieve the financial objectives as determined by the Board of Directors. To achieve its stated goals, the Company has developed three executive compensation policies. - The Company provides levels of salaried compensation that are competitive. - The Company provides annual incentive compensation for executives that vary in a consistent and predictable manner with the performance of the Company. - The Company provides an incentive program which enables selected executives to achieve incentive awards based on the long-term (multiple year) performance of the Company. The combination of these three compensation policies is intended to provide competitive earnings opportunities when performance reaches desired levels. Both the annual and long-term incentive plans are cancelable by the Board of Directors at any time. The Company provides salary levels that are competitive with the median (50th percentile) of the executive marketplace. The industry comparison groups used to evaluate competitiveness include: member owned organizations, wholesale distribution firms, mass merchandising firms and general industry and manufacturing organizations. Competitiveness is measured using data from a number of sources, including published information, proxies and surveys by consulting firms. The annual incentive plan is designed to ensure that executive compensation varies in relation to achievement of annual performance goals. In fiscal year 1994, the plan's overall Company goal was based on achieving Member payout objectives. Each executive's incentive award was determined by Member payout results. The long-term incentive plan assures a continuing focus on the Company's future. Goals are set for performance achievement over three-year intervals. A new performance period starts each year and goals for each three-year cycle currently underway are related to achievement of revenue growth. 11 13 EXECUTIVE COMPENSATION The following table sets forth the total annual compensation paid to the Company's five most highly compensated executive officers during fiscal year 1994 and the total compensation paid to each such individual for the Company's two previous fiscal years: SUMMARY COMPENSATION TABLE
NAME AND OTHER LONG-TERM PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) INCENTIVES(3) - --------------------------------------- ---- -------- -------- --------------- ------------- Daniel A. Cotter....................... 1994 $500,000 $375,000 $ 4,430 $ 250,000 President and Chief 1993 500,000 -- 4,996 -- Executive Officer 1992 500,000 136,500 3,928 250,000 Steven J. Porter....................... 1994 325,000 170,625 58,719 -- Executive Vice President 1993 167,115 25,000 11,944 -- and Chief Operating Officer 1992 -- -- -- -- Kerry J. Kirby......................... 1994 225,000 101,250 6,930 45,000 Vice President, 1993 225,000 25,313 6,746 -- Finance 1992 193,299 36,304 7,518 -- Robert A. Nolawski..................... 1994 205,000 90,000 4,727 40,000 Vice President 1993 200,000 41,100 33,038 -- 1992 205,111 77,175 13,046 -- Daniel T. Burns........................ 1994 175,000 78,750 6,906 35,000 Vice President, Law 1993 175,000 23,625 5,214 -- and Human Resources 1992 162,602 39,946 9,466 --
- --------------- (1) Annual bonus amounts are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. (2) Other compensation consists primarily of Company contributions to the Cotter & Company Employee's Savings and Compensation Deferral Plan (the "Savings Plan"). Under the Savings Plan, each participant may elect to make a contribution in an amount of up to ten percent (10%) of his annual compensation, not to exceed $30,000 (including Company contributions) a year, of which $9,240 of the executive officer's salary in fiscal year 1994 may be deferred. The Company's contribution to the Savings Plan is equal to seventy-five percent (75%) of the participant's contribution, but not to exceed four and one-half percent (4 1/2%) of the participant's annual compensation. Other compensation for Mr. Nolawski, who retired January 6, 1995, includes $4,443 and $27,427 of relocation payments in fiscal year 1992 and 1993, respectively. Mr. Porter's other compensation consists of $11,944 and $56,891 of relocation payments in fiscal year 1993 and 1994, respectively. (3) Mr. Cotter earned a transition award in 1992 under the long-term incentive plan initiated in fiscal year 1991. Daniel A. Cotter is employed under a long-term contract which commenced January 1, 1985 for a period of 15 years terminating December 31, 1999. Mr. Cotter agreed, in 1990, to revise his contract to conform his compensation to that applicable to all other executives. His base salary has not changed since 1990. The Company has a severance policy providing termination benefits based upon annual compensation and years of service. No reportable loans were made by the Company to its executive officers or to its directors during the last three fiscal years. LONG-TERM PERFORMANCE CASH AWARDS Beginning in fiscal year 1991, the Board of Directors adopted a long-term incentive plan for selected senior executive officers of the Company. The plan covers three-year periods beginning in 1991 through 1993. 12 14 Senior executives of the Company are eligible for cash payouts ranging from 10% to 75% of their annual salary if performance goals established for the plan are met. Performance goals for the current plans relate to the achievement of revenue growth. A new plan starts each year with goals set for the next three-year period. A range of estimated payouts which could be earned by the individuals listed in the Summary Compensation Table in fiscal year 1995, and paid in fiscal year 1996 is shown in the following table:
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM - ---------------------------------------------- ------------------ --------- -------- -------- Daniel A. Cotter.............................. 1993-1995 $ 125,000 $250,000 $375,000 Kerry J. Kirby................................ 1993-1995 25,000 50,000 75,000 Daniel T. Burns............................... 1993-1995 22,500 45,000 67,500
DEFINED BENEFIT RETIREMENT PLANS The Company has a defined benefit pension plan, the Cotter & Company Pension Plan (the "Plan"), which is qualified under the Code. The amount of the Company's annual contribution to the Plan is determined for the total of all participants covered by the Plan, and the amount of payment with respect to a specified person is not and cannot readily be separated or individually calculated by the actuaries for the Plan. The Plan provides fully vested unreduced monthly benefits to eligible employees who have retired at or after age 65 or served a minimum of five years of service and reached age 62. Each of the executive officers listed in the foregoing Summary Compensation Table is a participant in the Plan. The Plan has been amended to be a Social Security "excess" plan instead of being a Social Security "offset" plan. The benefits provided by the Plan are calculated in the form of a single annuity. The formula of the benefit for the service completed before January 1, 1989 is one and two-thirds percent of the participant's "average compensation" multiplied by the person's years of service thru December 31, 1988 up to a maximum of thirty such years, minus one and two-thirds percent of the participant's primary Social Security benefit multiplied by the person's years of service thru December 31, 1988 up to a maximum of thirty such years. For service completed after January 1, 1989, the benefit formula is one and one-twentieth percent of the participant's "average compensation" up to one-third of the retirement year Taxable Wage Base multiplied by the person's years of service after January 1, 1989, plus one and one-half percent of the participant's "average compensation" over one-third of the retirement year Taxable Wage Base multiplied by the person's years of service after January 1, 1989. Post January 1, 1989 service is limited such that the total service credited through January 1, 1989 plus post January 1, 1989 service does not exceed 30 years. A third benefit formula for service completed prior to January 1, 1992 is one and two-thirds percent of the participant's "average compensation" multiplied by the person's years of service thru December 31, 1991 up to a maximum of thirty such years, minus one and two-thirds percent of the participant's primary Social Security benefit multiplied by the person's years of service thru December 31, 1991 up to a maximum of thirty such years. The third formula will be used only if the benefit calculated is higher than the combination of the first two formulas. "Average compensation" means the average of the compensation received by an eligible employee during the five highest consecutive calendar years within the ten consecutive calendar years immediately preceding the date of termination of employment. Compensation considered in determining benefits includes salary, overtime pay, commissions, bonuses and deferral contributions under the Savings Plan. The average compensation does not differ substantially from all of the compensation for the officers listed in the Summary Compensation Table. The Company amended and restated in 1994 a Supplemental Retirement Plan (the "Supplemental Plan") for certain employees as designated by the Company's President and Chief Executive Officer. The benefits provided by the Supplemental Plan are calculated in the form of a single annuity in an amount per year which is equal to three percent of the participant's "average compensation" multiplied by years of service 13 15 up to a maximum of twenty such years, minus any benefits provided to the participants by the Plan, and minus the participant's primary Social Security benefit. "Average Compensation" for the Supplemental Plan is defined the same as for the Plan, as discussed above. The Supplemental Plan is not a qualified plan under the Code. Benefits payable under the Supplemental Plan will be financed through internal operations. The estimated annual retirement benefits which may be payable pursuant to the Plan to the officers named in the Summary Compensation Table is currently limited under Section 401(a)(17) of the Code, which outlines the maximum earnings amounts which may be considered under the Plan in determining retirement benefits. This limit is $150,000 for 1995. Section 415 of the Code outlines the maximum annual benefit which may be payable from the Plan during the year; the single dollar limit is $120,000 for 1995 for a participant retiring at age 65. The following table reflects the combined estimated annual retirement benefits which may be payable pursuant to the Plan and the Supplemental Plan to the officers named in the Summary Compensation Table at retirement under various assumed conditions. The benefit amounts are not subject to deduction for Social Security except as provided by the aforesaid benefit formula nor are said amounts subject to any other offset.
YEARS OF SERVICE AVERAGE -------------------------------------------------------- COMPENSATION 10 15 20 25 30 --------------- -------- -------- -------- -------- -------- $800,000................................. $228,400 $348,400 $468,400 $468,400 $468,400 700,000................................. 198,400 303,400 408,400 408,400 408,400 600,000................................. 168,400 258,400 348,400 348,400 348,400 500,000................................. 138,400 213,400 288,400 288,400 288,400 400,000................................. 108,400 168,400 228,400 228,400 228,400 300,000................................. 78,400 123,400 168,400 168,400 168,400 200,000................................. 48,400 78,400 108,400 108,400 108,400 100,000................................. 18,400 33,400 48,400 48,400 48,400
The present credited years of service for the officers listed in the above table are as follows: Daniel A. Cotter, 30 years; Robert A. Nolawski, 30 years; Kerry J. Kirby, 19 years, Daniel T. Burns, 14 years, and Steven J. Porter, 2 years. There is no existing market for the Company's Common Stock and there is no expectation that any market will develop. There are no broad market or peer group indexes the Company believes would render meaningful comparisons. Accordingly, a performance graph of the Company's cumulative total shareholder return for the previous five years, with a performance indicator of the overall stock market for the Company's peer group, has not been prepared. In fiscal year 1994 directors of the Company were each paid $1,000 per month. The Chairman of the Board is paid $1,000 per day to a maximum of $104,000 per year, when serving in the capacity as Chairman. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of February 25, 1995, each of the directors of the Company was the beneficial owner of 10 shares of Class A Common Stock of the Company comprising .2% of such shares issued and outstanding. Other than Daniel A. Cotter, no executive officer owns any shares of Class A Common Stock. The directors own in the aggregate approximately 1.5% of Class B Common Stock as of February 25, 1995. No executive officer owns any shares of Class B Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company uses Galaxy Travel Agency, Inc., a company engaged in providing normal travel business services, for Company officers, directors, employees, and Members. Daniel A. Cotter and his brother each own a one-half interest of Galaxy Travel. The total bookings placed by the Company with Galaxy Travel in fiscal year 1994 were approximately $2,000,000 and are estimated to be approximately the same in fiscal year 1995. The Company believes the foregoing transactions are on no-less favorable terms to it than could have been obtained from an independent party. 14 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) 1. FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying index (page F-1) to the consolidated financial statements are filed as part of this annual report. 2. FINANCIAL STATEMENT SCHEDULES No schedules have been filed because the required information is not applicable or is not material or because the required information is included in the consolidated financial statements or the notes thereto. 3. EXHIBITS The exhibits listed on the accompanying index to exhibits (pages E-1 and E-2) are filed as part of this annual report. (B) REPORTS ON FORM 8-K None. 15 17 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. COTTER & COMPANY By: /s/ KERRY J. KIRBY -------------------------------------- Kerry J. Kirby, Vice President, Treasurer and DATED: March 16, 1995 Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - --------------------------------------------- --------------------------- -------------------- /s/ DANIEL A. COTTER President, Chief Executive March 16, 1995 - --------------------------------------------- Officer and Director Daniel A. Cotter /s/ STEVEN J. PORTER Executive Vice President March 16, 1995 - --------------------------------------------- and Chief Operating Officer Steven J. Porter /s/ KERRY J. KIRBY Vice President, Treasurer and March 16, 1995 - --------------------------------------------- Chief Financial Officer Kerry J. Kirby /s/ JERRALD T. KABELIN Chairman of the Board March 16, 1995 - --------------------------------------------- and Director Jerrald T. Kabelin /s/ WILLIAM M. CLAYPOOL, III Director March 16, 1995 - --------------------------------------------- William M. Claypool, III /s/ SAMUEL D. COSTA, JR. Director March 16, 1995 - --------------------------------------------- Samuel D. Costa, Jr. /s/ LEONARD C. FARR Director March 16, 1995 - --------------------------------------------- Leonard C. Farr /s/ WILLIAM M. HALTERMAN Director March 16, 1995 - --------------------------------------------- William M. Halterman /s/ ROBERT J. LADNER Director March 16, 1995 - --------------------------------------------- Robert J. Ladner /s/ LEWIS W. MOORE Director March 16, 1995 - --------------------------------------------- Lewis W. Moore /s/ JEREMIAH J. O'CONNOR Director March 16, 1995 - --------------------------------------------- Jeremiah J. O'Connor /s/ RICHARD L. SCHAEFER Director March 16, 1995 - --------------------------------------------- Richard L. Schaefer /s/ GEORGE V. SHEFFER Director March 16, 1995 - --------------------------------------------- George V. Sheffer /s/ ROBERT G. WATERS Director March 16, 1995 - --------------------------------------------- Robert G. Waters /s/ JOHN M. WEST, JR. Director March 16, 1995 - --------------------------------------------- John M. West, Jr. /s/ DONALD E. YEAGER Director March 16, 1995 - --------------------------------------------- Donald E. Yeager
16 18 ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S) ----------- Report of Independent Auditors................................................. F-3 Consolidated Balance Sheet at December 31, 1994 and January 1, 1994............ F-4; F-5 Consolidated Statement of Operations for each of the three years in the period ended December 31, 1994...................................................... F-6 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1994...................................................... F-7 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 31, 1994............................ F-8 Notes to Consolidated Financial Statements..................................... F-9 to F-17
