-----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, QKh8f5ueKkKn3e0XOwr7bMJY0euG0EqYlv9P7YPhpyyOVDwIuqbPJw1vQMEh7oow kGVEf4gIAqfutTd2i9RZtg== 0000950137-97-001176.txt : 19970328 0000950137-97-001176.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950137-97-001176 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTTER & CO CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 002-20910 FILM NUMBER: 97564905 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 10-K405 1 ANNUAL REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO ------------------------ COMMISSION FILE NUMBER 2-20910 COTTER & COMPANY (Exact name of Registrant as specified in its charter)
DELAWARE 36-2099896 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 695-5000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X . NO __. INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. THERE IS NO PUBLIC MARKET FOR REGISTRANT'S CLASS A COMMON STOCK. SUCH SHARES ARE OFFERED BY THE REGISTRANT IN TEN-SHARE UNITS, EXCLUSIVELY TO RETAILERS OF HARDWARE AND RELATED MERCHANDISE, IN CONNECTION WITH BECOMING MEMBERS OF THE COMPANY. SAID STOCK IS LIMITED AS TO TRANSFERABILITY BY ITS TERMS. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT CLASS FEBRUARY 22, 1997 ----- ----------------- CLASS A COMMON STOCK, $100 PAR VALUE................ 48,510 CLASS B COMMON STOCK, $100 PAR VALUE................ 1,116,074
================================================================================ 2 PART I ITEM 1. BUSINESS. Cotter & Company (the "Company") was organized as a Delaware corporation in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. The Company's principal executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505. Its telephone number is (773) 695-5000. The Company is a Member-owned wholesaler of hardware and related merchandise. Historically, it has been the largest cooperative wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. On December 9, 1996, the Boards of Directors of the Company and ServiStar Coast to Coast Corporation ("SCC") agreed to merge the two companies pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). SCC is a $1,700,000,000 hardware wholesaler with a strong presence in retail lumber and building materials. The transaction is subject to customary closing conditions, 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. Membership entitles a Member to use certain Company trademarks and trade names, including the federally registered collective membership trademark indicating membership in "True Value(R) Hardware Stores". The "True Value(R)" collective membership mark has a present expiration date of January 2, 2003. The Company serves approximately 5,300 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan 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 ------------------------ 1996 1995 1994 ------ ------ ------ Hardware Goods................................. 22.4% 22.3% 20.1% Electrical and Plumbing........................ 18.2% 17.7% 15.8% Painting and Cleaning.......................... 14.0% 13.3% 14.4% Farm and Garden................................ 13.8% 13.3% 12.5% Lumber and Building Materials.................. 12.8% 12.7% 12.9% Appliances and Housewares...................... 11.2% 11.7% 10.4% Sporting Goods and Toys........................ 7.6% 9.0% 13.9%
The Company serves its Members by functioning as a low cost distributor of goods and maximizing its volume purchasing abilities, primarily through vendor rebates and discount programs, for the benefit of its Members. These benefits are passed along to its Members in the form of lower prices and/or patronage dividends. The Company has numerous individual agreements or commitments from its suppliers, virtually all of which are terminable by such suppliers without cause. Such provisions, either individually or in the aggregate, have not had any material adverse effect on the Company's ability to conduct its business. The goods and services purchased by the Company from these suppliers are generally available from a wide variety of sources. The Company is not dependent upon any one supplier or group of suppliers and has not experienced a problem in obtaining necessary goods. The Company holds conventions and meetings for its Members in order to keep them better informed as to industry trends and the availability of new merchandise. The Company also provides each of its Members with an illustrated price catalog showing the products available from the Company. The Company's sales to its Members are divided into three categories, as follows: (1) warehouse shipment sales (approximately 49% of total sales); (2) direct shipment sales 1 3 (approximately 41% of total sales); and (3) relay sales (approximately 10% of total sales). Warehouse shipment sales are sales of products purchased, warehoused, and resold by the Company upon orders from the Members. Direct shipment sales are sales of products purchased by the Company but delivered directly to Members from manufacturers. Relay sales are sales of products purchased by the Company in response to the requests of several Members for a product which is not normally held in inventory and is not susceptible to direct shipment. Generally, the Company will give notice to all Members of its intention to purchase products for relay shipment and then purchase only so many of such products as the Members order. When the product shipment arrives at the Company, it is not warehoused; rather, the Company breaks up the shipment and "relays" the appropriate quantities to the Members who placed orders. The Company also manufactures paint and paint applicators. The principal raw materials used by the Company are chemicals including among other ingredients, resins, solvents, coalescent extenders and pigments. All raw materials are purchased from outside sources. There are no minimum/maximum purchase obligations with the vendors and they have the right to terminate their agreements at any time. Currently, there is no shortage, nor is any anticipated, of such raw materials which would materially impact operations. The raw materials purchased by the Company from these vendors are generally available from a variety of sources. The Company is not dependent upon any one supplier and has not experienced a problem in obtaining necessary raw materials. The Company annually sponsors two "markets" (one in the Spring and one in the Fall). In fiscal year 1997, these markets will be held in Atlanta and New Orleans. Members are invited to the markets and generally place substantial orders for delivery during the period prior to the next market. During such markets, new merchandise and seasonal merchandise for the coming season are displayed to attending Members. As of February 22, 1997 and February 24, 1996, the Company had a backlog of firm orders (including relay orders) of approximately $16,000,000 and $23,000,000 respectively. It is anticipated that the entire backlog existing at February 22, 1997 will be filled by April 1, 1997. The Company's backlog at any given time is made up of two principal components: (i) normal resupply orders and (ii) market orders for future delivery. Resupply orders are orders from Members for merchandise to keep inventories at normal levels. Generally, such orders are filled the day following receipt, except that relay orders for future delivery (which are in the nature of resupply orders) are not intended to be filled for several months. Market orders for future delivery are Member orders for new or seasonal merchandise placed at the Company's two markets, for delivery during the several months subsequent to the markets. Thus, the Company will have a relatively high backlog at the end of each market which will diminish in subsequent months until the next market. The retail hardware industry is characterized by intense competition. Independent retail hardware businesses served by the Company continue to face intense competition from chain stores, discount stores, home centers and warehouse operations. Increased operating expenses for the retail stores, including increased costs due to longer open-store hours and higher rental costs of retail space, have cut into operating margins and brought pressures for lower merchandise costs, to which the Company has been responsive through a retail oriented competitive pricing strategy on high turnover, price sensitive items (Pinpoint Pricing program). The trueAdvantage(TM) program was introduced in 1995 to promote higher retail standards in order to build consumer loyalty and create a positive image for all True Value(R) stores. The trueAdvantage(TM) program is a voluntary program developed to help Members meet the wants and needs of the retail customer coming into hardware stores. The program establishes twelve standards to be met for the benefit of the retail customer. Included are state-of-the-art, high-tech standards like in-store computerization and participation in the Cotter Satellite Network as well as various "low-tech" essentials. The benefits of being a trueAdvantage(TM) Member include below market-rate business improvement financing and a 5% year-end discount on increases in their warehouse purchases. Over 1,000 Members have committed to the trueAdvantage(TM) program. The Company competes with other Member-owned and non-member-owned wholesalers as a source of supply and merchandising support for independent retailers. Competitive factors considered by independent retailers in choosing a source of supply include price, service capabilities, promotional support and merchandise selection and quality. Increased operating expenses and decreased margins have resulted in several non-member-owned wholesalers withdrawing from business. 2 4 The Company, through a Canadian subsidiary, owns a majority equity interest in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. This cooperative serves 505 True Value(R) Hardware and V&S(R) Variety Stores, all located in Canada. The cooperative has approximately 325 employees and generated less than 5% of the Company's consolidated revenue in fiscal year 1996. The Company operates several other subsidiaries, most of which are engaged in businesses providing additional services to the Company's Members. In the aggregate, these subsidiaries are not significant to the Company's results of operations. The Company employs approximately 3,500 persons in the United States on a full-time basis. Due to the widespread geographical distribution of the Company's operations, employee relations are governed by the practices prevailing in the particular area and are generally dealt with locally. Approximately 34% of the Company's hourly-wage employees are covered by collective bargaining agreements which are generally effective for periods of three or four years. In general, the Company considers its relationship with its employees to be good. DISTRIBUTION OF PATRONAGE DIVIDENDS The Company operates on a cooperative basis with respect to business done with or for Members. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-Laws and Retail Member Agreement, the annual patronage dividend is paid to Members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Patronage dividends are usually paid to Members within 60 days after the close of the Company's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of the Company's fiscal year, and the Company may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. The Company's By-Laws provide for the payment of year-end patronage dividends, after payment of at least 20% of such patronage dividends in cash, in qualified written notices of allocation including (i) Class B common stock based on book value thereof, to a maximum of 2% of the Member's net purchases of merchandise from the Company for the year (except in unusual circumstances of individual hardships, in which case the Board of Directors reserves the right to make payments in cash), (ii) promissory (subordinated) notes, or (iii) other property. Such promissory (subordinated) notes are for a five year term, bear interest at a fixed rate based on a premium spread above comparable U.S. Treasury notes as approved by the Board of Directors, and are subordinated to all other debt of the Company. The Company may also issue nonqualified written notices of allocation to its Members as part of its annual patronage dividend. See "Payment of Patronage Dividends in Accordance with the Internal Revenue Code." In determining the form of the annual patronage dividend, a Member's required investment in Class B common stock of the Company had been limited by the Board of Directors to an amount in the aggregate not exceeding an amount (computed on the basis of par value thereof and to the nearest multiple of $100) equal to (i) two percent (2%) of a Member's net purchases of direct shipment sales from the Company and purchases of direct shipment sales of 'Competitive Edge Program Lumber' materials computed separately at one percent (1%), (ii) four percent (4%) of a Member's net purchases of relay sales from the Company and (iii) eight percent (8%) of a Member's net warehouse purchases from the Company in the year of the highest total net purchases of the three preceding years. In 1996, the Board of Directors adopted a plan to continue to adequately capitalize the Company. The percentage method described in items (i) through (iii) has been superseded by the Board of Directors' 1996 plan, which plan is set forth in the Merger Agreement. The annual application of the requirements set forth in the Merger Agreement results in the issuance of a number of shares of Class B common stock, the cumulative value of which will not exceed two percent (2%) of the 3 5 Member's net purchases of merchandise from the Company. In that each Member currently has equal voting power (voting rights being limited to Class A common stock), acquisition of Class B common stock as patronage dividends generally results in the larger-volume Members having greater common stock equity in the Company but a lesser proportionate voting power per dollar of common stock owned than smaller-volume Members. See the Merger Agreement for the amounts of Class B common stock a Member is required to acquire through his or her patronage dividend. The indicated percentages are multiplied by the Member's purchase levels of the merchandise categories set forth in the Merger Agreement. The amount of such required investment is determined by majority vote of the Board of Directors, and may be increased or decreased by such vote. The basis for determining the necessity of an increase or decrease is through evaluation of the financial needs of the Company, keeping in mind the needs of the membership. The consideration and method of payment for such shares is by way of the required amount being calculated as part of the annual patronage dividend distribution amount. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as the Company) and their patrons (such as the Company's Members) so as to ensure that the business earnings of cooperatives are currently taxable either to the cooperatives or to the patrons. The shares of Class B common stock, the promissory (subordinated) notes and other written notices, which disclose to the recipient the stated amount allocated to him by the Company and the portion thereof which is a patronage dividend, distributed by the Company to its Members are "written notices of allocation" within the meaning of that phrase as used in the Code. For such written notices to be "qualified written notices of allocation" within the meaning of the Code, it is necessary that the Company pay 20% or more of the annual patronage dividend in cash and that the Members consent to having the allocations (at their stated dollar amount) treated as being constructively received by them and includable in their gross income. Such written notices that do not meet these requirements are "nonqualified written notices of allocation" within the meaning of the Code. Cash, qualified written notices, and other property (except nonqualified written notices of allocation) are currently deducted from earnings in determining the taxable income of the Company and, accordingly such qualified written notices of allocation are includable in gross income of the patron (Member). Section 1385(a) of the Code provides, in substance, that the amount of any patronage dividend which is paid in cash, qualified written notices of allocation or other property (except nonqualified written notices of allocation) shall be included in the gross income of the patron (Member) for the taxable year in which it receives such cash or such qualified written notices of allocation. In general, with respect to nonqualified written notices of allocation, no amounts are deductible by the Company or includible in gross income of the patron (Member) until redeemed by the Company. Thus, every year each Member may receive, as part of the Member's patronage dividend, non-cash "qualified written notices of allocation", which may include Class B common stock or promissory (subordinated) notes, the stated dollar amount of which must be recognized as gross income for the taxable year in which received. The portion of the patronage dividend paid in cash (at least 20%) may be insufficient, depending on the tax bracket in each Member's case, to provide funds for the payment of income taxes for which the Member will be liable as a result of the receipt of the entire patronage dividend, including cash, Class B common stock and promissory (subordinated) notes. In response to the provisions of the Code, the Company's By-Laws provide for the treatment of the shares of Class B common stock, promissory (subordinated) notes and such other notices as the Board of Directors may determine, distributed in payment of patronage dividends as "qualified written notices of allocation." The By-Laws provide in effect: (i) for payment of patronage dividends partly in cash, partly in qualified written notices of allocation (including the Class B common stock and promissory (subordinated) notes as described above), other property or in nonqualified written notices of allocation, and 4 6 (ii) that membership in the organization (i.e. the status of being a Member of the Company) shall constitute consent by the Member to take the qualified written notices of allocation or other property into account in the Member's gross income as provided in Section 1385(a) of the Code. Under the provisions of the Code, persons who become or became Members of the Company or who retained their status as Members after adoption of the By-Laws providing that membership in the organization constitutes consent, and after receiving written notification and a copy of the By-Laws are deemed to have consented to the tax treatment of the cash and the qualified written notices of allocation in which the patronage dividends are paid, in accordance with Section 1385(a) of the Code. Written notification of the adoption of the By-Laws and its significance, and a copy of the By-Laws, were sent to each then existing Member and have been, and will continue to be, delivered to each party that became, or becomes a Member thereafter. Such consent is then effective except as to patronage occurring after the distributee ceases to be a Member of the organization or after the By-Laws of the organization cease to contain the provision with respect to the above described consent. Such consent may be revoked by the Member only by terminating its membership in the Company in the manner provided in its Retail Member Agreement. Each year since 1978, the Company has paid its Members 30% of the annual patronage dividend in cash in respect to patronage (excluding nonqualified written notices of allocation) occurring in the preceding year. It is the judgment of management that the payment of 30% or more of patronage dividends in cash will not have a material adverse effect on the operations of the Company or its ability to maintain adequate working capital for the normal requirements of its business. However, the Company is obligated to distribute only 20% of the annual patronage dividend (excluding nonqualified written notices of allocation) in cash and it may distribute this lesser percentage in future years. MERGER At the Company's Annual Meeting, holders of Class A common stock will be asked to consider and vote upon a proposal to approve the Merger Agreement, including the issuance of the shares of common stock pursuant to the Merger Agreement, amendment and restatement of the Certificate of Incorporation as set forth in the Merger Agreement, ratification of revised By-Laws for TruServ Corporation ("TruServ"), and ratification of the revised form of the Retail Member Agreement as set forth in the Merger Agreement. The Amended and Restated Certificate of Incorporation will, among other things, increase the number of authorized shares of Class A common stock to 750,000 shares and the number of Class B common stock to 4,000,000 shares, eliminate cumulative voting, eliminate the requirement that all stockholders own the same number of shares of Class A common stock and change the name of the Company to TruServ. At the same meeting, holders of Class B common stock will be asked to consider and vote upon approving the increase in the number of authorized shares of Class B common stock