-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SWWVqJaMIYv6xps9fSgW6AGi9SrnSMVdec9YhcPyYdFuyRhA1XupR60o811kZVd3 hnG1WDWbdnpNlELMzcn8HA== 0000950137-96-000320.txt : 19960322 0000950137-96-000320.hdr.sgml : 19960322 ACCESSION NUMBER: 0000950137-96-000320 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960321 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64669 FILM NUMBER: 96536956 BUSINESS ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 BUSINESS PHONE: 3129752700 MAIL ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 S-2/A 1 FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1996 REGISTRATION NO. 33-64669 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ POST-EFFECTIVE AMENDMENT NO. 1 to FORM S-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------ COTTER & COMPANY (Exact name of Registrant as specified in its charter) Delaware 36-2099896 (State of Incorporation) (IRS Employer Identification No.)
8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (312) 695-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Kerry J. Kirby, Vice President and Chief Financial Officer Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (312) 695-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Daniel T. Burns, Vice President and Secretary William K. Blomquist, Esq. Cotter & Company Arnstein & Lehr 8600 West Bryn Mawr Avenue Suite 1200 Chicago, Illinois 60631-3505 120 South Riverside Plaza (312) 695-5000 Chicago, Illinois 60606
------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Post-Effective Amendment to the Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COTTER & COMPANY ------------------ CROSS REFERENCE SHEET
CAPTION IN ITEM IN FORM S-2 PROSPECTUS ------------------------------------------------- ------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Forepart of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Available Information; Reports to Security Holders; Documents Incorporated by Reference 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary; The Company; Certain Terms of the Notes 4. Use of Proceeds.................................. Use of Proceeds 5. Determination of Offering Price.................. Outside Front Cover Page of Prospectus and Plan of Distribution 6. Dilution......................................... Not Applicable 7. Selling Security Holders......................... Not Applicable 8. Plan of Distribution............................. Plan of Distribution 9. Description of Securities to be Registered....... General; Certain Terms of the Notes 10. Interests of Named Experts and Counsel........... Not Applicable 11. Information with Respect to the Registrant....... Summary; The Company; Consolidated Ratio of Earnings to Fixed Charges of The Company; Dividends; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Distribution of Patronage Dividends; Certain Terms of the Notes; Index to Consolidated Financial Statements 12. Incorporation of Certain Information by Reference........................................ Documents Incorporated By Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 21, 1996 PROSPECTUS COTTER & COMPANY $30,000,000 VARIABLE DENOMINATION FIXED RATE REDEEMABLE TERM NOTES These Variable Denomination Fixed Rate Redeemable Term Notes (the "Notes") are being issued and offered by Cotter & Company (the "Company") pursuant to the Cotter & Company Investment Program (the "Program"). This Offering (the "Offer") is being made in reliance on Rule 415 under the Securities Act of 1933. The Notes are offered exclusively to current Members of Cotter & Company holding Class A common stock and their immediate family members, current holders of certain Cotter & Company variable denomination fixed rate redeemable term notes, and current employees of Cotter & Company and its subsidiaries (collectively, the "Offerees"). The Program is designed to provide Offerees with a convenient means of investing funds directly with the Company. The Notes will be offered through a mailing to all Offerees (See "How to Invest"). The Notes will have various maturity dates and pay fixed rates of interest, as stated, for each maturity (See "General"). The Notes are restricted as to transferability (See "How to Redeem") and are subject to call by the Company (See "Certain Terms of the Notes"). Investment in a Note will be represented by a program account ("Account") established for each Offeree who purchases the Notes (the "Investor") by the agent bank (the "Agent Bank") appointed by the Company. The Notes will not be represented by a certificate or any other instrument evidencing the Company's indebtedness (See "Trust Indenture"). The Company reserves the right to modify, withdraw, or cancel this Offer at any time. There is no existing market for the Notes offered hereunder and there is no expectation that any market will develop. For further information regarding the Cotter & Company Investment Program, please call toll-free number 1-800-507-9000. Please read this Prospectus carefully and retain for future reference. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY - ----------------------------------------------------------------------------------------------------- Per Unit(1)........................ $1,000 See (2) Below $1,000(3) Total.............................. $30,000,000 See (2) Below $30,000,000(3) - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(1) The Notes will be offered only in units of $1,000 and no Investor may purchase less than one such unit. (2) There will be no underwriters. The subject Notes will be sold directly by the Company at par value. (3) There is no firm commitment for the sale of the securities offered hereunder; they will be sold from time to time by the Company. However, assuming the sale of all securities offered hereunder, and before deduction of approximately $71,000 for estimated expenses in connection with this offering, the total proceeds will be as shown above. ------------------ THE DATE OF THIS PROSPECTUS IS APRIL , 1996. 4 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates. REPORTS TO SECURITY HOLDERS Each year the Company distributes to its stockholder-Members an annual report containing consolidated financial statements reported upon by a firm of independent auditors. The Company may, from time to time, also furnish to its stockholder-Members interim reports, as determined by management. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 filed pursuant to Section 15(d) of the Exchange Act are incorporated herein by reference. All documents filed by the Company pursuant to Section 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offer shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents incorporated by reference in the Prospectus (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that the Prospectus incorporates). Requests for such copies should be directed to Kerry J. Kirby, Vice President and Chief Financial Officer, Cotter & Company, located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone number 312-695-5000. The Company currently estimates that the Offer will terminate on or about one year from offer date. 2 5 SUMMARY This Summary is qualified in its entirety by the detailed information and the Company's consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus and in the documents incorporated herein by reference. Cotter & Company (the "Company"), is located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505, telephone number (312) 695-5000. 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. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. The Notes being offered hereby are offered exclusively to current Members of the Company holding Class A common stock and their immediate family members, current holders of certain Cotter & Company variable denomination fixed rate redeemable term notes and current employees of the Company and its subsidiaries. The Notes are offered only in units of $1,000. Ownership of the Notes can be issued in one of the following four types of accounts: Single Tenancy, Joint Tenancy with Right of Survivorship, Tenancy by Custodian (under the Uniform Gifts to Minors Act) and Living Trust. Notes are issued quarterly in two-year terms; in three-year terms; and in four-year terms. Sales of Notes are made for cash. Investors will have the option to elect to receive the interest payments or to have the interest payments added to the Note on a semi-annual basis. The Notes are not equivalent to a deposit or other bank account and are not subject to the protection of the Federal Deposit Insurance Corporation or any other insurance. The Program is not subject to the requirements of the Investment Company Act of 1940 (including diversification of investments) or the Employee Retirement Income Security Act of 1974. All investments in the Notes are investments in securities of the Company and are not an obligation of the Agent Bank or any other company. The Notes being offered hereby are not transferable and may not be pledged as collateral for any debt of the Investor. Additionally, the Company has the option to redeem the Notes in whole or in part at the principal amount thereof plus accrued and unpaid interest to the redemption date. The Notes will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. There is no existing market for the Notes offered hereunder and there is no expectation that any market will develop. The Company intends to use the proceeds of this offering primarily for general working capital purposes, including the purchase of merchandise for resale to Members. 3 6 THE COMPANY The Company was organized as a Delaware corporation in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. The Company's principal executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone number 312-695-5000. 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. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. The Company serves approximately 5,600 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES OF THE COMPANY
