-----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, NHhjobFuWOXxERP7L0vFaCJy41r5fpnRoGEXpsno6WnFI8iVjukPgUozyg4zsk+I t8xPImnPDHx0PR+LqhSP7A== 0000950137-97-000903.txt : 19970305 0000950137-97-000903.hdr.sgml : 19970305 ACCESSION NUMBER: 0000950137-97-000903 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970228 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970304 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-20910 FILM NUMBER: 97550334 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 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) February 27, 1997 ----------------- Cotter & Company ---------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE -------- (State or Other Jurisdiction of Incorporation) 2-20910 36-2099896 ------- ---------- (Commission File Number) (I.R.S. Employer Identification No.) 8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505 --------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 773-695-5000 ------------ (Registrant's Telephone Number, Including Area Code) Not Applicable -------------- (Former Name or Former Address, if Changed Since Last Report) 2 ITEM 5. OTHER EVENTS. The Registrant hereby reports the results for its fiscal year ended December 28, 1996 set forth in its Financial Statements for such fiscal year, which are attached hereto as Exhibit 20-1. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. Exhibit 20-1 Registrant's audited Financial Statements for the Fiscal Year ended December 28, 1996. 2 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Cotter & Company ---------------- (Registrant) Date: March 4, 1997 By /s/ Kerry J. Kirby ------------------------------ (Signature) Name: Kerry J. Kirby Title: Chief Financial Officer 3 EX-20.1 2 FINANCIAL STATEMENTS 1 FINANCIAL REVIEW REVENUES In fiscal year 1996, Cotter & Company revenues were $2,441,707,000, an increase of 0.2% from fiscal year 1995. Current year revenues were influenced by the 1995 phase-out of the V&S Variety and General Power Equipment divisions. Comparable store revenues increased 4.4% due to improved member participation. Fiscal year 1996 revenue increases were concentrated in the core merchandise categories of Electrical and Plumbing, up 4.0%, Painting and Cleaning, up 5.0%, Farm and Garden, up 3.8% and Lumber and Building Materials, up 2.4%. Additionally, Cotter & Company continued to pursue business opportunities such as International, which increased 14.2% and trueAdvantage, which increased 14.2%. In addition, the Company continued to expand the Pinpoint Pricing program, which reduced the selling price of many core hardware and related products. OPERATIONS Overall gross margins, as a percentage of revenues, decreased for the fifth year in a row, to 8.1% from 8.3% last year. This reduction in gross margin was the result of a more competitive pricing strategy, which included the expanded Pinpoint Pricing program that resulted in a $7.1 million price reduction to the Members. Other pricing strategies returned an additional $2.0 million to the Members, predominately generated from the trueAdvantage program. Warehouse, general and administrative expenses increased slightly compared to the prior year, but as a percentage of revenues remained comparable to 4.7% in 1995, reduced from 5.2% in 1994. PATRONAGE DIVIDEND AND MEMBER PAYOUT The annual patronage dividend for fiscal year 1996 was $53,320,000 compared to $60,140,000 last year. Despite the decrease in the total dividends, the average patronage dividend return per Member increased over 10.0% for fiscal year 1996 compared to fiscal year 1995. Total Member payout, which includes interest paid semi-annually on previously issued promissory (subordinated) notes in addition to the patronage dividend, totaled $71,780,000 compared to $80,767,000 last year. Presented in the table below are the sources and components of Member payout for fiscal years 1996 and 1995. The patronage dividend paid to each Member will vary depending upon the volume and type of purchases, the method of shipment and extent of participation in each of the source programs listed below. As a result, each Member's patronage dividend will differ slightly from the overall Company averages. In fiscal year 1996, the average dividend percentages from stock, relay and direct shipment purchases were 2.7%, 1.5% and 0.4%, respectively. Purchases of Tru-Test Manufacturing and Baltimore Brush products earned Members an average manufacturing patronage dividend of 12.5% and 12.3%, respectively, in fiscal year 1996. In fiscal year 1995, the average dividend percentages for stock, relay, direct shipment, Tru-Test Manufacturing and Baltimore Brush purchases were 3.6%, 1.5%, 0.4%, 11.9% and 12.3%, respectively. The Company considers promissory (subordinated) notes and Class B common stock important parts of its patronage dividend. The five-year notes provide Members a recurring return on their investment and the Class B common stock provides the Company a source of permanent capital. Reflecting comparable market interest rates, promissory (subordinated) notes issued as part of the fiscal year 1996 patronage dividend bear interest at an annual rate of 8.1% compared to 7.6% in 1995.
