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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JANUARY 1, 1994 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 2-20910
COTTER & COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2099896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2740 NORTH CLYBOURN AVENUE, CHICAGO, ILLINOIS 60614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 975-2700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X . NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K 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, VARIETY AND RELATED MERCHANDISE, IN CONNECTION WITH
BECOMING MEMBERS OF THE COMPANY. SAID STOCK IS LIMITED AS TO
TRANSFERABILITY BY ITS TERMS.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING
AT
FEBRUARY
CLASS 26, 1994
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CLASS A COMMON STOCK, $100 PAR VALUE................ 65,160
CLASS B COMMON STOCK, $100 PAR VALUE................ 1,086,978
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PART I
ITEM 1. BUSINESS.
Cotter & Company (the "Company") was organized as a Delaware corporation in
1953. Upon its organization, it succeeded to the business of Cotter & Company,
an Illinois corporation organized in 1948. The Company's principal executive
offices are located at 2740 North Clybourn Avenue, Chicago, Illinois, 60614. Its
telephone number is (312) 975-2700.
The Company is a Member-owned wholesaler of hardware, variety and related
merchandise. It is the largest wholesaler of hardware and related items in the
United States. The Company also manufactures paint, paint applicators, outdoor
power equipment, heaters and hardware related products. For reporting purposes,
the Company operates in a single industry as a Member-owned wholesaler
cooperative.
Membership entitles a Member to use certain Company trademarks and trade
names, including the federally registered collective membership trademarks
indicating membership in "True Value Hardware Stores" and "V&S Variety Stores".
The "True Value" collective membership mark has a present expiration date of
January 2, 2003 and the "V&S Variety Stores" collective membership mark has a
present expiration date of July 22, 1995.
The Company serves approximately 7,500 True Value Hardware Stores
throughout the United States, including approximately 900 combination True Value
Hardware and V&S Variety Stores and 1,000 V&S Variety Stores. Primary
concentrations of Members exist in California (approximately 8%), New York
(approximately 7%), Illinois (approximately 6%), Pennsylvania and Texas
(approximately 5% each) and Michigan and Ohio (approximately 4% each).
The Company's total sales of merchandise to its U.S. Members were divided
among the following general classes of merchandise:
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ------------ ------------
Hardware Goods......................... 20.0% 20.8% 20.9%
Electrical and Plumbing Supplies....... 16.3% 16.3% 16.7%
Painting and Cleaning Supplies......... 14.9% 14.7% 15.5%
Variety and Related Goods.............. 13.9% 14.2% 13.7%
Farm and Garden Supplies............... 12.3% 11.7% 12.0%
Lumber and Building Materials.......... 12.3% 10.8% 9.5%
Appliances and Housewares.............. 10.3% 11.5% 11.7%
The Company serves its Members by purchasing products in quantity lots and
selling them to Members in smaller lots, passing along any savings to Members in
the form of lower prices and/or patronage dividends. The Company holds
conventions and meetings for its Members in order to keep them better informed
as to industry trends and as to new merchandise available. 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 47% of total sales); (2) direct (drop shipment) sales
(approximately 41% of total sales); and (3) relay sales (approximately 12% of
total sales). Warehouse shipment sales are sales of products purchased,
warehoused, and resold by the Company upon orders from the Members. Direct
shipment sales are sales of products purchased by the Company but delivered
directly to Members from manufacturers. Relay sales are sales of products
purchased by the Company in response to the requests of several Members for a
product which is not normally held in inventory and is not susceptible to direct
shipment. Generally, the Company will give notice to all Members of its
intention to purchase products for relay shipment and then purchases only so
many of such products as the Members order. When the product shipment arrives at
the Company, it is not warehoused; rather, the Company breaks up the shipment
and "relays" the appropriate quantities to the Members who placed orders.
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The Company also manufactures paint, paint applicators, outdoor power
equipment, heaters and hardware related products. The principal raw materials
used by the Company include chemicals, engines and steel. All raw materials are
purchased from outside sources. The Company has been able to obtain adequate
sources of raw materials and other items used in production and no shortages of
such materials which will materially impact operations are currently
anticipated.
The Company annually sponsors two "markets" (one in the Spring and one in
the Fall). In fiscal year 1994, these markets will be held in St. Louis,
Missouri. Members are invited to the markets and generally place substantial
orders for delivery during the period prior to the next market. During such
markets, new merchandise and seasonal merchandise for the coming season is
displayed to attending Members.
As of February 26, 1994 and February 27, 1993, the Company had a comparable
backlog of orders (including relay orders) believed to be firm of approximately
$23,000,000. It is anticipated that the entire backlog existing at February 26,
1994 will be filled by April 30, 1994. 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 orders for new or seasonal
merchandise given by Members during 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 and variety industry is characterized by intense
competition. Independent retail hardware and variety businesses, as served by
the Company, have met increased 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 shopping center locations, have cut into operating
margins and brought pressures for lower merchandise costs, to which the Company
has been responsive. The Company competes with other Member-owned and
non-member-owned wholesalers as a source of supply and merchandising support for
independent retailers. Competitive factors considered by independent retailers
in choosing a source of supply include pricing, servicing capabilities,
promotional support and merchandise quality. General increased operating costs
and decreased margins have resulted in the withdrawal from business of several
non-member-owned wholesalers or conversion to Member-owned status.
During fiscal year 1992, the Company acquired a majority equity interest in
Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of
hardware, variety and related merchandise. This cooperative serves 336 MacLeod's
True Value and Stedman's V&S Variety Stores, all located in Canada. The
cooperative has approximately 330 employees and generated less than 5% of the
Company's consolidated revenue in fiscal year 1993.
The Company operates several other subsidiaries, most of which are engaged
in businesses providing additional services to the Company's Members. In the
aggregate, these subsidiaries are not significant to the Company's results of
operations.
The Company employs approximately 4,300 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 40% of the Company's hourly-wage employees are covered by
collective bargaining agreements which are generally effective for periods of
three 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, the annual patronage dividend is paid to Members out of the gross
margins from operations and
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other patronage source income, after deduction for expenses 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 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 Internal Revenue Code.