to 4,000,000 shares. By approving the Merger, Members will be voting to increase their investment in TruServ with respect to the same retail stores for which they have already made their existing investment. Votes Required; Record Date. Approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the Company's outstanding shares of Class A common stock. Holders of Class A common stock are entitled to one vote per share on all matters. Approval of the proposal to increase the maximum authorized amount of Class B common stock requires the affirmative vote of the holders of a majority of the outstanding shares of Class B common stock. Holders of Class B common stock are entitled to one vote per share on such proposal. Only holders of the Company's Stock at the close of business on February 10, 1997 (the "Record Date") are entitled to notice of and to vote at the Company's Annual Meeting. Conversion of Securities. Upon consummation of the transactions contemplated by the Merger Agreement, (i) SCC will be merged with and into the Company, with the Company being the surviving corporation (and thereafter known as TruServ Corporation), and (ii) each outstanding share of SCC common stock and SCC Series A stock (excluding those shares thereof canceled pursuant to Article III of the Merger Agreement) will be converted into the right to receive one fully paid and non-assessable share of TruServ Class A common stock and each two outstanding shares of SCC preferred stock will be converted into the 5 7 right to receive one fully paid and non-assessable share of TruServ Class B common stock. No fractional shares of TruServ stock will be issued in connection with such exchange. Cash will be delivered in lieu of fractional or canceled shares. Based on the number of shares of SCC stock outstanding on the SCC record date, it is expected that approximately 262,348 and 1,083,752 shares of TruServ Class A common stock and Class B common stock, respectively, will be issued in connection with the Merger. It is anticipated that an additional approximately 250,000 shares of TruServ Class A common stock will be purchased by those pre- Merger stockholders of the Company to satisfy the new Class A common stock ownership requirement applicable to such Members as contemplated by the Merger Agreement. Retail Member Agreement. After the Effective Time of the Merger, all the Company's Members, and those SCC Members who voted in favor of the Merger Agreement, will be governed by the form of Retail Member Agreement attached to the Merger Agreement as Exhibit 3.8. Such Retail Member Agreement is an amendment and restatement of the existing Retail Member Agreement. All the Company stockholders, regardless of their vote for or against the Merger or their abstention from such vote, will be deemed to be bound by the agreement, as amended. A vote to approve the Merger Agreement by an SCC Member will be deemed to constitute that Member's agreement to accept and be bound by the terms of the Retail Member Agreement, in cancelation and replacement of such SCC Member's existing Retailers/Distributors Agreement(s) with SCC. The Hardware/Lumber Operations of such Member will after the Effective Time be conducted as part of the cooperative activities of TruServ and be governed by the Certificate of Incorporation, By-Laws and Retail Member Agreement of TruServ as in effect from time to time. The SCC Membership Agreement of each SCC Member voting against the Merger, or abstaining with respect thereto, together with any related license or franchise agreements, shall be assigned by SCC to TruServ without further action, subject to any terminations and replacements as may be agreed upon between each such SCC Member and TruServ. Whether or not an individual Member votes for, against or abstains from the Merger, if the Merger is approved by the requisite vote of SCC and the Company's Members, going forward all Members will belong to and be a part of TruServ, sharing in the benefits and advantages of membership in the new cooperative. The TruServ Class A common shares received by SCC Members as a result of the Merger will satisfy applicable Class A common stock ownership requirements for such Members. As members of TruServ, all Members will be bound by TruServ's By-Law consent provision. 6 8 ITEM 2. PROPERTIES. The Company's national headquarters is located in Chicago, Illinois. Information with respect to the Company's owned and leased warehousing and office facilities is set forth below:
SQUARE FEET OF LEASE WAREHOUSE AND EXPIRATION LOCATION OFFICE AREA INTEREST DATE -------- -------------- -------- ---------- Chicago, Illinois............................. 980,000 Owned Chicago, Illinois............................. 175,000 Leased December 31, 2010 Chicago, Illinois............................. 83,000 Leased October 31, 2000 Corsicana, Texas.............................. 450,000 Owned Denver, Colorado.............................. 360,000 Leased June 30, 2004 Fogelsville (Allentown), Pennsylvania......... 600,000 Owned Harvard, Illinois............................. 750,000 Owned Harvard, Illinois............................. 720,000 Owned Henderson, North Carolina..................... 300,000 Owned Indianapolis, Indiana......................... 420,000 Owned Jonesboro (Atlanta), Georgia.................. 360,000 Owned Kansas City, Missouri......................... 415,000 Owned Kingman, Arizona.............................. 375,000 Owned Manchester, New Hampshire..................... 525,000 Owned Mankato, Minnesota............................ 320,000 Owned Ocala, Florida................................ 375,000 Owned Peachtree City, Georgia....................... 60,500 Leased November 24, 2005 Portland, Oregon.............................. 405,000 Owned Westlake (Cleveland), Ohio.................... 405,000 Owned Winnipeg, Manitoba............................ 432,000 Owned Woodland, California.......................... 350,000 Owned
No location owned by the Company is subject to a mortgage. In December 1983, the Company completed construction of a 150,000 square foot addition to its regional distribution center in Manchester, New Hampshire. This addition was financed with the proceeds from the sale of $4,000,000 State of New Hampshire Industrial Development Authority Revenue Bonds (Cotter & Company Project) Series 1982. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at either the option of the Company or the bondholders at each interest reset date through maturity in 2003. In August 1995, the Company closed, but is currently sub-leasing, a portion of the 720,000 square foot Harvard, Illinois facility formerly used to manufacture outdoor power equipment. In 1996, the Company closed the 980,000 square foot Chicago, Illinois facility formerly used as the Company's national headquarters. The facility is available for sale. Information with respect to the Company's manufacturing facilities is set forth below:
SQUARE FEET OF MANUFACTURING PRINCIPAL LOCATION AREA PRODUCT INTEREST -------- -------------- --------- -------- Chicago, Illinois............................. 105,000 Paint Owned Cary, Illinois................................ 580,000 Paint and Owned Paint Applicators
7 9 The Company's facilities are suitable for their respective uses and are, in general, adequate for the Company's present needs. The Company owns and leases transportation equipment for use at its regional distribution centers for the primary purpose of delivering merchandise from the Company's regional distribution centers to its Members. Additional information concerning these leases can be found in Notes 3 and 5 to the consolidated financial statements included elsewhere herein. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no existing market for the common stock of the Company and there is no expectation that any market will develop. The Company's Class A common stock is owned almost exclusively by retailers of hardware and related products each of whom is a Member of the Company and purchases ten shares (which number will increase to 60 after consummation of the Merger described in Item 1 above) of the Company's Class A common stock (the only class of voting stock) upon becoming a Member. The Company is organized as a Delaware stock corporation and operates as a Member-owned wholesaler cooperative corporation. The shares of the Company's Class B common stock now outstanding were issued to Members in partial payment of the annual patronage dividend to which they became entitled as a result of patronage business done by such Members with the Company. In accordance with the Company's By-Laws, the annual patronage dividend is paid to Members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. The number of holders of record (as of February 22, 1997) of each class of stock of the Company is as follows:
NUMBER OF HOLDERS OF RECORD TITLE OF CLASS ---------- Class A common stock, $100 Par Value........................ 4,851 Class B common stock, $100 Par Value........................ 4,771
Dividends (other than patronage dividends) on the Class A common stock and Class B common stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of the Company, other than gross margins from operations with or for Members and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the common stock, subject to the provisions of the Certificate of Incorporation. Other than the payment of patronage dividends, including the redemption of all nonqualified written notices of allocation, the Company has not paid dividends on its Class A common stock or Class B common stock. The Board of Directors does not plan to pay dividends on either class of common stock. See the discussion of patronage dividends under Item 1--Business. 8 10 ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues........................... $2,441,707 $2,437,002 $2,574,445 $2,420,727 $2,356,468 Gross margins...................... $ 196,636 $ 202,068 $ 223,331 $ 217,921 $ 216,608 Net margins........................ $ 52,410 $ 59,037 $ 60,318 $ 57,023 $ 60,629 Patronage dividends................ $ 53,320 $ 60,140 $ 60,421 $ 54,440 $ 60,901 Total assets....................... $ 853,985 $ 819,576 $ 868,785 $ 803,528 $ 833,372 Long-term debt and obligations under capital leases............. $ 80,145 $ 79,213 $ 75,756 $ 69,201 $ 72,749 Promissory (subordinated) and instalment notes payable......... $ 185,366 $ 186,335 $ 199,099 $ 217,996 $ 235,695 Class A common stock............... $ 4,876 $ 5,294 $ 6,370 $ 6,633 $ 6,857 Class B common stock............... $ 114,053 $ 113,062 $ 116,663 $ 110,773 $ 108,982 Book value per share of Class A common stock and Class B common stock(a)......................... $ 101.89 $ 102.68 $ 103.57 $ 103.85 $ 101.42
- --------------- (a) The book value per share of the Company's Class A common stock and Class B common stock is the value, determined in accordance with generally accepted accounting principles, of such shares as shown by the respective year-end consolidated balance sheets of the Company, included elsewhere herein as reported on by the Company's independent auditors, after eliminating therefrom all value for goodwill, and other intangible assets and any retained earnings specifically appropriated by the Company's Board of Directors. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 In fiscal year 1996, the Company's revenues were $2,441,707,000, an increase of 0.2% from fiscal year 1995. Current year revenues were influenced by the 1995 phase-out of the V&S(R) Variety and General Power Equipment divisions. Comparable store revenues increased 4.4% due to improved Member participation. Fiscal year 1996 revenue increases were concentrated in the core merchandise categories of Electrical and Plumbing, up 4.0%, Painting and Cleaning, up 5.0%, Farm and Garden, up 3.8% and Lumber and Building Materials, up 2.4%. Additionally, the Company continued to pursue business opportunities such as International and trueAdvantage, which both increased 14.2%. Also, the Company further expanded the Pinpoint Pricing program to further reduce the selling price of many core hardware and related products. Overall gross margins, as a percent of revenues, decreased for the fifth year in a row to 8.1% from 8.3% in fiscal year 1995. The reduction in gross margin was the result of a more competitive pricing strategy, which included the expanded Pinpoint Pricing program that resulted in a $7,100,000 price reduction to the Members. Other strategies, predominantly the trueAdvantage program, returned an additional $2,000,000 to the Members. Warehouse, general and administrative expenses increased slightly compared to the prior year but as a percent of revenues remained comparable at 4.7% with the prior year, due to management's continued effort 9 11 to control operating expense and an expense recovery associated with prior years' favorable risk loss experience. Certain estimates of warehouse, general and administrative expenses are recorded throughout the year including expenses related to incurred but not reported healthcare claims, premiums for comprehensive insurance, capitalizable inventory related costs and other expense items. During the fourth quarter of fiscal 1996, the Company recorded approximately $11 million of net reductions in warehouse, general and administrative expenses relating to the refinement of these estimates recorded in the prior three quarters, a refund of insurance premiums of approximately $7 million and cost recoveries from manufacturers of approximately $5 million related to the Fall market. Interest paid to Members decreased by $2,167,000 or 10.5% primarily due to a lower principal balance and lower average interest rates. Other interest expense increased by $877,000 or 9.4% compared to last year primarily due to higher short-term borrowings partially offset by a lower average interest rate. Net margins were $52,410,000 for the year ended December 28, 1996 compared to $59,037,000 for the year ended December 30, 1995. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 In fiscal year 1995, the Company's revenues were $2,437,002,000, a decrease of 5.3% from fiscal year 1994. This decrease was attributable to the phase-out of the V&S(R) Variety division and the sale of the General Power Equipment manufacturing division. Comparable sales categories were flat with the prior year due to the soft economy and unusual weather in the United States, combined with the declining sales in Mexico. In addition, the Company expanded the Pinpoint Pricing program which reduced the selling price of many core hardware and related products. Overall merchandise gross margins, as a percentage of revenues, decreased for the fourth year in a row. This reduction in gross margin percentage was the result of an expanded Pinpoint Pricing program and the 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 Company term note program. Net margins were $59,037,000 for the year ended December 30, 1995 compared to $60,318,000 for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased from $22,473,000 at December 30, 1995, to $1,662,000 at December 28, 1996. This decrease was primarily due to cash flow used for operating activities. Cash used for operating activities was $9,609,000 for the year ended December 28, 1996 compared to cash flow provided by operating activities of $106,640,000 for the year ended December 30, 1995. The decrease in cash flow from operating activities resulted from increased inventory levels to better service the needs of Members with expanded inventory selection and improved service levels. Inventory levels increased by $32,243,000 in fiscal year 1996 compared to a $69,436,000 decrease in fiscal year 1995. Additionally, accounts and notes receivables used cash flow from operating activities of $38,581,000 due to seasonal payment terms extended to Members. Cash flows of $21,767,000 used for investing activities increased slightly from the previous fiscal year. These uses of cash flows were funded by financing activities which provided cash flow of $10,565,000 in fiscal year 1996. 10 12 At December 28, 1996, net working capital decreased slightly to $201,304,000 from $202,999,000 at December 30, 1995. The current ratio decreased to 1.43 at December 28, 1996 from 1.47 at December 30, 1995. The Company has established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The Company pays commitment fees for these lines. The borrowings under these agreements were $70,594,000 at December 28, 1996 and $2,657,000 at December 30, 1995. In addition, the Company has a private shelf agreement with available borrowings up to $50,000,000. The Company's capital is primarily derived from Class A common stock and retained earnings, together with promissory (subordinated) notes and nonvoting Class B common stock issued in connection with the Company's annual patronage dividend. Funds derived from these capital resources are usually sufficient to satisfy long-term capital needs. Total capital expenditures, including those made under capital leases, were $23,708,000 in fiscal year 1996 compared to $28,912,000 in fiscal year 1995 and $21,427,000 in fiscal year 1994. These capital expenditures were principally related to additional equipment and technological improvements at the regional distribution centers and national headquarters. Funding of capital expenditures in fiscal year 1997 is anticipated to come from operations and external sources if necessary. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements and report of independent auditors are listed on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company are:
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- -------------------- Karen M. Agnew...................... 54 Vice President since February, 1992. Director of National Headquarters Support from July, 1991 to February, 1992. Joe W. Blagg........................ 47 Director since April, 1996. Term for the Company expires April, 1999. Selected for the TruServ Board. Term expires April, 1998. Daniel T. Burns..................... 46 Vice President and General Counsel since November, 1990 and Secretary since February, 1995. Danny R. Burton..................... 50 Vice President Retail Development since May, 1992. William M. Claypool, III............ 74 Director since March, 1970. Term for the Company expires April, 1997. Selected for the TruServ Board. Term expires April, 2000. Samuel D. Costa, Jr. ............... 55 Director since July, 1988. Term for the Company expires April, 1999. Daniel A. Cotter.................... 62 President and Chief Executive Officer since January, 1983 and Director since September, 1989. Term for the Company expires April, 1999. Selected for the TruServ Board. Term expires April, 1998. Leonard C. Farr..................... 75 Director since March, 1972. Term for the Company expires April, 1999. William M. Halterman................ 49 Director since June, 1990. Term for the Company expires April, 1998. Selected for the TruServ Board. Term expires April, 1999.
11 13 Robert F. Johnson................... 53 Vice President since January, 1994. Director of Corporate Planning and Information Services from March, 1992 to January, 1994. Jerrald T. Kabelin.................. 59 Director since April, 1985. Term for the Company expires April, 1997. Selected for the TruServ Board. Term expires April, 1999. Kerry J. Kirby...................... 50 Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) since November, 1990. Charles L. Kremers.................. 46 Vice President since April, 1995. Director of Marketing from February, 1994 to April, 1995. Prior position was a Vice President of Advertising and Sales Promotions for a retail computer company. Robert J. Ladner.................... 50 Director since April, 1994. Term for the Company expires April, 1997. Chairman of the Board for the Company since April, 1996. Selected for the TruServ Board. Term expires April, 1999. Robert M. Liebgott.................. 46 Appointed Vice President in December, 1996. Prior position was Vice President of Merchandising and Advertising of a hardware industry corporation. John F. Lottes, III................. 56 Director since April, 1996. Term for the Company expires in April, 1997. Lewis W. Moore...................... 84 Director since June, 1948. Term for the Company expires April, 1997. Kenneth M. Noble.................... 39 Director since April, 1995. Term for the Company expires April, 1998. Robert Ostrov....................... 47 Appointed Senior Vice President in February, 1997. Prior position was Vice President of Human Resources and Benefits Organization for a retail company. Richard L. Schaefer................. 67 Director since May, 1976. Term for the Company expires April, 1998. John P. Semkus...................... 50 Vice President Distribution and Transportation since June, 1988. George V. Sheffer................... 44 Director since July, 1994. Term for the Company expires April, 1998. Selected for the TruServ Board. Term expires April, 2000. Dennis A. Swanson................... 57 Director since April, 1995. Term for the Company expires April, 1999. Selected for the TruServ Board. Term expires April, 1998. John M. West, Jr.................... 44 Director since October, 1991. Term for the Company expires April, 1998. Selected for the TruServ Board. Term expires April, 1998.