Fiscal Year Fiscal Year MEMBER PAYOUT 1996 1995 - ------------- ----------- ----------- (000's omitted) Sources of Member payout: Patronage dividend from: Stock shipments................................................ $30,108 $37,410 Relay shipments................................................ 3,282 3,473 Direct shipments............................................... 3,463 3,603 Tru-Test Manufacturing......................................... 13,919 13,276 Baltimore Brush................................................ 2,548 2,378 ------- ------- Total patronage dividend.......................................... 53,320 60,140 Interest paid to Members.......................................... 18,460 20,627 ------- ------- Total Member payout............................................... $71,780 $80,767 ======= ======= Components of Member payout: Cash payout: Interest paid to Members....................................... $18,460 $20,627 Cash patronage dividend........................................ 16,142 18,315 ------- ------- Total Member cash payout.......................................... 34,602 38,942 Promissory (subordinated) notes................................... 25,123 32,047 Class B common stock.............................................. 8,645 6,422 Member indebtedness............................................... 3,410 3,356 ------- ------- Total Member payout............................................... $71,780 $80,767 ======= =======
2 CONSOLIDATED BALANCE SHEET
December 28, December 30, 1996 1995 ------------ ------------ (000's omitted) ASSETS Current assets: Cash and cash equivalents .................................... $ 1,662 $ 22,473 Accounts and notes receivable ................................ 307,205 287,888 Inventories .................................................. 347,554 315,311 Prepaid expenses ............................................. 13,517 11,180 -------- -------- Total current assets ........................................ 669,938 636,852 Properties owned, less accumulated depreciation ................. 167,331 165,683 Properties under capital leases, less accumulated amortization .. 3,680 5,393 Other assets..................................................... 13,036 11,648 -------- -------- Total assets ................................................ $853,985 $819,576 ======== ======== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable ............................................. $287,291 $297,884 Accrued expenses ............................................. 51,149 53,363 Short-term borrowings ........................................ 70,594 2,657 Current maturities of notes, long-term debt and lease obligations ................................................. 43,458 61,634 Patronage dividend payable in cash ........................... 16,142 18,315 -------- -------- Total current liabilities ................................... 468,634 433,853 Long-term debt .................................................. 77,680 75,449 Obligations under capital leases ................................ 2,465 3,764 Capitalization: Promissory (subordinated) and instalment notes ............... 185,366 186,335 Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 48,480 and 52,710 shares) .................................. 4,876 5,294 Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,043,521 and 1,055,700 shares; issuable as partial payment of patronage dividends, 84,194 and 62,005 shares) .. 114,053 113,062 Retained earnings ............................................ 1,751 2,661 -------- -------- 306,046 307,352 Foreign currency translation adjustment ...................... (840) (842) -------- -------- Total capitalization ........................................ 305,206 306,510 -------- -------- Total liabilities and capitalization ........................ $853,985 $819,576 ======== ========
See Notes to Consolidated Financial Statements. 3 CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Revenues ................................. $2,441,707 $2,437,002 $2,574,445 ------------ --------------- ------------ Cost and expenses: Cost of revenues ....................... 2,245,071 2,234,934 2,351,114 Warehouse, general and administrative .. 115,457 114,107 132,759 Interest paid to Members ............... 18,460 20,627 22,894 Other interest expense ................. 10,175 9,298 7,493 Gain on sale of properties owned ....... -- -- (692) Other income, net ...................... (228) (1,177) (604) Income tax expense ..................... 362 176 1,163 ---------- ---------- ---------- 2,389,297 2,377,965 2,514,127 ---------- ---------- ---------- Net margins .............................. $ 52,410 $ 59,037 $ 60,318 ========== ========== ==========