The Company's By-Laws provide for the payment of year-end patronage
dividends, after payment of at least 20% of such patronage dividends in cash, in
qualified written notices of allocation including (i) Class B nonvoting Common
Stock based on book value thereof, to a maximum of 2% of the Member's net
purchases of merchandise from the Company for the year (except in unusual
circumstances of individual hardships, in which case the Board of Directors
reserves the right to make payments in cash), (ii) Promissory (Subordinated)
Notes, and (iii) other property. The Company may also issue nonqualified written
notices of allocation to its Members as part of its annual patronage dividend.
A Member's required investment in Class B Common Stock of the Company is
currently limited 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 (drop
shipment) sales from the Company and purchases of direct (drop 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. The Board of Directors anticipates maintaining these
percentages. In that each member has equal voting power (voting rights being
limited to Class A Common Stock), acquisition of Class B Common Stock as
patronage dividends results in the larger volume Members having greater Common
Stock equity in the Company but a lesser proportionate voting power per dollar
of Common Stock owned than smaller volume Members.
PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE
The Internal Revenue Code (the 'Code') specifically provides for the
taxation of cooperatives (such as the Company) and their patrons (such as the
Company's Members) so as to ensure that the business earnings of cooperatives
are currently taxable either to the cooperatives or to the patrons.
The shares of Class B Common Stock and the Promissory (Subordinated) Notes
distributed by the Company to its Members as partial payment of the patronage
dividend are 'written notices of allocation' within the meaning of that term as
used in the Code. In order that such written notices of allocation shall be
deducted from earnings in determining taxable income of the Company, it is
necessary that the Company pay 20% or more of the annual patronage dividend in
cash and that the Members consent to having the allocations (at their stated
dollar amount) treated as being constructively received by them and includable
in their gross income. These conditions being met, the shares of Class B Common
Stock and the Promissory (Subordinated) Notes distributed in payment of
patronage dividends become 'qualified written notices of allocation' as that
term is used in the Code. Section 1385(a) of the Code provides, in substance,
that the amount of any patronage dividend which is paid in money or in qualified
written notices of allocation shall be included in the gross income of the
patron (Member) for the taxable year in which he receives such money or such
qualified written notices of allocation.
Thus, every year each Member will receive, as part of the Member's
patronage dividend, non-cash items ('written notices of allocation') including
Class B Common Stock and 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.
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In response to the provisions of the Code, the Company's By-Laws provide
for the treatment of the shares of Class B Common Stock, Promissory
(Subordinated) Notes and such other notices as the Board of Directors may
determine, distributed in payment of patronage dividends as 'qualified written
notices of allocation.' The By-Laws provide in effect:
(i) for payment of patronage dividends partly in cash, partly in
qualified written notices of allocation (including the Class B Common Stock
and Promissory (Subordinated) Notes as described above), other property or
in nonqualified written notices of allocation, and
(ii) that membership in the organization (i.e. the status of being a
Member of the Company) shall constitute consent by the Member to take the
qualified written notices of allocation or other property into account in
the Member's gross income as provided in Section 1385(a) of the Code.
Under the provisions of the Code, persons who become or became Members of
the Company or who retained their status as Members after adoption of the
By-Laws providing that membership in the organization constitutes consent, and
after receiving written notification and a copy of the By-Laws are deemed to
have consented to the tax treatment of the cash and the qualified written
notices of allocation in which the patronage dividends are paid, in accordance
with Section 1385(a) of the Code. Written notification of the adoption of the
By-Laws and its significance, and a copy of the By-Laws, were sent to each then
existing Member and have been, and will continue to be, delivered to each party
that became, or becomes a Member thereafter. Such consent is then effective
except as to patronage occurring after the distributee ceases to be a Member of
the organization or after the By-Laws of the organization cease to contain the
provision with respect to the above described consent.
Each year since 1978, the Company has paid its Members 30% of the annual
patronage dividend in cash in respect to patronage (excluding nonqualified
written notices of allocation) occurring in the preceding year. It is the
judgment of management that the payment of 30% 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.
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ITEM 2. PROPERTIES.
The Company's national headquarters is located at 2740 North Clybourn
Avenue, Chicago, Illinois. Information with respect to the Company's owned and
leased warehousing and office facilities is set forth below:
SQUARE FEET
OF
WAREHOUSE AND
LOCATION OFFICE AREA INTEREST
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Chicago, Illinois........................................ 980,000 Owned
Corsicana, Texas......................................... 450,000 Owned
Denver, Colorado......................................... 310,000 Leased
Fogelsville (Allentown), Pennsylvania.................... 600,000 Owned
Harvard, Illinois........................................ 640,000 Owned
Henderson, North Carolina................................ 300,000 Owned
Indianapolis, Indiana.................................... 420,000 Owned
Jonesboro (Atlanta), Georgia............................. 360,000 Owned
Kansas City, Missouri.................................... 415,000 Owned
Kingman, Arizona......................................... 375,000 Owned
Manchester, New Hampshire................................ 525,000 Owned
Mankato, Minnesota....................................... 320,000 Owned
Ocala, Florida........................................... 375,000 Owned
Portland, Oregon......................................... 405,000 Owned
Westlake (Cleveland), Ohio............................... 405,000 Owned
Winnipeg, Manitoba....................................... 432,000 Owned
Woodland, California..................................... 350,000 Owned
No location owned by the Company (with the exception of Woodland) 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. The 5.94% interest rate will be adjusted based on
a bond index on October 1, 1994 and every three-year period thereafter. These
bonds may be redeemed at face value at either the option of the Company or the
bondholders on October 1, 1994 and every three-year period thereafter until
maturity in 2003.
In July 1985, the Company completed construction of a regional distribution
center in Woodland, California. The construction of the regional distribution
center was financed with the proceeds from the sale of Industrial Development
Revenue Bonds issued by the City of Woodland, California. At January 1, 1994,
the total outstanding debt was $1,150,000. These bonds bear interest at 8.25%.
Final principal payment of $1,150,000 is due in fiscal year 1994.
In February 1993, the Company completed the sale of a facility that it
previously owned in Pomona, California.
The Company's facility in Denver, Colorado is currently leased through June
30, 1994. The Company is moving this operation to a 360,000 square feet facility
in Denver, Colorado, that is leased through June 30, 1999.