- --------------- 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. ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION COMMITTEE The Management Development and Compensation Committee of the Board of Directors (the "Committee") consists of five non-employee directors: Samuel D. Costa, Jr. (Chairman), Jerrald T. Kabelin, Lewis W. 12 14 Moore , Kenneth M. Noble and Dennis A. Swanson. In addition, Robert J. Ladner, Chairman of the Board of Directors, and Daniel A. Cotter, President and Chief Executive Officer, served as ex-officio members of the Committee. The Committee assists the Board of Directors in fulfilling its responsibilities for setting and administering the policies which govern annual compensation and monitoring the Company's pension and certain other benefit plans. The Committee calls upon outside consultants for assistance, as necessary. The Committee meets at least annually. In fiscal year 1996, the Committee met on three occasions. Primary responsibilities of the Committee include: - Establishing the President's salary and annual and long-term incentive opportunities. - Approving other executive officer salaries recommended by the President. - Setting performance goals for the annual and long-term incentive plans. - Assessing performance achievement relative to goals and approving incentive payments. The Committee makes recommendations to the Board of Directors regarding compensation of the Company's executive officers. The philosophy of the Committee is to maintain an executive compensation program to help the Company attract, retain and motivate the executive resources needed to maintain industry leadership, provide high levels of service to Members, and achieve the financial objectives as determined by the Board of Directors. To achieve its stated goals, the Company has developed three executive compensation policies. - The Company provides levels of salaried compensation that are competitive. - The Company provides annual incentive compensation for executives that vary in a consistent and predictable manner with the performance of the Company. - The Company provides an incentive program which enables selected executives to achieve incentive awards based on the long-term (multiple year) performance of the Company. The combination of these three compensation policies is intended to provide competitive earnings opportunities when performance reaches desired levels. Both the annual and long-term incentive plans are cancelable by the Board of Directors at any time. The Company provides salary levels that are competitive with the median (50th percentile) of the executive marketplace. The industry comparison groups used to evaluate competitiveness include: member owned organizations, wholesale distribution firms, mass merchandising firms and general industry and manufacturing organizations. Competitiveness is measured using data from a number of sources, including published information, proxies and surveys by consulting firms. The annual incentive plan is designed to ensure that executive compensation varies in relation to achievement of annual performance goals. In fiscal year 1996, the plan's overall Company goal was based on achieving Member payout and revenue objectives. Each executive's incentive award was determined by Member payout results. The long-term incentive plan assures a continuing focus on the Company's future. Goals are set for performance achievement over three-year intervals. A new performance period starts each year and goals for each three-year cycle currently underway are related to achievement of revenue growth. 13 15 EXECUTIVE COMPENSATION The following table sets forth the total annual compensation paid to the Company's five most highly compensated executive officers during fiscal year 1996 and the total compensation paid to each such individual for the Company's two previous fiscal years: SUMMARY COMPENSATION TABLE
LONG- NAME AND OTHER TERM PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) INCENTIVES ------------------ ---- ------ -------- --------------- ---------- Daniel A. Cotter......................... 1996 $575,000 $310,500 $ 6,656 $ -- President and Chief 1995 500,000 250,000 6,305 -- Executive Officer 1994 500,000 375,000 4,430 250,000 Steven J. Porter (3)..................... 1996 393,750 149,200 6,750 -- Executive Vice President 1995 375,000 131,250 6,461 -- and Chief Operating Officer 1994 325,000 170,625 58,719 -- Kerry J. Kirby........................... 1996 262,500 85,100 5,719 -- Vice President, Treasurer and 1995 250,000 75,000 6,750 -- Chief Financial Officer 1994 225,000 101,250 6,930 45,000 Daniel T. Burns.......................... 1996 236,250 87,500 6,750 -- Vice President, Secretary 1995 225,000 67,500 6,750 -- and General Counsel 1994 175,000 78,750 6,906 35,000 David W. Christmas (3)................... 1996 210,000 68,000 6,688 -- Vice President, 1995 200,000 60,000 3,750 -- Merchandising 1994 80,200 26,250 -- --
- --------------- (1) Annual bonus amounts are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. (2) Other compensation consists primarily of Company contributions to the Cotter & Company Employee's Savings and Compensation Deferral Plan (the "Savings Plan"). Under the Savings Plan, each participant may elect to make a contribution in an amount of up to ten percent (10%) of his annual compensation, not to exceed $30,000 (including Company contributions) a year, of which $9,500 of the executive officer's salary in fiscal year 1996 may be deferred. The Company's contribution to the Savings Plan is equal to seventy-five percent (75%) of the participant's contribution, but not to exceed four and one-half percent (4 1/2%) of the participant's annual compensation. Mr. Porter's other compensation includes $56,891 of relocation payments in fiscal year 1994. (3) Steven J. Porter and David W. Christmas resigned from their positions in the first quarter of 1997. Daniel A. Cotter is employed under a long-term contract which commenced January 1, 1985 for a period of 15 years terminating December 31, 1999. Mr. Cotter agreed, in 1990, to revise his contract to conform his compensation to that applicable to all other executives. The Company has a severance policy providing termination benefits based upon annual compensation and years of service. Officers of the Company are also offered agreements providing for severance in the event of termination with the imposition of certain restrictions regarding competition and confidentiality. No loans were made by the Company to its executive officers or to its directors during the last three fiscal years. LONG-TERM PERFORMANCE CASH AWARDS The Board of Directors adopted a long-term incentive plan for selected senior executive officers of the Company. Senior executives of the Company are eligible for cash payouts ranging from 10% to 75% of their annual salary if performance goals established for the plan are met. Performance goals for the current plans relate to the achievement of revenue growth. 14 16 A new plan starts each year with goals set for the next three-year period. A range of estimated payouts which could be earned by the individuals listed in the Summary Compensation Table in fiscal year 1997, and paid in fiscal year 1998 is shown in the following table:
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM ---- ------------------ --------- ------ ------- Daniel A. Cotter.............................. 1995-1997 $143,750 $287,500 $431,250 Kerry J. Kirby................................ 1995-1997 28,090 56,180 84,270 Daniel T. Burns............................... 1995-1997 25,280 50,560 75,840
DEFINED BENEFIT RETIREMENT PLANS The Company has a defined benefit pension plan, the Cotter & Company Defined Lump Sum Pension Plan (the "Plan"), which is qualified under the Code. The Plan was amended and restated effective January 1, 1996. The amount of the Company's annual contribution to the Plan is determined for the total of all participants covered by the Plan, and the amount of payment with respect to a specified person is not and cannot readily be separated or individually calculated by the actuaries for the Plan. The Plan provides fully vested lump sum benefits to eligible employees who have served a minimum of five years of service. Annuities are also available and are the actuarial equivalent of the lump sum payment. Each of the executive officers listed in the foregoing Summary Compensation Table is a participant in the Plan. For each year of service, a participant receives a percentage of his or her "average compensation" in the form of a lump sum. The percentages range from two percent of average compensation for years of service performed prior to age 26, to twelve percent of average compensation for years of service performed at or after age 61. Participants with average compensation in excess of two-thirds of the Social Security Taxable Wage Base in the year of termination of employment or retirement receive an additional benefit on this excess compensation equal to half of the percentage applied to their full average compensation. Participants who were age 50 with at least fifteen years of service as of January 1, 1996 receive an additional 25% of their average compensation. The benefits under the Plan cannot be less than benefits already earned by the participant under the Plan as it existed prior to its amendment. "Average compensation" means the average of the compensation received by an eligible employee during the three highest consecutive calendar years within the ten consecutive calendar years immediately preceding the date of termination of employment. Compensation considered in determining benefits includes salary, overtime pay, commissions, bonuses, deferral contributions under the Savings Plan, and pre-tax medical premiums. The Company amended and restated effective January 1, 1996, a Supplemental Retirement Plan (the "Supplemental Plan") for certain employees as designated by the Company's President and Chief Executive Officer. For each year of service, participants receive a percentage of their "average compensation" in the form of a lump sum. The percentages are 22 percent of average compensation for years of service performed prior to age 55, to 28 percent of average compensation for years of service performed at or after age 55. Service is limited to 20 years, and the maximum aggregate percentage is 500%. This amount is reduced by any benefits payable under the Plan and eight times the participant's primary Social Security benefit. "Average Compensation" for the Supplemental Plan is defined the same as for the Plan, as discussed above. The benefits under the Supplemental Plan cannot be less than benefits already earned by the participant under the Supplemental Plan as it existed prior to its amendment. The Supplemental Plan is not a qualified plan under the Code. Benefits payable under the Supplemental Plan will be financed through internal operations. The estimated annual retirement benefits which may be payable pursuant to the Plan to the officers named in the Summary Compensation Table is currently limited under Section 401(a)(17) of the Code, which outlines the maximum earnings amounts which may be considered under the Plan in determining retirement benefits. This limit is $160,000 for 1997. Section 415 of the Code outlines the maximum annual benefit which may be payable from the Plan during the year; The dollar limit is $125,000 for 1997 for a participant retiring at age 65, with reduced amounts at younger ages. The actuarial equivalent of the annual amount may be payable as a lump sum. 15 17 The following table reflects the combined estimated annual retirement benefits which may be payable pursuant to the Plan and the Supplemental Plan to the officers named in the Summary Compensation Table at retirement under various assumed conditions, assuming retirement at age 65.
YEARS OF SERVICE AVERAGE -------------------------------------------------------- COMPENSATION 10 15 20 25 30 - ------------------------------------------ -------- -------- -------- -------- -------- $1,000,000................................ $258,926 $366,115 $473,305 $473,305 $473,305 900,000................................ 231,641 328,112 424,582 424,582 424,582 800,000................................ 204,357 290,108 375,860 375,860 375,860 700,000................................ 177,072 252,105 327,137 327,137 327,137 600,000................................ 149,788 214,101 278,415 278,415 278,415 500,000................................ 122,503 176,098 229,692 229,692 229,692 400,000................................ 95,218 138,094 180,970 180,970 180,970 300,000................................ 67,934 100,091 132,248 132,248 132,248 200,000................................ 40,649 62,087 83,525 83,525 83,525 100,000................................ 13,365 24,084 34,803 34,803 34,803
The present credited years of service for the officers listed in the above table are as follows: Daniel A. Cotter, 30 years; Kerry J. Kirby, 21 years and Daniel T. Burns, 16 years. There is no existing market for the Company's common stock and there is no expectation that any market will develop. There are no broad market or peer group indexes the Company believes would render meaningful comparisons. Accordingly, a performance graph of the Company's cumulative total stockholder return for the previous five years, with a performance indicator of the overall stock market for the Company's peer group, has not been prepared. In fiscal year 1996, directors of the Company were each paid $1,500 per month. The Chairman of the Board is paid $1,000 per day to a maximum of $100,000 per year, when serving in the capacity as Chairman. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of February 22, 1997, each of the directors of the Company was the beneficial owner of 10 shares of Class A common stock of the Company comprising .3% of such shares issued and outstanding. Other than Daniel A. Cotter, no executive officer owns any shares of Class A common stock. The directors own in the aggregate approximately 1.7% of Class B common stock as of February 22, 1997. No executive officer owns any shares of Class B common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 16 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) 1. FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying index (page F-1) to the consolidated financial statements are filed as part of this annual report. 2. FINANCIAL STATEMENT SCHEDULES No schedules have been filed because the required information is not applicable or is not material or because the required information is included in the consolidated financial statements or the notes thereto. 3. EXHIBITS The exhibits listed on the accompanying index to exhibits (pages E-1 and E-2) are filed as part of this annual report. (B) REPORTS ON FORM 8-K 1. Current Report on Form 8-K, dated as of December 17, 1996. 2. Current Report on Form 8-K, dated as of March 5, 1997. 3. Form 8-K/A Amendment to Current Report on Form 8-K, dated as of March 26, 1997. 17 19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. COTTER & COMPANY By: /s/ KERRY J. KIRBY -------------------------------------- Kerry J. Kirby, Vice President, Treasurer and DATED: March 27, 1997 Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DANIEL A. COTTER President, Chief Executive March 27, 1997 - ----------------------------------------------------- Officer and Director Daniel A. Cotter /s/ KERRY J. KIRBY Vice President, Treasurer and March 27, 1997 - ----------------------------------------------------- Chief Financial Officer Kerry J. Kirby /s/ ROBERT J. LADNER Chairman of the Board March 27, 1997 - ----------------------------------------------------- and Director Robert J. Ladner /s/ JOE W. BLAGG Director March 27, 1997 - ----------------------------------------------------- Joe W. Blagg /s/ WILLIAM M. CLAYPOOL, III Director March 27, 1997 - ----------------------------------------------------- William M. Claypool, III /s/ SAMUEL D. COSTA, JR. Director March 27, 1997 - ----------------------------------------------------- Samuel D. Costa, Jr. /s/ LEONARD C. FARR Director March 27, 1997 - ----------------------------------------------------- Leonard C. Farr /s/ WILLIAM M. HALTERMAN Director March 27, 1997 - ----------------------------------------------------- William M. Halterman /s/ JERRALD T. KABELIN Director March 27, 1997 - ----------------------------------------------------- Jerrald T. Kabelin /s/ JOHN F. LOTTES, III Director March 27, 1997 - ----------------------------------------------------- John F. Lottes, III /s/ LEWIS W. MOORE Director March 27, 1997 - ----------------------------------------------------- Lewis W. Moore /s/ KENNETH M. NOBLE Director March 27, 1997 - ----------------------------------------------------- Kenneth M. Noble /s/ RICHARD L. SCHAEFER Director March 27, 1997 - ----------------------------------------------------- Richard L. Schaefer /s/ GEORGE V. SHEFFER Director March 27, 1997 - ----------------------------------------------------- George V. Sheffer /s/ DENNIS A. SWANSON Director March 27, 1997 - ----------------------------------------------------- Dennis A. Swanson /s/ JOHN M. WEST, JR. Director March 27, 1997 - ----------------------------------------------------- John M. West, Jr.
20 ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S) ------- Report of Independent Auditors.............................. F-3 Consolidated Balance Sheet at December 28, 1996 and December 30, 1995.................................................. F-4; F-5 Consolidated Statement of Operations for each of the three years in the period ended December 28, 1996............... F-6 Consolidated Statement of Cash Flows for each of the three years in the period ended December 28, 1996............... F-7 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 28, 1996......................................... F-8 Notes to Consolidated Financial Statements.................. F-9 to F-16
F-1 21 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- F-2 22 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 F-3 23 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) 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 ======== ========
See Notes to Consolidated Financial Statements. F-4 24 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) 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. F-5 25 COTTER & COMPANY ------------------ 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. F-6 26 COTTER & COMPANY ------------------ 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. F-7 27 COTTER & COMPANY ------------------ 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 FOREIGN ------------------- ---------------- CURRENCY ISSUED AND RETAINED TRANSLATION ISSUED SUBSCRIBED TO BE 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. F-8 28 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-laws, the annual patronage dividend is paid to Members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. On December 9, 1996, the Boards of Directors of the Company and ServiStar Coast to Coast Corporation agreed to merge the two companies. ServiStar Coast to Coast is a $1,700,000,000 hardware wholesaler with a strong presence in retail lumber and building materials. The transaction is subject to customary closing conditions, including approval by the stockholders of both companies, and is expected to be completed on July 1, 1997. Following completion of the merger, the Company will be renamed TruServ Corporation. The significant accounting policies of the Company are summarized below: Consolidation. The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. On January 13, 1995, the Company agreed to the sale of certain inventory of its V&S(R) Variety division to a national wholesaler who agreed to supply the majority of the V&S(R) Stores. Also, on January 31, 1995, the Company sold certain assets of its outdoor power equipment manufacturing division to a nationally recognized company and secured a favorable supply agreement for such equipment. These transactions did not have a material impact on the Company's results of operation or financial position. Capitalization. The Company's capital (Capitalization) is derived from Class A voting common stock and retained earnings, together with promissory (subordinated) notes and Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes and $100 par value Class B common stock. Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents. The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories. Inventories are stated at the lower of cost, determined on the "first-in, first-out" basis, or market. F-9 29 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Properties. Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements--10 to 40 years; machinery and warehouse, office and computer equipment--5 to 10 years; transportation equipment--3 to 7 years; and leasehold improvements--the life of the lease without regard to options for renewal. Revenue Recognition. The Company recognizes revenue when merchandise is shipped or services are rendered. Retirement plans. The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contribution plans are based on collectively bargained rates times hours worked. The Company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reporting year. The Company's reporting year-end is the Saturday closest to December 31. 2. INVENTORIES Inventories consisted of:
DECEMBER 28, 1996 DECEMBER 30, 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 ======== ========
3. PROPERTIES Properties owned or leased under capital leases consisted of:
DECEMBER 28, 1996 DECEMBER 30, 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 ======== ======= ======== =======
F-10 30 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 28, 1996 DECEMBER 30, 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, $17,574,000, $7,625,000, $4,000,000 and $32,000,000, respectively. The Company has established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The borrowings under these agreements were $70,594,000 at December 28, 1996 and were at a weighted average interest rate of 5.5%. At December 30, 1995, the Company's Canadian subsidiary had short-term borrowings at an interest rate of 7.5%. The Company is required to meet certain financial ratios and covenants pertaining to certain debt arrangements. F-11 31 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under long-term non-cancelable leases, together with the present value of the net minimum lease payments, as of December 28, 1996:
CAPITAL OPERATING ------- --------- (000'S OMITTED) Fiscal years 1997................................................. $1,433 $10,387 1998................................................. 1,144 9,126 1999................................................. 809 7,411 2000................................................. 296 6,221 2001................................................. 184 5,509 Thereafter........................................... 108 45,651 ------ ------- Net minimum lease payments............................. 3,974 $84,305 ======= Less amounts representing interest..................... 145 ------ Present value of net minimum lease payments............ 3,829 Less amounts due within one year....................... 1,364 ------ $2,465 ======
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 ======= ======= ======
F-12 32 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 ======== ========
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 F-13 33 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) income tax and financial reporting for depreciation, inventory capitalization, bad debts, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
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 ======== ======== ========
F-14 34 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. CASH FLOW The Company's noncash financing and investing activities in fiscal year 1996 and 1995 include acquisition of transportation equipment by entering into capital leases and the acquisition of property for resale. These transactions aggregate $178,000 and $4,008,000 in fiscal years 1996 and 1995, respectively. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to noncash operating and financing activities are as follows:
FOR THE YEARS 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 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 ======= ======= =======
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 F-15 35 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. F-16 36 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBITS NUMBERED ENCLOSED DESCRIPTION PAGE -------- ----------- ------------ 21 Subsidiaries. 27 Financial Data Schedule.
EXHIBITS INCORPORATED BY REFERENCE ------------ 2-A Agreement and Plan of Merger dated as of December 9, 1996 between the Company and Servistar Coast to Coast Corporation. Incorporated by reference--Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 3-A Amended and Restated Certificate of Incorporation of Cotter & Company dated May 10, 1993. Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 3-B By-Laws of Cotter & Company as amended and restated through June 1, 1993. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-A Article Fourth of the Certificate of Incorporation of the Company, setting forth the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of the Class A common stock and Class B common stock of the Company. Article Twelfth of the Certificate of Incorporation of the Company, setting forth certain limitations on the rights of shareholders to bring an action against directors for breach of the duty of care. Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to: certain qualifications, limitations and restrictions on the common stock of the Company; the Member agreement between the Company and its shareholders; the payment of patronage dividends; dividends; qualifying shares; and valuation of Class B common stock of the Company issued as part of the annual patronage dividend. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-C Specimen certificate of Class A common stock. Incorporated by reference--Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836). 4-D Specimen certificate of Class B common stock. Incorporated by reference--Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836). 4-E Promissory (subordinated) note form effective for the year-ending December 31, 1986 and thereafter. Incorporated by reference--Exhibit 4-H to Registration Statement on Form S-2 (No. 33-20960). 4-F Instalment note form. Incorporated by reference--Exhibit 4-F to Registration Statement on Form S-2 (No. 2-82836). 4-G Copy of Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-J to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477).