FOR THE FISCAL YEARS - ---------------------------------------- 1995 1994 1993 1992 1991 - ---- ---- ---- ---- ---- 2.78 2.84 2.71 2.73 2.96
The ratio of earnings to fixed charges has been computed by dividing earnings before income taxes and fixed charges by fixed charges. Fixed charges consist of interest expense and the portion of rental expense deemed to represent interest expense. 4 7 USE OF PROCEEDS The proceeds from the sale of the Notes will be made available for general working capital purposes, including the purchase of merchandise for resale to Members. PLAN OF DISTRIBUTION The Notes being offered hereby are offered exclusively to current Members of the Company holding Class A common stock and their immediate family members, current holders of certain Cotter & Company variable denomination fixed rate redeemable term notes and current employees of the Company and its subsidiaries. The Notes are offered only in units of $1,000. All sales of the Notes will be made for cash. The availability of the Program will be communicated through a mailing to all Offerees. An Offeree, upon request of an application package will receive the Prospectus, the Program Description, IRS W-9 Certification Form and application form to be returned to the Company. The application will include the Investor's registration form for Two-Year Notes, Three-Year Notes, or Four-Year Notes. By signing and returning the application form and IRS W-9 Certification Form, together with a check for the invested amount to the Company's designated lockbox bank account, an Investor shall consent to be bound by the terms of the Program, as described in the Program Description, as amended from time to time by the Company. 5 8 GENERAL The Program is designed to provide Investors with a convenient means of investing funds directly with the Company. The Notes are available in units of $1,000. NOTE TERMS The Notes will be issued quarterly and will be offered in two-year terms; in three-year terms; and in four-year terms. INTEREST RATE The Notes will bear interest at a rate determined by the Company. The fixed interest rate on the Notes will be set for each quarter by the Company as a spread of 1% over the comparable Treasury Notes rate. Information concerning the interest rate on the Notes will be available by calling toll free number 1-800-507-9000. Investors will have the option to elect to receive interest payments or to have the interest payments added to the Note on a semi-annual basis. Interest is calculated on a 365 day year and will be paid on a semi-annual basis. Interest payments and principal at maturity will be paid by check and mailed on the next business day. The Investor can change the interest payment option between payment or reinvestment by notifying the Agent Bank in writing. TYPES OF ACCOUNTS Investors may hold ownership of the Notes in one of the following four types of accounts: Single Tenancy, Joint Tenancy with Right of Survivorship, Tenancy by Custodian (under the Uniform Gifts to Minors Act) and Living Trust. The Notes are not transferable and may not be pledged as collateral for any debt of the Investor. If an Investor's legal name changes, Form W-9 and a signature guarantee will be needed to change the name of the Investor on an account. The Notes cannot be held by a retirement savings plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended. ACCOUNT INFORMATION For current Account Information, Investors may call toll-free number 1-800-507-9000. HOW TO INVEST The availability of the Program will be communicated through a mailing to all Offerees. An Offeree, upon request of an application package will receive the Prospectus, the Program Description, IRS W-9 Certification Form and an application form to be returned to the Company. The application will include the Investor's registration form for Two-Year Notes, Three-Year Notes, or Four-Year Notes. By signing and returning the application form and IRS W-9 Certification Form, together with a check for the invested amount to the Company's designated lockbox bank account, an Investor shall consent to be bound by the terms of the Program, as described in the Program Description, as amended from time to time by the Company. THIS COMPLETED APPLICATION, THE IRS W-9 CERTIFICATION FORM AND THE CHECK FOR 6 9 THE INVESTED AMOUNT MUST BE RECEIVED BY THE COMPANY AT THE COMPANY'S DESIGNATED LOCKBOX BANK ACCOUNT ON OR BEFORE THE LAST BUSINESS DAY BEFORE THE START OF EACH CALENDAR YEAR QUARTER (MARCH 31ST FOR APRIL 1ST; JUNE 30TH FOR JULY 1ST; SEPTEMBER 30TH FOR OCTOBER 1ST AND DECEMBER 31ST FOR JANUARY 1ST). HOW TO REDEEM The Notes may be redeemed prior to maturity subject to a penalty (the "Penalty") consisting of the loss of 120 days of interest as calculated on the most recent quarterly stated principal balance. This Penalty may result in a reduction of the Investor's principal balance. Investors may not transfer ownership of the Notes. In cases of probate or court decree, the Notes will be redeemed and will be subject to Penalty. The Investors will not be able to break the Notes into smaller denominations at any time during the life of the Notes. CERTAIN TERMS OF THE NOTES TRUST INDENTURE The Notes will be issued under an indenture (the "Indenture"), between the Company and First Trust of Illinois (formerly Bank of America Illinois) (the "Trustee"). The statements under this heading are subject to the detailed provisions of the Indenture, a copy of which will be provided without charge to each person to whom a Prospectus is delivered, upon written or oral request. Such request should be directed to Kerry J. Kirby, Vice President and Chief Financial Officer, Cotter & Company, located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone number 312-695-5000. NOTE SUBORDINATION/RISK FACTORS The Notes will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. OPTIONAL REDEMPTION BY THE COMPANY The Notes will be redeemable at the Company's option at any time, in whole or in part, at 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. Any partial redemption of the Notes will be effected by lot or pro rata or by any other method that is deemed fair and appropriate by the Trustee. Any Notes redeemed at the Company's option, plus accrued and unpaid interest thereon to the date of redemption, will be paid by check to the Investor. Interest on all redeemed Notes shall cease to accrue on and after the effective date of redemption. 7 10 DIVIDENDS Other than the payment of patronage dividends, including the redemption of some nonqualified written notices of allocation, the Company has not paid dividends on its Class A common stock or Class B common stock. The Board of Directors does not plan to pay dividends on either class of stock. Dividends (other than patronage dividends) 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. See "Distribution of Patronage Dividends". SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.............................. $2,437,002 $2,574,445 $2,420,727 $2,356,468 $2,139,887 Gross margins......................... $ 202,068 $ 223,331 $ 217,921 $ 216,608 $ 197,745 Net margins........................... $ 59,037 $ 60,318 $ 57,023 $ 60,629 $ 59,425 Patronage dividends................... $ 60,140 $ 60,421 $ 54,440 $ 60,901 $ 60,339 Total assets.......................... $ 819,576 $ 868,785 $ 803,528 $ 833,372 $ 763,109 Long-term debt and obligations under capital leases...................... $ 79,213 $ 75,756 $ 69,201 $ 72,749 $ 13,335 Promissory (subordinated) and instalment notes payable............ $ 186,335 $ 199,099 $ 217,996 $ 235,695 $ 235,289 Redeemable Class A common stock....... $ 5,294 $ 6,370 $ 6,633 $ 6,857 $ 7,077 Redeemable Class B common stock....... $ 113,062 $ 116,663 $ 110,773 $ 108,982 $ 104,151 Book value per share of Class A common stock and Class B common stock(a)... $ 102.68 $ 103.57 $ 103.85 $ 101.42 $ 102.50