F-1 19 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- F-2 20 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 31, 1994 and January 1, 1994, and the related consolidated statements of operations, cash flows and capital stock and retained earnings for each of the three years in the period ended December 31, 1994. 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 31, 1994 and January 1, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 13, 1995 F-3 21 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, JANUARY 1, 1994 1994 ------------ ---------- (000'S OMITTED) Current assets: Cash and cash equivalents....................................... $ 1,831 $ 1,314 Accounts and notes receivable................................... 294,663 276,585 Inventories..................................................... 384,747 336,066 Prepaid expenses................................................ 7,861 6,969 ---------- ---------- Total current assets............................... 689,102 620,934 Properties owned, less accumulated depreciation................... 164,261 164,319 Properties under capital leases, less accumulated amortization.... 4,691 6,769 Other assets...................................................... 10,731 11,506 ---------- ---------- Total assets....................................... $868,785 $ 803,528 ========== ==========
See Notes to Consolidated Financial Statements. F-4 22 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
DECEMBER 31, JANUARY 1, 1994 1994 ------------ ---------- (000'S OMITTED) Current liabilities: Accounts payable................................................ $334,468 $ 255,216 Accrued expenses................................................ 45,304 38,926 Short-term borrowings........................................... 9,329 23,287 Current maturities of notes, long-term debt and lease obligations.................................................. 60,564 61,685 Patronage dividend payable in cash.............................. 18,383 16,614 -------- --------- Total current liabilities.......................... 468,048 395,728 Long-term debt.................................................... 72,163 63,977 Obligations under capital leases.................................. 3,593 5,224 Capitalization: Promissory (subordinated) and instalment notes.................. 199,099 217,996 Redeemable Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 63,350 and 65,880 shares)............................................... 6,370 6,633 Redeemable Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,047,756 and 1,019,640 shares; issuable as partial payment of patronage dividends, 104,275 and 75,780 shares).............. 116,663 110,773 Retained earnings............................................... 3,764 3,867 -------- --------- 325,896 339,269 Foreign currency translation adjustment......................... (915) (670) -------- --------- Total capitalization............................... 324,981 338,599 -------- --------- Total liabilities and capitalization............... $868,785 $ 803,528 ======== =========
See Notes to Consolidated Financial Statements. F-5 23 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Revenues........................................... $2,574,445 $2,420,727 $2,356,468 ---------- ---------- ---------- Cost and expenses: Cost of revenues................................. 2,351,114 2,202,806 2,139,860 Warehouse, general and administrative............ 132,759 132,674 123,244 Interest paid to Members......................... 22,894 24,458 25,716 Other interest expense........................... 7,493 7,429 7,273 Gain on sale of properties owned................. (692) (5,985) -- Other income, net................................ (604) (260) (643) Income tax expense............................... 1,163 2,582 389 ---------- ---------- ---------- 2,514,127 2,363,704 2,295,839 ---------- ---------- ---------- Net margins........................................ $ 60,318 $ 57,023 $ 60,629 ========== ========== ==========
See Notes to Consolidated Financial Statements. F-6 24 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ---------------------------------------------- DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Operating activities: Net margins......................................... $ 60,318 $ 57,023 $ 60,629 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization.................... 21,613 21,566 21,869 Provision for losses on accounts and notes receivable..................................... 4,233 4,057 4,447 Changes in operating assets and liabilities: Accounts and notes receivable.................... (33,112) (38,605) (29,798) Inventories...................................... (49,145) 183 (11,819) Accounts payable................................. 79,957 (45,070) 23,770 Accrued expenses................................. 6,022 (1,143) (6,221) Other adjustments, net........................... (1,223) (2,679) (3,035) -------- --------- --------- Net cash and cash equivalents provided by (used for) operating activities... 88,663 (4,668) 59,842 -------- --------- --------- Investing activities: Additions to properties owned....................... (21,427) (13,382) (17,871) Proceeds from sale of properties owned.............. 2,174 13,999 682 Changes in other assets............................. 1,132 (3,850) (2,076) -------- --------- --------- Net cash and cash equivalents (used for) investing activities............ (18,121) (3,233) (19,265) -------- --------- --------- Financing activities: Payment of annual patronage dividend................ (16,614) (18,570) (18,423) Payment of notes, long-term debt and lease obligations...................................... (39,632) (32,730) (18,776) Proceeds from long-term borrowings.................. -- -- 54,124 Increase (decrease) in short-term borrowings........ (13,851) 23,059 (20,975) Purchase of Class A common stock.................... (216) (470) (337) Proceeds from sale of Class A common stock.......... 288 323 352 -------- --------- --------- Net cash and cash equivalents (used for) financing activities............ (70,025) (28,388) (4,035) -------- --------- --------- Net increase (decrease) in cash and cash equivalents......................................... 517 (36,289) 36,542 -------- --------- --------- Cash and cash equivalents at beginning of year........ 1,314 37,603 1,061 -------- --------- --------- Cash and cash equivalents at end of year.............. $ 1,831 $ 1,314 $ 37,603 ======== ========= =========
See Notes to Consolidated Financial Statements. F-7 25 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS FOR THE THREE YEARS ENDED DECEMBER 31, 1994
COMMON STOCK, $100 PAR VALUE ------------------------------------ CLASS B FOREIGN CLASS A ------------ CURRENCY -------------------- ISSUED AND RETAINED TRANSLATION ISSUED SUBSCRIBED TO BE ISSUED EARNINGS ADJUSTMENT ------ ---------- ------------ -------- ----------- (000'S OMITTED) Balances at December 28, 1991.............. $7,016 $ 61 $104,151 $ 1,556 $ -- Net margins.............................. 60,629 Foreign currency translation adjustment............................ (932) Patronage dividend....................... 10,029 (60,901) Stock issued for paid-up subscriptions... 357 (357) Stock subscriptions...................... 345 Stock purchased and retired.............. (565) (5,198) ------ ------ -------- -------- ----- Balances at January 2, 1993................ 6,808 49 108,982 1,284 (932) Net margins.............................. 57,023 Foreign currency translation adjustment............................ 262 Patronage dividend....................... 7,686 (54,440) Stock issued for paid-up subscriptions... 312 (312) Stock subscriptions...................... 308 Stock purchased and retired.............. (532) (5,895) ------ ------ -------- -------- ----- Balances at January 1, 1994................ 6,588 45 110,773 3,867 (670) Net margins.............................. 60,318 Foreign currency translation adjustment............................ (245) Patronage dividend....................... 10,829 (60,421) Stock issued for paid-up subscriptions... 275 (275) Stock subscriptions...................... 265 Stock purchased and retired.............. (528) (4,939) ------ ------ -------- -------- ----- Balances at December 31, 1994.............. $6,335 $ 35 $116,663 $ 3,764 $(915) ====== ====== ======== ======== =====
- --------------- Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993 and December 28, 1991 (for 360, 590, 760 and 880 shares subscribed, respectively). See Notes to Consolidated Financial Statements. F-8 26 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. In accordance with the Company's By-laws, the annual patronage dividend is paid to Members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. The significant accounting policies of the Company are summarized below. Consolidation. The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. Capitalization. The Company's capital (Capitalization) is derived from redeemable Class A voting common stock and retained earnings, together with promissory (subordinated) notes and redeemable Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes (from fiscal year 1985 through fiscal year 1993, the promissory (subordinated) notes were for a term of seven years) and redeemable $100 par value Class B common stock. Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents. The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories. Inventories are stated at the lower of cost, determined on the "first-in, first-out" basis, or market. Properties. Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements--10 to 40 years; 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. Income Taxes. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 3, 1993. Under this standard, the liability method is used whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities adjusting for the impact of tax credit carryforwards. 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 F-9 27 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Reporting year. The Company's reporting year-end is the Saturday closest to December 31. NOTE 2--INVENTORIES Inventories consisted of:
DECEMBER 31, 1994 JANUARY 1, 1994 ----------------- --------------- (000'S OMITTED) Manufacturing inventories: Raw materials........................... $ 12,986 $ 14,795 Work-in-process and finished goods...... 60,094 54,992 --------- --------- 73,080 69,787 Merchandise inventories................... 311,667 266,279 --------- --------- $ 384,747 $ 336,066 ========= =========
NOTE 3--PROPERTIES Properties owned or leased under capital leases consisted of:
DECEMBER 31, 1994 JANUARY 1, 1994 -------------------- -------------------- OWNED LEASED OWNED LEASED -------- ------- -------- ------- (000'S OMITTED) Buildings and improvements.................... $168,311 $ -- $166,055 $ -- Machinery and warehouse equipment............. 79,953 -- 76,330 -- Office and computer equipment................. 62,868 -- 55,191 -- Transportation equipment...................... 22,757 14,556 18,778 15,337 -------- ------- -------- ------- 333,889 14,556 316,354 15,337 Less accumulated depreciation and amortization................................ 181,920 9,865 164,731 8,568 -------- ------- -------- ------- 151,969 4,691 151,623 6,769 Land.......................................... 12,292 -- 12,696 -- -------- ------- -------- ------- $164,261 $ 4,691 $164,319 $ 6,769 ======== ======= ======== =======
F-10 28 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 31, 1994 JANUARY 1, 1994 ----------------- --------------- (000'S OMITTED) Senior note at 8.60%........................ $50,000 $50,000 Term loans: Canadian prime (8.00% and 5.50%, respectively).......................... 3,565 3,777 United States prime plus .5% (9.00%) and fixed (7.75%), respectively............ 6,200 6,200 Redeemable (subordinated) term notes: 7.00%..................................... 4,346 -- 7.37%..................................... 1,512 -- 7.61%..................................... 3,540 -- Industrial Revenue Bonds: 5.28% and 5.94%, respectively............. 4,000 4,000 8.25%..................................... -- 1,150 ------- ------- 73,163 65,127 Less amounts due within one year............ 1,000 1,150 ------- -------- $72,163 $63,977 ======= =======
Principal payments for the 8.60% senior note are due in incrementally increasing amounts starting in 1995 through maturity in 2007. Under the senior note agreement, the Company is required to meet certain financial ratios and covenants. The two term loans are due in 1997 and 1999, respectively. The redeemable (subordinated) term notes were issued in exchange for promissory (subordinated) notes maturing on December 31, 1994 that were held by promissory note holders, who do not own the Company's Class A Common Stock. The notes are due in 1996, 1997 and 1998. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at either the option of the Company or the bondholders at each interest reset date through maturity in 2003. Total maturities of long-term debt for fiscal years 1995, 1996, 1997, 1998, 1999 and thereafter are $1,000,000, $6,346,000, $8,077,000, $7,540,000, $10,200,000 and $40,000,000, respectively. 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, which amount to $67,800,000 at December 31, 1994. Borrowings under these agreements were $9,329,000 at December 31, 1994. The Company pays commitment fees for these lines. The weighted average interest rate on short-term borrowings was 6.63% at December 31, 1994 and 3.48% at January 1, 1994. NOTE 5--CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transportation equipment under operating and capital leases. F-11 29 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a schedule of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments, as of December 31, 1994:
CAPITAL OPERATING ------- --------- (000'S OMITTED) Fiscal years 1995................................................. $ 1,887 $ 6,356 1996................................................. 1,538 4,812 1997................................................. 1,039 2,892 1998................................................. 751 1,830 1999................................................. 416 1,351 Thereafter........................................... -- 4,400 ------- ------- Net minimum lease payments............................. 5,631 $21,641 ======= Less amount representing interest...................... 298 ------- Present value of net minimum lease payments............ 5,333 Less amounts due within one year....................... 1,740 ------- $ 3,593 =======
Capitalized leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value which is related to the lessor's book value at expiration of the lease term. Rent expense under operating leases was as follows:
DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Minimum rent..................................... $8,487 $8,174 $7,253 Contingent rent.................................. 611 575 616 ------ ------ ------ $9,098 $8,749 $7,869 ====== ====== ======
F-12 30 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--CAPITALIZATION Promissory (subordinated) and instalment notes consisted of:
DECEMBER 31, JANUARY 1, 1994 1994 ------------ ---------- (000'S OMITTED) Promissory (subordinated) notes-- Due currently............................................ $ 39 $ 51 Due on December 31, 1994--8.50%.......................... -- 26,173 Due on December 31, 1994--9.50%.......................... -- 30,321 Due on December 31, 1995--7.50%.......................... 20,744 21,324 Due on December 31, 1995--10.00%......................... 35,355 36,257 Due on December 31, 1996--9.50%.......................... 28,436 28,930 Due on December 31, 1996--6.00%.......................... 24,888 27,187 Due on December 31, 1997--10.00%......................... 17,579 18,138 Due on December 31, 1997--7.87%.......................... 16,793 -- Due on December 31, 1998--8.00%.......................... 28,512 29,266 Due on December 31, 1999--8.00%.......................... 27,030 27,827 Due on December 31, 1999--8.20% (to be issued)........... 27,909 -- Due on December 31, 2000--6.50% (issued 1994)............ 25,628 26,752 Instalment notes at interest rates of 6.50% to 10.00% with maturities through 1998............................. 4,010 4,062 -------- --------- 256,923 276,288 Less amounts due within one year........................... 57,824 58,292 -------- --------- $199,099 $ 217,996 ======== =========
The promissory (subordinated) 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. Promissory (subordinated) 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 promissory (subordinated) 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 (subordinated) and instalment notes for fiscal years 1995, 1996, 1997, 1998, 1999 and thereafter are $57,824,000, $54,463,000, $35,197,000, $28,872,000, $54,939,000 and $25,628,000, respectively. NOTE 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. F-13 31 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--INCOME TAXES Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes" (See Note 1). As permitted under the new rules, prior years' financial statements have not been restated. The cumulative effect of adopting SFAS No. 109 as of January 3, 1993 was not material to the consolidated financial statements of the Company. At December 31, 1994, the Company has alternative minimum tax credit carryforwards of approximately $1,200,000 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 31, 1994 resulted primarily from alternative minimum tax credit carryforwards and temporary differences between income tax and financial reporting for depreciation, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