E-1 37
EXHIBITS INCORPORATED BY REFERENCE ------------ 4-H Cotter & Company $50,000,000 Private Shelf Agreement with Prudential Insurance Company of America dated December 29, 1995 incorporating amendment on existing Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-H to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 4-I Trust Indenture between Cotter & Company and First Trust of Illinois (formerly Bank of America). Incorporated by reference--Exhibit T3C to Cotter & Company Form T-3 (No. 22-26210). 4-J Credit Agreement dated March 29, 1996 for $125,000,000 revolving credit between Cotter & Company, various financial institutions, and Bank of America. Incorporated by reference--Exhibit 4-J to the Company's Form S-2 (No. 33-39477). 10-A Form of "Retail Member Agreement with Cotter & Company" between the Company and its Members that offer primarily hardware and related items. Incorporated by reference-- Exhibit 10-C to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 10-B Current form of "Subscription to Shares of Cotter & Company". Incorporated by reference--Exhibit 10-H to Registration Statement on Form S-2 (No. 2-82836). 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 the 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 the 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 Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477).
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EXHIBITS INCORPORATED BY REFERENCE ------------ 10-K Contract between Kerry J. Kirby and the Company. Incorporated by reference--Exhibit 10-K to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 10-L Current Form of "Retail Member Agreement with Cotter & Company" between the Company and its Members that offer primarily hardware and related items. Incorporated by reference--Exhibit 10-A to Registration Statement on Form S-4 (No. 333-18397). 10-M Retail Conversion Funds Agreement dated as of December 9, 1996 between the Company and SCC. Incorporated by reference--Exhibit 10-L to Registration Statement on Form S-4 (No. 333-18397).
SEQUENTIALLY SUPPLEMENTAL NUMBERED INFORMATION PAGE - ------------ ------------ (a) Notice of Annual Meeting of Stockholders on April 1, 1997 and Proxy solicited by the Board of Directors. (b) Joint Proxy Statement/Prospectus--Incorporated by reference to Registration Statement on Form S-4 File No. 333-18397. (c) Cotter & Company 1996 Annual Report.
E-3 EX-21 2 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21 Subsidiaries of Registrant The registrant owns 100% of the issued and outstanding Capital Stock of Cotter Real Estate Agency, Inc., Cotter Acceptance Co., Inc., Cotter Trucking, Inc., and General Paint and Manufacturing Co., all Illinois corporations, indirectly through Cotter Acceptance, Co., 100% of the issued and outstanding Capital Stock of Warner True Value Hardware, Inc., a Minnesota corporation and indirectly through Cotter Real Estate Agency, Inc., 100% of the issued and outstanding capital stock of True Value de Mexico, S.A. de C.V., a Mexican Corporation. The accounts of these subsidiaries have been consolidated with the registrant's at December 28, 1996, and December 30, 1995. In January 1992, the registrant formed a Canadian subsidiary, Cotter Canada Hardware & Variety Company, Inc., owning 100% of the issued and outstanding Capital Stock. Indirectly, through this subsidiary, the registrant owns 100% of the issued and outstanding voting Preferred Stock of the Canadian cooperative, Cotter Canada Hardware and Variety Cooperative, Inc. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-28-1996 DEC-31-1995 DEC-28-1996 1,662 0 307,205 0 347,554 669,938 354,263 183,252 853,985 468,634 80,145 0 0 118,929 186,277 853,985 2,441,707 2,441,707 2,245,071 2,245,071 115,229 0 28,635 52,772 362 52,410 0 0 0 52,410 0 0
EX-99.A 4 NOTICE OF ANNUAL MEETING & PROXY 1 EXHIBIT-99.A COTTER & COMPANY 8600 WEST BRYN MAWR AVENUE CHICAGO, ILLINOIS 60631 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS APRIL 1, 1997 TO THE STOCKHOLDERS OF COTTER & COMPANY: The Annual Meeting of Stockholders of Cotter & Company, a Delaware Corporation, will be held at the Rosemont Convention Center, 9301 West Bryn Mawr Avenue, Rosemont, Illinois, Tuesday, April 1, 1997, at the hour of 10:00 in the morning, local time, for the following purposes: 1. To approve the Agreement and Plan of Merger, and related transactions, including amendment of the Amended and Restated Certificate of Incorporation; and 2. To consider and act upon such further business as may properly come before the meeting or any adjournments thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS PRESENTED. Only holders of record of the Common Stock of the Company at the close of business on February 10, 1997, will be entitled to notice of and to vote at said meeting. The Proxy solicited by the Board will be voted in favor of (FOR) all proposals unless a contrary decision is made by the Stockholders, and on all other matters to come before the meeting, or any adjournments thereof, in the discretion of the Proxies therein. STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE ANNUAL MEETING IN PERSON ARE ASKED TO SIGN, DATE, AND RETURN THE ENCLOSED PROXY TO THE COMPANY IN THE ENCLOSED, STAMPED ENVELOPE, ADDRESSED TO COTTER & COMPANY, C/O HARRIS TRUST AND SAVINGS, P.O. BOX 2702, CHICAGO, ILLINOIS 60690-9402. YOUR VOTE IS IMPORTANT YOU ARE URGED TO SIGN, DATE AND RETURN YOUR PROXY WITHOUT DELAY, TO INSURE ITS ARRIVAL IN TIME FOR THE MEETING. THIS WILL ENSURE THE PRESENCE OF A QUORUM AT THE MEETING. By Order of the Board of Directors Daniel T. Burns Signature Daniel T. Burns Secretary Chicago, Illinois Date of Mailing: February 14, 1997 2 EXHIBIT-99.A PROXY PROXY COTTER & COMPANY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Samuel D. Costa, Jr., Leonard C. Farr, Dennis A. Swanson, and each of them, as Proxies, with full power of substitution, and hereby authorizes them to represent and to vote, as designated below, all shares of Class A Common Stock and, solely with respect to the proposal below to increase the maximum number of authorized shares of Class B Common Stock, all shares of Class B Common Stock, of Cotter & Company held of record by the undersigned on February 10, 1997, at the Rosemont Convention Center, 9301 West Bryn Mawr Avenue, Rosemont, Illinois on Tuesday, April 1, 1997, at 10:00 a.m., local time, and at any adjournments thereof. A COPY OF THE COMPANY'S 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 30, 1995 ACCOMPANIES THIS PROXY. PLEASE MARK, SIGN, DATE, AND RETURN THE PROXY BALLOT PROMPTLY USING THE ENCLOSED ENVELOPE. (CONTINUED AND TO BE SIGNED ON REVERSE SIDE.) COTTER & COMPANY PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/ [ ] The Board recommends a vote FOR all of the following proposals. To be Voted Upon by Class A Common Stock and, to the extent indicated, by Cotter Class B Common Stock, FOR AGAINST ABSTAIN 1. With respect to the undersigned's Class A Common Stock, on the Proposal to approve the Agreement / / / / / / and Plan of Merger dated as of December 9, 1996 providing for the merger of ServiStar Coast to Coast Corporation with and into Cotter & Company, thereafter known as TruServ Corporation, including (i) additional capital requirements, (ii) a new form of Retail Member Agreement, (iii) revised By-Laws and (iv) restatement of the Certificate of Incorporation, including, without limitation, (a) authorizing an increase in the maximum outstanding Class A Common Stock to 750,000 shares, and also with respect to the undersigned's Class B Common Stock, authorizing an increase in the maximum outstanding Class B Common Stock to 4,000,000 shares, respectively, (b) elimination of cumulative voting, (c) elimination of required uniform ownership of Class A Common Stock, and (d) changing the corporate name. Upon approval of the proposed new form of Retail Member Agreement, all prior Cotter & Company Retail Member Agreements shall be automatically superseded by such new form of Retail Member Agreement. FOR AGAINST ABSTAIN 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly / / / / / / come before the meeting, or any adjournment thereof. This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this Proxy will be voted FOR Proposals 1 and 2. _________________________________________________________________________________________________, 1997 Signature(s) Date PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON YOUR COMMON STOCK CERTIFICATE. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
EX-99.C 5 COTTER & CO. 1996 ANNUAL REPORT 1 EXHIBIT-99.C COVER: Cotter & Company 1996 Annual Report INSIDE FRONT COVER: DENISE L GIBBONS DENNIS J VAN FLEET JOSEPH D CLARK JOHN T ROGERS KARA L MACKIE MICHAEL J SOCHA SAMUEL A CONRY DONALD F RILEY KATHERINE L VERMETT JOSEPH P JUSTEN CHERYL DREDSKE GUY E HUDSON LLOYD A SMITH LARRY R KORTTE KURT A WILKENING CERES C MORGAN JACK E HORGAN DEANNA L THOMPSON RICHARD L GATREL MARY C MILLER MICHAEL W MARKO DARCY A BUSH RUSTY L MARTIN ROSEMARIE A CARLSON KATHRYN L JOHNSON RANDY A HORTER CORINNE K ORR TERRY F CREMEENS WILLIAM E MELTON THOMAS J WHITE BARBARA K CAMREN DONALD K WILSON SANDRA L DUNHAM SCOTT R SHANHOLTZER DEBRA K CALDWELL JANICE A SCHMIDT KENNETH G MOLLER BARBARA SOUCIE KEVIN L SOVA JAMES G MOORE SCOTT L HERMANN JEAN A BOVIALL ALEJANDRO ZAMORA HERMAN F EICHHOLZ BECKYJ THOMAS RICHARD W PIERCE RAY B SMITH DAVID A KAMHOLTZ THERESAM KRUEGER DONALD A BUSCH DALE A MEYER STEVEN J SORENSEN LONNIE W RETHERFORD DEBORAA HOPPE LINDA M WEBB KENNETH W REYNOLDS CHRIS SHIPPEE DAPHNEJ KELLETT ROBINM BISLEW WALTERE TAYLOR BRENDA L RAGLIN JULIE M KORTTE GEORGE C KORTTE JR KATHRYN M JONES DAVIDM GARCIA REBECCA L WADE KIMBERLY S HERNES MICHAEL V SMITH SUSANE FIEPKE PATRICIA M EICHHOLZ JOHN M PETERSON JR EVA BOYKIN SHELLEY M BOUNDS RUTHANN M VEST MARSHA H KING JULIANN M WOOD BOBBI-JO ENGELKE MICHAEL D GREENLEE JANE L GALLAGLY KATHRYN JOHANSEN EDITH L ABARCA DENNIS W MORGAN RONALD D RYMAN JOE NINO JR WANDA K GREENLEE DARHL D THOMAS JR PAULINE S DALEY MELISSA A ABARCA MICHAEL E ROUSH TIM J ELLER DOUGLAS C NOBLE JEFFERY S KLEIN JANETTE L HASS RAYMUND G DURICIC WILLIAM L MORELLI JR BARBARA J HALLMAN DENNIS E FORSYTHE JOHN D SMITH MICHELLE M ROSE THOMAS D BLOOMGREN ROBIN G ENGELKE PAUL R WHITE JAMES W HUTCHINSON SANDRA A BURTMAN CHRISTOPHER E JONES THOMAS C DAVIE GARY D HAMMOND SHEILA A RAAB MARIE P ANDERSON KATHLEEN CLARK BIBIANNE J VERBA SAMANTHA L JOHNSON KATHRYN WALSTRA CHRISTOPHER M RUHFF JOANN TIMM MYRNA L BARBER SHARON S BORTH MARY L DAVIS JANET JUNGBLUT BARBARA J CRADIC SHERRIL A NAY JOAN A SCHMID MARGARET F JACOBSON TAMMY M EDMONDS CAROLE S MOORE JULIE ZELL MARY K LEONARD NATHAN A BRUGGER JACKI R WENZEL MARGRET M KAZORT KRISTINA P DAVIS DALE K ALTEN DARCY L BUCHANAN KATHERINE FERGER GLENN D KENDALL PAMALA S SIMONSON WILLIAM D JONES MICHELE R PETTY JAMIE A SCHROETER ANTHONY C URBAS BRENDAR GORTER JACKIE L AUSTIN JENNIFER L KOHLIN SANDRA L LANE MICHELE L MORRIS JOSEPH W MORGAN JAMES E MASON ROXANNE G MIDDLETON JOYCE L BURD DONALD H JONES MIKE S REYNOLDS GERALD A KAMLAGER MICHAEL J KAZORT KEVIN L MASON SHELLEY M GATREL KATHRYN J EMMER PATSY S MULLIN MICHAEL G WESSELS CHARLES W DUKEY DEBRA K WHITE MICHAEL A HURRLE LISA R MELSON LLOYD SMITH DAWN E MORRIS LINDA J RETHERFORD JEFF SMITH TIMOTHY G KILPS STEPHEN M HAVENS JAMIE M DAVIS BRIAN L ROHRER THOMAS E WILLIAMS RONALD L DITZENBERGER DONALD L KUNATH LARRY L MACKEBEN JOSEPH E SINKOVIC FRANKLIN HARRIS RONALD A FILKILL STEVE MARSHALL CHRISTOPHER S GOAN DENNIS L BEHNER SHERRY L HAYES SHELLY Y SLAGLE RITA C REESE LONNIE E ESTEP DALE A STEIN DEREK TROY DECLUETT TONY R BOWIE STEVEN L GALLIS DENISE M BAXTER ROBERT A RUSNAK ALVIN J SCHWEIDT ALONZO BOGGAN SERGIO EDUARDO FUENTES JOHN E STEINMAN DAVID J WOLFS MARK D BISHOP JAMES T SUTHARD THERESA M GOSSETT TAMMY L TERNOIR WANDA J JEFFERSON JENNIFER L LAROCHELLE DANIEL J SKUBOVIUS CHRISTOPHER BUTLER DENNIS M KUKO TYRONE WOODRUFF GERALD L FABER CARL WILLIAM AUVIL SARA J LOUIS TYRONE MCCLAIME DONNA J SIMMONS ROSA L BREWER RENWICK LYDELL RUSH THOMAS F DUDKOWSKI CLOGGIE A CROWDER ROBERT S PFENNINGER MICHAEL KAZIMER JACQUELINE MARIE GROH MICHAEL R FILKILL WILLIE C MCMILLON MICHELLE M GRISANTI JOSEPH CARL PALETTA DOROTHY MION TIMOTHY JR. SWARTWOOD DAVID A REPKO CHARLES R NEWMAN JOSEPH J MENDONSA BETTY COOPER MIGUEL A SUAREZ GEORGE R DUNCKEL ROBERT J ENGLISH ALAN S LOCKSEY CLARICE RUCKER KAREN L SOTKA CLIFFORD D MCINTOSH ROY E RASHKE DERRICK L MUSE DAVID D CHIDO JAMES D HAMILTON ROBERT BROWN LARRY D MARSHALL PERCY HATCHER SCOTT M MACK DONNA M PARSONS CLARENCE SCHULTZ JR LEE A MCCOY DAVID K GAUM PHILLIP A HARDING RICHARD J MIROLA GREGORY BUTE JAMES A LINN DENISE L CONWAY TRACEY A DIFILIPPO KAREN L KRATT FREDERICK A PAPENFOTH SR SHERMAN DEROSHA JR THOMAS P JUERGENS JOSEPH E COOKE FRANK J SMITH RICHARD A SCHMIDT TONY L MION PETER C ZIKELI PETER J SIGAL SR MICHELLE R ALMAS VICTOR R OSGOOD II SAMUEL E MCCOY RODNEY S HULSEY TERESA L BUTLER TERRI HAHN LYNN M WILMS DENISE SURRENA JUDY K DRIGGS ROSE M RADVANSKY MARY E THOMAS LINDA LEE HANNON NANCY J KUNKLE MARY ANNE JONAS SHARON M KELTY SUSAN J SIEFKE MARK J FEYERCHAK LINDA J WARANAI CHRISTINE A IPPOLITO EDWARD RADVANSKY STANLEY C HUNTINGTON TERENCE E GASKEY JEFFERSON D SMITH WILLIAM T BARRY JR DENNIS W NACARATO WILLIAM J MCINTIRE JOSEPH E KNECHTGES KRISTEN D GUNVALSEN THEODORE A CSINCSAK JR TONY R PETITT GARRY J MARSH FREDERICK D CIPOLLA JAMES E LAUBERT JAIME J KOPCZYK EDWARD P BUTCHER DARRELL R BAON CLAUDE M PITMAN DAVID A SCOTT RODNEY ALAN BOONE FRANK DEAN TOY ROBERT J TRISKA ROBERT B BAIRD BRIAN A LANCASTER RICHARD N JONES RUSSELL L GRAHAM JOHN M PERRETTI RAYMOND DUTTKO ALAN J FEENEY EDWARD J MACHOVINA GEOFFREY W SHANKS JAMES D BROWN DOUGLAS E RUNYON ERIC R JANUS TIMOTHY J CLARK BERNARD J ULINE CHARLES C SUTZ RICHARD LEMMEYER CLAUDIA A JOZEFKOWICZ BRIAN M WRIGHT LINDA ANN WALLS MICHAEL P ELLIS CANDUS M OLSON MICHAEL J ROMANSKI DAVID S STANLEY DONALDR LOVING JR CRAIG J BALOG JAY D RHODES STANLEY TATE JR WILLIAM B LIPFIRD CY D YOUNG RONALD J SABIN JR JOHN WEINMANN MARTHA L PARSONS GREGORY E JAMES PAUL D FRANKIEWICZ JEFFREY M SCHULTZ JAMES G STEIGERWALD ROY J RASHKE ADAM D CSONGEDI HENRY O BUEHNER KENNETH R COOK MICHELLE L MERKOSKY LYNNE M SHAFFER MARY C CALLIHAN MARK P BINDER PAUL D DILLS MICHAEL D MACNEAL DAVID A KUTNER JOHN M CRAWFORD JR ROBERT A SZABO