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Operating activities: Net margins ............................................ $ 52,410 $ 59,037 $ 60,318 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization ........................ 20,561 20,706 21,613 Provision for losses on accounts and notes receivable ......................................... 3,201 3,741 4,233 Changes in operating assets and liabilities: Accounts and notes receivable ...................... (38,581) (13,921) (33,112) Inventories ........................................ (32,243) 69,436 (49,145) Accounts payable ................................... (10,593) (36,584) 79,957 Accrued expenses ................................... (2,563) 7,552 6,022 Other adjustments, net ............................. (1,801) (3,327) (1,223) -------- -------- -------- Net cash and cash equivalents provided by (used for) operating activities .................. (9,609) 106,640 88,663 -------- -------- -------- Investing activities: Additions to properties owned .......................... (23,530) (24,904) (21,427) Proceeds from sale of properties owned ................. 3,151 5,022 2,174 Changes in other assets ................................ (1,388) 617 1,132 -------- --------- --------- Net cash and cash equivalents (used for) investing activities ............................. (21,767) (19,265) (18,121) -------- --------- --------- Financing activities: Payment of annual patronage dividend ................... (18,315) (18,383) (16,614) Payment of notes, long-term debt and lease obligations .......................................... (40,271) (43,106) (39,632) Proceeds from long-term borrowings ..................... 1,693 3,000 -- Increase (decrease) in short-term borrowings ........... 67,937 (6,672) (13,851) Purchase of common stock .............................. (660) (1,740) (216) Proceeds from sale of Class A common stock ............. 181 168 288 -------- --------- --------- Net cash and cash equivalents provided by (used for) financing activities ............................. 10,565 (66,733) (70,025) -------- --------- --------- Net increase (decrease) in cash and cash equivalents ....................................... (20,811) 20,642 517 -------- --------- --------- Cash and cash equivalents at beginning of year ............ 22,473 1,831 1,314 -------- --------- --------- Cash and cash equivalents at end of year .................. $ 1,662 $22,473 $1,831 ======== ========= =========
See Notes to Consolidated Financial Statements. 4 CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS For the Three Years Ended December 28, 1996
Common Stock, $100 Par Value --------------------------------------- Class A Class B ---------------------- --------------- Issued Foreign and Currency to be Retained Translation Issued Subscribed Issued Earnings Adjustment ---------- ---------- --------------- -------- ----------- (000's omitted) Balances at January 1, 1994 .... $6,588 $ 45 $110,773 $ 3,867 $(670) Net margins ................... 60,318 Foreign currency translation adjustment ................... (245) Patronage dividend ............ 10,829 (60,421) Stock issued for paid-up subscriptions ................ 275 (275) Stock subscriptions ........... 265 Stock purchased and retired ... (528) (4,939) -------- -------- ----------- ------- ------- Balances at December 31, 1994 .. 6,335 35 116,663 3,764 (915) Net margins ................... 59,037 Foreign currency translation adjustment ................... 73 Patronage dividend ............ 6,422 (60,140) Stock issued for paid-up subscriptions ................ 168 (168) Stock subscriptions ........... 156 Stock purchased and retired ... (1,232) (10,023) -------- -------- ----------- ------- ------- Balances at December 30, 1995 .. 5,271 23 113,062 2,661 (842) Net margins ................... 52,410 Foreign currency translation adjustment ................... 2 Patronage dividend ............ 8,645 (53,320) Stock issued for paid-up subscriptions ................ 184 (184) Stock subscriptions ........... 189 Stock purchased and retired ... (607) (7,654) -------- -------- ----------- ------- ------- Balances at December 28, 1996 .. $4,848 $28 $114,053 $1,751 $(840) ======== ======== =========== ======= =======
Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 28, 1996, December 30, 1995 and December 31, 1994 and $14,000 at January 1, 1994 (for 290, 240, 360 and 590 shares subscribed, respectively). See Notes to Consolidated Financial Statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. All members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each member. In accordance with the Company's By-laws, the annual patronage dividend is paid to Members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. On December 9, 1996, the Boards of Directors of the Company and ServiStar Coast to Coast Corporation agreed to merge the two companies. ServiStar Coast to Coast is a $1,700,000,000 hardware wholesaler with a strong presence in retail lumber and building materials. The transaction is subject to customary closing conditions, including approval by the stockholders of both companies, and is expected to be completed on July 1, 1997. Following completion of the merger, the Company will be renamed TruServ Corporation. The significant accounting policies of the Company are summarized below: Consolidation The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. On January 13, 1995, the Company agreed to the sale of certain inventory of its V&S Variety division to a national wholesaler who agreed to supply the majority of the V&S Stores. Also, on January 31, 1995, the Company sold certain assets of its outdoor power equipment manufacturing division to a nationally recognized company and secured a favorable supply agreement for such equipment. These transactions did not have a material impact on the Company's results of operation or financial position. Capitalization The Company's capital (Capitalization) is derived from Class A voting common stock and retained earnings, together with promissory (subordinated) notes and Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes and $100 par value Class B common stock. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories Inventories are stated at the lower of cost, determined on the `first-in, first-out' basis, or market. Properties Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements - 10 to 40 years; machinery and warehouse, office and computer equipment - 5 to 10 years; transportation equipment - 3 to 7 years; and leasehold improvements - the life of the lease without regard to options for renewal. Revenue Recognition The Company recognizes revenue when merchandise is shipped or services are rendered. Retirement plans The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contribution plans are based on collectively bargained rates times hours worked. The Company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reporting year The Company's reporting year-end is the Saturday closest to December 31. 2. INVENTORIES
Inventories consisted of: December 28, December 30, 1996 1995 -------------- -------------- (000's omitted) Manufacturing inventories: Raw materials ........... $ 2,797 $ 2,139 Work-in-process and finished goods ......... 24,558 19,407 -------- -------- 27,355 21,546 Merchandise inventories .. 320,199 293,765 -------- -------- $347,554 $315,311 ======== ========
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. PROPERTIES Properties owned or leased under capital leases consisted of:
December 28, December 30, 1996 1995 -------------- -------------- Owned Leased Owned Leased ------ ------ ------ ------ (000's omitted) Buildings and improvements ...................... $179,206 $ -- $173,568 $ -- Machinery and warehouse equipment ............... 61,183 -- 60,197 -- Office and computer equipment ................... 74,065 -- 77,340 -- Transportation equipment ........................ 16,561 11,202 21,076 11,454 -------- ------ -------- ------ 331,015 11,202 332,181 11,454 Less accumulated depreciation and amortization .. 175,730 7,522 178,793 6,061 -------- ------ -------- ------ 155,285 3,680 153,388 5,393 Land ............................................ 12,046 -- 12,295 -- -------- ------ -------- ------ $167,331 $3,680 $165,683 $5,393 ======== ====== ======== ======
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of: December 28, December 30, 1996 1995 ------------ ----------- (000's omitted) Senior note at 8.60% ................................ $47,000 $49,000 Term loans: 5.97% ............................................. 2,437 3,000 Variable (7.33% and 7.60%, respectively) .......... 6,200 6,200 Canadian prime at 7.50% ........................... -- 3,665 Redeemable (subordinated) term notes: Fixed Interest rates ranging from 6.85% to 7.61% .. 26,683 16,697 Industrial Revenue Bonds (5.28%) .................... 4,000 4,000 ------- ------- 86,320 82,562 Less amounts due within one year .................... 8,640 7,113 ------- ------- $77,680 $75,449 ======= =======