DEFERRED LIABILITY METHOD METHOD --------------------------- ---------- FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Current: Federal........................................ $ 486 $ 343 $ 551 State.......................................... 462 22 152 Foreign........................................ 278 237 122 ------ ------ ------ Total current.................................. 1,226 602 825 ------ ------ ------ Deferred: Federal........................................ (147) 1,582 (497) State.......................................... (26) 317 (14) Foreign........................................ 110 81 75 ------ ------ ------ Total deferred................................. (63) 1,980 (436) ------ ------ ------ $1,163 $2,582 $ 389 ======= ====== ======
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. F-14 32 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% in fiscal year 1994 and 1993 and 34% in fiscal year 1992 is as follows:
DEFERRED LIABILITY METHOD METHOD -------------------------- ---------- FOR THE YEARS ENDED ---------------------------------------- DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Tax at U.S. statutory rate.................... $ 21,518 $ 20,862 $ 20,746 Effects of: Patronage dividend.......................... (21,147) (19,054) (20,706) State income taxes, net of federal tax benefit.................................. 283 220 91 Other, net.................................. 509 554 258 -------- --------- --------- $ 1,163 $ 2,582 $ 389 ======== ========= =========
NOTE 9--CASH FLOW The Company's noncash financing and investing activities in fiscal year 1992 include acquisitions of transportation and warehouse equipment by entering into capital leases. In fiscal year 1992, ownership of a distribution center previously under capital lease was transferred to the Company. Also in fiscal year 1992, a wholly-owned subsidiary of the Company acquired certain assets, in part, by assuming debt. These transactions aggregate $12,527,000. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to noncash operating and financing activities are as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Patronage dividend payable in cash...................... $ 18,383 $ 16,614 $ 18,570 Promissory (subordinated) notes......................... 23,213 20,852 22,711 Class B nonvoting common stock.......................... 5,900 2,086 4,934 Instalment notes........................................ 3,058 2,939 2,485 Member indebtedness..................................... 9,867 11,949 12,201 -------- -------- -------- $ 60,421 $ 54,440 $ 60,901 ======== ======== ======== Note renewals........................................... $ 26,191 $ 27,187 $ 22,686 ======== ======== ========
Cash paid for interest during fiscal years 1994, 1993 and 1992 totalled $30,583,000, $32,056,000 and $31,638,000, respectively. Cash paid for income taxes during fiscal years 1994, 1993 and 1992 totalled $1,709,000, $1,387,000 and $1,771,000, respectively. F-15 33 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 31, JANUARY 1, JANUARY 2, 1994 1994 1993 ------------ ---------- ---------- (000'S OMITTED) Income: Actual return (loss) on plan assets................... $ (1,543) $ 7,486 $ 2,856 Amortization of excess plan assets.................... 920 920 920 -------- -------- -------- (623) 8,406 3,776 -------- -------- -------- Expenses: Service cost-benefits earned during year.............. 4,765 4,556 3,633 Interest on projected benefit obligation.............. 6,736 6,266 5,738 Deferral of excess (deficiency) of actual over estimated return on plan assets.................... (8,815) 1,042 (3,060) -------- -------- -------- 2,686 11,864 6,311 -------- -------- -------- Net pension cost........................................ $ 3,309 $ 3,458 $ 2,535 ======== ======== ========
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 8.5% and 4.5%, respectively, in fiscal year 1994; 7.5% and 4.5%, respectively, in fiscal year 1993; and 9.0% and 6.0%, respectively, in fiscal year 1992. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal year 1994 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1994, 1993 and 1992, the expected long-term rate of return on assets was 9.5%. 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 F-16 34 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:
DECEMBER 31, JANUARY 1, 1994 1994 ------------ ---------- (000'S OMITTED) Assets: Total plan assets at fair value................................... $ 80,046 $ 81,726 ======== ======== Obligations: Accumulated benefit obligations: Vested......................................................... $ 53,055 $ 55,605 Non-vested..................................................... 7,683 8,704 Effect of projected compensation increases........................ 19,924 24,110 -------- -------- Total projected benefit obligations............................... 80,662 88,419 -------- -------- Net excess assets (liabilities): Unrecognized: Unamortized excess assets at original date..................... 8,643 9,563 Net actuarial gain (loss)...................................... 565 (5,773) Prior service costs............................................ (5,313) (6,170) Recognized accrued pension cost................................... (4,511) (4,313) -------- -------- Total net excess assets (liabilities)............................. (616) (6,693) -------- -------- Total obligations and net excess assets (liabilities)............... $ 80,046 $ 81,726 ======== ========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $757,000, $702,000 and $556,000 for fiscal years 1994, 1993 and 1992, respectively. NOTE 11--SUBSEQUENT EVENTS On January 13, 1995, the Company announced the sale of certain inventory of its V&S(R) Variety division to a national wholesaler who has also agreed to supply the majority of the V&S(R) stores. Also, on January 31, 1995, the Company agreed to sell 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 should not have a material impact on the Company's results of operations or financial position. F-17 35 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBITS NUMBERED ENCLOSED DESCRIPTION PAGE -------- ---------------------------------------------------------------- ------------ 21 Subsidiaries.
EXHIBITS INCORPORATED BY REFERENCE -------------- 3-A Amended and Restated Certificate of Incorporation of Cotter & Company dated May 10, 1993. Incorporated by reference -- Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 3-B By-Laws of Cotter & Company as amended and restated through June 1, 1993. Incorporated by reference -- Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-A Article Fourth of the Certificate of Incorporation of the Company, setting forth the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of the Class A Common Stock and Class B Common Stock of the Company. Article Twelfth of the Certificate of Incorporation of the Company, setting forth certain limitations on the rights of shareholders to bring an action against directors for breach of the duty of care. Incorporated by reference -- Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to: certain qualifications, limitations and restrictions on the Common Stock of the Company; the Member agreement between the Company and its shareholders; the payment of patronage dividends; dividends; qualifying shares; and valuation of Class B Common Stock of the Company issued as part of the annual patronage dividend. Incorporated by reference -- Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-C Specimen certificate of Class A Common Stock. Incorporated by reference -- Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836). 4-D Specimen certificate of Class B Common Stock. Incorporated by reference -- Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836). 4-E Promissory (Subordinated) Note form effective for the year-ending December 31, 1986 and thereafter. Incorporated by reference -- Exhibit 4-H to Registration Statement on Form S-2 (No. 33-20960). 4-F Instalment Note form. Incorporated by reference -- Exhibit 4-F to Registration Statement on Form S-2 (No. 2-82836). 4-G Copy of Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference -- Exhibit 4-J to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 10-A Form of "Retail Member Agreement with Cotter & Company" between the Company and its Members that offer primarily hardware and related items. Incorporated by reference -- Exhibit 10-C to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 10-B Current form of "Subscription to Shares of Cotter & Company". Incorporated by reference -- Exhibit 10-H to Registration Statement on Form S-2 (No. 2-82836).
E-1 36
EXHIBITS INCORPORATED BY REFERENCE -------------- 10-C Cotter & Company Pension Plan (As Amended and Restated June 20, 1994 Effective As Of January 1, 1989). Incorporated by reference -- Exhibit 10-C to Post-Effective Amendment No. 4 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 Supplemental Retirement Plan between Cotter & Company and selected executives of the Company dated December 30, 1988. Incorporated by reference -- Exhibit 10-V to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (No. 33-20960). 10-F Amendment dated November 1, 1991 to Supplemental Retirement Plan between Cotter & Company and selected executives of the Company. Incorporated by reference -- Exhibit 10-Q to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (No. 33-39477). 10-G Amendment dated December 15, 1994 to Supplemental Retirement Plan between Cotter & Company and selected executives of the Company. Incorporated by reference -- 10-G to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-H Annual Incentive Compensation Program and Long-Term Incentive Compensation Program between Cotter & Company and selected executives of the Company. Incorporated by reference -- filed as Exhibits A and B to Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477). 10-I Cotter & Company Long-Term Incentive Compensation Program for Executive Management (Amended) dated November 7, 1994. Incorporated by reference -- 10-I to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-J 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-K 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). 27 Financial Data Schedule. Incorporated by reference -- Exhibit 27 to Post- Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477)
SEQUENTIALLY SUPPLEMENTAL NUMBERED INFORMATION PAGE - ------------ ------------- (a) Notice of Annual Meeting of Stockholders on April 4, 1995. (b) Proxy solicited by the Board of Directors. (c) Cotter & Company 1994 Annual Report.
E-2 EX-21 2 SUBSIDIARIES 1 EXHIBIT 21 Subsidiaries of Registrant The registrant owns 100% of the issued and outstanding Capital Stock of Cotter Real Estate Agency, Inc., Cotter Acceptance Co., Inc., Cotter Insurance Agency, Inc., Cotter Trucking, Inc., Wheeler Manufacturing Co., and Atlas Power Equipment Company, all Illinois corporations, and indirectly through Cotter Acceptance, Co., 100% of the issued and outstanding Capital Stock of Warner True Value Hardware, Inc., a Minnesota corporation. The accounts of these subsidiaries have been consolidated with the registrant's at December 31, 1994 and January 1, 1994. In January 1992, the registrant formed a Canadian subsidiary, Cotter Canada Hardware & Variety Company, Inc., owning 100% of the issued and outstanding Capital Stock. Indirectly, through this subsidiary, the registrant owns 100% of the issued and outstanding voting Preferred Stock of the newly formed Canadian cooperative, Cotter Canada Hardware and Variety Cooperative, Inc. EX-99.A 3 SUPPLEMENT A 1 SUPPLEMENT (a) COTTER & COMPANY 2740 North Clybourn Avenue Chicago, Illinois 60614 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS April 4, 1995 TO THE STOCKHOLDERS OF COTTER & COMPANY: The Annual Meeting of Stockholders of COTTER & COMPANY, a Delaware Corporation, will be held at its Distribution Center located at 7058 Snowdrift Road, Fogelsville, Pennsylvania 18051, on Tuesday, April 4, 1995, at the hour of 10:00 in the morning, local time, for the following purposes: 1. To elect five Directors to serve for a term of three years and to elect one Director for a term of one year to fill an unexpired term and until the election and qualification of their respective successors; 2. To approve the appointment of Ernst & Young, independent public accountants, as auditors of the Company for fiscal year 1995; and 3. To consider and act upon such further business as may properly come before the meeting or any adjournments thereof. Election of Directors. The Nominating Committee and the Board of Directors have nominated for election five (5) nominees listed below, each to hold office for a term of three (3) years and until his successor is elected and qualified: William M. Halterman George V. Sheffer Kenneth M. Noble John M. West, Jr. Richard L. Schaefer Additionally, Dennis A. Swanson has been nominated to serve for a term of one (1) year to fill the unexpired term of Michael P. Cole, retired. The shares represented by the Proxy solicited by the Board of Directors will be voted in favor of the election of the above-named nominees unless authority is expressly withheld. The Board of Directors knows of no reason why any nominee for director will be unable to serve if elected. If any nominee shall become unavailable for election, it is intended that such shares shall be voted for the election of a substitute nominee selected by the persons named in the enclosed Proxy. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES PRESENTED. 2 Appointment of Independent Public Accountants. The Board recommends that you vote FOR the approval of the appointment of Ernst & Young, independent public accountants, as auditors for the Company for the fiscal year ending December 30, 1995. The Proxy solicited by the Board will be voted in favor of the approval of Ernst & Young to serve as auditors for the Company for fiscal year 1995 unless a contrary decision is made by the Stockholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG AS AUDITORS FOR THE COMPANY FOR FISCAL YEAR 1995. Only holders of record of the Class A Stock of the Company at the close of business on February 25, 1995, will be entitled to notice of and to vote at said meeting. The Proxy solicited by the Board will be voted in favor of all proposals unless a contrary decision is made by the Stockholders, and of all other matters to come before the meeting, or any adjournments thereof, in the discretion of the Proxies therein. STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE ANNUAL MEETING IN PERSON ARE ASKED TO SIGN, DATE, AND RETURN THE ENCLOSED PROXY TO THE COMPANY IN THE ENCLOSED, STAMPED ENVELOPE, ADDRESSED TO COTTER & COMPANY, P.O. BOX 5314, NAPERVILLE, IL 60567-5314. YOUR VOTE IS IMPORTANT YOU ARE URGED TO SIGN, DATE, AND RETURN YOUR PROXY WITHOUT DELAY, TO INSURE ITS ARRIVAL IN TIME FOR THE MEETING. THIS WILL ENSURE THE PRESENCE OF A QUORUM AT THE MEETING. By Order of the Board of Directors /s/ DANIEL T. BURNS ----------------------------------- Daniel T. Burns Secretary Chicago, Illinois Date of Mailing: March 10, 1995 EX-99.B 4 SUPPLEMENT B 1 SUPPLEMENT (b) COTTER & COMPANY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints William M. Claypool, III; Lewis W. Moore; and Robert G. Waters, and each of them, as Proxies, with full power of substitution, and hereby authorizes them to represent and to vote, as designated below, all shares of Class A Common Stock of Cotter & Company held of record by the undersigned on February 25, 1995, at the Annual Meeting of Stockholders to be held on Tuesday, April 4, 1995, at the Company's Distribution Center located at 7058 Snowdrift Road, Fogelsville, Pennsylvania 18051, at 10:00 a.m., local time, and at any adjournments thereof. MARK AN X INSIDE BOX [X] THE BOARD RECOMMENDS A VOTE FOR ALL OF THE FOLLOWING PROPOSALS. WITHHOLD AUTHORITY TO VOTE FOR ALL FOR NOMINEES LISTED BELOW 1.* ELECTION OF DIRECTORS For all nominees listed below (except as marked to the contrary below). 2. To vote for the election of Dennis A. Swanson to serve for a term of one year to fill the unexpired term of Michael P. Cole, retired. * William M. Halterman, Kenneth M. Noble, Richard L. Schaefer, George V. Sheffer, and John M. West, Jr., for a term of three years. To withhold authority to vote for any individual nominee, write that nominee's name on the space provided. FOR AGAINST ABSTAIN 3. Proposal to approve the appointment of Ernst & Young, independent public accountants, as auditors of the Company for the fiscal year 1995. 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting, or any adjournments thereof. This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this Proxy will be voted for Proposals 1, 2, 3 and 4. Please sign exactly as your name appears on your Class A Common Stock certificate. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. A copy of the Company's 10-K Annual Report is available upon request. PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY BALLOT PROMPTLY USING THE ENCLOSED ENVELOPE.