CURTIS J BALOG ROBERT H GARCIA ROBERT L GRIFFIN TONI TASHE NICKOLOFF JAMES E NEELY RICHARD L 2 SINDELAR GARY JOSEPH GARZA SHANNON L MURRAY MICHELLE C DRUDZINSKI ROBERT C EARLY LARRY A WATERS MARK J KUZMANOVICH WILLIAM A RISHEL SAUL A HERNANDEZ JAMES D SOTHERLAND STEVEN M FOSTER DONNA S BRISSON GEORGE A DUBOIS CHRISTOPHER S OLEARY SUZAN M HINTON RUSSELL L GLIDDEN DANIEL J BATTISTELLI ARMAND R L'HEUREUX LAWRENCE D CARTY RICHARD D WALEGA DANA R FRASER WILLIAM H TREMBLAY JACQUES R BOISVERT DANIEL R LAWRENCE JOHN J KILLAY PHILIP D BALDINELLI GREGORY J FEEHAN ADELAIDE E RILEY STEVEN A GOUPIL ROBERT E LABRIE DOUGLAS A BALDINELLI BRENDA K BOLDUC RALF J BAUMANN WILLIAM A ZYGADLO HORACIO L KIEP ANNE L HOULE ROBERT A PHANEUF THOMAS HUNT DANIEL J NOLL DAVID J JEROME ROBERT F BEECHER RAYMOND T BRISSON GERARD J CHALIFOUR GILBERT BOISVERT DANIEL J COSMA SCOTT R HENAULT DAN R HUPPE WENDY L MERRILL JAMES M ALDRIDGE MARK P TURGEON DAVID L LANGLOIS RAYMOND P SEVIGNY JOHN N NACOS MICHAEL D BOISVERT JOHN A MADDEN PHILIP C BEAUDET JAMES R YOUNG BARRY R FAUCHER TINA M SARETTE GERALD M VEILLEUX ALAN R COTE LUCIEN A DESRUISSEAUX JOHN M PERSONS ROBERT R MORIN ROLAND L MIVILLE CATHERINE A CARCHIDE MICHAEL J OTOOLE ROBERT N MOREAU PAUL LAMPRON JAMES J HAWES DARRYL B CHAMPNEY ERIK P RANSOM DANNY C WEBSTER KENNETH J SKIDMORE SR RAYMOND R PROVENCHER WILLIAM O PETTERSON JR ELAINE M BOBULA ROBERT STEVENS RAY M CAMPBELL HENRY HEBERT DAVID J BILODEAU CINDY L LITTLE LUC L LABRIE MARY WEBSTER DANIEL T HALL MARK BEDARD HARRY J LORANGER JR EDWARD A RICHARD THEODORE W ROBINSON MARK A JORDAN RUSSELL J SMALL BRICE R CUNNINGHAM RICHARD R ST HILAIRE BELLA M MORIN ELAINE PYATT DAVID M SHEA MARLENE R WHITE PATRICIA A BILODEAU MELISSA M VINCENT JOAN A GOLABIEWSKI DOROTHY G MURRAY DEBRA J TIRRELL RICHARD P GURTNER JUDITH C SALACH DAVID MUZEROLL CHARLOTTE J FRIZZELL TERI A SMITH CAROL A MILLER JOYCE M BARIBEAU ANN-MARIE THERRIEN LINDA M DAY MICHAEL C DUFF COLLETTE J MCKENNA LYNDA M SANBORN ANN M JORDAN GERALD E JALBERT NORMAN D ROSS OWEN R BELLOWS TODD A LETOURNEAU PAUL D AGRELL NORMAN R PROULX THOMAS D KELLETT SHEILA M COOK JEFFREY A SAVAGE JOSEPH C RIENERT ROBERT E WEBB ROBERT A LA BARRE WILLIAM E HUTTON HARRY M WEAVER ROBERT C BROWN JOSEPH C GANCARZ ALBERT J PROVENCHER RUSSELL PHILLIPS RAYMOND V AYOTTE ERNEST E PEPIN GERARD J BIRON DAVID A BURGESS MARK SILEGY CLAUDE A ST PIERRE CHRISTOPHER J BURDIN GREGORY J HUNT MICHAEL J PROVOST DAVID J ENRIGHT HOWARD A ZERBER BRIAN ROBIDOUX GLORIA M NOLAN RICHARD L DUHAIME JOSEPH F KATZ GARY K BOLDUC CARRIE I NOLAN KRISTINE L BERGERON RUSSELL F FEDERICO STEPHEN DELBENE WILLIAM P COOK ROBERT P DALTON STEVE C GIBSON NICHOLE L COLTEY PAULINE TANCREDE CHARLES T LACKEY EDWARD S RAND LINDA B UNDERWOOD RUSSELL W SPAIN THEODORE A TODD ERIC V JACOBS CHRISTOPHER J LE MAUK RICHARD A MELANSON RANDY COWLES WAYNE BARSS ROGER E HUARD LEO L DEMERS CRISH BUXTON JAMES P BARTLETT ARTHUR G MAKRIS THOMAS E CARNEY GILLIS L UPTON JO A VAUX PAUL A DIROSA FERDINAND P DLUGOSZ III EDWARD T JUDGE GLENN A LAWRENCE DAVID W CRAMER MELISSA A MATHERNE DOUGLAS R CHAUVETTE MICHAEL K DUNKER PAMELA A PROKOS JACK J VILLEMURE CORY F SAMBLE KEVIN R DEROCHER RICHARD T DUCHARME DONALD E LABRECQUE RICHARD P DUMOULIN ALLAN YIANAKOPOLOS CHRISTOPHER F LABORE BETSY L MARTEL DAVID K SCHNEIDER JOANNE C YOUNG RONALD M CLENDENNING THOMAS W SCHLEAR JR OSCAR R ROY III PAULINE A JACOB DAVID A PHILBROOK DANIEL M BOLDUC ROGER G YOUNG LORETTA A SESTITO JAMES D III LEATH DAMITA A ANDREWS DAVID L BROWN CAROL A MCBURNETT GWENDOLYN A RICHARDSON CLAUDIE B JONES JOHN FITZGERALD BARTON LINDA V RANSOM WILLIE N MARTIN JEREMY D GOBER DAVIS M DUNBAR FREDRICK O LEE AGNES J WEEMS SCOTT M WRIGHT LARRY P HAMILTON JEFF C FOX TERRANCE L OWENS KEVIN R SATTAZAHN WILFRED BROWN RODDRICK K JOHNSON MICKY E BALES NEHEMIAH JOHNSON JOHNNY D THOMPSON SANDI J HAYES WILLIAM S MCALLISTER WILLIAM H DUTTENHOFFER MELVIN A JORDAN AKUA T METZGER ROBERT JACK MILNER KIMSEY A HARMON IRMA S JACKSON MARCUS A EMORY DONNA J FRAZIER MICHAEL E WYATT TERRY L TUTTON MICHAEL D WHITLOCK DONNY R PARHAM TOMMY A ROE JANET M JACKSON JOEL D MARSHALL MARCUS L BROWN DALE M BOOTON LISA C MILANI CYNTHIA E GLASS SHEILA G HARRIS EDWARD S BLANTON LEWIS E VOYLES MICHELLE M WALDROP FARRON L WHISENANT CHARLES B CANNADY JR JERRY W SMITH ROBERT V ANDREWS DELFIN DIAZ JAMES H LUMBUS DARREL F MILLER GREGORY A CHAMBERS JAMES FULLER GREGORY S LANIER MONA J BROTHERTON MICHAEL FLETCHER MICHAEL W JONES JR GEORGIA L STOREY LINDA G BONNER RONDA J BURT NANCY D WEEKS TERRILYN ELLIOTT CARLENE CLINTON MICHELLE LOWRIMORE CAROLYN G DUKES RUBY CLEMMONS NANNETTE J MARTIN DIANE M GIBSON TONIE WAYNE JARRELL NELLA M BARTON LYDIA M HEAD REGINA V THOMPSON JOHN H BYRON JR JOHN L COOPER LARRY SHULTZ DONALD HAMM THOMAS FAIN JAMES D CAMPBELL ERNEST M POPE JR WILLIAM H SCHENCK FLOYD G HAY BRUCE L KARR JOHN O MOORE MICHAEL D SCHENCK CLEOPHAS SMITH LONNIE S DICKERSON STEVEN E ATKINSON NEIL L SCOTT THOMAS E MILLER II KEVIN PANGBURN JAMES E HOBBS COLEY BANKS STEPHEN P PRESTON JONATHAN JOHNSON DANNY L SMITH DEBRA KAYE CLAYTON DAVID REID MARSHA D GRAY ANGELA R HAYNES ZAKIYYAH KHALIFAH AQUIL BYRON JAMES ADDERLEY WANDA BOLER ANTONIO BURNEY TONYA MICHELLE WILLIAMS SYEPHEN CHRISTOPHER FOLDS CHRIS RAMIREZ MARY ANN HUNTER MELANIE ELIZABETH SHANNON TOBY C HENDRICKS ROBERT B WOOD LARRY DARNELL WOODS SCOTT JOHN PALICKI CRAIG CLAY RAMBERT JAMES LEONARD ASBERRY JOSEPH THOMPSON III WAYMAN HUNT ANTHONY C HUNT BRADLEY ALLEN HOBBS ANTHONY PAUL BASTIAN ANGELA RENEE ARNOLD CHARLIE M RICE MICHAEL ANTHONY WILLIAMS SHEEWAN DENISE DAVIS LEMUEL CRAIG EUBANKS DEBORAH ANN WATSON TERRY LEWIS WALLER WANDA SALLEY PORTIA ELAINE DAVIS DEXTER DURANT CLARK MICHELLE L HENSON KAREN JAN PAGE 1: WORKING TOGETHER BUILDING DREAMS HOLLIS JEREMY JOHN TAYLOR JOSH R HEARD DONALD M BISSELL LISA J KENT ANASTASIOS AIVALIOTIS ROGER W CARLILE DEAN A GEARY GREGORY R SLY GARY D GRIER CHARLES D HOTALING LOUIS J MACDONALD JEFFREY T 3 BERKS DAVID L DUNCAN SABINO CASTELLANO JAY PETTIS JOHN A SELLIN JEROME R RYNNING DAVID L BERGER EDWARD P TAMLIN LEONARD W GRANT JOE COPPOLA RICHARD W KEEFER JR MICHAEL D FARRELL DENNIS R BURG DAVID R ORTH RANDOLFF MOREY GLENN R MADSEN WILLIAM R TERRIEN CHAD W MOORE GEORGE D BAYNARD CHARLES E THOMAS WILLIAM J ELDRIDGE DONALD M SPARKS DOUGLAS A BISSELL RICHARD E DYAS VASILIOS KLADOUCHOS RAYMOND G GILL BRUCE W RICHARDSON RONALD L RATHKE ROBERT B MOEN GARY A SASSER EARL J MEWING DAVID E SMITH LOUIS L SEIDL JOHN W ZIMMERMAN FORREST G MOSS ROY E BYRD LONNIE SHELLENBARGER CHARLES W SCHMIDT JR MERLIN V KOST BOB E DEVEREUX RUSSELL L SICHLEY MICHAEL W KEEL ROBERT M FARLEY RYAN HORDICHOK DANNY D PROCTOR GAYLE J DITTLER SCOTT J DANELL JAMES J GUERARD STEVEN W FLOURA BRIAN M GARRY RONALD G CALDER WILLIAM K LABRECQUE CHARLES A CECILIANI KENNETH FELTON JR TREVOR A CASWELL BRIAN M LUBY JAMES G HUDDLESTON JASON A BIRMAN KEN D COCKRIEL JOHN D HUDDLESTON LARRY H HUNT KENNETH C SEIBEL BRENT D LAWRENCE THOMAS HAYS NICHOLAS A BANKS THOMAS C SLOOP CASSANDRA J WARREN KENT R SALYER MICHAEL E MCMAHAN KENNETH A CROUSE JR CHARLOTTE C SEIDL JOYCE I BANANTO DEBORAH L NORDYKE PAULA A CADY KATHLEEN E FARLEY MARCIA N MAES WANDA SUE GRAVES HALLGRIMSON SYLVIA J MITCHELL MARJORIE L PERRINE DONNA C MOSS COLLETTE J MCDOWELL SUSAN A DALTON GORDONK HAUGEN STEVEN D GATES BRIAN R HAGEY WILLIAM D LAYTON JOSEPH C D'AMICO R MITCHELL MANN DAVID J MENG WILLIS S RILEY III JONATHAN P MILLER DANIEL J HOFFMAN BRIAN P ROOF NICK W HARMS ROGER L NICHOLSON MICHAEL J ENDNER ROBERT DIDIER JR MICHAEL D BILLERBECK LARRY LUKESH BENJAMIN E HARMAN JASON A ALDERMAN DANIEL H BETTS RICK D BYRAM JON M BUDDE DOUG D URBICK ROBERT HEWITT BRAD A NEWBREY EDWARD A HAMMERBERG STEVE A MEYER RAYMOND W HARMAN RANDALL M WALLACE RAE J NORTON STEPHEN J RYAN DONALD L BURNS FRED M FISHER LOREN R PETTIS ERIC D VAN DYKE DAVID J GENTZLER TOM D VEAL BRUCE M GATES ROCKY L ROGERS MARK V SAVRE ROBERT M KEENE BECKY L MOREY JAMES STEVENS JERRY HARMS CHRISTOPHER R NEELY RICHARD A LAINE DAVE R BROUGHTON KATHY L GRUBER LORNA M ROTH MARCIE R BESZ CHRISTINE M BRINGENBERG MICHELLE M HUBBARD CHARLENE J HILBERT SANDRA R KUCSAN JOHN A MORRISON COLLEEN FLUESO SUSAN A WADDING JOANN R MOLL BARBARA T KLIMEK DAVID E ROTH GLORIA A BAUER JUNE E CESSNA LINDA K KLEMAN CATHY A KLINE DANIELLE KROLL LORETTA A BOYER RONALD M GREENZWEIG KEVIN B MILLER SHANNON Y FRITZ BRENDA L STITZER MICHAEL A KINDT RODGER M DUNSE DAVID C FRITZINGER JR EDWARD J FYNES DAVID M KNOBLACH LEON K BUFFINGTON BEATRICE M LOPATA LINCOLN D LABAR PATRICK MOORE BERNICE J RAUCH DEBORAH M EASTMAN BRETTG ZEHNER TODD A BURKETT MICHAEL K NONNEMACHER RICKY L DERR JOHN KREMSNER SHARON ZEHNER THOMAS C KUTZ JEFFERY S FOX JOSEPH T NARATIL ROBERT G LICK ROSALIE B BILLHEIMER JEFFREY W BAUCHSPIES JAMES M TOTANI M RICHARD BIEHL DENNIS J CHECK BRUCE D YODER DENNIS G RAUCH RICKY FRITZ ROBERT M SMITH CARL D HAMANN ROBERT J NEIFERT JR FREDERICK D RUPP DORA L HOPPES DARVIN J SCHOENBERGER JOHN EVANKO JR LEE C BITTNER EDDY L FISHER KIP R KOGELMAN JOSEPH A FREY RENEEA WERKHEISER MICHAEL GALANTI ROBERT J CSENCITZ JEREMY W SCHAUS DIANE L HARTUNG DONNA M STROHL FRANCIS E ZEHNER DONALD E NESTER MICHAEL J EGAN MILTON C BAILEY KEITH SNYDER PAUL RUSSELL BROPHY BRENT S KLECKNER CARL C MOYER BARRY L SILFIES MICHELLE ZETTLE THOMAS S RUHE JOSEPH S CSENCITZ JERRY W HEIM ROGER L HOFFMAN KIRBY E MILLER RYAN K THOMSON DONALD B MAIROSE ROBERT D BEST ARTHUR E RUDELITSCH GREGORYJ MATYASCIK STERLING S CHRISTMAN MICHAEL B SHIPWASH BETH A PAJAKINAS KENNETH W SCHAUS CHRISTOPHER S MITCHELL JOHN P ROWLAND MICHAEL P HALDEMAN DENNIS POHRANICHNY JOYCE J STEIGERWALT JAMES D YOURGAL ANGELO GEORGE ZERVOS SALVATORE E TAIBI MAUREEN R REX GARY J BRODE BRUCE E STEIGERWALT KEITH L HESS ROBERT F FLUESO GARY C HOCH ROBERT J BEVICH ROBERTA J SCHLEGEL JOEL F GEORGE WILLIAM D HAUSMAN DONALD W MARTIN MARY K BEDNARIK STANLEY P TORBEY THOMAS R SOMMERS TERRY L ROTH JEANINE C BRAREN WUCHTER DANIEL A SWEITZER DALE K STOKES MICHAEL E BUSKIRK JASON C RIEPENSELL MICHAEL TOMECEK ALLEN K MECKES GLENN E MITCHELL MICHAEL J BURNS LOUISE R BRAREN JEFFREY A SCHALLES LINDA L VICTORY WILLIAM J FARBER JILL PARKER TODD A CHEESE DAVID E JOHN ROBERT E MILLER JR GARY S LONG RICKY E SMITH DAVID R MOORE CAROL J LYNN DOUGLAS T BOBENKO RONALD E MUIK KAY E HAMM DEBRA L AHNER DONALD J LEIBY TINA M MARKO ROGER A RUHE TODD D QUALLEY TERRY S KUNKLE FRANK J GESECK III RANDALL A RUHE DENISE A BEVICH MICHAEL J HANZARIK JR SYBIL M CORRELL GERALD L NAGLE JOHN T MINCHHOFF MILTON C BAILEY JR JAMES D VARNER MICHAEL R MANOGUE SUELLEN M HESS GARY S STROHL RICHARD SCHOENEBERGER JR GARY M BENNER ANDREA L SHUMACK ROBERT W LEDFORD PATRICIA A SCHWARTZ WILLIAM J OCHS LINDA K WECHSLER DAVID L MAKOVSKY JR JASON D ZELIFF MIGUEL A ROSARIO MICHAEL J MELLEY LISA J COSTENBADER PATRICK A FARBER MITCHELL W MILLER SHELLY A WILLIAMS KIM L MAY DENNIS M KERN STEVE V GOWEN KAY A KNAPPENBERGER JONATHAN N SKELTON MARK A BENNER GLEN A PAULES RANDY P TROXELL MARK L PAULES MICHAEL T WILLIAMS LOUIS L AMICI JR DENNIS W TROXELL JACKIE L GILDNER MILES I ENGLEMAN BERLYN R TROXELL JR SHAWN D LINDLEY JEREMY WHITE JEFFREY E MILLER PAUL S MILLER JAMIE D HOMYAK JEFFREY G MILLER LESLIE L GEORGE BRIAN C ONUSHCO WENDY L DAVIES JOSEPH B YASHUR JR JASON K HOMYAK SHAWN M KELLER BRIAN P MCAVOY MARK G POLKOWSKI MICHAEL D STEIGERWAIT THOMAS J STEIGERWALT JASON L MUFFLEY JUSTIN M MUFFLEY PHILIP H BRINK MICHAEL J SERINA JASON M ALLENDER LEROY CROUCH MICHAEL D MOORE CLAUDE W MOORE ROSANNA HERNANDEZ TIMOTHY J SIPES GEORGE S BRYSON LARRY D BLICKHAN RICK D PARRIS FRANK A KUHL JESSIE D CERVANTES CONNIE TSE DRBOHLAV DANNY G CONNER DAVID L SEBASTIAN STEVEN H BENNETT JASON A TREOLO LISA A MURDOCK SHAWN C MCGINNIS JAMES H CRUNK WILLIAM L FOREMAN CRAIG D SMITH TONIA E STUKES LEROY A BRONSON ERICK M EATON KENNETH L HALL KATHY L BRILLHART JOSE A LUCERO SAMUEL ALLEN DONALD R LYNN LARRY D PRIDEMORE LISA K WARDEN ROBERTO VILLALOBOS DARIN L ELLISON BILLY J MCTEER RICHARD K CORAM RAYMOND C MITCHELL MARION D HECKADON PAUL M WENDLANDT JOSEPH M MADISON JAMES H JOHNSON DAVID W CHARLES TED H DAVIS LARRY R STEWART TERRY A KOOKER JAMES GILLESPIE JR JOSEPHA PINTER RICHARD BERRY JR DEWEY L HENRY III 4 BOBBY R WILKINS JR TIMOTHY E CUSHING MARY L HARPER CHARLES A YOKLEY MICHAEL O LEFFINGWELL JAMES D HARRILL JR KARYN S BOWER VONDA S NOLAND LISA STODGELL MARY C LOCKARD MARK A DEARDORFF BRIANK KURLE HAL M HYDEN VICKI L BRYSON KAREN I STEWART JOHNR SMITH PATRICIA BELCHER SARAH J STATLER HAROLDL CLEMENS REBECCA L WRIGHT EDWIN M RODRIGUEZ MARK A SCHICK JOHN W DARLING KIM AUGUSTIN CAROLYN S SMITH JANICE J BRINDLE SHAWNT ALFORD MARY A MILBURN MICHAEL L GILLESPIE BOBBI S JOHNSON CHRISTOPHER A HOFF JAMES R HIXSON II LUU T LOWRY DARRELL L SHAFER JOHN A GASTON CHARLES E KNIGHT JOSEPH F SPICER BENJAMIN D CHAI MICHAEL C SCOTT ROBERT J MORRIS BRIAN BITTNER JAMES D MURDOCK TIMOTHY M CERVANTES JEREMIAHJ WILLIAMS KEVIN D NELSON RUSSELL L FISHER ORLANDO E COLEMAN HENRY R HERNANDEZ MARK BURGER JASON M CHERRY DANIELG HALL LEANNA J CHAMBERLAIN SANDRA K CORRISTON DIANA K SMITH BARBARA MITCHELL SHIRLEY I THIELE SANDRA S MELENSON VELMA I BARNUM ROSE M REEVES PAMELA M ARCHER KIMBERLY R JUNKIN ROSE A CERVANTES BRENDA K BREMER AMIEM BAUGHER TARA N GRAHAM DONNA J TUBBS CYNTHIA L BEASLEY ROBERT J FRANK RICHARD L VOWELLS JAMES A SIEKER VERN E SHEETS MICHAEL L DAVIS LARRY D BULLARD BENNY L KUEHN THURMAN J KUYKENDALL MICHAEL K HOPKINS DONALD E CANNAFAX CHARLES V DOWNEY DENNIS E DORWEILER EDWIN D WHITE JOSEPH B ANCRUM ROGER D HATTON DWIGHT O COLEMAN DEANG JONES II EZEQUIEL URESTI DAVID L SMITH DALE A BERRY JAMES A FEITZ ROBERT HARRILL DEANNA M ELLISON RONALD L JOHNSON KENNETH L SHAY JOHN R VINSON CRAIG A BROWN KIMBERLY R BUCKNER JOESPH L CLARY JAMES S BAKER LARRY DUNCAN GREGORY M WEEDEN PAUL A SAFFELL MARYANN CAVENDER JAMIE W CLARK SARAH J WHITE DANIEL J HEITMAN AUBREY J DAVIS VALERIE A WALKER MICHAEL J CHRISTACOPULOS MICHAEL A COTE RALPH D GEDDES TERRY N TURNER SCOTT LE MAY DEBORAH A MURCHISON MISTY J NILES DANIEL S AVILA CARL MECOM LAURA K MILLER HERMAN P WHEELER KENNETH L BRAZIEL JOHN V PETCULESCU LELAND HART CHARLES R HEITMAN KATHY GADE ANN L CARD RICK E POLLEY HOLLY L VINES MICHAEL J KOERNER JUDY LYNN PADILLA DENNIS D DONOVAN TAMMY LYNN HASTINGS BRYAN L CRAIG ALBERT LEGAULT JAMES S DUNHAM JOHN F TILLIS CHAUN D WILLIAMS MARK HARRINGTON JAMES E BENSON SHARON B WYNNE RAELYN S RYAN ROBERT BRANIGAN RUBY C HEITMAN BERNARD RAMOS LINDA K MISKILL PATRICIAF