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Information with respect to the Company's manufacturing facilities is set
forth below:
SQUARE FEET
OF
MANUFACTURING PRINCIPAL
LOCATION AREA PRODUCT INTEREST
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Chicago, Illinois............................. 105,000 Paint Owned
Cary, Illinois................................ 580,000 Paint and Owned
Paint Applicators
Harvard, Illinois............................. 830,000 Heaters and Owned
Outdoor Power
Equipment
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, variety and related
products each of whom is a Member of the Company and purchases ten shares of the
Company's Class A Common Stock (the only class of voting stock) upon becoming a
Member. The Company is organized and operates as a 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 and provisions authorized by the
Board of Directors.
The number of holders of record (as of February 26, 1994) of each class of
stock of the Company is as follows:
NUMBER OF
HOLDERS OF
TITLE OF CLASS RECORD
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Class A Common Stock, $100 Par Value......................... 6,516
Class B Common Stock, $100 Par Value......................... 6,396
Dividends (other than patronage dividends) upon the Class A Common Stock
and Class B Common Stock, subject to the provisions of the Company's Certificate
of Incorporation, may be declared out of gross margins of the Company, other
than gross margins from operations with or for Members and other patronage
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source income, after deduction for expenses 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 of said classes of stock. See the discussion
of patronage dividends under Item 1--Business.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED
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JANUARY 1, JANUARY 2, DECEMBER 28, DECEMBER 29, DECEMBER 31,
1994 1993 1991 1990 1989
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues.......................... $2,420,727 $2,356,468 $2,139,887 $2,135,120 $2,058,822
Net margins....................... $ 57,023 $ 60,629 $ 59,425 $ 54,847 $ 66,507
Patronage dividends............... $ 54,440 $ 60,901 $ 60,339 $ 56,269 $ 67,605
Total assets...................... $ 803,528 $ 833,372 $ 763,109 $ 709,895 $ 714,889
Long-term debt and obligations
under capital leases............ $ 69,201 $ 72,749 $ 13,335 $ 15,077 $ 15,642
Promissory (subordinated) and
instalment notes payable........ $ 217,996 $ 235,695 $ 235,289 $ 215,452 $ 216,770
Redeemable Class A Common Stock... $ 6,633 $ 6,857 $ 7,077 $ 7,362 $ 7,401
Redeemable Class B Common Stock... $ 110,773 $ 108,982 $ 104,151 $ 101,398 $ 95,793
Book value per share of Class A
Common Stock and Class B Common
Stock(a)........................ $ 103.85 $ 101.42 $ 102.50 $ 103.38 $ 104.74
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(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 1993 COMPARED TO FISCAL YEAR 1992
Revenues increased $64,259,000 or 2.7% compared to the previous year. The
majority of this revenue gain resulted from increased direct shipment sales to
Members. Contributing to the increased direct shipments were strong increases of
15.6% from Lumber and Building Materials and a 20.5% increase from the Company's
manufacturing division, General Power Equipment Company. Another significant
portion of the Company's revenue increase was due to Cotter Canada Hardware and
Variety Cooperative, Inc. ("Cotter Canada"). With its growth in membership and
its first full year of operations, Cotter Canada shipments to Canadian members
increased by 36.4%.
Consolidated gross margins increased $1,313,000 but as a percentage of
revenue decreased to 9.0% from 9.2% reflecting the change in sales mix from
warehouse to direct shipments.
Warehouse, general and administrative expenses increased by $9,430,000 or
7.7% due to higher manufacturing and logistic costs, increases associated with a
full year of operations at Cotter Canada and
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non-recurring expenses related to the decentralization of functions previously
performed at the Company's National Headquarters.
Interest paid to Members decreased $1,258,000 or 4.9% primarily due to a
lower average interest rate.
Other interest expense increased by $156,000 or 2.1% due to a long-term
financing agreement entered into by the Company during the second quarter of
fiscal year 1992 to finance the expansion of the Company's distribution network
and entry into Canada. This increase was partially offset by a decrease in
short-term borrowings and the average rate of interest compared to the
corresponding period last year.
The gain on sale of properties owned of $5,985,000 and the corresponding
increase in income tax expense of $2,193,000 resulted primarily from the
disposition of a regional distribution center in Pomona, California and real
estate located in Chicago, Illinois.
Net margins were $57,023,000 for the year ended January 1, 1994 compared to
$60,629,000 for the year ended January 2, 1993.
FISCAL YEAR 1992 COMPARED TO FISCAL YEAR 1991
Revenues for fiscal year 1992 increased by $216,581,000 or 10.1%. This
represents the highest single year dollar increase in the Company's history. The
majority of the revenue growth resulted from a 7.8% increase in merchandise
shipments to the True Value and V&S Variety Members from the Company's regional
distribution network and manufacturing facilities. All general classes of
merchandise experienced revenue gains, reflecting Member confidence in
merchandising programs and regional assortments. Another significant influence
on revenues was the Company's expansion into the Canadian market. Shipments to
Canadian Members by Cotter Canada exceeded $65,000,000.
Gross margins increased by $18,863,000 or 9.5%. As a percentage of
revenues, gross margins remained comparable to last year.
Warehouse, general and administrative expenses increased by $11,404,000 or
10.2% but as a percentage of revenues remained comparable with the prior year.
The Company was able to maintain this percentage, even though the Company
increased the number of items stocked in regional distribution centers and
member ordering patterns continued to shift away from direct (drop shipment)
sales. Additionally, fiscal year 1992 was the first full fiscal year of
operating the Kingman, Arizona regional distribution center, and the year the
Company began its Canadian operation.
Interest paid to Members decreased slightly due to a decrease in the
average interest rate partially offset by an increase in the balance of the
promissory (subordinated) and instalment notes.
Other interest expense increased by $4,807,000 due to long-term financing
agreements entered into by the Company during fiscal year 1992, to finance the
expansion of the Company's distribution network and entry into Canada.
Other income, net decreased by $1,502,000 due to a reduction in interest
income compared to fiscal year 1991. Interest income decreased due to a
reduction in the notes receivable and short-term investment amounts held during
the year as well as lower rates of interest earned on these balances.
Net margins were $60,629,000 and $59,425,000 for fiscal years 1992 and
1991, respectively. The difference resulted primarily from increased merchandise
shipments to Members.