EX-99.C 5 SUPPLEMENT C 1 SUPPLEMENT(c) COTTER & COMPANY 1994 ANNUAL REPORT [COLLAGE OF 110 TRUE VALUE CUSTOMERS] 2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.
1. Scott Stryker, Stone Ridge, NY 56. Dale Kennow, Glendale, AZ 2. Tammy Murphy, Thompson Station, TN 57. Mary White, Worland, WY 3. Jimmy Scott, Marks, MS 58. Albert Jost, Pittsburg, KS 4. John Duclos, Goffstown, NH 59. Susan L. Burkhert, Adrian, MI 5. Kenneth G. Korges, Dallas, TX 60. Joseph J. Witt, Wilmington, DE 6. Jan Emery, Hillsboro, OR 61. Tammy Burr, Shawano, WI 7. Brian Pletcher&Missy Kidder, Elkhart, IN 62. Lane Campbell, Suwanee, GA 8. Robert A. Hayes, Sun City West, AZ 63. Konrad McCree, Clearwater, FL 9. Terri Williams, Benton, KY 64. Dorothy Yaw, Sandpoint, ID 10. Dan Aurilio, McDonald, OH 65. Charles Cochran, Metropolis, IL 11. Jennifer Smith, Metropolis, IL 66. Gary W. Trabert, Bethlehem, WV 12. Russ Rector, Sandpoint, ID 67. Phyllis Phipps, Goffstown, NH 13. Owen Eric McClinchey, Powell River, BC 68. Ronald King, Columbus, IN 14. Maureen M. Moore, Stanwood, WA 69. Clyde Nason, Jr., S. Portland, ME 15. Phil Garner, Sugar Hill, GA 70. Jeffrey Lawler, Rapid City, SD 16. Virginia Butler, Pike Road, AL 71. Georgia Leithead, Ten Sleep, WY 17. Danny Nobles, Cerro Gordo, NC 72. William O. Thompson, Wilmington, DE 18. Carolyn Burris, Irving, TX 73. Charlie E. Shirley, Marysville, WA 19. Anthony D. Martin, Williamston, SC 74. Betty Smith, Williamston, SC 20. Hung Tran, Granger, IN 75. Robert E. Lara, Arrey, NM 21. Bob E. Burris, Sr., Belton, SC 76. Charles Dean Finley, Coralville, IA 22. Pat Grantham, Coralville, IA 77. Valerie Carpenter, Brattleboro, VT 23. Nina B. Huff, Wheeling, WV 78. Robbie Williams, Aurora, CO 24. Ronald Coram, Metropolis, IL 79. Steve Oellermann, Glendive, MT 25. Mike Price, Cumming, GA 80. Patricia Johnson, Carrollton, VA 26. Jose Melendez, Rapid City, SD 81. Robert Collins, Benton, KY 27. Robert G. Coonan, Brattleboro, VT 82. Joey Yaeger, Elko, NV 28. R. Scott Brinkman, Delta, UT 83. Dawn M. Geldof, Newark, DE 29. Joe Milo, Deming, NM 84. Steve Swader, Sandpoint, ID 30. Kelli Dawn Burt, Sandpoint, ID 85. John D. Soto, Glendale, AZ 31. Elbert, Oxendine, Fairmont, NC 86. Kitty Bell. Lumberton, NC 32. Gloria Ahern, S, Portland, ME 87. Mark Jester, Ponca City, OK 33. James Rindo, Pepperell, MA 88. Gary H. Bosley, Wheeling, WV 34. Richard Norman, Thompson Station, TN 89. James French, Pittsburg, KS 35. Larry & Rosemary Dunlap, Granger, IN 90. Susan & Melody Fulone, New Boston, NH 36. Jerry K. Fogle, Elko, NV 91. John E. Frost, Brattleboro. VT 37. Helen D. Meyers, Allenwood, PA 92. Meri Huckins, Clearwater, FL 38. Thomas Fleming, Aurora, CO 93. David Crawford, Mtn. Home, AR 39. Diane Price, Phoenix, AZ 94. Ted King, Murray, KY 40. Ray Hauser, Ponca City, OK 95. Dennis Hartsell, Edwardsburg, MI 41. John Skufca, McDonald, OH 96. Arma T. Holman, Delta, UT 42. Charles E. Goss, Jr., Dunstable, MA 97. Clint Holmes, Worland, WY 43. Mark Crasnick, Portland, ME 98. Jack Brown, Hannibal, MO 44. Peter Kane, New Paltz, NY 99. Barb Darling, Slinger, WI 45. Joan Brenner, Glendive, MT 100. Kendric Haithcox, Cassopolis, MI 46. Rev. Johnny Alford, Montgomery, Al 101. Tom Corcoran, Marietta, GA 47. Pamela Berovic, Hillsboro, OR 102. Dee Miller, Hartville, OH 48. Edward Pewitt, Franklin, TN 103. Dean Hamer, Tipton, IA 49. Joice Evans, Hannibal, MO 104. R. David Hunter, Turbotville, PA 50. Ray Arnold, Jr., Franklin, TN 105. Karen Willard, Smithfield, VA 51. Clair Noble, Iowa City, IA 106. Jimmy Autrey, Columbus, NM 52. Ed Akers, Tonkawa, OK 107. Donald Burwell, Adrian, MI 53. Thomas Herbert, Deming, NM 108. Anne Brennan, Groton, MA 54. Terry Gumm, Columbus, IN 109. Thomas Violante, Hillsboro, OR 55. Sam & Daniel Abtam, Dunbarton, NH 110. Winkey Weil, Montgomery, AL
3 The business mission of Cotter & Company is AS OUR to maximize our Members' profitability and growth CUSTOMER by aggressively providing cost-effective, innovative EVOLVES products, programs and services. To do that, we must SO MUST OUR serve today's True Value customers even while we prepare BUSINESS. to serve tomorrow's different and changing customers. 4 YOUR CUSTOMERS ARE THE MOST IMPORTANT PEOPLE IN COTTER & COMPANY'S BUSINESS. [PICTURE OF CHAIRMAN OF THE BOARD AND PRESIDENT] Chairman Jerry Kabelin and President Dan Cotter. As you read this annual report, you will see very quickly that it is focused on your customers as much as on your company. On the cover you see the faces of more than 100 True Value(R) Store customers, from practically every state in the union. They are not models, they are the people who come into your stores every day. - ------------------------------------------------------------------------------- Your patronage dividend grew by 11%, faster than your company's revenues. - ------------------------------------------------------------------------------- They are the most important people in your business, and we know that at Cotter & Company. That's why so much attention is being paid to these people in today's actions and tomorrow's plans. That emphasis on your customers continues throughout this report, for good reason. One of the most difficult, and most important, things in business is striking the right balance between serving the needs and wants of customers today, and tooling up to meet the very different wants and needs of different customers tomorrow. During 1994, Cotter & Company achieved that balance. Here are a few of the highlights of 1994. Your wholesaler has: - Increased patronage dividends 11.0% - Increased revenues by 6.4% to nearly $2.6 billion - Created a new, modern and effective advertising program - Reduced corporate margins (leaving more money in the Member's pocket throughout the entire year) - Filled Member orders at the highest rate in history - Successfully moved your Red Carpet Market to St. Louis - Invested money and manpower in technology for the future - Merged key new executives into your top management team Everything that was accomplished in 1994 was the result of years of good planning and hard work. When this process started, professionals told your management team the needed changes would take three to five years. We thought it could be done sooner. We were wrong. But now everything is coming together, and the results will compound year after year. If there is one single thing in which we, your chairman and president, take the most pride, it is the way your top management has pulled together as a team. These executives have devoted all their efforts to giving Members what they need. At meeting after meeting your executives have addressed every issue with no concern about how it affects them or their departments, but only considering how it affects Members. Financially, this has been a very good year. We have surpassed our sales goal and the patronage dividend has exceeded 1993 and our 1994 Budget. It's also better than it looks at first glance. More than $6 million that would have been included in the year-end patronage dividend in years past stayed with Members all year long in 1994, because of the impact of our very successful Pinpoint Pricing program. Your wholesaler's lower-than-normal margins on these high-profile items made you more competitive and more profitable. You kept that $6+ million at work in your business all year long. If you had not received an "instant" patronage dividend through lower prices, your total patronage dividend would have been about $66 million, the highest since 1989 and more than 20% above 1993. In 1994, we invested $5 million to enhance your company's technological infrastructure. This investment, approved by Members, will make your future more secure and more profitable. - ------------------------------------------------------------------------------- Pinpoint Pricing kept $6 million of your money working in your business throughout the entire year. - ------------------------------------------------------------------------------- Many of our other accomplishments have been equally important and equally impressive. 2 5 Growth in the Just Ask Rental program has been outstanding. This program gives Members a unique competitive advantage over giant chain competitors and other independents, too. Your Lumber and Building Materials division (LBM) had an excellent year, with sales surpassing $300 million for the first time in history, as the result of an 11.9% increase. - ------------------------------------------------------------------------------- Record fill rates especially in core departments, prevented loss sales and kept your customers happy. - ------------------------------------------------------------------------------- Cotter Canada showed strong growth with a revenue increase of 11.6% to $128 million (Canadian) in 1994. Cotter Canada provides a solid base for our international growth. Leaders of both Cotter Canada and LBM retired in 1994, and their loss will be felt, but both men fully deserve all the good things that retirement can bring, and they go with our best wishes. Bob Nolawski, who started with Cotter & Company unloading trucks in the Cleveland Distribution Center, worked his way up through the ranks to Vice President, and was the logical choice to be the first President of Cotter Canada, where he did a great job. Fred McCarthy led LBM to 15% annual growth for the 18 years he headed that operation. But good leadership is common throughout your company, and good leaders always prepare their successors. That's why our strong 1994 will be followed by an even better 1995. Details of your company's performance in 1994 fill the following pages of this report. It was a year filled with significant accomplishments. One factor considered in all forward-looking decisions in 1994 has been the long-discussed move of your national headquarters. It has been increasingly obvious for several years that this move had to be made in order to serve Members better. The buildings that now house your headquarters are more valuable for other purposes, and Cotter & Company must have more efficient facilities to lower costs and keep you competitive. In fact, any element of your own wholesaler that is non-productive is open to review. We cannot afford under-performing assets and all decisions must be made on the basis of what is best for the total Membership. That philosophy was behind the sale of V&S(R) early in 1995 and the announced sale of General Power, effective in August, 1995. Both these actions will enhance the company's profitability, but of equal importance, they are part of an ongoing response to changes in the marketplace. These two moves allow Cotter & Company to concentrate on what made True Value Stores industry leaders ever since the company was founded in 1948. This concentration on hardware, housewares, building materials and related products will benefit every True Value Store. Your Board of Directors and your executives are concentrating on meeting your needs today and into the future, not resting on the success of the past. During 1994 you heard frequent reference to the need for a fully participating Membership. [BAR CHART SHOWING COMPANY REVENUES AND AMOUNT PAID BY COMPANY AS PATRONAGE DIVIDEND FOR THE YEARS 1993 AND 1994] The unselfish interests of committed Members, regardless of size, must come before the self-interest of those few who want to take the benefits of Membership without giving anything back. We will remain strong and successful only if Members work together, cooperating with each other and with the executives, managers and employees of the company they own. Your management recognizes that this past year was successful because of the loyalty, understanding and cooperation of the vast majority of Members. We salute you, we thank you, and we promise to do everything we can to lead your company to even greater success in the years ahead. /s/ Jerrald T. Kabelin Jerrald T. Kabelin Chairman of the Board /s/ Daniel A. Cotter Daniel A. Cotter President and Chief Executive Officer 3 6 1994 WAS THE YEAR OF THE CUSTOMER AS COTTER & COMPANY BUILT FOR THE FUTURE. [PICTURE OF FAMILY SHOPPING] Dennis Hartsell, a corporate pilot, and his wife, Mary, are active do-it-yourselfers. Family life centers around church, children--two boys and a girl--and their home. They've been shopping at least twice a month at the same True Value Store for 12 years, for service and "helpful step-by-step advice." They don't consider themselves experts, even though they remodel one room a year, so they use their True Value Store as "a trusted partner," according to Dennis. Recent projects include adding closets, tiling bathrooms and upgrading plumbing and electrical. Dennis and Mary, both 45, are typical of the "baby boomer" generation that accounts for almost half of all American households. Boomers are in their peak earning years and 74% own their home. Many are outgrowing their homes and they have the income to do something about it, adding rooms, improving kitchens and baths, and more. Baby boomers represent the largest volume potential in the home improvement industry. If ever there was a "year of the customer" for Cotter & Company and True Value Stores, 1994 surely was that year. All of the changes that have been implemented in the last few years, changes designed to help True Value Stores serve today's customers and prepare to serve tomorrow's different customers, began to bear fruit. It was a good year in every department, from Retail Development to Merchandising to Distribution to Management Information Services. Reorganized and renamed in late 1994, Cotter & Company's new "Retail Development Department" was both a functioning part and a symbol of the changes within the company. With more professionally-trained people in the field, Members got strong proof of Cotter's commitment to help their business. MARKET MOVE VERY SUCCESSFUL. Moving Cotter's Red Carpet Markets from Chicago to St. Louis was successful beyond our greatest hopes. Attendance set records in Spring and Fall, in both people and stores. Sparkling facilities, efficient for Members and vendors, helped increase orders to record levels at both Markets. Equally important was the expanded role of the Markets in training Members and their employees to meet challenges of the future. A series of Friday seminars designed to keep Members on top of the external changes that will dictate how they do business in the years ahead drew more than 700 stores in the spring. It was the first time such programs were offered at this level of skill and expertise, and attendance at the Fall seminars tripled. [BAR CHART SHOWING HOMEOWNERSHIP BY AGE OF HEAD OF HOUSEHOLD] Popular product knowledge meetings held previously in crowded quarters on Clybourn Avenue also were expanded, and at the Fall Market 3,838 men and women attended 46 of these meetings. RENTAL PROGRAM EXPANDS. Of all the accomplishments in providing support for Members, nothing in recent years equals the success of Just Ask Rental. The number of participants doubled again in 1994, after doubling in 1993, and opening stock orders for the participating Members were up 171% in dollars. Participants report very profitable add-on sales to rental customers and ROI has exceeded expectations. There were 168 Just Ask Rental departments operating at year-end and 32 more Members were surveyed, trained and awaiting delivery of equipment. Opening a Just Ask Rental department isn't as simple as "just signing up." The process includes surveying the market, analyzing the store's location and physical facilities, training managers and employees, ordering equipment, and merchandising the department. Therefore, Just Ask Rental growth is not limited by Member interest, but by availability of personnel to provide management expertise, training and leadership. In 1995 more staff and resources are being devoted to Just Ask Rental. The highly rated Member Information Center, already a winner by any standard, became even more successful. 