YOUNG ERIC JARVIS JEROME I KLAFTER LINDA L SUTTON SHIELA S SMITH ZORAYDA LEE STACKHOUSE JAY R MACNIELL VERNE KANNIANEN KEVIN R CURTIS JON P PITTMAN DAVID HATTON SARA E CONAWAY DEBBIE A SORG WENDI B SELANA SCOTT E RHODA DEBRA A BAILEY THOMAS E ANDERSON ALANNA J MCCRARY MELISSA K FESSENDEN TRACY A FRIEND SALLY A EVANS ROBERT R HUNSAKER RICHARD R FORTIER LINDA FITZL LYNN KANNIANEN JAMES CRONIN DONNA M SIMPSON SUZANNE MCCLINTOCK KAREN L RAINWATER STACY L SWANSON YVONNE BARRON FREIDA DELAHOYDE MICHELE HUTH MARJORIE M PITTMAN LANCE D MATZDORFF MANUEL ARREDONDO CLEOPHUS M HERMES WALTER COLLINS MICHAEL E SCHMIDT KENNETH S HUNTER LESLIE F RIECK DAVID A BURKE DENNIS W CLARK FRANK A CIOLKOSZ ALLAN C MORRIS CHRISTOPHER HORNBROOK JAMES J ENGSTROM MICHAEL E HOSKINS LONNIE R JONES ROGER L ROBERSON JAMES E ROBERSON BILL F BRIDGER LARRY J SULLIVAN PETE T GALVAN ELIJAH BRADLEY ROBERT O WILKINS LESLIE A TAYLOR DAVID E RAGSDALE JERRY U ESTRIDGE JOEL S DUBOSE LARRY S RAGLAND CECIL R BEASLEY JOHN D BRATCHER JOHN W CAREY JR FREDDIE L PRUITT JOHNNY C WHITE JR JOHN W BRIGGS CYNTHIA D MCCARTER JULIUS G MUSICK LOUIS J ROBERTS JR JEFF W DOVER ROBERT L REAM WILLIAM W BAILEY GARY T LEHMAN JR LORI J EMERSON KEVIN V CLARY MARTHA L NICHOLS RANDY S WATTERS WILLIAM T WARD JEFFERY D CHANDLER WAYNE J WOLF DARRELL G TEMPLIN JERRY D FORD DAVIDG ROSE TOMMIE J BATSON FREDE RICHARDSON RUTHIE RICHARDS KATHY L MORGAN TENA M THOMAS BILLY E AULDS DEBORAH J OBRIEN BARBARA A FAULK DAVID K THOMAS PAUL S COTTAR LEE E GRIFFIN JOE L HARRELL LIZZIE M LAWRENCE GABRIEL OVALLE KERRY D CARRICO ROBERT L JONES RANDALL M FARMER MARVIN R DANIELS SR KEVIN A GETTEL THOMAS E WILLIAMS STANFORD L DANIELS CHARLES L BARHAM RICHARD E FERRELL BRANDON R FRANKS RICHARD A PAIR STEPHEN C MCQUARY ROBERT B THOMAS JR CHARLES BURNS JR DONALD W NUNAMAKER ERNESTO NAJERA ALVIN C MULLICAN JR JOE C MILAM JOHN W PITTS DARYN W NICHOLSON BRIAN W NORTHERN MELVIN D THOMPSON DANNY L HAYES MATTHEW C MORGAN RICKY L POGUE KELLEY P MITCHELL CRAIG M BRIGGS JAMIL W JOHNSON DONALD E WILLIAMS JR SHANE ERIC EUDY LORI A MURRAY JAMES W NEAL JR CHARLES J FRANKLIN MARY C WOODCOCK ERIC K KRANTZ GREGORY C WOODS JAMES E TOLLIVER MARY L KENNEMORE RICHARD W GRANT JR PAGE 2: PHOTO OF ROBERT LADNER AND DANIEL COTTER PAGE 3: A LETTER TO OUR MEMBERS Chart: Average Member Return (in thousands) (for the years 1992-1996) Perhaps it was anticipating the future when your Chairman and President's 1995 letter noted "the measure of a company's success in any given period... is how well the company prepared... for the years ahead." If that was correct, then it is undoubtedly true 1996 was the most successful year in the history of Cotter & Company. When the announcement was made on December 9 that Cotter & Company was planning to merge with ServiStar Coast to Coast to make the world's largest and most efficient hardware co-op, to be named TruServ(TM) Corporation, your company took the greatest step ever in its quest to serve Members well into the next century. We are very proud of the work that went into that merger plan. It was not easy to accomplish this at the same time we continued with all the other important work essential to giving you the products, programs and services that you expect every day. 5 The work involved in planning the merger and preparing for the announcement did not get in the way of day-to-day operations. For scores of your executives, managers and others, the planning process meant an extraordinary work load. For everyone there was a great deal of satisfaction in the knowledge that they had done something very important for the future success of all Members. The effort put forth to make TruServ a reality is indicative of the dedication and energy Cotter & Company employees demonstrate every day on your behalf. All of these employees are named in this report. Many of them are pictured. The names and faces you see throughout this publication belong to the voices you hear when you call Chicago headquarters or one of our Distribution Centers. They belong to the hands that create your advertising, or the minds that devise the services that help you compete. Whoever they are, pictured or not, every employee shares one goal in common, and that is to serve the Membership. They are part of the team that put 1996 in the history books. When you look at Cotter & Company financial statements for 1996, you will see figures showing a good, but not great, year. You should be even more impressed when you look behind the numbers. Total revenues were virtually flat at $2.44 billion, an increase of only 0.2 percent from the year before. However, your company's Membership base was significantly larger during a big part of 1995, before the variety division was closed (and General Power sold). That's why we emphasize the "comparable stores" figure, showing that stores that were Members for all of 1995 and 1996 increased their purchases from Cotter & Company 4.4 percent. One of the first questions our Members always ask at year end is "how is the patronage dividend?" We believe you will be pleased with the answer. The total patronage dividend is $53.3 million, and the number of Members participating is down considerably from a year earlier. The result is impressive: The average patronage dividend is up 10.3 percent over a year earlier! And that's not all. Your company's gross margins as a percent of revenues were driven down again for the fifth consecutive year, so you have a lower cost from the time you receive merchandise instead of waiting a year to get a bigger patronage dividend. The $7.1 million you Members saved in your purchases as a result of Cotter & Company's lower margins is significant, PAGE 4: Chart: Operating Expenses as a Percent of Revenues (for the years 1992-1996) whether you used it to increase your profit or improve your competitive position. The dividend on Tru-Test Manufacturing purchases increased to 12.5 percent from 11.9 percent while Baltimore Brush remained at 12.3 percent. Before we discuss programs and services, we'd like to emphasize one performance category in which we take particular pride. That is expense control. There were a lot of extraordinary expenses, such as the one-time cost of moving to a new national headquarters, and upgrades in information services. Yet overall, your executives, managers and staff did an excellent job of controlling costs. We were particularly pleased when CFO magazine, which serves Chief Financial Officers nationally, recognized Cotter & Company as a leader in holding down selling, general and administrative (SG&A) costs. The annual survey, conducted by Arthur Andersen LLP, lists leading "Lean SG&A Machines" in 33 industries, and your company was No. 1 in its category. We believe the best measure of your company's performance during 1996 is the way programs and services have progressed. trueAdvantage has been remarkable. Today there are 1,403 Members who have committed to trueAdvantage, and 624 of those Members meet all the standards and are eligible for all the benefits of the program. The remaining 779 are in the process of being approved for full participation. The count of committed stores rose 38 percent last year; the number of approved trueAdvantage Members soared 232 percent! This shows Members are not just signing up for the program, they are taking action in their stores to meet customer expectations and enhance the name of True Value everywhere. trueAdvantage stores earned $1.5 million in credits during 1996 by increasing their warehouse purchases, and most of the stores were eligible for these credits for only a portion of the year. trueAdvantage stores' stock purchases in 1996 were up over 14 percent. Additionally, 13 percent of the trueAdvantage Members have made use of the below-market-rate business improvement financing, with interest savings averaging $500 a month per store, or $6,000 a year. The number of participants in the loan buy-down program still is growing rapidly. trueAdvantage is a voluntary program and the benefits are available to every True Value Member. Store size is not a major factor, and the standards are based on customer expectations. PAGE 5: The growth and in-store success of Just Ask Rental has become the envy of the industry. In 1996, 100 new Just Ask Rentals opened, bringing the total to 350. Many more started the process of market analysis, preparation of in-store space, writing opening stock orders and training employees, and we expect about 500 Just Ask Rental Departments will be operating before the end of 1997. The Commercial Supply Network shows an even faster development and growth rate. The Paint Shop concept developed by Tru-Test Manufacturing at the end of 1994 is taking off, with 297 Paint Shops added during 1996, expanding the program to 432 Member stores. The new "joint venture" Cabot Stain Program has been extremely successful. Almost 1,000 stores were shipped $2.1 million in Cabot products after the Fall Market. This seven weeks of business compares with $3.5 million in Enrich Varnish and Stains products for an entire year. Efforts to improve service levels on your merchandise orders continued, and while the numbers were nearly the same the last two years, growing to 93.2 percent, the emphasis on how your needs were met has been fine-tuned. Items considered "seasonal" often are sold year-round in many stores, so your management has taken steps to provide year-round order fill in those areas. Basic departments have been given extra attention. We know that an unfilled order is a lost sale and a disappointed customer to you, so we have expanded our efforts to deliver 100 percent complete orders immediately. Two major accomplishments -- the introduction of True Start(TM) and negotiation of an alliance with Triad to provide enhanced technical support for Tru-Trac and Triad users-- made 1996 a year of important advances in Information Services. In the Information Services section of this report you will find details about your new affordable True Start store automation system. The rollout at the Fall Market was quite successful, with a hundred Members installing the system in the busy closing months of the year. 6 Establishment of new regional advertising and merchandising programs was a major 1996 accomplishment. The Marketing and Merchandising sections of this report give details of these programs, which help Members do a better job of serving the unique wants and needs of customers, whether the store is in Portland, Ore., or Portland, Maine, in Minneapolis, Minn., or Miami, Fla. Cotter Canada has completed another excellent year, with membership at year-end reaching 505, a net gain of 12 percent for the year. True Value International continued to expand, now serving stores in more than 50 foreign countries and U.S. territories, an increase of 10 countries from a year earlier. To summarize, 1996 might be described as the most exciting time in the 49-year history of your company. There were outstanding accomplishments, some with an immediate impact and others that will ensure the future prosperity and security of True Value Members. None of this could have been accomplished without the support of Members, and the dedication and hard work of management, staff and all employees of Cotter & Company. We thank all of you for your cooperation and loyalty. Robert J. Ladner Chairman of the Board Daniel A. Cotter President and Chief Executive Officer Chart: Gross Margins as a Percent of Revenues (for the years 1992-1996) PAGE 6: Photo of Kevin Houlihan, Richard Matzke, & Frank Rothing PAGE 7: Photo of tape measure Photo of Master Mechanic Packaging The true measure of a successful merchandising program is the value it delivers at retail. Can the customer find the right product choices at True Value? Is the price competitive? What about quality? These are the key questions we ask whenever we plan, negotiate or purchase merchandise for our retail Members. It's simply not enough to provide a broad selection of merchandise at competitive prices. We need to know that the merchandise has the power to draw paying customers into True Value. In 1996 Dave Christmas led the Merchandising group in an aggressive pursuit to expand SKUs and negotiate better prices for True Value Members. We successfully added thousands of new items, achieving a product offering that exceeds 60,000 SKUs. And by flexing the purchasing muscle of 5,000 retailers, Cotter & Company negotiated lower prices on thousands of items. By year's end, we reduced Members' merchandise costs by $7.1 million--savings that simultaneously improve retail margins and earn loyal customers. Commercial Supply is another success story. Serving the growing industrial and commercial supply customer has created advantageous profit centers for nearly 200 True Value retailers. Cotter & Company supports these Members with a comprehensive training seminar, catalogs, support literature and a team selling approach. We strengthened the merchandise program in 1996 by deploying seven regional merchandise managers across the country. These local experts serve as liaisons to the corporate merchants, generating a merchandise mix tailored to local demands. Customer demand for choices was also enhanced with the addition of popular national brands. These items complement the offering of nationally renowned private labels exclusive to True Value, including Tru-Test(R) Paints, Master Mechanic(R) and Green Thumb(R). An important key to our successful merchandising efforts is the strong and lasting relationships we build with our manufacturing partners. We continue to work with vendors who share our commitment to provide a quality product offering at lower prices. There's much more to a successful merchandising equation. We consider packaging, display, vendor programs that reward Members and much more. But the bottom line is always the value we can deliver at retail, because earning customers for our Members is the cornerstone of retail success. Kevin Houlihan Richard Matzke Frank Rothing Merchandising Photo of Merchandising department employees PAGE 8: Photo of Danny R. Burton PAGE 9: 7 Photo of woman shopping Cover of Just Ask Rental Brochure The greatest balance we achieve at Cotter & Company is to act like a wholesaler and think like a retailer. That means we have to understand both sides of the business--gaining