- --------------- (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. 8 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 In fiscal year 1995, Cotter & Company revenues were $2,437,002,000, a decrease of 5.3% from fiscal year 1994. This decrease was attributable to the phase-out of the V&S(R) Variety division and the sale of the General Power Equipment manufacturing division. Comparable sales categories were flat with the prior year due to the soft economy and unusual weather in the United States, combined with the declining sales in Mexico. In addition, the Company expanded the Pinpoint Pricing program which reduced the selling price of many core hardware and related products. Overall merchandise gross margins, as a percentage of revenues, decreased for the fourth year in a row. This reduction in gross margin percentage was the result of an expanded Pinpoint Pricing program and the withdrawal from the resigned businesses of V&S(R) Variety division and General Power Equipment manufacturing division. Warehouse, general and administrative expenses decreased by $18,652,000 or 14.0% compared to the prior year. As a percentage of revenue, these expenses were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses was attributable to continued efforts to reduce operating costs, an expense recovery associated with prior years' favorable risk loss experience and efficiencies derived from the resigned businesses. Interest paid to Members decreased by $2,267,000 or 9.9% primarily due to a lower average principal balance and a decrease in the average interest rate. Other interest increased due to the increase in the Cotter & Company term note program. Net margins were $59,037,000 for the year ended December 30, 1995 compared to $60,318,000 for the year ended December 31, 1994. 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. 9 12 Interest paid to Members decreased by $1,564,000 or 6.4% primarily due to a lower average interest rate. 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. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents in fiscal year 1995 increased $20,642,000 to $22,473,000. This improvement was primarily due to improved cash flow from operating activities, which was $106,640,000 for the year ended December 30, 1995 compared to $88,663,000 for the year ended December 31, 1994. This improvement in cash flow from operating activities was the result of better management of current assets. Inventories decreased by $69,436,000 during fiscal year 1995. Much of this reduction can be attributed to the sale of the V&S(R) Variety and General Power Equipment Manufacturing divisions. This was accomplished with no reduction in the Company's ability to provide merchandise to Members. This decrease in inventory was offset partially by a corresponding decrease in accounts payable of $36,584,000 and short-term borrowings of $6,672,000 from fiscal year 1994 to fiscal year 1995. Cash flows of $19,265,000 used for investing activities were comparable to the previous year. Financing activities required $66,733,000 for the year ended December 30, 1995 compared to $70,025,000 a year earlier. At December 30, 1995, net working capital decreased to $202,999,000 from $221,054,000 at December 31, 1994. The current ratio of 1.47 for December 30, 1995 is comparable to last year. 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 $63,000,000 at December 30, 1995. The Company pays commitment fees for these lines. The borrowings under these agreements were $2,657,000 at December 30, 1995 and $9,329,000 at December 31, 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 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 $28,912,000 in fiscal year 1995 compared to $21,427,000 in fiscal year 1994 and $13,382,000 in fiscal year 1993. 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 1996 is anticipated to come from operations and external sources, if necessary. On December 29, 1995, the Company finalized a private shelf agreement for available borrowings of up to $50,000,000. 10 13 BUSINESS 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. 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 5,600 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). The Company's total sales of merchandise to its U.S. Members were divided among the following general classes of merchandise:
FOR THE FISCAL YEARS ------------------- 1995 1994 1993 ----- ----- ----- Hardware Goods......................................... 22.3% 20.1% 20.0% Electrical and Plumbing................................ 17.7% 15.8% 16.3% Painting and Cleaning.................................. 13.3% 14.4% 14.9% Farm and Garden........................................ 13.3% 12.5% 12.3% Lumber and Building Materials.......................... 12.7% 12.9% 12.3% Appliances and Housewares.............................. 11.7% 10.4% 10.3% Sporting Goods and Toys................................ 9.0% 13.9% 13.9%
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 48% of total sales); (2) direct shipment sales (approximately 42% of total sales); and (3) relay sales (approximately 10% 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. 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. 11 14 The Company annually sponsors two "markets" (one in the Spring and one in the Fall). In fiscal year 1996, 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 24, 1996 and February 25, 1995, the Company had a backlog of firm orders (including relay orders) of approximately $23,000,000 and $21,000,000 respectively. It is anticipated that the entire backlog existing at February 24, 1996 will be filled by April 30, 1996. 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 trueAdvantage program was introduced in 1995 to promote higher retail standards in order to build consumer goodwill and create a positive image for all True Value stores. 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 several non-member-owned wholesalers withdrawing from business. The Company, through a Canadian subsidiary, owns a majority equity interest in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. This cooperative serves approximately 430 True Value(R) and V&S(R) Stores, all located in Canada. The cooperative has approximately 340 employees and generated less than 5% of the Company's consolidated revenue in fiscal year 1995. The Company operates several other subsidiaries, most of which are engaged in businesses providing additional services to the Company's Members. In the aggregate, these subsidiaries are not significant to the Company's results of operations. The Company employs approximately 3,500 persons in the United States on a full-time basis. Due to the widespread geographical distribution of the Company's operations, employee relations are governed by the practices prevailing in the particular area and are generally dealt with locally. Approximately 34% of the Company's hourly-wage employees are covered by collective bargaining agreements which are generally effective for periods of three or four years. In general, the Company considers its relationship with its employees to be good. 12 15 DISTRIBUTION OF PATRONAGE DIVIDENDS The Company operates on a cooperative basis with respect to business done with or for Members. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-Laws and Retail Member Agreement; the annual patronage dividend is paid to Members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Patronage dividends are usually paid to Members within 60 days after the close of the Company's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of the Company's fiscal year, and the Company may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. The Company's By-Laws provide for the payment of year-end patronage dividends, after payment of at least 20% of such patronage dividends in cash, in qualified written notices of allocation including (i) Class B 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. As a result, effective with the 1996 patronage dividend, these percentages may 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 13 16 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 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. In order to avoid the administrative inconvenience and expense of issuing separate certificates representing shares of Class B common stock and separate promissory (subordinated) notes to each Member, the 14 17 Company deposits a bulk certificate and a bulk promissory (subordinated) notes with Harris Trust and Savings Bank, Chicago, Illinois for safekeeping for and on behalf of its Members and sends a written notice to each Member of these deposits and the allocation thereof to such Member. Each Member is, and is shown on the books of the Company as, the registered owner of his allocation of Class B common stock and promissory (subordinated) notes. Upon written request to the Company, a Member can obtain a certificate for all or any portion of his Class B common stock and a Note or Notes for all or any portion of the amount allocated to his account. MANAGEMENT The directors and principal executive officers of the Company are as follows:
NAME (AGE) OFFICE -------------------------------------------------- ------------------------------------- Karen M. Agnew (53)............................... Vice President and Assistant Secretary Joe W. Blagg (46)................................. Director Daniel T. Burns (45).............................. Vice President and Secretary Danny R. Burton (49).............................. Vice President David W. Christmas (47)........................... Vice President William M. Claypool, III (73)..................... Director Samuel D. Costa, Jr. (54)......................... Director Daniel A. Cotter (61)............................. President, Chief Executive Officer and Director Leonard C. Farr (74).............................. Director William M. Halterman (48)......................... Director Robert F. Johnson (52)............................ Vice President Jerrald T. Kabelin (58)........................... Director Kerry J. Kirby (49)............................... Vice President, Chief Financial Officer and Treasurer Charles L. Kremers (45)........................... Vice President Robert J. Ladner (49)............................. Chairman of the Board and Director John F. Lottes III (55)........................... Director Lewis W. Moore (83)............................... Director Kenneth M. Noble (38)............................. Director Steven J. Porter (43)............................. Executive Vice President and Chief Operating Officer Richard L. Schaefer (66).......................... Director John P. Semkus (49)............................... Vice President George V. Sheffer (43)............................ Director Dennis A. Swanson (56)............................ Director John M. West, Jr. (43)............................ Director
15 18 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. DESCRIPTION OF REDEEMABLE TERM NOTES These Variable Denomination Fixed Rate Redeemable Term Notes are being issued and offered by Cotter & Company pursuant to the Cotter & Company Investment Program. The Notes will be made available to current Members of Cotter & Company holding Class A common stock and their immediate family members, current holders of certain Cotter & Company variable denomination fixed rate redeemable term notes, and to current employees of Cotter & Company and its subsidiaries. The Program is designed to provide investors with a means of investing funds directly with the Company. AGENT BANK AND ADMINISTRATION The Company has engaged the Northern Trust Bank of Chicago as the Agent Bank to service the Program. The Agent Bank will send the following to the Investor: -- Investment confirmation, -- Quarterly statements listing all notes held and all transaction information on a year-to-date basis, -- Advance maturity notices with renewal forms, -- Form 1099INT and -- Form 1099B (if applicable). Additionally, the Agent Bank will provide an automated voice response system, at toll-free number 1-800-507-9000, to allow Investors to call and obtain aggregate account and individual Note information. The Agent Bank will also process early redemption requests, respond to inquiries and provide to Investors information on Notes and accounts. Additional or other inquiries from Investors to the Agent Bank will be forwarded to the Company. TAXES The Program is not qualified under Section 401(a) of the Internal Revenue Code. Accordingly, all interest credited to the Notes or paid in any taxable year is reportable by the Investor as taxable income for Federal income tax purposes. No part of the taxable interest is excludable from taxable income. The December statement to each Investor from the Agent Bank each year will state the full amount reportable as taxable income. The Agent Bank also will file tax information returns as required by law. State and local income taxes and tax reporting also may be applicable. Investors are individually responsible for complying with applicable federal, state, and local tax laws and should consult their individual tax advisors with respect to tax consequences which may be applicable to their particular situation. LEGAL MATTERS The legality of the Notes will be passed upon for the Company by Messrs. Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606. 16 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS
PAGE(S) ------- Report of Independent Auditors...................................................... 19 Consolidated Balance Sheet at December 30, 1995 and December 31, 1994............... 20-21 Consolidated Statement of Operations for each of the three years in the period ended December 30, 1995................................................................. 22 Consolidated Statement of Cash Flows for each of the three years in the period ended December 30, 1995................................................................. 23 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 30, 1995....................................... 24 Notes to Consolidated Financial Statements.......................................... 25-33
17 20 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- 18 21 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 30, 1995 and December 31, 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 30, 1995. 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 30, 1995 and December 31, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 12, 1996 19 22 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Current assets: Cash and cash equivalents..................................... $ 22,473 $ 1,831 Accounts and notes receivable................................. 287,888 294,663 Inventories................................................... 315,311 384,747 Prepaid expenses.............................................. 11,180 7,861 -------- -------- Total current assets............................. 636,852 689,102 Properties owned, less accumulated depreciation................. 165,683 164,261 Properties under capital leases, less accumulated amortization.................................................. 5,393 4,691 Other assets.................................................... 11,648 10,731 -------- -------- Total assets..................................... $819,576 $868,785 ======== ========
See Notes to Consolidated Financial Statements. 20 23 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
DECEMBER 30, DECEMBER 31, 1995 1994 --------------- ------------ (000'S OMITTED) Current liabilities: Accounts payable.............................................. $297,884 $334,468 Accrued expenses.............................................. 53,363 45,304 Short-term borrowings......................................... 2,657 9,329 Current maturities of notes, long-term debt and lease obligations................................................ 61,634 60,564 Patronage dividend payable in cash............................ 18,315 18,383 -------- -------- Total current liabilities........................ 433,853 468,048 Long-term debt.................................................. 75,449 72,163 Obligations under capital leases................................ 3,764 3,593 Capitalization: Promissory (subordinated) and instalment notes................ 186,335 199,099 Redeemable Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 52,710 and 63,350 shares)....................... 5,294 6,370 Redeemable Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,055,700 and 1,047,756 shares; issuable as partial payment of patronage dividends, 62,005 and 104,275 shares)......... 113,062 116,663 Retained earnings............................................. 2,661 3,764 -------- -------- 307,352 325,896 Foreign currency translation adjustment....................... (842) (915) -------- -------- Total capitalization............................. 306,510 324,981 -------- -------- Total liabilities and capitalization............. $819,576 $868,785 ======== ========
See Notes to Consolidated Financial Statements. 21 24 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED ------------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 --------------- ------------ ---------- (000'S OMITTED) Revenues........................................... $2,437,002 $2,574,445 $2,420,727 ---------- ---------- --------- Cost and expenses: Cost of revenues................................. 2,234,934 2,351,114 2,202,806 Warehouse, general and administrative............ 114,107 132,759 132,674 Interest paid to Members......................... 20,627 22,894 24,458 Other interest expense........................... 9,298 7,493 7,429 Gain on sale of properties owned................. -- (692) (5,985) Other income, net................................ (1,177) (604) (260) Income tax expense............................... 176 1,163 2,582 ---------- ---------- --------- 2,377,965 2,514,127 2,363,704 ---------- ---------- --------- Net margins........................................ $ 59,037 $ 60,318 $ 57,023 ========== ========== =========