4 7 [PICTURE OF FATHER AND SON FIXING SINK] When they tell me something, I know it's right and they answer all my questions without making me feel dumb. Dennis Hartsell 5 8 ADVERTISING HIT NEW HEIGHTS WITH GREATER CREATIVITY, IMPROVED COMMUNICATIONS. [PICTURE OF FATHER AND SON LOOKING AT TOOLS] Kendrick Haithcox is an active do-it-yourselfer, and when he and his wife, Kelly, expand their two-bedroom home this spring, he will do most of the work himself. He's been shopping at the same True Value Store almost twice a week for nearly 10 years. His Dad first took him to that store when he was a child, and he values their knowledgeable assistance. Kendrick works for an excavating contractor, and when anyone needs supplies at work, "I always tell them to go to True Value because I know they will have it." Folks like Kendrick and Kelly Haithcox are part of the largest minority group in America. African-American families represent more than 10% of all U.S. households and 45% are home owners. This is an important segment of the home-improvement business, and the older average age of homes owned by African-Americans further expands the sales potential. The number of African-American do-it-yourselfers grow every year! The number of calls grew to more than 130,000 during the year, a 13% increase, and 70% of all callers got immediate answers to their questions. In 1993, 63% of the calls were answered immediately, up significantly from 1992. The popular "town-hall" meetings, conducted by your directors, expanded to every distribution center in 1994. Store remodeling continued as an important service for Members, and the size of the average remodeling project grew 6% to 11,400 square feet. ADVERTISING HIT NEW HEIGHTS. The spectacular new "Red Cross Across America" promotion, new television advertising, strengthened direct mail advertising, and the introduction of the new Member-friendly Marketing Advisor were highlights of True Value advertising in 1994. "Red Cross Across America" was Cotter & Company's first cause marketing program, and it helped familiarize all Americans with the True Value motto "Help is just around the corner," while raising more than $12 million in viewer donations to support disaster programs of the Red Cross. More exciting and creative TV advertising, emphasizing the help available in True Value Stores, was more closely tied to print and direct mail promotions. Start and closing dates were established for all promotions, to enhance the "buy now" message vital to successful advertising. Direct mail has now been reformatted for a cleaner, more contemporary look, with stronger pricing, taking advantage of the Pinpoint Pricing program. National print ads support Members who use direct mail. The number of Members using direct mail grew again, largely because of the Impact 8 program, and total direct mail circulation soared 20% in 1994. MARKETING ADVISOR SIMPLIFIED PROMOTIONS. The Marketing Advisor, the product of teamwork throughout the company, concentrates each month's advertising, marketing information and promotions in one book, making it easy for the Member to order. Included are locked-in ship dates, 15 to 45 days before the date of the sale. Bargains of the Month, newspaper advertising, promotional relays and more are part of this simplified, consolidated communication. With the Marketing Advisor, promotional buying at the Spring and Fall Markets is being de-emphasized. Other True Value promotions achieved excellent results in 1994. [BAR CHART SHOWING TOTAL MINORITY POPULATION (MILLIONS OF HOUSEHOLDS)] The 13th annual True Value/Jimmy Dean Country Showdown in Nashville created a lot of excitement at local and state competitions across the country, concluding with the national finals in the home of the original Grand Ole Opry in Nashville. True Value continued its highly productive promotional role in automobile racing, leading with sponsorship of the International Race of Champions, the motorsports version of The Masters tournament in golf. True Value and Master Mechanic(R) tools again sponsored the Silver Crown racing series in USAC, and awards for drivers, mechanics and crew members in NASCAR. 6 9 [PICTURE OF FATHER AND SON FIXING DOOR WITH MOTHER IN BACKGROUND] We've got two hardware stores, and their prices are like night and day. I drive two miles further to True Value to save money and get better service. Kendrick Haithcox 7 10 PINPOINT PRICING, RECORD ORDER FILL RATES MADE 1994 THE BEST EVER FOR MERCHANDISING. [PICTURE OF MAN AND WOMAN SELECTING HOUSEHOLD ITEM] Brian Pletcher and Missy Kidder, both 22, still live at home but they already have started a "house-buying" fund and will be married after graduating from college in June. Brian worked in construction and as a painter during his summers, so he knows how to do most anything around the house, and plans to turn a "fixer-upper" into something much better. They like the True Value Store where they already shop because "the layout is efficient, you don't have to search all through it, you can find things, and the people help you." Like most busy young people, time is important to them, and they value shopping convenience. First-time homeowners (ages 20 to 34) are most likely to do their own home improvements. And more than 73% of young homeowners buy a single family house. Because most young couples' first homes are almost twice the age of "trade-up" houses, they spend heavily to repair and improve their homes. Establishing shopping loyalty with these buyers, whose home ownership rates are now increasing, brings strong business for today and the future. Leo Burnett, one of the nation's largest and most creative ad agencies, was named as Cotter's new agency in 1994. Italia/Gal Advertising was added for local and retail support. Late in 1994 Cotter announced an agreement with Major League Baseball to tie many 1995 promotions to the country's favorite game, but the players' strike forced postponement of this 1995 promotion, now slated for 1996. PINPOINT PRICING HELPED EVERYONE. Members everywhere benefited from Pinpoint Pricing, the new Marketing Advisor, improved service level, and the reorganization of the Merchandising Department. Pinpoint Pricing has expanded to more than 500 items. It gives Members the support of low prices to meet competition and build their store's image as the place for great values. Cotter & Company's reduced margins on these specially priced items has the effect of giving Members an "instant patronage dividend" totalling more than $6 million. The fill rates for warehouse shipments set records all through 1994, and the average for the year was a remarkable 91%, up from the 1993 figure of 89.8%. For the last 34 consecutive weeks of 1994, the fill rate was higher every week than for the comparable week of 1993. [BAR CHART SHOWING DOING IT YOURSELF IMPROVEMENT ACTIVITY BY AGE] Service levels on core departments were much higher. Plumbing, electrical, hand tools, power tools and paint sundries all had fill rates from 92.4% to 95.1%, improving from 1.5 to 3 percentage points over 1993. COMMERCIAL SALES GET BIG BOOST. Another breakthrough in Member support was the introduction of the Commercial/Industrial Catalog at the Fall Market. Members earlier had used a Janitorial/Cleaning Supplies catalog with good effect. The new catalog will help expand outside sales. The Commercial/Industrial Catalog was developed from fine-line catalogs, showing other products that could be sold to this growing category of potential customers. It includes some 38,000 SKUs from all core departments, including only warehouse stocked items. It shows "the total world of True Value," far beyond what is in stores, by illustrating what is available in distribution centers. Expanding the potential for commercial sales even more, Cotter & Company struck an exclusive deal with Grainger, the world's largest seller of commercial and industrial products, to give Members access to all of the 55,000 SKUs in that catalog. The Commercial/Industrial Catalog will be re-issued in an improved version in 1995, and Cotter & Company is working to lower the cost so more copies can be distributed by Members. In 1994, 1,000 Members bought more than 10,000 copies. The Plan-o-Gram Program was moved to the Merchandising Department in 1994, and the number of plan-o-grams, in basic and extended formats, was doubled to over 400 offerings. Nearly 100,000 plan-o-grams were distributed to Members, at no charge, after the Fall Red Carpet Market. 8 11 [PICTURE OF MAN PUTTING UP LIGHT FIXTURE WITH WOMAN WATCHING HIM] I trust my True Value store. They have local owners and you know who they are. Missy Kidder 9 12 HIGH TECHNOLOGY FOR THE FUTURE UNDERGOES TESTS WHILE STORE USE OF COMPUTERS GROWS. [PICTURE OF WOMAN SELECTING PAINT] Barb Darling, divorced mother of a helpful 10-year-old, has been shopping at least twice a month at her True Value Store since her son was born. Barb is busy at work, handling billing for a national company, and at home with projects like painting and refinishing. "True Value," she says, "makes it easy for me to get what I need when I'm in a hurry." There's no limit to Barb's home repairs, "If it has to be done, Itry it," she explains, so she values the professional help and the honesty she gets in her True Value store. Women like Barb Darling make up the fastest growing segment of the DIY home improvement market. Single women households doubled from 1970 to 1990, and now account for 30% of all households. And single women are taking on DIY projects in record numbers. Only 15 years ago, 30% of all do-it-yourselfers were women; now that number is over 50%. Because their time is so limited and many women are newer to DIY home repairs, they rely heavily on expert sales people, preferring convenient stores with personalized service like True Value. The plan-o-grams are reviewed twice a year for integration of new products and elimination of discontinued items, and to reflect changes in customer product choices, wants and needs. The Merchandising Department held nine round table sessions during 1994, about the same as in the past, but the format of these meetings is changing as conditions and needs change. Roundtable sessions still feature "listening" time for executives and managers to learn Member concerns and needs, but tighter focus gives participants the opportunity to take a more proactive role in discussions of products, programs and services. MORE SUPPORT TO COME FROM VENDORS. During the last six months of the year, extensive time and effort went into development of a Vendor Agreement that will have far-reaching effect on every Member and Cotter & Company. This document is the cornerstone for all future relationships with vendors, including terms and conditions on deals, dating, pricing, delivery, advertising, and in-store support for our Members. In October, the Merchandising department was reorganized so all of the buyers and their support staff could use their experience and strength with greater efficiency in the appropriate departments. Parts Central has been moved from General Power Company to the Merchandising Department to increase the opportunity for True Value Stores to become the prime source for repair and service parts for thousands of name brand items. Parts Central expanded to more than 75,000 SKUs in 1994. [BAR CHART SHOWING FEMALE HEADS OF HOUSEHOLDS (IN MILLIONS)] INFORMATION SERVICES SERVES TWO MASTERS. While most of the departments at Cotter & Company have a single "customer base," Information Services is in the unique position of having to satisfy two constituencies, national headquarters on one hand and the Membership on the other. Both want the same thing: greater productivity and lower cost. At the retail level, a major success story was the continued growth of the Tru-Trac(R) POS(point-of-sale) system. The number of Tru-Trac users increased by nearly 23% during the year, and at year end more than 530 of these efficient and economical systems were in place. Triad grew to 1,300 Member stores. In addition to Tru-Trac and Triad, Members invested in other POS systems as well. The total gives Cotter & Company the largest base of computerized stores in the industry. Both Tru-Trac and Triad announced significant enhancements to Member systems during 1994. Improvements were in the areas of file maintenance, greater ease of operation and use, and improved communications features, and the availability of hand-held laser bar code terminals. With Member training as an emphasis, Tru-Trac held its first education conference in Orlando in 1994 to increase the level of knowledge concerning use of automated systems. Testing of Cotter & Company's electronic catalog, featuring CD-ROM technology, advanced significantly in 1994, and now there are 250 participants as the system moves closer to a complete rollout. 