the advantages of a national wholesaler while improving every retail enterprise. It means we have to listen. We have to be flexible. We have to be creative. In that sense, 1996 was a Leap Year in more ways than one. trueAdvantage is our Company's most aggressive retail support program. We concluded 1996 with 624 retailers meeting all 12 retail standards. These Members not only qualify for rebates and other incentives, they also report tremendous customer response to their retail improvements. There are countless other opportunities to help our Members compete more aggressively at retail. We learn more every day through our Retail Development and Operations Team which is in the field talking to Members, observing customers, listening to questions, exploring new opportunities and finding answers and solutions. In 1996 we responded to Member feedback and the changing retail environment, generating new programs to appeal to female consumers, ideas for competing against big boxes and national chains, buying markets with broader appeal, a new price shopping program called Hardware Education Leadership Program (HELP) and much more. The field Retail Support Team assisted Members with 90 changes of ownership and established 32 branch locations with nearly 400,000 square feet of new retail space. Another 78 Members expanded their retail locations, adding over 630,000 square feet of selling space. And another 92 Members remodeled their existing stores. The Just Ask Rental program became the No. 1 in-store program in the rental industry this year. This dynamic program came about because Members told us there were big opportunities in rental. We listened, and committed resources to rental--providing advertisingtraining and market evaluations for Members considering this business. By year's end, there were 350 Just Ask Rental operations. That's what comes from performing like a wholesaler, while thinking like a retailer. Danny R. Burton Vice President, Retail Development and Operations/Markets Photo of Retail Development department employees PAGE 10: Photo of Robert F. Johnson PAGE 11: Photo collage of globe, keyboard, and numbers Photo of keyboard closeup The benefits of retail automation are so evident, industry analysts routinely question why automation is not mandated in each of the hardware co-ops. It's a fair question, but what industry analysts fail to understand is the financial challenge of automating a store, particularly a small, neighborhood hardware store. It's an obstacle we overcame in 1996. Cotter & Company entered the year with a mission to develop an entry-level computer system that would simultaneously help True Value retailers gain the advantages of electronic systems, but would also protect our Members' bottom line and ease their initial automation investments. We closed the year with an affordable, accessible, highly compatible system called True Start(TM). The system is appropriately named because it essentially gives Members--large and small--a place to start. True Start requires a modest investment of less than $6,000. It is provided with training, service and support. It is user-friendly, so even the most new-to-automation retailer can put it to use quickly and easily. True Start consists of an electronic catalog, complete with the 60,000 items included in the Fine Line Catalog. It provides electronic ordering for speedy, accurate processing without errors. Plus it allows retailers to communicate electronically with Cotter & Company. The implications of True Start are immense. It will eliminate duplication of effort at the store level, reduce order processing time, improve tracking and follow-up. And perhaps most important, True Start will give Members more time to spend with their customers and minding the store. With full automation will come the efficiencies and savings that will help us compete more successfully against the big boxes and national chains. That's why retail automation exists. And that's why Cotter & Company has been a leader in developing it. Robert F. Johnson Vice President, Information Services PAGE 12: Photo of Charles L. Kremers PAGE 13: True Value MasterCard graphic The Story of Santa Claus poster graphic Photo of World Series/Man of theYear Flip card stunt 8 Building the True Value brand in the hotly contested DIY market is a multi-faceted responsibility... one that requires national, regional and local components. To effectively reach the do-it-yourself customer, we have to be everywhere our customers are. In 1996, we were. The launch of the regional program was a milestone, because it allows retailers to tailor marketing efforts to their specific market with low-cost regional circulars. More than 1,300 stores took advantage of the regional circulars in 1996. In 1996, True Value launched the industry's first co-branded MasterCard(R) that not only provided one of the lowest annual percentage rates, but also rewarded customers for shopping at True Value stores with rebates in the form of gift certificates redeemable only at True Value. By the end of the year, there were nearly 75,000 active customers in the U.S. carrying True Value MasterCards. True Value reached millions of consumers in 1996 on national television with dramatic commercials positioning True Value as a helpful do-it-yourself resource. We also ran national commercials to generate store traffic during our major holiday sales. In the spring, True Value virtually owned Opening Day of Major League Baseball(R). We rebuilt 115 local Fields of Dreams in the first summer of our baseball sponsorship. We honored local heroes and benefited hundreds of charities across the country through our Man of The Year sponsorships in Major League Baseball, NASCAR(R) and the NFL(TM). Then we dominated the fourth game of the World Series in October with a card stunt orchestrated by 55,000 fans and watched by millions of viewers around the world. True Value made history again in December, sponsoring the new animated CBS special, "The Story Of Santa Claus," viewed by millions of families during the busy holiday shopping season. We brought the theme of the program home to local stores by serving as drop sites for the U.S. Marine Corps' Toys For Tots program. At every level, in every season, True Value was a dominant presence in 1996, with even more to come in 1997. Charles L. Kremers Vice President, Advertising and Marketing PAGE 14: Photo of John P. Semkus PAGE 15: Photo of Inside of Warehouse Chart: Service Levels (for the years 1993-1996) Distribution accounts for 50 percent of your company's operating costs. Going into 1996, one of our primary business objectives was to drive costs out of the distribution and transportation channels while preserving the reliable service we provide the Members. By all accounts, we exceeded our goals. Overall, system-wide labor and operating expenses were maintained in 1996, while the organization handled over $100 million more merchandise than the previous year. By putting our trucks to more efficient use and revising our route structure, we also eliminated 1.2 million miles and 17 tractors from the distribution cycle. And we did this while delivering 31 million more pounds of merchandise than was delivered in 1995. These achievements were particularly important because they allowed us to lessen the impact of the significant and unexpected increases in the cost of diesel fuel. In the third quarter of 1996, Cotter & Company introduced a new and simplified system for assigning freight charges to the Membership. The system is based on 14 purchase brackets which are calculated against a Member's total purchase dollars. Essentially, the system gives Members more control because they can ultimately manage their freight rates by maximizing their Cotter & Company purchases. One of the most advantageous programs in 1996 was the Gainsharing initiative. This employee empowerment program has proven so successful, it has been introduced in 10 of our 15 Distribution Centers. Gainsharing is a program which awards monetary bonuses to employees who meet and exceed performance goals. Manchester is a prime example of how Gainsharing benefits the employees and the company. The empowered Manchester DC staff capitalized on the incentives with such enthusiasm they earned individual bonuses and still managed to achieve an 8 percent reduction in operating costs for the Membership. In 1996 we also developed an infrastructure for our Quick Response strategy, an initiative that will pivot on the Central Ship system. By year-end we had prepared the Central Ship facility, located inside the former General Power factory, to receive slower-moving SKUs; and we tested technological systems that could successfully manage the new distribution format. By laying this groundwork in 1996, we are confident that the launch of Central Ship will occur on schedule in the second quarter of 1997. There were other achievements that put 1996 in the history books. The RDCs posted a significant improvement in quality by achieving a 10 percent gain for the year. Service levels reached 93.2 percent, and we also realized a productivity improvement in both lines filled and dollars shipped. These are successes that achieve greater service and cost control for the membership. The dedicated employees who made it happen should be very proud of what they accomplished in 1996. John P. Semkus Vice President, Distribution and Transportation 9 PAGE 16: Photo of Kerry J. Kirby, Karen M. Agnew & Daniel T. Burns PAGE 17: Managing the financial performance of a co-op is a complex business. At Cotter & Company, there are essentially 5,000 bottom lines to consider in every business decision. At the wholesale level, our primary mission in 1996 has been to fortify the financial strength of Cotter & Company and improve our permanent capital. We achieved this goal through many efforts: controlling expenses, realizing operating efficiencies and modifying the Members' stock requirement. These and other changes will make Cotter & Company a healthier company, and every improvement has been pursued with a parallel interest in protecting our Members' interests. We need to maximize their patronage dividends, and put cash back into their businesses as quickly as possible so they can invest in their futures. 1996 was a milestone for True Value, and with the emergence of TruServ(TM) in the years ahead, we are building on a solid foundation that is remarkably firm. Kerry J. Kirby Vice President Finance, Treasurer and Chief Financial Officer To take the pulse of a company, you should look in its mail room. Or check out the switchboard and the duplicating center. That's where chaos tends to migrate, because that's where the deadlines are ultimately met and where all the make-or-break services that hold a company together are performed. Cotter & Company has always invested in these vital services, and the new West Loop center that opened in 1996 is a prime example. This facility houses accounts payable, claims administration, member and manufacturer relations, collating, credit card operations, mail services, maintenance, payroll, printing and shipping/receiving. In 1996 the group of professionals who occupy West Loop accomplished hundreds of thousands of small, often invisible feats. And thanks to them the Members were heard, the bills got paid, the mail was delivered, information was disseminated, data was processed, staff was paid and Cotter & Company enjoyed a banner year. Karen M. Agnew Vice President Management Services; Assistant Secretary The Human Resources, Benefits and Law Departments impact nearly every aspect of Cotter & Company's business, providing legal advice or training in areas of corporate and commercial law, trademark or real estate law, benefit plans, labor relations or human resources. The Law Department concluded some significant projects in 1996, including the Triad Agreement, the Member Finance Agreement with the National Consumer Cooperative Bank and the new True Value credit card agreement. Labor agreements with unions were negotiated at our West Loop Center and the Portland and Parts Central facilities. And managers were trained on management relations practices. The Human Resources and Benefits team provided empowerment training, career development programs and GainSharing systems. In its ongoing commitment to provide competitive benefits, the Benefits Department amended the pension plan to provide lump sum payments, and established a point of service medical plan. Along with the 401K plan, these plans provide benefits that meet contemporary needs of our associates. Daniel T. Burns Vice President Legal and Human Resources; Secretary PAGE 18: Photo of the Board of Directors Cotter & Company Board of Directors First Row: (left to right) Leonard C. Farr, William M. Claypool, III, Robert J. Ladner, Daniel A. Cotter, Jerrald T. Kabelin, Samuel D. Costa Second Row: (left to right) John M. West, Jr., Richard L. Schaefer, Joe W. Blagg, George V. Sheffer, Dennis A. Swanson, Kenneth M. Noble, William M. Halterman, John F. Lottes, III Joe W. Blagg3 Weakley-Watson True Value Brownwood, TX (915) 646-0536 Director since 1996 William M. Claypool, III1,2 Claypool True Value Hardware 10 Needles, CA (619) 326-2110 Director since 1970 Samuel D. Costa, Jr.4 Costa's True Value Hardware Smethport, PA (814) 887-5542 Director since 1988 Daniel A. Cotter* President and Chief Executive Officer Cotter & Company Chicago, IL (773) 695-5000 Director since 1989 Leonard C. Farr3 Farr's True Value Hardware Coos Bay, OR (541) 267-2137 Director since 1972 William M. Halterman3 Halterman's True Value Hardware Petersburg, WV (304) 257-4552 Director since 1990 Jerrald T. Kabelin1,4,5 Kabelin True Value Hardware LaPorte, IN (219) 324-5251 Director since 1985 Robert J. Ladner, Chairman* Ladner's True Value Hardware Granite Falls, MN (320) 564-3130 Director since 1994 John F. Lottes, III2 Rozier True Value Perryville, MO (573) 547-6521 Director since 1996 Lewis W. Moore1,4 Moore's True Value Rochelle, IL (815) 562-7682 Director since 1948 (Not pictured) Kenneth M. Noble4 Noble True Value Hardware South Glens Falls, NY (518) 761-6777 Director since 1995 Richard L. Schaefer3 Carroll-Ames True Value Hardware Bryan, OH (419) 636-1149 Director since 1976 George V. Sheffer2 Murdale True Value Hardware Carbondale, IL (618) 529-3400 Director since 1994 Dennis A. Swanson4 Steamboat True Value Hardware Steamboat Springs, CO (970) 879-8014 Director since 1995 John M. West, Jr.2 Gulf Coast True Value Hardware Englewood, FL (941) 474-1807 Director since 1991 Corporate Officers Karen M. Agnew 11 Vice President, Management Services; Assistant Secretary Daniel T. Burns Vice President, Legal and Human Resources; Secretary Danny R. Burton Vice President, Retail Development and Operations/Markets David W. Christmas Vice President, Merchandising Daniel A. Cotter President; Chief Executive Officer Robert F. Johnson Vice President, Information Services Kerry J. Kirby Vice President, Finance; Treasurer; Chief Financial Officer Charles L. Kremers Vice President, Advertising and Marketing Steven J. Porter Executive Vice President; Chief Operating Officer John P. Semkus Vice President, Distribution and Transportation Committee Memberships: 1-Executive Committee, 2-Long Range Planning Committee, 3- Audit and Finance Committee 4-Management Development and Compensation Committee 5-Business Development Committee * Ex officio member of all committees PAGE 19: WORKING TOGETHER BUILDING DREAMS JAMES C SAYLES CHRISTINE M LANGE VALLAY BOWDEN BILLY RAY BARBER ALVIN CHAD RICHARDS DOUGLAS WARREN WHITTEN KEVIN R COLLIER JEREMY A ZILLS DORIS F DOMINGUEZ CATHYSTUTTS JONES STEVENS SMITH CARL M CASBEER JR JAMES E WIELKENS RAUL PEREZ CRISSAL DUVALL JOHNC RITTER JARRODD COKER KEVIN LEE LARRY E CARNLEY MARSHALL HENSLEY RANDY J WARREN JR JOHN L WEAVER ANDY G MIKULA EMMA F RALEY RUBY K DRAUGHN ANNAM TANNER RONALD C ZILLS LINDA J DERDEN ROGER W HARTMAN RONALD DALE JORDAN JOSEPH R KLECKA II JAYNE A WHITE EDDIE B FARMER ROY E WISEMAN TERESA A ROPER MICHAEL R KIDWELL CHARLES E ALLEN RANDALL J CARVER STEPHEN W MUNCY GARY A POE DWAIN R SMITH WANDA F SPAIN JAIME RIOS SCOTTY L MAYO CLINTON J BELL JR PAULA G WATSON VICTOR M SLOVAK PAULINO MORENO REID A TOLLEFSON PETER A GONZALES JAMEY L TIPPING GEORGE W MITCHELL EDDIE J WATSON TOMMY E SIMS ROBERT K FARRIS STEVEN W HAYNIE DARLENE WARREN VICKI L BRANCH MARK A BATES KENNETH W VALENTINE DAVID G SEALE WILLIAM D BURNETT III LEONEL P GARCIA JERRY W REDMON MAURICE A SMITH VIRGIL C JOHNSON JIMMY E DRIVER CHARLENE DENNIS MICHAEL D MCCARTER GILBERTO MEDRANO JR DARRELL J FREDERICK BRIAN D NETT WILLIAM H WAKEFIELD RANDY W NEREM MICHAEL J KREMER RONALD J SMOOK EDWARD J JACOBSON DAVID L THRUN SAM E BODE KEVIN J DORN BRUCE J HEMINOVER MITCHELL J LAVEN KEVIN K KENT PAUL C DUMKE DANNY L HOPP BRYON C BAUMAN KENNETH D ZERNECHEL JAMES J RYAN NEIL G HEILMAN JOHN C CARLSON GERRIT N HOOGENRAAD LARRY L LAMM RONALD L STATHAM ROBERT A DITTRICH DARCEY L BAUMAN ROYAL C PAHNISCH KELLY J TRUDEAU DANNY A KOLLMANN RICHARD A FRENZEL MARLYN J PETERSON DANIEL L THORSON ROBERT P MULDOON DOUGLAS S SARGENT HUGH B GAPPA MICHAEL L LUTTER KEITH G ANDERSON BRUCE E LOKKEN THOMAS J HOERR LYNN W OLSON THEODOOR K HOOGENRAAD STEVEN D VISHER JAMES A REED JEFFREY S LUTTER LARRY L HOLTZ GERALD STOFFREGEN THOMAS D TESKE KEITH J DORN DALE E MARBLE DENNIS D METTLER DANIEL P GEMMILL DANIEL C SARGENT DENNY J WELLER SCOTT D JOHNSON DONALD D SOLYNTJES CHRISTOPHER S BLEGEN ROBERT A REED DAVID C SCHULTZE RYAN M KIRBY CHRISTOPHER T EMICH GARY D KLINDER CRAIG T WOITAS WILLIAM W LLOYD WILLIAM J KINDLER JONATHAN 12 G EMICH DANIEL K WILLIAMS MICHAEL J HESTON THOMAS J PERRIZO MARK A ENTER STEVEN G KREMER KEVIN J JONES JERRY H BEEMAN JACE R FRANKLIN PAUL E NELSON PATSY A ZIWISKY CINDY R SCHMIT JANET L HOFFMAN SHARON M JACOBSEN CARMEN A OEFFLER COLLEEN MCVENES VICTORIA A JUHLIN CATHERINE A HEMINOVER MARY A WIDELL DENISE M THOMPSON MAXINE L ANDERSON SHARI L HADLER JANS KOR JR ARNOLD W MENSE CHARLES E HOFFMAN JAMES L BURNS RAYMOND L WARD ELDON J JONES GENE H STRUCK TERRY L MENK RONALD D WILLIAMS THOMAS J ELBERT GERALD B WAISANEN DUANE J HANSON WALTER J BAUER GORDON J GOEBEL TIMOTHY J ELBERT BILLY A RAMUS THOMAS J NEUBERT RANDY KEIM HARRY E STEVENSON DANIEL V SONNEK ALAND STENCEL BARRY W KEIM RANDALL S BESKE DOUGLAS J THOMPSON DONALD ACTON HAROLD M ALLEN ROYCE BAUER BYRON CLEMENS JEFFERY D MILLER DANNY W MCMAHON TOM B FISHER DWAYNE W BEDWELL DENNIS HILAND BRIAN H SCHWARTZ ROBERT L WAGNER RICHARD T HENRY MEACHELE L GREATHOUSE JERRY MCCONNELL JAMES E CALDWELL DONALD MARTIN CAROL A WESTRICH ESTEL MARTIN STERLING STEWART JR TIM J COURTNEY BRUCE SCHAEDEL ROBERT G CAIN LARRY W LEE II TINA M WILLIAMS RANDY WAYNE GILL JOE A REED BRIAN C SNIDER JACK B EMMONS JON D GILES JOHN L VARGO LLOYD R HORLACZER MICHAEL MURPHY III ROYCE A HUG JOHN P COX BARRY W MCCONNELL GREG M UNGER JOHN L MCDONALD JAMES K LIEBERT ROBERT R KANE TROY W GLENDENNING STEVEN D GORE TODD B DILLINGHAM MATTHEW D LYONS DAVID R BRENTON RANDALL G HALCOMB JAMES L TRAYLOR ROOSEVELT SELLERS JR TIMOTHY A RUSSELL DANIEL J ZIMMERMANN KURT A HARRIS DARRELL C MYNATT DAVID P MASON JR SHARON K DUKE BRIAN SWIHART ROBERT D SNAPP JR ARCY J CASADA JIM F SPEARS TOMMY J OLIVE DAVID L ROLFSON MICHAEL C HOBEIN MARK E WRIGHT JAMES M WHITE JR ERIN L COOK JOHN M DANIELS KEITH L DURHAM SHANNON L MCKINNEY KATHY J JOHNSON KEITH A DOWELL JACK GAMMON JAMES C JANSEN THERESA ANN CLINE JAMES C MAVERICK BRIAN DOUGLAS MASON GIRMA SEIFU DOUGLAS J PRIVETTE CHRISTINA M DEMOTT ROBERT A ROBERTSON LARRY WALLACE MARTHA BARRETT CHERRYL MAYFIELD DIANA ROBERTS JANET K GILES JAN MARTIN SHIRLEY J LUSK RUTH B SMITH PAULA L RAGAR KATRINA BREEDEN SUSAN D LITTLE YVONNE J MAHONEY MARVIN D TERRELL FLOYD P ANDERSON JOHN D HOLT DANIEL MOORE DALLAS L MEDENWALD CHARLES S BUSH CHARLES D BOOTH DUANE W BRIAR JERRY A YOST RICHARD D COPE TANYAS PARMALEE STEVEN K WEST EDWARD H BURTON EDWARD J AHERN JR CURTIS COOK RICK R ABNEY TIMOTHY O'CONNOR STEPHEN T MEYER JAMES W HEFFLEY CHARLES B COOPER GARY D PRUESS FRANK L THOMPSON TERRY TROSPER KYLE S MCKINNIES MICHAEL E MAHOY MARK D WYLD JAY A BUSER SCOTT C HARROD ERIC E WATSON JON T REIFF THOMAS L CARY ROBERT DOUGLAS PLACE TROY W LUSK ROBERT G HARRIS EDWARD J GERKEN DARWIN H SCHLEHUBER JASON A WALKER BRIAN J O'DONNELL DELTON G SCHLEHUBER JACK BREMER KENNETH H MC CLAIN HENRY J VARGAS ROY F BESSEY KEVIN E BASS ROBERT J PETERSON BRYCE R PURCHASE ANTHONY C MURPHY CHRISTOPHER P WOLF ODDIE B MEDLOCK ANDREW C JENKINS ARNOLD SENA LAWRENCE H PORTER BRIAN D NELSON JOHN L THOMPSON STEVE GOMEZ CARL G MEDLOCK DANNY J PAWLETZKI ROBERT S LOPEZI ROGER A SJOSTRAND MICHAEL J TATE JAMES D BOUSKA PATRICK K TOW MICHAEL R RONDEAU REED M HABERL RICK C TAFOYA DARCY JOANNE DAVID W SCHNEIDER NICHOLAS J GUADAGNOLI CHARLES P HIXENBAUGH DANIEL A BLOHM DAVID JAMES BOWES KENDRA S GRISCHKOWSKY FRANK E BRICKHOUSE DEON R ROGERS DAVID W PARKS AMBER D MORRIS ANNIE M BALDWIN SHAWN D TOW TIMOTHY M BONE EDITH R STOUT THOMAS V TOEWS SHARON L SIMMONS MANUEL A GUTIERREZ JAMES D BENNETT DONALD A COSTER SCOTT D SMITH MICHAEL E MENDEZ DARWIN D KRAMER DANIEL T ORTEGA JR NORMAN D WHEELER GREGORY VIDAL LEAL SCOTT E BROSIER PAUL F THORNTON ROY N HARRIS REBECCA L BOLTON ELINA M FRESQUEZ MELANIE M STOWELL CAROL L PROUTY CONNIE A REISENBIGLER JESSICA E FADEYI PAMELA SINNER SHARON M FRIEDLI PAULINE L STOWELL TAMMIE L TAYLOR JEROME L REISENBIGLER DENNIS F SITTER DALE J DAVIS SHAWN T SCOTT DALE R HOHN PAUL L DELK PAUL A BECKER ARTHUR M WALLEVIK MARVIN M EDELMAN VERNON L RAUDABAUGH MIKEL R CONNOR KENNETH J POOLER JAMES S PIMPLE WILLIAM D TAYLOR VIRGIL L KRUGER WILLIAM T WYATT THOMAS NICHOLAS GEURTS RICHARD S REISENBIGLER JOHN HARVEY ELLIS RICHARD P THOMAS JOHN W MURPHY ROCKY D WOOD DUANE ALLEN CLEARWATER MICHAEL M ZUNIGA THOMAS HICKS GARY GENE SCHAFER RICK L GASPERSON MARION E MERIDETH DAVID DAY GUERRERO NEWTON J HOLT MARK PAUL BIGGS ROBERT E POLKIV HOSEA JEROME DAVIS DARLA TAFOYA LISA J CORREIA MICHAEL G WESTRAY RICHARD A TURNER GENE A DINGER SERGIO MARTINEZ GORDON L MUMMA DAVE A ENGLAND MICHAEL J PATENAUDE HOWARD W DOYLE JEFFERY M SMITH DON WESLEY WARNKE CHARLES E PIAZZA URIAH WALTER HARRISON CLARK JODY A KING MICHAEL B COTNER ANGELA KATHRINE RYAN HENRY D RATHJEN JR EDELMIRA AMISTANI ERNESTO MARTINEZ DAVID M HAMER CARLOS G HERNANDEZ ADRIAN RODRIGUEZ KENISE M NICHOLS DEBRA L KING MICHAEL A CORDONE JOHN A TIESMAN JIM D HAIRSTON ROBERT J ALVAREZ KEVIN J HAMER MEREDITH R RUTHERFORD TIMOTHY W HAYES BEN I HIGA JR. GREG L MIKAELSEN ROBERT R CARTER DALE T GAULDIN ROBERT H DUNCAN JR NICOLAS MARMOLEJO HENRY G HUNTER GWEN K HATZFELD PARKER JOHN A HILL MARTIN J JOHANNECK CABRERA JAMES L CRESAP KARRIE L HATZFELD LYDIA LOSOYA ROBERTO LOSOYA BILLY W GAGE MATTHEW J WUNDER VIKTOR W ANDERSON STEPHEN P GILLESPIE DENNIS D HUBBARD GEORGE N SANDOVAL JR MARK C PIPKIN ESTELA MARTINEZ JEFFREY S HILL RICARDO PIZANO BENJAMIN J DELEON ADRIAN E PEREZ ANTONIO M OLVERA LOUIS C STEINMETZ LUIS C VILLA JOSHUA K SCHAFER CINDY MARTINEZ HERTIS M BOYD GARY S GADDIE ROBERT URIBES TERRANCE L PARKHURST JR MICHAEL R ROACH DONALD D WEEKS RICHARD O GUTIERREZ MELISSA L MENDOZA TERRY R PIXTON ANNETTE POLK LAURA M HENRIQUEZ ALBERTA R SAVALA TERESA H TORRES MARILYN K NAVARRO DEBRA A LANDERS LYNDA L COOK DANIEL E GREY CATHY R MONTOYA TOM A ROACH RAUL MARTINEZ ANTONIO MONTOYA JR RANDY L LEEPER JAVIER M JACOBO RYAN K STEWART MARK L PRESTON HENRY R DAVIS TIMOTHY D SEXTON KENNETH J BROWN MONROE THOMPSON RAUL R CASTANEDA STEVEN D PEARSON GARY O SURRATT DORREN D THRUSH THOMAS C WILLIAMS STEVEN C ANDERSON DELBERT E SURRATT EDWARD L TATUM MICHAEL E BOWERS ERIC R JACOBSEN DAVID A MELLO MELVIN WINROW MARK A GALLEGO JOHN C HUMPHREY RONALD C HESELTON DAN T PARSONS DAVID A TRUJILLO TIMOTHY WAYNE BECKWITH MARY C WALKER BRENDA F 13 LIMER LARRY D BULLOCK DEBORAH H MADDOX CLISTON KEARNEY CLAUDINE A ALSTON JONATHAND STEVENSON SAMUEL T MEADOR FELICIA A DUNSTON RAYMOND T BULLOCK REBECCA A RAY JULIAN W PEGRAM BRIAN J STEVENSON EMMA P TOWNSEND LARRY A JORDAN MARILYN PENDERGRASS JOSEPH SHEARIN SOPHIA D RICHARDSON DEBRA G TOWNS SHEILA R TURNER RONALD W BATES JAMES T PENNY JOHN E HAWLEY HERMAN A MARTIN WAYNE H THOMAS WILLIAM C PATTON CURTIS T DURHAM CONVIE E HOWARD LEROY RICHARDSON OLANDIS T HARRIS CRAIG H CLARK MARY M PERRY TIMOTHY L COMPTON LLOYD WATKINS MARIE K JONES EUGENE NEWELL ALFRED TAYLOR III JEANETTE E GRIMALDI DERRICK L HAWKINS RENITA D PEACE SANDRA KAY LEDESMA LARRY HENDERSON KENNETH HENDERSON DOUGLAS R ROBERTS DEBORAH F BROOKS RICHARD J TAYLOR RONALD F LYNN DAVID K AVERY DANNY L RIGGAN STANLEY RICE TIGKIN R RICHARDSON KENNETH L BALL BENJAMIN W PULLEY BETTY J WIMBUSH LARRY D OWENS JENNIFER B LAYTON MICHAEL R WINTERS MARGARET F RICHARDSON JAMES ALLEN JR WILLIAM T WYCHE JOANN D HENDRICKS JUDITH MARIE EDWARDS GAIL N TIPPETT LORI V NULL VICKY C STOKES KRISTAL M DICKERSON MICHELLE R NEWTON EDNA F BISHOP MELINDA J CURTIS GEORGE E BAGBY MARSHALL N BRADLEY ARCHIE SMITH MICHAEL E JONES JIMMIE L THORNTON JERRY ANDREWS MELVIN L LEWIS RICHARD E WAVERLY JOHN C HENDERSON JERRY W PRATHER SR OTHA P WILKINS JR GEORGE WHITFIELD III MICHAEL G ROBERTS HAROLD L PLUMMER AUBREY D RODWELL DARYL K HORNE RICHARD L MASSON DAVID W BJORK LLOYD A ENGLETON WILBERT R SWIFT DAVID FLUKER JAMES H THURNGUIST BRIAN S JONES WILLIE WASHINGTON JR SANDRA K LITTLE SUSAN R ALGER MARK C DZURIK BERNARD E GRAHAM DAVID L HERNANDEZ ROBERT L MCGLYNN SHANNON A REWERTS HENRY D SMITH JR DORIS ELIZABETH STEGALL DENCOV BRYANT II TINA M WILLIS MARY A ENGLETON CHARLES ANTHONY HOUSER BRUCE S TOSCANO CAROLYN D REICH TERESA A RIAUBIA ANGELA R GAGNE JOSE R SOTO NOEL RICKY SMITH RICHARD C EYLER VUSHNU PERSAUD ROSLYN M SMITH MARY A ST LAURENT JEANNE M MC KENZIE PATRICIA ANNE CATHCART CAROLYN S SHANNON KIMBERLY A BAYNE TERESA K ALLEN GARY M CHAPMAN ROBERT E WOODRING JERRY W TIDWELL JR GARRY L SUMMERS STEPHEN J SCHMIDT SR CHRISTOPHER E OLIVER ARTHUR W BROWN LORIL DAVIS JEFFREY PATRIZI KATHYM ORZECH JOSHUA B LEMON SHANNONM KEANE SCOTT HUMPHREY SANDRAD GAIC JANEA NADOLNY APRILM APLAND SARAHE MAJKZAK LORNA J SIMPSON HAROLD M LAMBKEE ELIZABETH A CAMPBELL MICHELLE A BURMAN CRISTIE L KETCHAM JERI B APLAND BARBARA M SYPIEN IRENE A BREUTZMANN FRANK E GIERUT SUZANN HENKEL MARYANN E RAMIREZ WENDY J WEBER REGINA S RADKE CHERYL A GRUEBNAU DEBRA J DERDZINSKI CHERYL L PHILLIPS MARILYN FUENTES PAGE 20: COTTER & COMPANY 1996 ANNUAL REPORT 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 14 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 ======= =======
15 PAGE 21: COTTER & COMPANY 1996 ANNUAL REPORT 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. 16 PAGE 22: COTTER & COMPANY 1996 ANNUAL REPORT 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. PAGE 23: COTTER & COMPANY 1996 ANNUAL REPORT 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
17
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. PAGE 24: COTTER & COMPANY 1996 ANNUAL REPORT 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
18 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. PAGE 25: COTTER & COMPANY 1996 ANNUAL REPORT 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. 19 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 PAGE 26: COTTER & COMPANY 1996 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ======== ========
20 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, $17,574,000, $7,625,000, $4,000,000 and $32,000,000, respectively. PAGE 27: COTTER & COMPANY 1996 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 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 $10,387 1998 ....................................... 1,144 9,126 1999 ....................................... 809 7,411 2000 ....................................... 296 6,221 2001 ....................................... 184 5,509 Thereafter ................................. 108 45,651 ------ ------- Net minimum lease payments ................... 3,974 $84,305 ======= Less 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
22 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 ======== ========
PAGE 28: COTTER & COMPANY 1996 ANNUAL REPORT 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: 23
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 ======= ======= =======
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. PAGE 29: COTTER & COMPANY 1996 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ======= ======= ========
24 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. PAGE 30: COTTER & COMPANY 1996 ANNUAL REPORT 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 25 Chicago, Illinois February 10, 1997 PAGE 30: COTTER & COMPANY 1996 ANNUAL REPORT 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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