LIQUIDITY AND CAPITAL RESOURCES
At January 1, 1994, net working capital decreased to $225.2 million from
$230.2 million at January 2, 1993. The current ratio increased to 1.57 in fiscal
year 1993 compared to 1.56 in fiscal year 1992. Current assets decreased $18.0
million, primarily due to the Company's change in cash position, offset by an
increase of $22.2 million in receivables due to increased sales and offering
Members favorable payment terms received by the Company from its vendors.
Current liabilities decreased $13.0 million primarily due to a decrease in
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accounts payable as a result of decreased wholesale merchandise inventory offset
by an increase in current maturities of long-term obligations and short-term
borrowings.
Historically, cash flow from operations together with proceeds of
short-term borrowings have sufficiently funded the Company's operations. In an
attempt to improve Members' cash flow, the Company continued to offer Members
extended terms on purchases during fiscal year 1993 thereby increasing extended
term receivables by 24.7%. During fiscal year 1994, the Company anticipates that
cash provided by operating activities will increase due to forecasted
improvement in the relationship between inventories and accounts payable.
Cash and cash equivalents decreased to $1.3 million at January 1, 1994
compared to $37.6 million at January 2, 1993. Short-term lines of credit
available under informal agreements with lending banks, cancelable by either
party under specific circumstances, amounted to $56.5 million at January 1,
1994. There were $23.3 million of borrowings outstanding under these agreements
at January 1, 1994 compared to $0.3 million at January 2, 1993.
The Company's capital is primarily derived from redeemable Class A Common
Stock and retained earnings, together with promissory (subordinated) notes and
redeemable nonvoting Class B Common Stock issued in connection with the
Company's annual patronage dividend. Funds derived from these capital resources
are usually sufficient to satisfy long-term capital needs.
Net capital expenditures, including those made under capital leases, were
$5.6 million in fiscal year 1993 compared to $27.0 million in fiscal year 1992
and $30.5 million in fiscal year 1991. These capital expenditures were
principally related to additional equipment and technological improvements at
the regional distribution centers and National Headquarters. Additionally, a
wholly-owned subsidiary of the Company acquired certain assets of a hardware and
variety wholesaler based in Canada for approximately $13.1 million in fiscal
year 1992. In fiscal year 1991, capital expenditures included the construction
of a new regional distribution center in Kingman, Arizona. Funding of capital
expenditures in fiscal year 1994 is anticipated to come from operations and
external sources, if necessary.
The effects of all recent tax legislation have not had a material effect on
the Company's financial position and results of operations.
Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect of this adoption does
not have a material effect on the consolidated financial statements.
Additionally, the Company has reviewed the impact of all new accounting
standards issued as of the filing date of this report, that will be adopted at a
future date, and has determined that these will not have a material impact on
the Company's operating results and financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements and consolidated financial statement
schedules covered by the report of the Company's independent auditors are listed
on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
11
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...................... 51 Appointed Vice President in February, 1992.
Director of National Headquarters Support from
July, 1991 to February, 1992. Prior position from
April, 1986 was Executive Assistant to the
President.
Daniel T. Burns..................... 43 Vice President and General Counsel. Vice
President since November, 1990. General Counsel
since April, 1988.
Danny R. Burton..................... 47 Appointed Vice President in May, 1992. National
Member Development Manager from July, 1990 to
May, 1992. Prior position from September, 1985 to
June, 1990 was Sales Manager.
Kenneth O. Cayce, Jr................ 73 Director since March, 1964. Term expires April,
1995.
William M. Claypool, III............ 71 Director since March, 1970. Term expires April,
1994. Nominated by the Board of Directors for
reelection to a three-year term.
Michael P. Cole..................... 50 Director since July, 1988. Term expires April,
1996.
Samuel D. Costa, Jr................. 52 Director since July, 1988. Term expires April,
1996.
Daniel A. Cotter.................... 59 President, Chief Executive Officer and Director.
Elected President in January, 1978, Chief
Executive Officer in January, 1983 and Director
since September, 1989. Term expires April, 1996.
Leonard C. Farr..................... 72 Director since March, 1972. Term expires April,
1996.
William M. Halterman................ 46 Director since June, 1990. Term expires April,
1995.
Robert F. Johnson................... 50 Appointed Vice President in January, 1994.
Director of Corporate Planning and Information
Services since March, 1992. Prior position was
Distribution Industry Consulting Manager of a
Corporation in Illinois.
Jerrald T. Kabelin.................. 56 Chairman of the Board since April, 1993. Director
since April, 1985. Term expires April, 1994.
Nominated by the Board of Directors for
reelection to a three-year term.
Arthur W. Ketelsen.................. 74 Director since April, 1985. Term expires April,
1994. Not seeking reelection.
Kerry J. Kirby...................... 47 Vice President and Chief Financial Officer since
November, 1990. Secretary and Treasurer
(Principal Financial and Accounting Officer)
since April, 1989. Controller from April, 1988 to
October, 1990.
Robert J. Ladner.................... 47 Nominated by the Board of Directors for election
as a Director to a three-year term to replace
Arthur W. Ketelsen, whose term will expire April,
1994.
Lewis W. Moore...................... 81 Director since June, 1948. Term expires April,
1994. Nominated by the Board of Directors for
reelection to a three-year term.
10
12
POSITION(S) HELD AND
NAME AGE BUSINESS EXPERIENCE
---- --- --------------------
Robert A. Nolawski.................. 55 President of Cotter Canada Hardware and Variety
Cooperative, Inc. since February, 1992. Vice
President since November, 1990. Prior position
was Warehouse and Physical Distribution Manager.
Jeremiah J. O'Connor................ 51 Director since July, 1984. Term expires April,
1995.
Steven J. Porter.................... 41 Executive Vice President and Chief Operating
Officer since August, 1993. Prior position was
Vice President of Merchandising of a retail
building materials and hardware company based in
Missouri.
Richard L. Schaefer................. 64 Director since May, 1976. Term expires April,
1995.
John P. Semkus...................... 47 Vice President, Distribution and Transportation
since February 1992. Appointed Vice President in
June, 1988. Prior position was Operating Manager
of a regional distribution center.