See Notes to Consolidated Financial Statements. 22 25 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ------------------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Operating activities: Net margins....................................... $ 59,037 $ 60,318 $ 57,023 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization.................. 20,706 21,613 21,566 Provision for losses on accounts and notes receivable................................... 3,741 4,233 4,057 Changes in operating assets and liabilities: Accounts and notes receivable.................. (13,921) (33,112) (38,605) Inventories.................................... 69,436 (49,145) 183 Accounts payable............................... (36,584) 79,957 (45,070) Accrued expenses............................... 7,552 6,022 (1,143) Other adjustments, net......................... (3,327) (1,223) (2,679) ---------- ---------- -------- Net cash and cash equivalents provided by (used for) operating activities......................... 106,640 88,663 (4,668) ---------- ---------- -------- Investing activities: Additions to properties owned..................... (24,904) (21,427) (13,382) Proceeds from sale of properties owned............ 5,022 2,174 13,999 Changes in other assets........................... 617 1,132 (3,850) ---------- ---------- -------- Net cash and cash equivalents (used for) investing activities.......... (19,265) (18,121) (3,233) ---------- ---------- -------- Financing activities: Payment of annual patronage dividend.............. (18,383) (16,614) (18,570) Payment of notes, long-term debt and lease obligations.................................... (43,106) (39,632) (32,730) Proceeds from long-term borrowings................ 3,000 -- -- Increase (decrease) in short-term borrowings...... (6,672) (13,851) 23,059 Purchase of common stock.......................... (1,740) (216) (470) Proceeds from sale of Class A common stock........ 168 288 323 ---------- ---------- -------- Net cash and cash equivalents (used for) financing activities.......... (66,733) (70,025) (28,388) ---------- ---------- -------- Net increase (decrease) in cash and cash equivalents....................................... 20,642 517 (36,289) ---------- ---------- -------- Cash and cash equivalents at beginning of year...... 1,831 1,314 37,603 ---------- ---------- -------- Cash and cash equivalents at end of year............ $ 22,473 $ 1,831 $ 1,314 ========== ========== ========
See Notes to Consolidated Financial Statements. 23 26 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS FOR THE THREE YEARS ENDED DECEMBER 30, 1995
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 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) Net margins........................... 59,037 Foreign currency translation adjustment......................... 73 Patronage dividend.................... 6,422 (60,140) Stock issued for paid-up subscriptions...................... 168 (168) Stock subscriptions................... 156 Stock purchased and retired........... (1,232) (10,023) ------ ------ -------- ------ ------ Balances at December 30, 1995........... $5,271 $ 23 $113,062 $ 2,661 $(842) ====== ====== ======== ====== ======
- --------------- Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 30, 1995 and December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993 (for 240, 360, 590, and 760 shares subscribed, respectively). See Notes to Consolidated Financial Statements. 24 27 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. 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. On January 13, 1995, the Company agreed to the sale of certain inventory of its V&S(R) Variety division to a national wholesaler who has also agreed to supply the majority of the V&S(R) Stores. Also, on January 31, 1995, the Company sold certain assets of its outdoor power equipment manufacturing division to a nationally recognized company and secured a favorable supply agreement for such equipment. These transactions did not have a material impact on the Company's results of operation or financial position. Capitalization. The Company's capital (Capitalization) is derived from 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 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; 25 28 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Retirement plans. The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contribution plans are based on collectively bargained rates times hours worked. The Company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reporting year. The Company's reporting year-end is the Saturday closest to December 31. 2. INVENTORIES Inventories consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- (000'S OMITTED) Manufacturing inventories: Raw materials......................... $ 2,139 $ 12,986 Work-in-process and finished goods.... 19,407 60,094 -------- -------- 21,546 73,080 Merchandise inventories................. 293,765 311,667 -------- -------- $ 315,311 $ 384,747 ======== ========
3. PROPERTIES Properties owned or leased under capital leases consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 -------------------- -------------------- OWNED LEASED OWNED LEASED -------- ------- -------- ------- (000'S OMITTED) Buildings and improvements.................... $173,568 $ -- $168,311 $ -- Machinery and warehouse equipment............. 60,197 -- 79,953 -- Office and computer equipment................. 77,340 -- 62,868 -- Transportation equipment...................... 21,076 11,454 22,757 14,556 -------- -------- -------- -------- 332,181 11,454 333,889 14,556 Less accumulated depreciation and amortization................................ 178,793 6,061 181,920 9,865 -------- -------- -------- -------- 153,388 5,393 151,969 4,691 Land.......................................... 12,295 -- 12,292 -- -------- -------- -------- -------- $165,683 $ 5,393 $164,261 $ 4,691 ======== ======== ======== ========
26 29 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- (000'S OMITTED) Senior note at 8.60%..................... $49,000 $50,000 Term loans: 5.97%.................................. 3,000 -- Canadian prime (7.50% and 8.00%, respectively)....................... 3,665 3,565 Variable (7.60% and 7.20%, respectively)....................... 6,200 6,200 Redeemable (subordinated) term notes: 6.85%.................................. 3,328 -- 6.97%.................................. 1,131 -- 7.00%.................................. 4,363 4,346 7.05%.................................. 3,054 -- 7.37%.................................. 1,491 1,512 7.61%.................................. 3,330 3,540 Industrial Revenue Bonds (5.28%):........ 4,000 4,000 ------- ------- 82,562 73,163 Less amounts due within one year......... 7,113 1,000 ------- ------- $75,449 $72,163 ======= =======
Principal payments for the 8.60% senior note are due in incrementally increasing amounts through maturity in 2007. Under the senior note agreement, the Company is required to meet certain financial ratios and covenants. Principal payments for the 5.97% term loan are due quarterly beginning in 1996 through maturity in 1999. Payments for the other 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, 1995 and 1994, that were held by promissory (subordinated) note holders, who do not own the Company's Class A common stock. The notes are due in 1996, 1997, 1998 and 1999. 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 1996, 1997, 1998, 1999, 2000 and thereafter are $7,113,000, $12,234,000, $9,211,000, $14,004,000, $4,000,000 and $36,000,000, respectively. 27 30 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancellable by either party under specific circumstances, which amount to $63,000,000 at December 30, 1995. The Company pays commitment fees for these lines. The borrowings under these agreements were $2,657,000 at December 30, 1995 and were at a rate of 7.50%. All of these borrowings were for the Canadian subsidiary. At December 31, 1994, the Company had a weighted average interest rate on short-term borrowings of 6.63% and included both U.S. and Canadian borrowings. 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments, as of December 30, 1995:
CAPITAL OPERATING ------- --------- (000'S OMITTED) Fiscal years 1996................................................. $ 1,984 $ 6,832 1997................................................. 1,409 9,067 1998................................................. 1,135 7,102 1999................................................. 800 5,669 2000................................................. 305 5,134 Thereafter........................................... 306 47,599 ------ ------- Net minimum lease payments............................. 5,939 $81,403 ======= Less amount representing interest...................... 314 ------- Present value of net minimum lease payments............ 5,625 Less amounts due within one year....................... 1,861 ------- $ 3,764 ======
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. 28 31 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense under operating leases was as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Minimum rent.................................. $ 9,553 $8,487 $8,174 Contingent rent............................... 510 611 575 -------- ------ ------ $ 10,063 $9,098 $8,749 ======== ====== ======
6. CAPITALIZATION Promissory (subordinated) and instalment notes consisted of:
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Promissory (subordinated) notes - Due on December 31, 1995--7.50%........................ $ -- $ 20,783 Due on December 31, 1995--10.00%....................... -- 35,355 Due on December 31, 1996--6.00%........................ 23,588 24,888 Due on December 31, 1996--9.50%........................ 27,029 28,436 Due on December 31, 1997--10.00%....................... 16,660 17,579 Due on December 31, 1997--7.87%........................ 15,616 16,793 Due on December 31, 1998--7.47%........................ 16,461 -- Due on December 31, 1998--8.00%........................ 27,048 28,512 Due on December 31, 1999--8.00%........................ 25,470 27,030 Due on December 31, 1999--8.20% (issued in 1995)....... 25,327 27,909 Due on December 31, 2000--6.50%........................ 23,996 25,628 Due on December 31, 2000--7.58% (to be issued)......... 32,047 -- Instalment notes at interest rates of 6.50% to 10.00% with maturities through 1999........................ 5,753 4,010 -------- -------- 238,995 256,923 Less amounts due within one year......................... 52,660 57,824 -------- -------- $186,335 $199,099 ======== ========
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 29 32 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) competitive market rates of comparable instruments. The Company anticipates that this practice will continue. Total maturities of promissory and instalment notes for fiscal years 1996, 1997, 1998, 1999, and 2000 are $52,660,000, $34,007,000, $44,772,000, $51,514,000, and $56,042,000, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the uncertainty of the ultimate maturities of the promissory (subordinated) notes, management believes it is impracticable to estimate their fair value. The carrying amounts of the Company's other financial instruments approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the Company's incremental borrowing rate for similar borrowings. 8. INCOME TAXES At December 30, 1995, the Company has alternative minimum tax credit carryforwards of approximately $900,000 which do not expire. The carryforwards are available to offset future federal tax liabilities. Significant components of the Company's deferred tax assets and liabilities as of December 30, 1995 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:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Current: Federal..................................... $ (363) $ 486 $ 343 State....................................... 379 462 22 Foreign..................................... 273 278 237 --------- --------- -------- Total current............................... 289 1,226 602 --------- --------- -------- Deferred: Federal..................................... (145) (147) 1,582 State....................................... (26) (26) 317 Foreign..................................... 58 110 81 --------- --------- -------- Total deferred.............................. (113) (63) 1,980 --------- --------- -------- $ 176 $1,163 $2,582 ========= ========= ========
30 33 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as patronage dividend based on margins from business done with or for Members. The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% in fiscal year 1995, 1994 and 1993 is as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Tax at U.S. statutory rate.................. $ 20,725 $ 21,518 $ 20,862 Effects of: Patronage dividend........................ (21,049) (21,147) (19,054) State income taxes, net of federal tax benefit................................ 229 283 220 Other, net................................ 271 509 554 ---------- ---------- -------- $ 176 $ 1,163 $ 2,582 ========== ========== ========
9. CASH FLOW The Company's noncash financing and investing activities in fiscal year 1995 include acquisition of transportation equipment by entering into capital leases and the acquisition of property for resale. These transactions aggregate $4,008,000. 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 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Patronage dividend payable in cash......................... $ 18,315 $ 18,383 $ 16,614 Promissory (subordinated) notes............................ 23,536 23,213 20,852 Class B nonvoting common stock............................. (2,592) 5,900 2,086 Instalment notes........................................... 5,972 3,058 2,939 Member indebtedness........................................ 14,909 9,867 11,949 ---------- ---------- ------- $ 60,140 $ 60,421 $ 54,440 ========== ========== ======= Note renewals.............................................. $ 23,974 $ 26,191 $ 27,187 ========== ========== =======
Cash paid for interest during fiscal years 1995, 1994 and 1993 totaled $29,624,000, $30,583,000 and $32,056,000, respectively. Cash paid for income taxes during fiscal years 1995, 1994 and 1993 totaled $1,012,000, $1,709,000 and $1,387,000, respectively. 31 34 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
FOR THE YEARS ENDED ---------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Income: Actual return (loss) on plan assets................. $ 25,564 $ (1,543) $ 7,486 Amortization of excess plan assets.................. 914 920 920 ---------- ----------- ------- 26,478 (623) 8,406 ---------- ----------- ------- Expenses: Service cost-benefits earned during year............ 4,152 4,765 4,556 Interest on projected benefit obligation............ 7,242 6,736 6,266 Deferral of excess (deficiency) of actual over estimated return on plan assets.................. 18,021 (8,815) 1,042 ---------- ----------- ------- 29,415 2,686 11,864 ---------- ----------- ------- Net pension cost...................................... $ 2,937 $ 3,309 $ 3,458 ========== ========== =======
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 7.25% and 4.50%, respectively, in 1995, 8.50% and 4.50%, respectively, in fiscal year 1994 and 7.50% and 4.50%, respectively, in fiscal year 1993. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal year 1995 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1995, 1994 and 1993, the expected long-term rate of return on assets was 9.50%. During 1995, the Company amended its pension plan. This amendment had no material impact on the projected benefit obligation. 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 32 35 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 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Assets: Total plan assets at fair value................................. $104,396 $ 80,046 ========== ========== Obligations: Accumulated benefit obligations: Vested....................................................... $ 77,435 $ 53,055 Non-vested................................................... 10,830 7,683 Effect of projected compensation increases...................... 21,730 19,924 ---------- ---------- Total projected benefit obligations............................. 109,995 80,662 ---------- ---------- Net excess assets (liabilities): Unrecognized: Unamortized excess assets at original date................... 7,673 8,643 Net actuarial gain (loss).................................... (3,793) 565 Prior service costs.......................................... (4,017) (5,313) Recognized accrued pension cost................................. (5,462) (4,511) ---------- ---------- Total net excess assets (liabilities)........................... (5,599) (616) ---------- ---------- Total obligations and net excess assets (liabilities)............. $104,396 $ 80,046 ========== ==========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $720,000, $757,000, and $702,000 for fiscal years 1995, 1994 and 1993, respectively. 33 36 --------------------------------------------------------- --------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