10 13 [PICTURE OF MOTHER AND SON REFINISHING CHAIR] You go into True Value, you walk out with what you need and you feel good because people have helped you. I appreciate that! Barb Darling 11 14 REDUCED COSTS AND IMPROVED DELIVERY SERVICES HELPED MEMBERS TAKE BETTER CARE OF CUSTOMERS. [PICTURE OF MAN AND WOMAN SELECTING WOOD PRODUCTS] Hung Tran and his wife Nhung came to the United States as refugees from Vietnam in 1975, and almost immediately became regular shoppers at their nearby True Value Store. Their home maintenance and repair projects include painting, paneling and finishing a basement, but they'll tackle almost anything despite the little time they have available away from their family owned restaurant. Hung values the way his True Value Store treats him and his projects. "When I go in I find the same salesperson, and he doesn't just sell stuff, he helps us with our projects and solves our problems." The Trans are one of the minority households whose growth represents the biggest demographic event since the baby boom. Asians and Hispanics accounted for 49% of new U.S. households in the 1990s, and are a growing force in the home improvement market. Asians and Hispanics are growing more rapidly than any other minority group, and tend to leave central cities for the suburbs to become homeowners. This development process has successfully provided the first hardware industry deployment of CD-ROM technology, brought Member feedback on the use and effectiveness of a stand-alone electronic catalog, and built a foundation to launch a new Member ordering system. Information Services also started a pilot program in 100 stores testing expansion of credit card authorization systems at retail, using the Cotter Communications Systems infrastructure to reduce the cost and increase the speed of checkout transactions. Within corporate headquarters, Information Services had multiple projects under way in 1994. TOP PRIORITY GOES TO LISTMENT. In re-engineering major business operating systems, top priority has gone to the listment, simplifying this critical payment process for the Membership. The development will be complete in 1995, with roll-out to follow as quickly as possible. Marketing information systems are being upgraded as Cotter & Company creates a new Member Data Base. Stronger regional marketing and advertising support systems and better order fill rates will flow from this profile of the Membership. Automation of the Retail Development staff with lap-top PCs started in 1994. This will result in better analysis of Members' business operations, and stronger support by the field staff. Continued emphasis on Electronic Data Interchange has built the number of vendors using EDI about one third, to 800 major vendors, and today over 80% of Cotter's volume is bought on EDI purchase orders. [BAR CHART SHOWING MINORITY POPULATION GROWTH (IN MILLIONS OF ADDITIONAL PEOPLE)] SATELLITE NETWORK STILL GROWING. The Cotter Satellite Network continues to grow. The network now serves some 2,200 stores, an increase of 10% from the year before, at a cost to the Member lower than retailers elsewhere are paying for in-store music alone. A highlight of CSN during 1994 has been improved in-store advertising, with better ties in copy and timeliness to the other advertising by Cotter & Company. CSN has become a major communication vehicle for the company, unique in the industry. In addition to in-store advertising, it offers messages, data transmission, training and video communications from National Headquarters executives and managers. All transportation and distribution activity in 1994 met two objectives. The first was to contain, or even reduce, costs through increased productivity and efficiency; the second was a continuing evaluation of the needs of the total Membership, so that any "efficiencies" did not come at the cost of reduced service to Members. Productivity was increased and operating expenses were trimmed, leaving Members with one of the lowest freight costs in the industry, about 2% of the cost of the merchandise they buy. Service to Members was improved, with expanded hours in the distribution centers, more timely delivery of promotional merchandise, and record order fill rate. The department's statistics were awesome. More than 325 tractors hauled some 900 delivery trailers nearly 25 million miles in 1994, the equivalent of 7,800 trips from Portland, Oregon, to Portland, Maine. 12 15 [PICTURE OF MAN AND WOMAN DOING WOODWORK] If you buy something for 10 cents they still treat you like you have bought something for $10 million. Nhung Tran 13 16 MANUFACTURING INCREASES PROFITABILITY WHILE PROVIDING PRODUCT INNOVATIONS AND SERVICE. [PICTURE OF MAN AND WOMAN PURCHASING VASE] Larry Dunlap is a retired banker, and an active do-it-yourselfer, who moved back to Indiana in 1991. True Value is his store of first choice because of service and convenience; "True Value has everything, they know how to use it and they know where to find it." In the California home where they lived 25 years Larry and Rosemary did everything--built a deck, painted, put up fences. "We're not real knowledgeable," Rosemary says, "so we need a store where we can get helpful advice. The True Value sales people must be jacks of all trades because they know about almost everything." Senior citizens are the most likely of all Americans to own their homes--80% do. The Dunlaps, like other mature couples, take pride and derive satisfaction from do-it-yourself projects around the home. The number of older Americans is increasing, and with more disposable dollars for home renovation than any other age group, they are very important home improvement customers. Cotter & Company's transportation and distribution team handled more than 1.8 billion pounds of merchandise in 1994, an increase of 10% over the year previous. Cost per pound, the best measure of productivity, was reduced more than 4%. The Denver Regional Distribution Center was relocated, to a more efficient and larger building completed on schedule and on budget. If one looks at the bottom line of Cotter & Company's manufacturing subsidiaries, 1994 was a good year. But if you evaluate the year based on service to Members and financial results, it was outstanding. All three manufacturing segments had sale increases. Both Tru-Test Mfg. Company and Baltimore Brush & Roller Co. added significantly to an already good patronage dividend. Baltimore Brush & Roller completed 8 years without a price increase, an unheard of record in the industry. That means dollars in Members' hands and better competitive positioning for True Value Stores. Sales were up 1.7% to $18 million and patronage dividend increased slightly. Product innovations continue, with the highest quality Accu-Flo(R) contractor line now being sold in over 1,100 stores, more than double the number of stores from a year ago. The line is highly profitable and it brings contractors into True Value Stores where our Members can introduce them to everything else in the stores and in distribution centers. [BAR CHART SHOWING HOMEOWNERSHIP RATES BY AGE] AUTOMATIC REPLENISHMENT BOOSTS SALES. A major achievement at Baltimore Brush was the introduction of its Vendor Managed Inventory program on a test basis. This automatic replenishment program ties the Member's Tru-Trac system to Baltimore Brush computers, automatically reordering selected applicators as the product is sold in the store. The store reduces its reordering cost, needs no back room inventory to prevent out-of-stock conditions, and increases sales. Paint applicator sales rose by as much as 22% in the test stores. Tru-Test Manufacturing served Members extremely well, with sales up 2.2% to $112 million, and a patronage dividend that climbed 8%. The higher patronage dividend did not come at the expense of higher prices, either. Tru-Test implemented only modest price increases on the WeatherAll(R) and E-Z Kare(TM) lines late in the year, and that only raised prices back to where they were before 1992's price reduction. Major product improvements and introductions took place in 1994. The Easy Color(TM) line of mid-price latex paint was introduced very successfully in the July 4 circular. The Woodsman(R) line underwent major improvements, with upgraded products and point-of-purchase support. The results were a better product, with greater durability and reduced drying time, and a 23% increase in sales! E-Z KARE GETS MAGAZINE'S NO.1 RATING! The image coup of the year came in February when Consumer Reports honored E-Z Kare(TM) Flat Enamel with its No. 1 rating. Sales have been great ever since, up 17.5% for E-Z Kare Flat Enamel for the year, and the resulting carry-over gave the entire line a 8.8% increase. 14 17 [PICTURE OF MAN AND WOMAN POTTING PLANTS] I've given up on the bigger stores--they usually don't know much, so we go where we can get advice. That's True Value, and I just don't go anywhere else Larry Dunlap 15 18 LUMBER/BUILDING MATERIALS, INSURANCE AND INTERNATIONAL BUSINESS ALL REPORT GROWTH. Computer color matching systems within True Value Stores now constitute the largest network of this kind of color-matching computers anywhere in the nation. The 1,000th unit was sold at the Fall Market. Tru-Test changed its supplier for the Custom Color Analyzer after the financial failure of the previous manufacturer. But your management was alert and able to make a relatively trouble-free change. All new equipment has state-of-the-art technology and Members with older models are getting excellent service on their equipment. Customer calls for product knowledge rose 55%, to more than 135,000 calls on the toll-free information hot line during the year. This is the equivalent of a call every 40 seconds for 10 hours a day every day of the year. [PICTURE OF TRUE VALUE CUSTOMER] A major project in 1994 was writing bilingual (Spanish/English) instructional labels for the paint line in 1995. The new labels will bring major increases in sales in many markets where there is a substantial Hispanic population. General Power's 1994 sales increase of nearly 15% was more than double the entire industry's growth of about 6%. Pre-season booking meetings at 70 locations (no Members were more than 150 miles away) were very successful because of the heavy product-knowledge training for owners, managers and employees. Lumber and Building Materials 1994 sales climbed 11.9% to $303 million. Continued innovations in products and product lines contributed to the growth. A kitchen and bathroom products program, offering merchandise with varied price points and products, achieved very strong acceptance from our Members. The first LBM market ever at Las Vegas drew a record crowd in January, with the number of stores attending up 17%. Continued efforts to increase efficiency and reduce costs paid off throughout National Headquarters administrative offices in 1994. For example, printing and production costs have been contained, and even reduced in some situations, despite four paper price increases in calendar 1994. The 17 fine-line catalogs were re-formatted to meet Member requests during 1994, and now are routinely issued twice a year. Increased efficiency helped subscribers to Cotter Member Insurance Ltd. again in 1994. Rates on health coverage were basically unchanged from the year before, although the industry in general saw rates of 8% to 10%. Cotter Member Insurance, completely owned by Members who use it, protects participating Members at the lowest possible cost. More than half of all Members use Cotter Member Insurance. INTERNATIONAL BUSINESS EXPANDING. Cotter & Company continued to expand its off-shore business, and in 1994, as evidence of that commitment to globalization, formed a new division, True Value International, to serve this expanding market. In 1994, True Value International served 143 stores in more than 40 countries and U.S. Provinces, and sales to these stores were up 17% for the year. (These numbers do not include Cotter Canada.) Cotter Canada had an excellent year, with sales rising 11.6% to $128 million (Canadian), and after tax profits were up 34.8%. Membership also grew, but major emphasis throughout the year was on refinement of systems and programs for long-term growth. [PICTURE OF TRUE VALUE CUSTOMER] CANADA A LEADER IN HIGH TECH PROGRAMS. Cotter Canada is a leader in high tech systems that increase efficiency, build sales and reduce costs for all Members. Currently 32% of all Cotter Canada stores have point-of-sale systems, and 60% of those computerized stores are using the innovative automatic replenishment system being pioneered in the industry by Cotter Canada. The Member is in complete control of the program, identifying items to be automatically replenished, setting reorder points and reorder quantities. Some stores have as many as 7,000 SKUs on automatic replenishment, and some are buying as much as 80% of their warehouse purchases by this system. Total membership increased by 15%, and combination hardware and variety stores, a new idea in Canada, more than doubled. Another new idea for Cotter Canada was addition of "Crafts 'n' More" stores, a category with great potential in that country. [PICTURE OF TRUE VALUE CUSTOMER] These new concepts are typical of the changes True Value and its Members are making to serve the customer better than ever before. 1994 was a good year and the future holds exciting potential for the entire True Value organization. 