Robert G. Waters.................... 73 Director since March, 1973. Term expires April,
1994. Nominated by the Board of Directors for
reelection to a three-year term.
John M. West, Jr.................... 41 Director since October, 1991. Term expires April,
1995.
Donald E. Yeager.................... 51 Director since April, 1993. Term expires April,
1996.
- ---------------
During the past five years, the principal occupation of each director of the
Company, other than Daniel A. Cotter, was the operation of retail hardware
stores.
ITEM 11. EXECUTIVE COMPENSATION.
PENSION AND COMPENSATION COMMITTEE
The Pension and Compensation Committee of the Board of Directors (the
"Committee") consists of three non-employee directors: Kenneth O. Cayce, Jr.
(Chairman), Lewis W. Moore and Michael P. Cole. In addition, Jerrald T. Kabelin,
Chairman of the Board of Directors, and Daniel A. Cotter, President and Chief
Executive Officer, served as ex-officio members of the Committee. The Committee
assists the Board of Directors in fulfilling its responsibilities for setting
and administering the policies which govern annual compensation and monitoring
the Company's pension plans. It meets in executive session and with ex-officio
members and the Chief Financial Officer concerning executive compensation
matters. The Committee calls upon outside consultants for assistance, as
necessary.
The Committee meets at least annually. In fiscal year 1993, the Committee
met on four 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 incentive plan and long-term
incentive plan.
- Assessing performance achievement relative to goals and approving
incentive payments.
- Determining which individuals, upon recommendation of the President, will
participate in the annual incentive plan and the long-term incentive plan
and the level of incentive awards which will be available to each
participant.
- Approving any revisions proposed for executive compensation.
11
13
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 it needs 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. The
annual incentive program and the long-term incentive program 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
1993, the plan's overall Company goal was based on achieving Member payout
objectives. Each executive had at least a portion of their incentive award
determined by Member payout results. The President's entire incentive award is
based upon Member payout results. Those executives with departmental
responsibilities are measured against department goals in addition to Member
payout.
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.
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
1993 and Paul F. Fee, who ceased to be an officer of the
12
14
Company, during fiscal year 1993, and the total compensation paid to each such
individual for the Company's two previous fiscal years:
SUMMARY COMPENSATION TABLE
NAME AND OTHER LONG-TERM
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) INCENTIVES(3)
- --------------------------------------- ---- -------- -------- --------------- -------------
Daniel A. Cotter....................... 1993 $500,000 $ -- $ 4,996 $ --
President and Chief 1992 500,000 136,500 3,928 250,000
Executive Officer 1991 500,000 262,500 12,166 250,000
Paul F. Fee............................ 1993 275,000 59,419 257,677 --
Executive Vice 1992 275,000 81,623 7,563 90,283
President 1991 275,000 77,108 9,536 48,125
Kerry J. Kirby......................... 1993 225,000 25,313 6,746 --
Vice President, 1992 193,299 36,304 7,518 --
Finance 1991 148,674 49,005 7,026 --
Robert A. Nolawski..................... 1993 200,000 41,100 33,038 --
Vice President 1992 205,111 77,175 13,046 --
1991 127,488 33,534 6,651 --
Daniel T. Burns........................ 1993 175,000 23,625 5,214 --
Vice President, Legal 1992 162,602 39,946 9,466 --
and Human Resources 1991 145,102 47,850 4,358 --
Steven J. Porter....................... 1993 167,115 25,000 11,944 --
Executive Vice President 1992 -- -- -- --
and Chief Operating Officer 1991 -- -- -- --
- ---------------
(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 $8,994 of the executive officer's salary in fiscal year 1993
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. Fee's other compensation in fiscal year 1993 consists of
payments pursuant to an employment agreement. Mr. Nolawski's other
compensation includes $4,443 and $27,427 of relocation payments in fiscal
year 1992 and 1993, respectively. Mr. Porter's other compensation consists
of $11,944 of relocation payments in fiscal year 1993.
(3) Mr. Cotter and Mr. Fee earned transition awards during the initial first two
fiscal years of the long-term incentive program initiated in fiscal year
1991. No long-term incentive awards were earned in fiscal year 1993.
Daniel A. Cotter is employed under a long-term contract which commenced
January 1, 1985 for a period of 15 years terminating December 31, 1999. Mr.
Cotter agreed, in 1990, to revise his contract to conform his compensation to
that applicable to all other executives. His base salary has not changed since
1990.
The Company has a severance policy providing termination benefits based
upon annual compensation and years of service.
No reportable loans were made by the Company to its executive officers or
to its directors during the last three fiscal years.
13
15
LONG-TERM PERFORMANCE CASH AWARDS
Beginning in fiscal year 1991, the Board of Directors adopted a long-term
incentive program for selected senior executive officers of the Company. The
plan covers three-year periods beginning in 1991 through 1993. Senior executives
of the Company are eligible for cash payouts ranging from 20% to 50% of their
average annual salary if performance goals established for the plan are met.
Performance goals for the current plans relate to the achievement of revenue
growth.
A new plan starts each year with goals set for the next three-year period.
A range of estimated payouts which could be earned by the individuals listed in
the Summary Compensation Table in fiscal year 1994, and paid in fiscal year 1995
is shown in the following table:
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
- ---- ------------------ --------- -------- --------
Daniel A. Cotter.............................. 1992-1994 $ 125,000 $250,000 $375,000
Kerry J. Kirby................................ 1992-1994 22,500 45,000 67,500
Robert A. Nolawski............................ 1992-1994 20,000 40,000 60,000
Daniel T. Burns............................... 1992-1994 17,500 35,000 52,500
DEFINED BENEFIT RETIREMENT PLANS
The Company has a defined benefit pension plan, the Cotter & Company
Pension Plan (the "Plan"), which is qualified under the Internal Revenue Code.
The amount of the Company's annual contribution to the Plan is determined for
the total of all participants covered by the Plan, and the amount of payment
with respect to a specified person is not and cannot readily be separated or
individually calculated by the actuaries for the Plan. The Plan provides fully
vested unreduced monthly benefits to eligible employees who have retired at or
after age 65 or served a minimum of five years of service and reached age 62.
Each of the executive officers listed in the foregoing Summary Compensation
Table is a participant in the Plan. The Plan has been amended to be a Social
Security "excess" plan instead of being a Social Security "integrated" plan. The
benefits provided by the Plan are calculated in the form of a single annuity.