Principal payments for the 8.60% senior note are due quarterly in incrementally increasing amounts through maturity in 2007. Principal payments for the 5.97% term loan are due quarterly beginning in 1996 through maturity in 1999. Payment for the variable term loan is due in 1999. The redeemable (subordinated) term notes have two to four year terms and are issued in exchange for promissory (subordinated) notes that were held by promissory note holders, who do not own the Company's Class A Common Stock. Also, effective October 1, 1996 the term notes were opened for purchase by investors that are affiliated with the Company. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at the option of either the Company or the bondholders at each interest reset date through maturity in 2003. Total maturities of long-term debt for fiscal years 1997, 1998, 1999, 2000, 2001 and thereafter are $8,640,000 $16,481,000, $11,374,000, $13,825,000, $4,000,000 and $32,000,000, respectively. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The borrowings under these agreements were $70,594,000 at December 28,1996 and were at a weighted average interest rate of 5.5%. At December 30, 1995, the Company's Canadian subsidiaries had short- term borrowings at an interest rate of 7.5%. The Company is required to meet certain financial ratios and covenants pertaining to certain debt arrangements. 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouses, office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under long-term non-cancelable leases, together with the present value of the net minimum lease payments, as of December 28, 1996:
Capital Operating ------- --------- (000's omitted) Fiscal years - ------------ 1997 ....................................... $1,433 $ 9,662 1998 ....................................... 1,144 8,439 1999 ....................................... 809 6,898 2000 ....................................... 296 6,114 2001 ....................................... 184 5,504 Thereafter ................................. 108 45,651 ------ ------- Net minimum lease payments ................... 3,974 $82,268 ======= Less amount representing interest ............ 145 ------- Present value of net minimum lease payments .. 3,829 Less amounts due within one year ............. 1,364 ------ $2,465 ======
Capital leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value which is related to the lessor's book value at expiration of the lease term.
Rent expense under operating leases was as follows: For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Minimum rent ...................................... $14,476 $ 9,553 $8,487 Contingent rent ................................... 495 510 611 ------- ------- ------ $14,971 $10,063 $9,098 ======= ======= ======
6. CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of: December 28, December 30, 1996 1995 ------------ ------------ (000's omitted) Promissory (subordinated) notes - Due on December 31, 1996--6.00% ......................... $ -- $ 23,588 Due on December 31, 1996--9.50% ......................... -- 27,029 Due on December 31, 1997-10.00% ......................... 16,037 16,660 Due on December 31, 1997--7.87% ......................... 14,832 15,616 Due on December 31, 1998--7.47% ......................... 14,886 16,461 Due on December 31, 1998--8.00% ......................... 25,684 27,048 Due on December 31, 1999--7.86% ......................... 15,349 -- Due on December 31, 1999--8.00% ......................... 24,254 25,470 Due on December 31, 1999--8.20% ......................... 23,431 25,327 Due on December 31, 2000--6.50% ......................... 23,010 23,996 Due on December 31, 2000--7.58%(issued in 1996) ......... 29,315 32,047 Due on December 31, 2001--8.06%(to be issued) ........... 25,123 -- Instalment notes at interest rates of 6.50% to 8.20% with maturities through 2000 ........... 6,899 5,753 -------- -------- 218,820 238,995 Less amounts due within one year ......................... 33,454 52,660 -------- -------- $185,366 $186,335 ======== ========