16 19 FINANCIAL REVIEW. - -------------------------------------------------------------------------------- REVENUES In fiscal year 1994, Cotter & Company revenues increased $153,718,000 from last year. Total revenues grew to $2,574,445,000, an increase of 6.4%. The improvement resulted from increased merchandise shipments to existing Members. Classes of merchandise with the strongest percentage increases in fiscal year 1994 were Lumber and Building Materials, up 11.9%; Farm and Garden Supplies, up 8.9%; Hardware Goods, up 7.3%; Appliances and Housewares, up 7.0%; and Variety and Related Goods, up 6.4%. The South Central region of the United States showed the largest growth at 9.4%. Other regions showing strong growth were the Southeast at 8.1%; the Northeast at 7.2%; and North Central at 7.1%. - -------------------------------------------------------------------------------- OPERATIONS Overall merchandise gross margins, as a percentage of revenues, decreased compared to last year reflecting a change in the Company's sales mix from warehouse to direct shipments, combined with the Pinpoint Pricing program and more promotionally oriented merchandising programs. Warehouse, general and administrative expenses, expressed as a percentage of revenues, decreased primarily due to the Company's continuing efforts to reduce operating costs. - -------------------------------------------------------------------------------- PATRONAGE DIVIDEND AND MEMBER PAYOUT The annual patronage dividend for fiscal year 1994 was $60,421,000 compared to $54,440,000 last year, representing an increase of 11.0%. Total Member payout, which includes interest paid semi-annually on previously issued promissory (subordinated) notes in addition to the patronage dividend, totalled $83,315,000 compared to $78,898,000 last year. The sources and components of Member payout for fiscal years 1994 and 1993 are presented in the table below. The patronage dividend paid to each Member will vary depending upon the volume and type of purchases, the method of shipment and extent of participation in each of the above source programs. Each Member's patronage dividend will differ slightly from the overall Company averages. In fiscal year 1994, the average dividend percentages from stock, relay, and direct shipment purchases were 3.3%, 1.5% and 0.4%, respectively. Purchases of Tru-Test Manufacturing and Baltimore Brush & Roller products earned Members a manufacturing patronage dividend of 12.3% and 12.6%, respectively, in fiscal year 1994. In fiscal year 1993, the average dividend percentages for stock, relay, direct shipment, Tru-Test Manufacturing and Baltimore Brush & Roller purchases were 3.0%, 1.5%, 0.5%, 11.6% and 12.8%, respectively. The Company considers promissory (subordinated) notes and Class B common stock important parts of its patronage dividend. The notes provide Members a recurring return on their investment and the Class B common stock provides the Company a source of permanent capital. Promissory (subordinated) notes issued as part of the fiscal year 1994 patronage dividend bear interest at an annual rate of 8.2% compared to 6.5% in 1993. The Member cash payout in fiscal year 1994 was $41,277,000 compared to $41,072,000 in fiscal year 1993. - -------------------------------------------------------------------------------- MEMBER PAYOUT
Fiscal Year Fiscal Year 1994 1993 ----------- ----------- (000's omitted) Sources of Member payout: Patronage dividend from: Stock Shipments $36,008 $30,877 Relay shipments 4,269 4,048 Direct shipments 3,916 4,331 Tru-Test Manufacturing 13,890 12,862 Baltimore Brush & Roller 2,338 2,322 ------- ------- Total patronage dividend 60,421 54,440 Interest paid to Members 22,894 24,458 ------- ------- Total Member payout $83,315 $78,898 ======= ======= Components of Member payout: Cash Payout: Interest paid to Members $22,894 $24,458 Cash patronage dividend 18,383 16,614 ------- ------- Total Member cash payout 41,277 41,072 Promissory (subordinated) notes 27,909 26,752 Class B common stock 10,829 7,686 Member indebtedness 3,300 3,388 ------- ------- Total Member payout $83,315 $78,898 ======= =======
17 20 CONSOLIDATED BALANCE SHEET. - --------------------------------------------------------------------------------
December 31, January 1, 1994 1994 ------------ ---------- (000's omitted) ASSETS Current assets: Cash and cash equivalents $ 1,831 $ 1,314 Accounts and notes receivable 294,663 276,585 Inventories 384,747 336,066 Prepaid expenses 7,861 6,969 -------- -------- Total current assets 689,102 620,934 Properties owned, less accumulated depreciation 164,261 164,319 Properties under capital leases, less accumulated amortization 4,691 6,769 Other assets 10,731 11,506 -------- -------- Total assets $868,785 $803,528 ======== ======== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable $334,468 $255,216 Accrued expenses 45,304 38,926 Short-term borrowings 9,329 23,287 Current maturities of notes, long-term debt and lease obligations 60,564 61,685 Patronage dividend payable in cash 18,383 16,614 -------- -------- Total current liabilities 468,048 395,728 Long-term debt 72,163 63,977 Obligations under capital leases 3,593 5,224 Capitalization: Promissory (subordinated) and instalment notes 199,099 217,996 Redeemable Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 63,350 and 65,880 shares) 6,370 6,633 Redeemable Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,047,756 and 1,019,640 shares; issuable as partial payment of patronage dividends, 104,275 and 75,780 shares) 116,663 110,773 Retained earnings 3,764 3,867 -------- -------- 325,896 339,269 Foreign currency translation adjustment (915) (670) -------- -------- Total capitalization 324,981 338,599 -------- -------- Total liabilities and capitalization $868,785 $803,528 ======== ========
See Notes to Consolidated Financial Statements. 18 21 CONSOLIDATED STATEMENT OF OPERATIONS. - --------------------------------------------------------------------------------
For the Years Ended ------------------------------------------ December 31, January 1, January 2, 1994 1994 1993 ------------ ---------- ---------- (000's omitted) Revenues $2,574,445 $2,420,727 $2,356,468 ---------- ---------- ---------- Cost and expenses: Cost of revenues 2,351,114 2,202,806 2,139,860 Warehouse, general and administrative 132,759 132,674 123,244 Interest paid to Members 22,894 24,458 25,716 Other interest expense 7,493 7,429 7,273 Gain on sale of properties owned (692) (5,985) -- Other income, net (604) (260) (643) Income tax expense 1,163 2,582 389 ---------- ---------- ---------- 2,514,127 2,363,704 2,295,839 ---------- ---------- ---------- Net margins $ 60,318 $ 57,023 $ 60,629 ========== ========== ==========
See Notes to Consolidated Financial Statements. 19 22 CONSOLIDATED STATEMENT OF CASH FLOWS. - --------------------------------------------------------------------------------
For the Years Ended ---------------------------------------------- December 31, January 1, January 2, 1994 1994 1993 ------------ ---------- ---------- (000's omitted) Operating activities: Net margins $ 60,318 $ 57,023 $ 60,629 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization 21,613 21,566 21,869 Provision for losses on accounts and notes receivable 4,233 4,057 4,447 Changes in operating assets and liabilities: Accounts and notes receivable (33,112) (38,605) (29,798) Inventories (49,145) 183 (11,819) Accounts payable 79,957 (45,070) 23,770 Accrued expenses 6,022 (1,143) (6,221) Other adjustments, net (1,223) (2,679) (3,035) -------- -------- -------- Net cash and cash equivalents provided by (used for) operating activities 88,663 (4,668) 59,842 -------- -------- -------- Investing activities: Additions to properties owned (21,427) (13,382) (17,871) Proceeds from sale of properties owned 2,174 13,999 682 Changes in other assets 1,132 (3,850) (2,076) -------- -------- -------- Net cash and cash equivalents (used for) investing activities (18,121) (3,233) (19,265) -------- -------- -------- Financing activities: Payment of annual patronage dividend (16,614) (18,570) (18,423) Payment of notes, long-term debt and lease obligations (39,632) (32,730) (18,776) Proceeds from long-term borrowings -- -- 54,124 Increase (decrease) in short-term borrowings (13,851) 23,059 (20,975) Purchase of Class A common stock (216) (470) (337) Proceeds from sale of Class A common stock 288 323 352 -------- -------- -------- Net cash and cash equivalents (used for) financing activities (70,025) (28,388) (4,035) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 517 (36,289) 36,542 -------- -------- -------- Cash and cash equivalents at beginning of year 1,314 37,603 1,061 -------- -------- -------- Cash and cash equivalents at end of year $ 1,831 $ 1,314 $ 37,603 ======== ======== ========
See Notes to Consolidated Financial Statements. 20 23 CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS. - --------------------------------------------------------------------------------
For the Three Years Ended December 31, 1994 Common Stock, $100 Par Value ----------------------------------------- Class A Class B ------------------------- -------- Issued Foreign and Currency to be Retained Translation Issued Subscribed Issued Earnings Adjustment ------ ---------- -------- -------- ----------- (000's omitted) Balances at December 28, 1991 $7,016 $ 61 $104,151 $ 1,556 $ -- Net margins 60,629 Foreign currency translation adjustment (932) Patronage dividend 10,029 (60,901) Stock issued for paid-up subscriptions 357 (357) Stock subscriptions 345 Stock purchased and retired (565) (5,198) ------ ----- -------- -------- ------- Balances at January 2, 1993 6,808 49 108,982 1,284 (932) Net margins 57,023 Foreign currency translation adjustment 262 Patronage dividend 7,686 (54,440) Stock issued for paid-up subscriptions 312 (312) Stock subscriptions 308 Stock purchased and retired (532) (5,895) ------ ----- -------- -------- ------- Balances at January 1, 1994 6,588 45 110,773 3,867 (670) Net margins 60,318 Foreign currency translation adjustment (245) Patronage dividend 10,829 (60,421) Stock issued for paid-up subscriptions 275 (275) Stock subscriptions 265 Stock purchased and retired (528) (4,939) ------ ----- -------- -------- ------- Balances at December 31, 1994 $6,335 $ 35 $116,663 $ 3,764 $ (915) ====== ===== ======== ======== =======
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993 and December 28, 1991 (for 360, 590, 760 and 880 shares subscribed, respectively). See Notes to Consolidated Financial Statements. 21 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a member-owned wholesaler cooperative. In accordance with the Company's By-laws, the annual patronage dividend is paid to Members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. The significant accounting policies of the Company are summarized below. Consolidation The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. Capitalization The Company's capital (Capitalization) is derived from redeemable Class A voting common stock and retained earnings, together with promissory (subordinated) notes and redeemable Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes {from fiscal year 1985 through fiscal year 1993, the promissory (subordinated) notes were for a term of seven years} and redeemable $100 par value Class B common stock. Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories Inventories are stated at the lower of cost, determined on the "first-in, first-out" basis, or market. Properties Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements - 10 to 40 years; 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. Income Taxes The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 3, 1993. Under this standard, the liability method is used whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities adjusting for the impact of tax credit carryforwards. Retirement plans The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contributions 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. Reporting year The Company's reporting year-end is the Saturday closest to December 31. 22 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2. INVENTORIES Inventories consisted of:
December 31, January 1, 1994 1994 ------------ ---------- (000's omitted) Manufacturing inventories: Raw materials $ 12,986 $ 14,795 Work-in-process and finished goods 60,094 54,992 -------- -------- 73,080 69,787 Merchandise inventories 311,667 266,279 -------- -------- $384,747 $336,066 ======== ========
3. PROPERTIES Properties owned or leased under capital leases consisted of:
December 31, 1994 January 1, 1994 --------------------- --------------------- Owned Leased Owned Leased -------- ---------- --------- --------- (000's omitted) Buildings and improvements $168,311 $ -- $166,055 $ -- Machinery and warehouse equipment 79,953 -- 76,330 -- Office and computer equipment 62,868 -- 55,191 -- Transportation equipment 22,757 14,556 18,778 15,337 ------- ------- -------- ------- 333,889 14,556 316,354 15,337 Less accumulated depreciation and amortization 181,920 9,865 164,731 8,568 ------- ------- -------- ------- 151,969 4,691 151,623 6,769 Land 12,292 -- 12,696 -- ------- ------- -------- ------- $164,261 $ 4,691 $164,319 $ 6,769 ======== ======= ======== =======
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
December 31, January 1, 1994 1994 ------------ ---------- (000's omitted) Senior note at 8.60% $50,000 $50,000 Term loans: Canadian prime (8.00% and 5.50%, respectively) 3,565 3,777 United States prime plus .5% (9.00%) and fixed (7.75%), respectively 6,200 6,200 Redeemable (subordinated) term notes: 7.00% 4,346 -- 7.37% 1,512 -- 7.61% 3,540 -- Industrial Revenue Bonds: 5.28% and 5.94%, respectively 4,000 4,000 8.25% -- 1,150 ------- ------- 73,163 65,127 Less amounts due within one year 1,000 1,150 ------- ------- $72,163 $63,977 ======= =======