The formula of the benefit for the service completed before January 1, 1989
is one and two-thirds percent of the participant's "average compensation"
multiplied by the person's years of service thru December 31, 1988 up to a
maximum of thirty such years, minus one and two-thirds percent of the
participant's primary Social Security benefit multiplied by the person's years
of service thru December 31, 1988 up to a maximum of thirty such years.
For service completed after January 1, 1989, the benefit formula is one and
one-twentieth percent of the participant's "average compensation" equal to
one-third of the retirement year Taxable Wage Base multiplied by the person's
years of service after January 1, 1989 up to a maximum of thirty such years,
plus one and one-half percent of the participant's "average compensation" over
one-third of the retirement year Taxable Wage Base multiplied by the person's
years of service after January 1, 1989 up to a maximum of thirty such years.
A third benefit formula for service completed prior to January 1, 1992 is
one and two-thirds percent of the participant's "average compensation"
multiplied by the person's years of service thru December 31, 1991 up to a
maximum of thirty such years, minus one and two-thirds percent of the
participant's primary Social Security benefit multiplied by the person's years
of service thru December 31, 1991 up to a maximum of thirty such years. The
third formula will be used only if the benefit calculated is higher than the
combination of the first two formulas.
"Average compensation" means the average of the compensation received by an
eligible employee during the five highest consecutive calendar years within the
ten consecutive calendar years immediately preceding the date of termination of
employment. Compensation considered in determining benefits includes salary,
overtime pay, commissions, bonuses and deferral contributions under the Savings
Plan. The average compensation does not differ substantially from all of the
compensation for the officers listed in the Summary Compensation Table.
14
16
The Company amended and restated in 1991 a Supplemental Retirement Plan
(the "Supplemental Plan") for certain employees as designated by the Company's
President and Chief Executive Officer. The benefits provided by the Supplemental
Plan are calculated in the form of a single annuity in an amount per year which
is equal to three percent of the participant's "average compensation" multiplied
by years of service up to a maximum of twenty such years, minus any benefits
provided to the participants by the Plan, and minus the participant's primary
Social Security benefit. "Average Compensation" for the Supplemental Plan is
defined the same as for the Plan, as discussed above. The Supplemental
Retirement Plan is not a qualified plan under the Internal Revenue 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 (except Mr.
Cotter and Mr. Nolawski) is currently limited under the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") to $118,800 at retirement under various
assumed conditions. Beginning in 1983, "TEFRA" limited the maximum annual
retirement benefits payable to an individual under the Pension Plan to the
higher of (a) $90,000 or (b) the participant's accrued benefits under the
Pension Plan as of December 31, 1982. The limits of the "TEFRA" maximum annual
retirement benefits are subject to the cost-of-living adjustments in 1994 for
post-1986 cost-of-living increases.
The following table reflects the estimated annual retirement benefits which
may be payable pursuant to the Plan to the officers named in the Summary
Compensation Table (except to those officers currently limited under "TEFRA," as
previously explained) at retirement under various assumed conditions. The
benefit amounts are not subject to deduction for Social Security except as
provided by the aforesaid benefit formula nor are said amounts subject to any
other offset.
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
COMPENSATION 10 15 20 25 30
- --------------- -------- -------- -------- -------- --------
$700,000................................. $111,542 $118,800 $118,800 $118,800 $118,800
600,000................................. 95,546 118,800 118,800 118,800 118,800
500,000................................. 79,550 118,800 118,800 118,800 118,800
400,000................................. 63,551 96,787 118,800 118,800 118,800
300,000................................. 47,555 72,461 97,367 118,800 118,800
200,000................................. 31,559 48,135 64,711 81,288 97,864
100,000................................. 15,563 23,809 32,055 40,302 48,548
The present credited years of service for the officers listed in the above
table are as follows: Daniel A. Cotter, 30 years; Paul F. Fee, 21 years; Robert
A. Nolawski, 30 years; Kerry J. Kirby, 18 years, Daniel T. Burns, 13 years, and
Steven J. Porter, 1 year.
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 shareholders
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 1993 directors of the Company were each paid $1,000 per
month. The Chairman of the Board is paid $1,000 per day to a maximum of $104,000
per year, when serving in the capacity as Chairman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of February 26, 1994, each of the directors of the Company was the
beneficial owner of 10 shares of Class A Common Stock of the Company comprising
.2% of such shares issued and outstanding. Other than Daniel A. Cotter, no
executive officer owns any shares of Class A Common Stock.
The directors own in the aggregate approximately 1.5% of Class B Common
Stock as of February 26, 1994. No executive officer owns any shares of Class B
Common Stock.
15
17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company uses Galaxy Travel Agency, Inc., a company engaged in providing
normal travel business services, for Company officers, directors, employees, and
Members. Daniel A. Cotter and his brother each own a one-half interest of Galaxy
Travel. The total bookings placed by the Company with Galaxy Travel in fiscal
year 1993 were approximately $2,300,000 and are estimated to be approximately
the same in fiscal year 1994.
The Company believes the foregoing transactions are on no-less favorable
terms to it than could have been obtained from an independent party.
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
The consolidated financial statement schedules listed in the
accompanying index (page F-1) to the consolidated financial
statements are filed as part of this annual report.
3. EXHIBITS
The exhibits listed on the accompanying index to exhibits
(pages E-1 and E-2) are filed as part of this annual report.
(B) REPORTS ON FORM 8-K
None.
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, Secretary, Treasurer and
DATED: March 17, 1994 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 17, 1994
------------------------------- Officer and Director
Daniel A. Cotter
/s/ STEVEN J. PORTER Executive Vice President March 17, 1994
------------------------------- and Chief Operating Officer
Steven J. Porter
/s/ KERRY J. KIRBY Vice President, Secretary, March 17, 1994
------------------------------- Treasurer and
Kerry J. Kirby Chief Financial Officer
/s/ JERRALD T. KABELIN Chairman of the Board March 17, 1994
------------------------------- and Director
Jerrald T. Kabelin
/s/ KENNETH O. CAYCE, JR. Director March 17, 1994
-------------------------------
Kenneth O. Cayce, Jr.