Page ---- Available Information..................... 2 Reports to Security Holders............... 2 Documents Incorporated by Reference....... 2 Summary................................... 3 The Company............................... 4 Consolidated Ratio of Earnings to Fixed Charges of the Company.................. 4 Use of Proceeds........................... 5 Plan of Distribution...................... 5 General................................... 6 Note Terms................................ 6 Interest Rate............................. 6 Types of Accounts......................... 6 Account Information....................... 6 How to Invest............................. 6 How to Redeem............................. 7 Certain Terms of the Notes................ 7 Trust Indenture........................... 7 Note Subordination/Risk Factors........... 7 Optional Redemption by the Company........ 7 Dividends................................. 8 Selected Financial Data................... 8 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 9 Business.................................. 11 Distribution of Patronage Dividends....... 13 Management................................ 15 Description of Redeemable Term Notes...... 16 Agent Bank and Administration............. 16 Taxes..................................... 16 Legal Matters............................. 16 Index to Consolidated Financial Statements Covered by Report of Independent Auditors................................ 17
--------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- $30,000,000 COTTER & COMPANY VARIABLE DENOMINATION FIXED RATE REDEEMABLE TERM NOTES FOR INFORMATION CONCERNING THE COTTER & COMPANY INVESTMENT PROGRAM, WRITE TO: THE COTTER & COMPANY INVESTMENT PROGRAM P.O. BOX 75933 CHICAGO, ILLINOIS 60675-5933 OR CALL: TOLL FREE NUMBER 1-800-507-9000 PROSPECTUS ------------------------ DATED APRIL , 1996 --------------------------------------------------------- --------------------------------------------------------- 37 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the actual or estimated expenses in connection with the issuance and distribution of the Variable Denomination Fixed Rate Redeemable Term Notes being registered: Registration Fee.................................................... $ -- Printing of Registration Statement and Prospectus................... 16,000 Accounting Fees and Expenses........................................ 10,000 Legal Fees.......................................................... 10,000 Fees and Expenses for Qualifying Securities under "Blue Sky" Laws of Various States.................................................... 35,000 ------- Total............................................................... $71,000 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation, as amended, provides that the Company shall indemnify, in accordance with and to the full extent permitted by the Delaware General Corporation Law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Company), by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise, against any liability or expense actually and reasonably incurred by such person in respect thereof. Such indemnification is not exclusive of any other right of such director, officer, or employee to indemnification provided by law or otherwise. Additionally, pursuant to Section 145(a)-(g) of the Delaware General Corporation Law which empowers a corporation to indemnify its directors, officers, employees and agents, the Board of Directors of the Company on July 23, 1973 adopted a By-Law (Article XII, Indemnification of Directors, Officers and Employees--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994 and incorporated herein by reference) providing for such indemnification. The following is a summary of the most significant provisions of said By-Law: As against third parties, the Company shall indemnify any director, officer, employee or agent for any expenses (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred in defending any threatened, pending or completed suit or proceeding, whether civil, criminal, administrative or investigative brought against such person by reason of the fact that he was or is a director, officer, employee or agent, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding if he had no reasonable cause to believe his conduct unlawful. In any action or suit by or in the right of the Company, the Company shall indemnify any director, officer, employee or agent who is or was a party or threatened to be made a party to such threatened, pending or completed action or suit, for expenses (including attorney's fees and amounts paid in settlement) reasonably and actually incurred in connection with the defense or settlement of such suit or action, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, except that no indemnification shall be made if such person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Chancery of Delaware or the court where the suit was brought finds that in view of all the circumstances of the case, such person is entitled to indemnification. Any indemnification, unless ordered by a court, shall be made by the Company only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the party to be S-1 38 indemnified has met the applicable standard of conduct. Such determination shall be made by the Board of Directors by a majority vote of a quorum, consisting of directors who were not parties of such action, suit or proceeding, or if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the stockholders. Additionally, the shareholders of the Company have approved an amendment to the Certificate of Incorporation to eliminate personal liability of directors to the Company or its shareholders for monetary damages for breach of fiduciary duty of care. The amendment provides that a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 is concerned, see Item 17 "Undertakings" below. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ----- ------------------------------------------------------------------------------- 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). 4-H Cotter & Company $50,000,000 Private Shelf Agreement with Prudential Insurance Company of America dated December 29, 1995 incorporating amendment on existing Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-H to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 4-I Trust Indenture between Cotter & Company and First Trust of Illinois (formerly Bank of America). Incorporated by reference--Exhibit T3C to Cotter & Company Form T-3 (No. 22-26210). 5 Opinion of Messrs. Arnstein & Lehr.
S-2 39
EXHIBIT NUMBER DESCRIPTION ----- ------------------------------------------------------------------------------- 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). 10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended and Restated Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-C to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 10-D Cotter & Company Employees' Savings and Compensation Deferral Plan (As Amended and Restated Effective April 1, 1994). Incorporated by reference--Exhibit 10-D to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-E Cotter & Company Supplemental Retirement Plan between Cotter & Company and selected executives of the Company (As Amended and Restated January 2, 1996 Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-E to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 10-F Annual Incentive Compensation Program and Long-Term Incentive Compensation Program between Cotter & Company and selected executives of the Company. Incorporated by reference--filed as Exhibits A and B to Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477). 10-G Cotter & Company Long-Term Incentive Compensation Program for Executive Management (Amended) dated November 7, 1994. Incorporated by reference--Exhibit 10-I to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-H Employment Agreement between Cotter & Company and Daniel A. Cotter dated October 15, 1984. Incorporated by reference--Exhibit 10-N to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 2-82836). 10-I Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel A. Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by reference-- Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477). 10-J Contract between Daniel T. Burns and the Company. Incorporated by reference--Exhibit 10-J to Post-Effective No. 5 to Registration Statement in Form S-2 (No. 33-39477). 10-K Contract between Kerry J. Kirby and the Company. Incorporated by reference--Exhibit 10-K to Post-Effective No. 5 to Registration Statement on Form S-2 (No. 33-39477). 12 Statement of Computation of Consolidated Ratio of earnings to fixed charges of the Company for the Fiscal Years Ended 1995, 1994, 1993, 1992 and 1991. 23-A Consent of Arnstein & Lehr is included in Exhibit 5 to this Registration Statement. 23-B Consent of Independent Auditors (included on page S-6). 99 Current Application Package for Cotter & Company Investment Program. Incorporated by reference--Exhibit 99 to Registration Statement on Form S-2 (No. 33-64669).