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The promissory notes are issued principally in payment of the annual patronage dividend. Promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the Company as specified by its Board of Directors. Notes to be issued relate to the patronage dividend which is distributed after the end of the year. Prior experience indicates that the maturities of a significant portion of the notes due within one year are extended, for a three year period, at interest rates substantially equivalent to competitive market rates of comparable instruments. The Company anticipates that this practice will continue. Total maturities of promissory and instalment notes for fiscal years 1997, 1998, 1999, 2000 and 2001 are $33,454,000, $42,690,000, $64,603,000, $52,950,000 and $25,123 ,000, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the uncertainty of the ultimate maturities of the promissory (subordinated) notes, management believes it is impracticable to estimate their fair value. The carrying amounts of the Company's other financial instruments approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the Company's incremental borrowing rate for similar borrowings. 8. INCOME TAXES At December 28, 1996, the Company has alternative minimum tax credit carryforwards of approximately $900,000 which do not expire. The carryforwards are available to offset future federal tax liabilities. Significant components of the Company's deferred tax assets and liabilities as of December 28,1996 resulted primarily from alternative minimum tax credit carryforwards and temporary differences between income tax and financial reporting for depreciation, inventory capitalization, bad debts, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Current: Federal ......... $ -- $ (363) $ 486 State ........... 237 379 462 Foreign ......... 275 273 278 ----- ------ ------ Total current ... 512 289 1,226 ----- ------ ------ Deferred: Federal ......... (147) (145) (147) State ........... (26) (26) (26) Foreign ......... 23 58 110 ----- ------ ------ Total deferred .. (150) (113) ( 63) ----- ------ ------ $ 362 $ 176 $1,163 ===== ====== ======
The Company operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as patronage dividend based on margins from business done with or for Members. The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% in fiscal year 1996, 1995 and 1994 is as follows:
For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Tax at U.S. statutory rate ........................ $18,470 $20,725 $21,518 Effects of: Patronage dividend .............................. (18,662) (21,049) (21,147) State income taxes, net of federal tax benefit .. 137 229 283 Other, net ...................................... 417 271 509 ------- ------- ------- $ 362 $ 176 $ 1,163 ======= ======= =======
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. CASH FLOW The Company's non-cash financing and investing activities in fiscal year 1996 and 1995 include acquisition of transportation equipment by entering into capital leases and the acquisition of property for resale. These transactions aggregate $178,000 and $4,008,000 in fiscal years 1996 and 1995, respectively. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to non-cash operating and financing activities are as follows:
For the Year Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Patronage dividend payable in cash .. $16,142 $18,315 $18,383 Promissory (subordinated) notes ..... 15,354 23,536 23,213 Class B nonvoting common stock ...... 1,248 (2,592) 5,900 Instalment notes .................... 4,605 5,972 3,058 Member indebtedness ................. 15,971 14,909 9,867 ------- ------- ------- $53,320 $60,140 $60,421 ======= ======= ======= Note renewals ....................... $27,938 $23,974 $26,191 ======= ======= =======
Cash paid for interest during fiscal years 1996, 1995 and 1994 totaled $28,694,000, $29,624,000 and $30,583,000, respectively. Cash paid for income taxes during fiscal years 1996, 1995 and 1994 totaled $694,000, $1,012,000 and $1,709,000, respectively. 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
For the Years Ended ------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ --------------- ------------ (000's omitted) Income: Actual return (loss) on plan assets .................... $13,007 $25,564 $ (1,543) Amortization of excess plan assets ..................... 914 914 920 ------- ------- -------- 13,921 26,478 (623) ------- ------- -------- Expenses: Service cost-benefits earned during the year ........... 4,851 4,152 4,765 Interest on projected benefit obligation ............... 7,623 7,242 6,736 Deferral of excess (deficiency) of actual over estimated return on plan assets ................ 4,223 18,021 (8,815) ------- ------- -------- 16,697 29,415 2,686 ------- ------- -------- Net pension cost.............................................. $ 2,776 $ 2,937 $ 3,309 ======= ======= ========