/s/ WILLIAM M. CLAYPOOL, III Director March 17, 1994
-------------------------------
William M. Claypool, III
/s/ MICHAEL P. COLE Director March 17, 1994
-------------------------------
Michael P. Cole
/s/ SAMUEL D. COSTA, JR. Director March 17, 1994
-------------------------------
Samuel D. Costa, Jr.
/s/ LEONARD C. FARR Director March 17, 1994
-------------------------------
Leonard C. Farr
/s/ WILLIAM M. HALTERMAN Director March 17, 1994
-------------------------------
William M. Halterman
/s/ ARTHUR W. KETELSEN Director March 17, 1994
-------------------------------
Arthur W. Ketelsen
/s/ LEWIS W. MOORE Director March 17, 1994
-------------------------------
Lewis W. Moore
/s/ JEREMIAH J. O'CONNOR Director March 17, 1994
-------------------------------
Jeremiah J. O'Connor
/s/ RICHARD L. SCHAEFER Director March 17, 1994
-------------------------------
Richard L. Schaefer
/s/ ROBERT G. WATERS Director March 17, 1994
-------------------------------
Robert G. Waters
/s/ JOHN M. WEST, JR. Director March 17, 1994
-------------------------------
John M. West, Jr.
/s/ DONALD E. YEAGER Director March 17, 1994
-------------------------------
Donald E. Yeager
18
20
ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
PAGE(S)
-----------
Report of Independent Auditors................................................. F-3
Consolidated Balance Sheet at January 1, 1994 and January 2, 1993.............. F-4; F-5
Consolidated Statement of Operations for each of the three years in the period
ended January 1, 1994........................................................ F-6
Consolidated Statement of Cash Flows for each of the three years in the period
ended January 1, 1994........................................................ F-7
Consolidated Statement of Capital Stock and Retained Earnings for each of the
three years in the period ended January 1, 1994.............................. F-8
Notes to Consolidated Financial Statements..................................... F-9 to F-15
Consolidated Financial Statement Schedules for each of the three years in the
period ended January 1, 1994:
IV--Indebtedness of and to Related Parties--Not Current................... F-16
V--Property, Plant and Equipment......................................... F-17
VI--Accumulated Depreciation and Amortization of Property, Plant and
Equipment................................................................ F-18
IX--Short-Term Borrowings................................................. F-19
All other schedules have been omitted because the required information is
not applicable or is not material in amounts sufficient to require submission of
the schedule or because the required information is included in the consolidated
financial statements or the notes thereto.
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 January 1, 1994 and January 2, 1993, 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 January 1, 1994. Our audits also
included the consolidated financial statement schedules listed in the Index at
item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules 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 January 1, 1994 and January 2, 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 1, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG
Chicago, Illinois
February 9, 1994
F-3
23
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
ASSETS
JANUARY JANUARY
1, 2,
1994 1993
-------- --------
(000'S OMITTED)
Current assets:
Cash and cash equivalents............................................. $ 1,314 $ 37,603
Accounts and notes receivable......................................... 276,585 254,401
Inventories........................................................... 336,066 336,603
Prepaid expenses...................................................... 6,969 10,330
-------- --------
Total current assets..................................... 620,934 638,937
Properties owned, less accumulated depreciation......................... 164,319 178,484
Properties under capital leases, less accumulated amortization.......... 6,769 8,954
Other assets............................................................ 11,506 6,997
-------- --------
Total assets............................................. $803,528 $833,372
-------- --------
-------- --------
See Notes to Consolidated Financial Statements.
F-4
24
COTTER & COMPANY
------------------
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
Current liabilities:
Accounts payable.................................................. $ 255,216 $ 300,925
Accrued expenses.................................................. 38,926 39,367
Short-term borrowings............................................. 23,287 293
Current maturities of notes, long-term debt and lease
obligations.................................................... 61,685 49,582
Patronage dividend payable in cash................................ 16,614 18,570
---------- ----------
Total current liabilities............................ 395,728 408,737
Long-term debt...................................................... 63,977 65,282
Obligations under capital leases.................................... 5,224 7,467
Capitalization:
Promissory (subordinated) and instalment notes.................... 217,996 235,695
Redeemable Class A common stock and partially paid subscriptions
(Authorized 100,000 shares; issued and fully paid 65,880 and
68,080 shares)................................................. 6,633 6,857
Redeemable Class B nonvoting common stock and paid-in capital
(Authorized 2,000,000 shares; issued and fully paid 1,019,640
and 979,700 shares; issuable as partial payment of patronage
dividends, 75,780 and 97,842 shares)........................... 110,773 108,982
Retained earnings................................................. 3,867 1,284
---------- ----------
339,269 352,818
Foreign currency translation adjustment........................... (670) (932)
---------- ----------
Total capitalization................................. 338,599 351,886
---------- ----------
Total liabilities and capitalization................. $ 803,528 $ 833,372
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
F-5
25
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ----------
(000'S OMITTED)
Revenues............................................ $2,420,727 $2,356,468 $2,139,887
---------- ---------- ----------
Cost and expenses:
Cost of revenues.................................. 2,202,806 2,139,860 1,942,142
Warehouse, general and administrative............. 132,674 123,244 111,840
Interest paid to Members.......................... 24,458 25,716 26,006
Other interest expense............................ 7,429 7,273 2,466
Gain on sale of properties owned.................. (5,985) -- --
Other income, net................................. (260) (643) (2,145)
Income tax expense................................ 2,582 389 153
---------- ---------- ----------
2,363,704 2,295,839 2,080,462
---------- ---------- ----------
Net margins......................................... $ 57,023 $ 60,629 $ 59,425
---------- ---------- ----------
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F-6
26
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
----------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
Cash flows from operating activities:
Net margins............................................... $ 57,023 $ 60,629 $ 59,425
Adjustments to reconcile net margins to cash and cash
equivalents provided by (used for) operating
activities:
Depreciation and amortization.......................... 21,566 21,869 20,727
Provision for losses on accounts and notes
receivable........................................... 4,057 4,447 5,417
Changes in operating assets and liabilities:
Accounts and notes receivable........................ (38,605) (29,798) (30,043)
Inventories.......................................... 183 (11,819) (44,628)
Accounts payable..................................... (45,070) 23,770 13,954
Accrued expenses..................................... (1,143) (6,221) 8,238
Other adjustments, net............................... (2,679) (3,035) (1,771)
---------- ---------- ------------
Net cash and cash equivalents provided
by (used for) operating activities......... (4,668) 59,842 31,319
---------- ---------- ------------
Cash flows used for investing activities:
Additions to properties owned............................. (13,382) (17,871) (20,092)
Proceeds from sale of properties owned.................... 13,999 682 1,250
Changes in other assets................................... (3,850) (2,076) 894
---------- ---------- ------------
Net cash and cash equivalents (used for)
investing activities....................... (3,233) (19,265) (17,948)
---------- ---------- ------------
Cash flows used for financing activities:
Payment of annual patronage dividend...................... (18,570) (18,423) (16,978)
Payment of notes, long-term debt and lease obligations.... (32,730) (18,776) (25,231)
Proceeds from long-term borrowings........................ -- 54,124 --
Increase (decrease) in short-term borrowings.............. 23,059 (20,975) 12,000
Purchase of Class A common stock.......................... (470) (337) (266)
Proceeds from sale of Class A common stock................ 323 352 328
---------- ---------- ------------
Net cash and cash equivalents (used for)
financing activities....................... (28,388) (4,035) (30,147)
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents........ (36,289) 36,542 (16,776)
---------- ---------- ------------
Cash and cash equivalents at beginning of year.............. 37,603 1,061 17,837
---------- ---------- ------------
Cash and cash equivalents at end of year.................... $ 1,314 $ 37,603 $ 1,061
---------- ---------- ------------
---------- ---------- ------------
See Notes to Consolidated Financial Statements.