Principal payments for the 8.60% senior note are due in incrementally increasing amounts starting in 1995 through maturity in 2007. Under the senior note agreement, the Company is required to meet certain financial ratios and covenants. The two term loans are due in 1997 and 1999, respectively. The redeemable (subordinated) term notes were issued in exchange for promissory (subordinated) notes maturing on December 31, 1994 that were held by promissory note holders, who do not own the Company's Class A Common Stock. The notes are due in 1996, 1997 and 1998. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at either the option of the Company or the bondholders at each interest reset date through maturity in 2003. Total maturities of long-term debt for fiscal years 1995, 1996, 1997, 1998, 1999 and thereafter are $1,000,000, $6,346,000, $8,077,000, $7,540,000, $10,200,000 and $40,000,000, respectively. 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, which amount to $67,800,000 at December 31, 1994. Borrowings under these agreements were $9,329,000 at December 31, 1994. The Company pays commitment fees for these lines. The weighted average interest rate on short-term borrowings was 6.63% at December 31, 1994 and 3.48% at January 1, 1994. 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transporation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments, as of December 31, 1994:
Capital Operating ------- --------- (000's omitted) Fiscal years 1995 $1,887 $ 6,356 1996 1,538 4,812 1997 1,039 2,892 1998 751 1,830 1999 416 1,351 Thereafter -- 4,400 ------ ------- Net minimum lease payments 5,631 $21,641 ======= Less amount representing interest 298 ------ Present value of net minimum lease payments 5,333 Less amounts due within one year 1,740 ------ $3,593 ======
23 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Capitalized leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value which is related to the lessor's book value at expiration of the lease term. Rent expense under operating leases was as follows:
December 31, January 1, January 2, 1994 1994 1993 ------------ ----------- ---------- (000's omitted) Minimum rent $8,487 $8,174 $7,253 Contingent rent 611 575 616 ------ ------ ------ $9,098 $8,749 $7,869 ====== ====== ======
6. CAPITALIZATION Promissory (subordinated) and instalment notes consisted of:
December 31, January 1, 1994 1994 ------------ ---------- (000's omitted) Promissory (subordinated) notes - Due currently $ 39 $ 51 Due on December 31, 1994-8.50% -- 26,173 Due on December 31, 1994-9.50% -- 30,321 Due on December 31, 1995-7.50% 20,744 21,324 Due on December 31, 1995-10.00% 35,355 36,257 Due on December 31, 1996-9.50% 28,436 28,930 Due on December 31, 1996-6.00% 24,888 27,187 Due on December 31, 1997-10.00% 17,579 18,138 Due on December 31, 1997-7.87% 16,793 -- Due on December 31, 1998-8.00% 28,512 29,266 Due on December 31, 1999-8.00% 27,030 27,827 Due on December 31, 1999-8.20% (to be issued) 27,909 -- Due on December 31, 2000-6.50% (issued 1994) 25,628 26,752 Instalment notes at interest rates of 6.50% to 10.00% with maturities through 1998 4,010 4,062 -------- -------- 256,923 276,288 Less amounts due within one year 57,824 58,292 -------- -------- $199,099 $217,996 ======== ========
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 1995, 1996, 1997, 1998, 1999 and thereafter are $57,824,000, $54,463,000, $35,197,000, $28,872,000, $54,939,000 and $25,628,000, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the uncertainty of the ultimate maturities of the promissory notes, management believes it is impracticable to estimate their fair value. The carrying amounts of the Company's other financial instruments approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the Company's incremental borrowing rate for similar borrowings. 8. INCOME TAXES Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes" (See Note 1). As permitted under the new rules, prior years' financial statements have not been restated. The cumulative effect of adopting SFAS No. 109 as of January 3, 1993 was not material to the consolidated financial statements of the Company. At December 31, 1994, the Company has alternative minimum tax credit carryforwards of approximately $1,200,000 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 31, 1994 resulted primarily from alternative minimum tax credit carryforwards and temporary differences between income tax and financial reporting for depreciation, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
Deferred Liability Method Method --------------------------- ---------- For the Years Ended ------------------------------------------ December 31, January 1, January 2, 1994 1994 1993 ------------ ---------- ---------- (000's omitted) Current: Federal $ 486 $ 343 $ 551 State 462 22 152 Foreign 278 237 122 ------ ------ ------ Total current 1,226 602 825 ------ ------ ------ Deferred: Federal (147) 1,582 (497) State (26) 317 (14) Foreign 110 81 75 ------ ------ ------ Total deferred (63) 1,980 (436) ------ ------ ------ $1,163 $2,582 $ 389 ====== ====== ======
24 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 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 1994 and 1993 and 34% in fiscal year 1992 is as follows:
Deferred Liability Method Method ----------------------- ---------- For the Years Ended ------------------------------------ December 31, January 1, January 2, 1994 1994 1993 ------------ ---------- ---------- (000's omitted) Tax at U.S. statutory rate $ 21,518 $ 20,862 $ 20,746 Effects of: Patronage dividend (21,147) (19,054) (20,706) State income taxes, net of federal tax benefit 283 220 91 Other, net 509 554 258 -------- -------- -------- $ 1,163 $ 2,582 $ 389 ======== ======== ========
9. CASH FLOW The Company's noncash financing and investing activities in fiscal year 1992 include acquisitions of transportation and warehouse equipment by entering into capital leases. In fiscal year 1992, ownership of a distribution center previously under capital lease was transferred to the Company. Also in fiscal year 1992, a wholly-owned subsidiary of the Company acquired certain assets, in part, by assuming debt. These transactions aggregate $12,527,000. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to noncash operating and financing activities are as follows:
For the Years Ended ------------------------------------ December 31, January 1, January 2, 1994 1994 1993 ------------ ---------- ---------- (000's omitted) Patronage dividend payable in cash $18,383 $16,614 $18,570 Promissory (subordinated) notes 23,213 20,852 22,711 Class B nonvoting common stock 5,900 2,086 4,934 Instalment notes 3,058 2,939 2,485 Member indebtedness 9,867 11,949 12,201 ------- ------- ------- $60,421 $54,440 $60,901 ======= ======= ======= Note renewals $26,191 $27,187 $22,686 ======= ======= ========
Cash paid for interest during fiscal years 1994, 1993 and 1992 totalled $30,583,000, $32,056,000 and $31,638,000, respectively. Cash paid for income taxes during fiscal years 1994, 1993 and 1992 totalled $1,709,000, $1,387,000 and $1,771,000, respectively. 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
For the Years Ended ------------------------------------- December 31, January 1, January 2, 1994 1994 1993 ------------------------------------- (000's omitted) Income: Actual return (loss) on plan assets ($1,543) $ 7,486 $2,856 Amortization of excess plan assets 920 920 920 ------- ------- ------ (623) 8,406 3,776 ------- ------- ------ Expenses: Service cost - benefits earned during year 4,765 4,556 3,633 Interest on projected benefit obligation 6,736 6,266 5,738 Deferral of excess (deficiency) of actual over estimated return on plan assets (8,815) 1,042 (3,060) ------- ------- ------ 2,686 11,864 6,311 ------- ------- ------ Net pension cost $3,309 $ 3,458 $2,535 ======= ======= ======
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 8.5% and 4.5%, respectively, in fiscal year 1994; 7.5% and 4.5%, respectively, in fiscal year 1993; and 9.0% and 6.0%, respectively, in fiscal year 1992. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal year 1994 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1994, 1993 and 1992, the expected long-term rate of return on assets was 9.5%. 25 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Plan assets are composed primarily of corporate equity and debt securities. Benefits are based on years of service and the employee's compensation during the last ten years of employment, offset by a percentage of Social Security retirement benefits. Trusteed net assets and actuarially computed benefit obligations for the Company administered pension plans are presented below:
December 31, January 1, 1994 1994 ----------- ---------- (000's omitted) Assets: Total plan assets at fair value $80,046 $81,726 ======= ======= Obligations: Accumulated benefit obligation: Vested $53,055 $55,605 Non-vested 7,683 8,704 Effect of projected compensation increases 19,924 24,110 ------- ------- Total projected benefit obligation 80,662 88,419 ------- ------- Net excess assets (liabilities): Unrecognized: Unamortized excess assets at original date 8,643 9,563 Net actuarial gain (loss) 565 (5,773) Prior service costs (5,313) (6,170) Recognized accrued pension cost (4,511) (4,313) ------- ------- Total net excess assets (liabilities) (616) (6,693) ------- ------- Total obligations and net excess assets (liabilities) $80,046 $81,726 ======= =======
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $757,000, $702,000 and $556,000 for fiscal years 1994, 1993 and 1992, respectively. 11. SUBSEQUENT EVENTS On January 13, 1995, the Company announced the sale of certain inventory of its V&S Variety division to a national wholesaler who has also agreed to supply the majority of the V&S stores. Also, on January 31, 1995, the Company agreed to sell 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 should not have a material impact on the Company's results of operations or financial position. 26 29 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 31, 1994 and January 1, 1994, and the related consolidated statements of operations, cash flows, and capital stock and retained earnings for each of the three years in the period ended December 31, 1994. 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 31, 1994 and January 1, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG, LLP Chicago, Illinois February 13, 1995 27 30 SELECTED FINANCIAL DATA.
For The Years Ended ----------------------------------------------------------------------- December 31, January 1, January 2, December 28, December 29, 1994 1994 1993 1991 1990 ------------ ---------- ---------- ------------ ------------ (000's omitted) Revenues $2,574,445 $2,420,727 $2,356,468 $2,139,887 $2,135,120 Net margins $ 60,318 $ 57,023 $ 60,629 $ 59,425 $ 54,847 Total assets $ 868,785 $ 803,528 $ 833,372 $ 763,109 $ 709,895 Member payout: Patronage dividend $ 60,421 $ 54,440 $ 60,901 $ 60,339 $ 56,269 Interest paid to Members 22,894 24,458 25,716 26,006 24,083 ---------- ---------- ---------- ---------- ---------- $ 83,315 $ 78,898 $ 86,617 $ 86,345 $ 80,352 ---------- ---------- ---------- ---------- ---------- Member cash payout: Patronage dividend in cash $ 18,383 $ 16,614 $ 18,570 $ 18,423 $ 16,978 Interest paid to Members 22,894 24,458 25,716 26,006 24,083 ---------- ---------- ---------- ---------- ---------- $ 41,277 $ 41,072 $ 44,286 $ 44,429 $ 41,061 ---------- ---------- ---------- ---------- ---------- Member notes and common stock: Promissory (subordinated) and instalment notes $ 199,099 $ 217,996 $ 235,695 $ 235,289 $ 215,452 Redeemable Class A common stock 6,370 6,633 6,857 7,077 7,362 Redeemable Class B common stock 116,663 110,773 108,982 104,151 101,398 ---------- ---------- ---------- ---------- ---------- $ 322,132 $ 335,402 $ 351,534 $ 346,517 $ 324,212 ---------- ---------- ---------- ---------- ----------
28 31 DIRECTORS AND OFFICERS. [PICTURE OF BOARD OF DIRECTORS] (Front, left to right) Len Farr, Sam Costa, Dick Schaefer, Bob Waters (Center) Lew Moore, Jerry Kabelin, Ed Yeager, Jerry O'Conner, Will Halterman (Rear) Mitch West, Bill Claypool, Bob Ladner, Dan Cotter, George Sheffer BOARD OF DIRECTORS WILLIAM M. CLAYPOOL III (1)(2) Claypool True Value Hardware Needles, CA (619) 326-4660 Director since 1970 Term expires 1997 SAMUEL D. COSTA, JR. (4) Costa's True Value Hardware Smethport, PA (814) 887-5542 Director since 1988 Term expires 1996 DANIEL A. COTTER* President and Chief Executive Officer Cotter & Company Chicago, IL (312) 975-2700 Director since 1989 Term expires 1996 LEONARD C. FARR (3) Farr's True Value Hardware Coos Bay, OR (503) 267-2137 Director since 1972 Term expires 1996 WILLIAM M. HALTERMAN (3) Halterman's True Value Hardware Petersburg, WV (304) 257-4552 Director since 1990 Term expires 1995 JERRALD T. KABELIN, CHAIRMAN* Kabelin True Value Hardware LaPorte, IN (219) 362-3310 Director since 1985 Term expires 1997 ROBERT J. LADNER (3) Ladner's True Value Hardware Granite Falls, MN (612) 564-3130 Director since 1994 Term expires 1997 LEWIS W. MOORE (1)(4) Moore's True Value Hardware Rochelle, IL (815) 562-7682 Director since 1948 Term expires 1997 JEREMIAH J. O'CONNOR (1)(4) O'Connor True Value Billerica, MA (508) 663-3520 Director since 1984 Term expires 1995 RICHARD L. SCHAEFER (3) Carroll-Ames True Value Hardware Bryan, OH (419) 636-1149 Director since 1976 Term expires 1995 GEORGE V. SHEFFER (2) Murdale True Value Hardware Carbondale, IL (618) 529-3400 Director since 1994 Term expires 1995 ROBERT G. WATERS (1) Waters True Value Hardware Junction City, KS (913) 238-3114 Director since 1973 Term expires 1997 JOHN M.WEST, JR. (2) Gulf Coast True Value Hardware Englewood, FL (813) 474-1807 Director since 1991 Term expires 1995 DONALD E.YEAGER (2) Yeager True Value Van Buren, AR (501) 474-5278 Director since 1993 Term expires 1996 Committee Memberships: 1. Executive Committee 2. Long Range Planning Committee 3. Audit and Finance Committee 4. Management Development and Compensation Committee * Ex officio member of all committees CORPORATE OFFICERS DANIEL A. COTTER President; Chief Executive Officer STEVEN J. PORTER Executive Vice President; Chief Operating Officer KERRY J. KIRBY Vice President, Finance; Secretary and Treasurer; Chief Financial Officer KAREN M. AGNEW Vice President, Management Services; Assistant Secretary DANIEL T. BURNS Vice President, Law and Human Resources DANNY R. BURTON Vice President, Retail Development and Operations/Markets DAVID W. CHRISTMAS Vice President, Merchandising ROBERT F. JOHNSON Vice President, Information Services JOHN P. SEMKUS Vice President, Distribution and Transportation JOHN F. MOYNIHAN Assistant Secretary 32 COTTER&COMPANY 2740 N. Clybourn Avenue Chicago, Illinois 60614 312-975-2700 -----END PRIVACY-ENHANCED MESSAGE-----