S-3 40 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any Prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions described in Item 15, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. S-4 41 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 19TH DAY OF MARCH 1996. COTTER & COMPANY By: /s/ DANIEL A. COTTER ------------------------------------ Daniel A. Cotter President, Chief Executive Officer and Director PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ --------------- /s/ DANIEL A. COTTER President, Chief Executive March 19, 1996 - --------------------------------------------- Officer and Director Daniel A. Cotter /s/ STEVEN J. PORTER Executive Vice President March 19, 1996 - --------------------------------------------- and Chief Operating Officer Steven J. Porter /s/ KERRY J. KIRBY Vice President, Treasurer and March 19, 1996 - --------------------------------------------- Chief Financial Officer Kerry J. Kirby /s/ JERRALD T. KABELIN Chairman of the Board March 19, 1996 - --------------------------------------------- and Director Jerrald T. Kabelin /s/ WILLIAM M. CLAYPOOL, III Director March 19, 1996 - --------------------------------------------- William M. Claypool, III /s/ SAMUEL D. COSTA, JR. Director March 19, 1996 - --------------------------------------------- Samuel D. Costa, Jr. /s/ LEONARD C. FARR Director March 19, 1996 - --------------------------------------------- Leonard C. Farr /s/ WILLIAM M. HALTERMAN Director March 19, 1996 - --------------------------------------------- William M. Halterman /s/ ROBERT J. LADNER Director March 19, 1996 - --------------------------------------------- Robert J. Ladner /s/ LEWIS W. MOORE Director March 19, 1996 - --------------------------------------------- Lewis W. Moore /s/ KENNETH M. NOBLE Director March 19, 1996 - --------------------------------------------- Kenneth M. Noble /s/ RICHARD L. SCHAEFER Director March 19, 1996 - --------------------------------------------- Richard L. Schaefer /s/ GEORGE V. SHEFFER Director March 19, 1996 - --------------------------------------------- George V. Sheffer /s/ DENNIS A. SWANSON Director March 19, 1996 - --------------------------------------------- Dennis A. Swanson /s/ ROBERT G. WATERS Director March 19, 1996 - --------------------------------------------- Robert G. Waters /s/ JOHN M. WEST, JR. Director March 19, 1996 - --------------------------------------------- John M. West, Jr. /s/ DONALD E. YEAGER Director March 19, 1996 - --------------------------------------------- Donald E. Yeager
S-5 42 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 12, 1996, in the Post-Effective Amendment No. 1 to the Registration Statement (Form S-2 No. 33-64669) and related Prospectus of Cotter & Company for the registration of $30,000,000 of Variable Denomination Fixed Rate Redeemable Term Notes. We also consent to the incorporation by reference therein of our report with respect to the consolidated financial statements of Cotter & Company for each of the three years in the period ended December 30, 1995 included in the Annual Report (Form 10-K) of Cotter & Company for the year ended December 30, 1995, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Chicago, Illinois March 19, 1996 S-6 43 INDEX TO EXHIBITS FILED TO POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-2 OF COTTER & COMPANY
EXHIBIT NUMBER EXHIBIT - ------ ---------------------------------------------------------------------------------- 5 Opinion of Messrs. Arnstein & Lehr. 12 Statement of Computation of Consolidated Ratio of earnings to fixed charges of the Company for the Fiscal Years Ended 1995, 1994, 1993, 1992 and 1991. 23-B Consent of Independent Auditors (included on page S-6).
Exhibits incorporated by reference are listed on Pages S-2 and S-3 of Post-Effective Amendment No. 1 to Registration Statement on Form S-2 of Cotter & Company. S-7 EX-5 2 OPINION OF MESSRS. ARNSTEIN & LEHR 1 EXHIBIT 5 [ARNSTEIN & LEHR LETTERHEAD] March 19, 1996 Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 Re: Post Effective Amendment No. 1 to Registration Statement on Form S-2 (No. 33-64669) Gentlemen: We refer to the Post Effective Amendment No. 1 to Registration Statement on Form S-2 (No. 33-64669) being filed by Cotter & Company, a Delaware corporation (hereinafter referred to as the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, pertaining to the registration of $30,000,000 principal amount of the Company's Variable Denomination Fixed Rate Redeemable Term Notes (the "Notes"). The Notes will be issued and sold directly by the Company in the minimum amount of $1,000 and integral multiples thereof for cash. Notes will be sold only to current members of the Company holding Class A Common Stock and their immediate family members, current holders of certain variable denomination fixed rate redeemable term notes of the Company, and current employees of the Company and its subsidiaries. Based upon our examination, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. The Company has an authorized capital consisting of 100,000 shares of Class A Common Stock, $100 par value and 2,000,000 shares of Class B Common Stock, $100 par value. As of February 24, 1996, there were 52,220 Class A Common shares issued and outstanding and 1,111,143 Class B Common shares issued and outstanding. All of said shares were legally issued, fully paid and non-assessable as of said date. 3. The proposed offering of $30,000,000 principal amount of the Notes has been duly authorized and when sold as contemplated the Notes will be duly issued, valid and binding obligations of the Company. 2 Cotter & Company March 19, 1996 Page 2 We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the related Prospectus as counsel for the Company who have passed upon the legalities of the securities registered thereunder. Sincerely, Amstein & Lehr EX-12 3 STATEMENT OF COMPUTATION 1 EXHIBIT 12 COTTER & COMPANY SCHEDULE OF COMPUTATION FOR FIXED CHARGES RATIO TO EARNINGS FOR THE FISCAL YEARS ENDED 1995, 1994, 1993, 1992 AND 1991 (000'S OMITTED)
YEAR END ------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- NET EARNINGS AFTER TAX $59,037 $60,318 $57,023 $60,629 $59,425 ADD: TAX PROVISION 176 1,163 2,582 389 153 ------- ------- ------- ------- ------- PRETAX INCOME 59,213 61,481 59,605 61,018 59,578 ------- ------- ------- ------- ------- ADD: FIXED CHARGES INTEREST PAID TO MEMBERS 20,627 22,894 24,458 25,716 26,006 OTHER INTEREST PAID 9,298 7,493 7,429 7,273 2,466 ------- ------- ------- ------- ------- TOTAL INTEREST EXPENSE 29,925 30,387 31,887 32,989 28,472 ------- ------- ------- ------- ------- RENTAL EXPENSES 10,063 9,098 8,749 6,850 5,583 % OF RENTAL EXPENSES 33.33% 33.33% 33.33% 33.33% 33.33% ------- ------- ------- ------- ------- APPLICABLE RENTAL EXPENSES 3,354 3,032 2,916 2,283 1,861 ------- ------- ------- ------- ------- TOTAL FIXED CHARGES 33,279 33,419 34,803 35,272 30,333 ------- ------- ------- ------- ------- PRETAX EARNINGS BEFORE FIXED CHARGES $92,492 $94,900 $94,408 $96,290 $89,911 ======= ======= ======= ======= ======= PRETAX EARNINGS RATIO TO FIXED CHARGES 2.78 2.84 2.71 2.73 2.96 ======= ======= ======= ======= =======
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