11 The discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were respectively, 7.75% and 4.50% in fiscal year 1996, 7.25% and 4.50%, in fiscal year 1995 and 8.50% and 4.50% in fiscal year 1994. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal years 1996 and 1995 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1996, 1995 and 1994, the expected long-term rate of return on assets was 9.50%. During 1995, the Company amended its pension plan, and such amendment had no material impact on the projected benefit obligation or pension expense. During 1996, the Company settled $8,520,000 of pension obligations under it's amended plan that resulted in a reduction of $798,000 in pension expense for fiscal year 1996. Plan assets are composed primarily of corporate equity and debt securities. Benefits are based on years of service and the employee's compensation during the last ten years of employment, offset by a percentage of Social Security retirement benefits. Trusteed net assets and actuarially computed benefit obligations for the Company administered pension plans are presented below:
December 28, December 30, 1996 1995 ------------ ------------ (000's omitted) Assets: Total plan assets at fair value ...................... $107,954 $104,396 ======== ======== Obligations: Accumulated benefit obligations - Vested ............................................ $ 70,593 $ 77,435 Non-vested ........................................ 13,369 10,830 Effect of projected compensation increases ........... 21,015 21,730 -------- -------- Total projected benefit obligations .................. 104,977 109,995 -------- -------- Net excess assets (liabilities): Unrecognized - Unamortized excess assets at original date ........ 6,170 7,673 Net actuarial gain (loss) ......................... 5,702 (3,793) Prior service costs ............................... (3,424) (4,017) Recognized accrued pension cost ...................... (5,471) (5,462) -------- -------- Total net excess assets (liabilities) ................ 2,977 (5,599) -------- -------- Total obligations and net excess assets (liabilities) .. $107,954 $104,396 ======== ========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $641,000, $720,000 and $757,000 for fiscal years 1996, 1995 and 1994, respectively. REPORT OF INDEPENDENT AUDITORS To the Members and the Board of Directors Cotter & Company We have audited the accompanying consolidated balance sheets of Cotter & Company as of December 28, 1996 and December 30, 1995, and the related consolidated statements of operations, cash flows, and capital stock and retained earnings for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cotter & Company at December 28, 1996 and December 30, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois February 10, 1997 12 SELECTED FINANCIAL DATA
For the Fiscal Years --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- --------------- ---------- ---------- (000's omitted) Revenues $2,441,707 $2,437,002 $2,574,445 $2,420,727 $2,356,468 Gross margins $ 196,636 $ 202,068 $ 223,331 $ 217,921 $ 216,608 Net margins $ 52,410 $ 59,037 $ 60,318 $ 57,023 $ 60,629 Total assets $ 853,985 $ 819,576 $ 868,785 $ 803,528 $ 833,372 Member payout: Patronage dividend $ 53,320 $ 60,140 $ 60,421 $ 54,440 $ 60,901 Interest paid to Members 18,460 20,627 22,894 24,458 25,716 ---------- ---------- ---------- ---------- ---------- $ 71,780 $ 80,767 $ 83,315 $ 78,898 $ 86,617 ---------- ---------- ---------- ---------- ---------- Member cash payout: Patronage dividend in cash $ 16,142 $ 18,315 $ 18,383 $ 16,614 $ 18,570 Interest paid to Members 18,460 20,627 22,894 24,458 25,716 ---------- ---------- ---------- ---------- ---------- $ 34,602 $ 38,942 $ 41,277 $ 41,072 $ 44,286 ---------- ---------- ---------- ---------- ---------- Member investment: Promissory (subordinated) and instalment notes $ 185,366 $ 186,335 $ 199,099 $ 217,996 $ 235,695 Class A common stock 4,876 5,294 6,370 6,633 6,857 Class B common stock 114,053 113,062 116,663 110,773 108,982 ---------- ---------- ---------- ---------- ---------- $ 304,295 $ 304,691 $ 322,132 $ 335,402 $ 351,534 ========== ========== ========== ========== ==========
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