F-7
27
COTTER & COMPANY
------------------
CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS
FOR THE THREE YEARS ENDED JANUARY 1, 1994
COMMON STOCK, $100 PAR VALUE
------------------------------------
CLASS B FOREIGN
CLASS A ------------ CURRENCY
-------------------- ISSUED AND RETAINED TRANSLATION
ISSUED SUBSCRIBED TO BE ISSUED EARNINGS ADJUSTMENT
------ ---------- ------------ -------- -----------
(000'S OMITTED)
Balances at December 29, 1990.............. $7,274 $ 88 $101,398 $ 2,470 $ --
Net margins.............................. 59,425
Patronage dividend....................... 8,095 (60,339)
Stock issued for paid-up subscriptions... 363 (363)
Stock subscriptions...................... 336
Stock purchased and retired.............. (621) (5,342)
------ ---------- ------------ -------- -----------
Balances at December 28, 1991.............. 7,016 61 104,151 1,556 --
Net margins.............................. 60,629
Foreign currency translation
adjustment............................ (932)
Patronage dividend....................... 10,029 (60,901)
Stock issued for paid-up subscriptions... 357 (357)
Stock subscriptions...................... 345
Stock purchased and retired.............. (565) (5,198)
------ ---------- ------------ -------- -----------
Balances at January 2, 1993................ 6,808 49 108,982 1,284 (932)
Net margins.............................. 57,023
Foreign currency translation
adjustment............................ 262
Patronage dividend....................... 7,686 (54,440)
Stock issued for paid-up subscriptions... 312 (312)
Stock subscriptions...................... 308
Stock purchased and retired.............. (532) (5,895)
------ ---------- ------------ -------- -----------
Balances at January 1, 1994................ $6,588 $ 45 $110,773 $ 3,867 $(670)
------ ---------- ------------ -------- -----------
------ ---------- ------------ -------- -----------
- ---------------
Subscribed Class A common stock amounts are net of unpaid amounts of
$14,000 at January 1, 1994, $27,000 at January 2, 1993 and December 28, 1991,
and $32,000 at December 29, 1990 (for 590, 760, 880, and 1,200 shares
subscribed, respectively).
See Notes to Consolidated Financial Statements.
F-8
28
COTTER & COMPANY
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES
Cotter & Company (the Company) is a member-owned wholesaler of hardware,
variety and related merchandise. The Company also manufactures paint, paint
applicators, outdoor power equipment, heaters and hardware related products. The
Company's goods and services are sold predominantly within the United States,
primarily to retailers of hardware, variety and related lines, each of whom has
purchased ten shares of the Company's Class A common stock on becoming a Member.
The Company operates in a single industry as a member-owned wholesaler
cooperative. In accordance with the Company's By-laws, the annual patronage
dividend is paid to Members out of gross margins from operations and other
patronage source income, after deduction for expenses and provisions authorized
by the Board of Directors. The significant accounting policies of the Company
are summarized below.
Consolidation. The consolidated financial statements include the accounts
of the Company and all wholly-owned subsidiaries. In fiscal years 1992 and 1993,
the consolidated financial statements also include the accounts of Cotter Canada
Hardware and Variety Cooperative, Inc., a Canadian member-owned wholesaler of
hardware, variety and related merchandise, in which the Company has a majority
equity interest.
Capitalization. The Company's capital (Capitalization) is derived from
redeemable Class A voting common stock and retained earnings, together with
promissory (subordinated) notes and redeemable Class B nonvoting common stock
issued in connection with the Company's annual patronage dividend. The By-laws
provide for partially meeting the Company's capital requirements by payment of
the year-end patronage dividend, of which at least twenty percent must be paid
in cash, and the balance in promissory (subordinated) notes and redeemable $100
par value Class B common stock.
Membership may be terminated without cause by either the Company or the
Member on 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. The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value.
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, warehouse
and office equipment--5 to 10 years; transportation equipment--3 to 7 years; and
leasehold improvements--the life of the lease without regard to options for
renewal.
Income Taxes. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 3,
1993. Under this standard, the liability method is used whereby deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities adjusting for the impact of tax credit carryforwards.
Retirement plans. The Company sponsors two noncontributory defined benefit
retirement plans covering substantially all of its employees. Company
contributions to union-sponsored defined contribution plans are
F-9
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based on collectively bargained rates times hours worked. The Company's policy
is to fund annually all tax-qualified plans to the extent deductible for income
tax purposes.
Reporting year. The Company's reporting year-end is the Saturday closest to
December 31.
NOTE 2--INVENTORIES
Inventories consisted of:
JANUARY 1, 1994 JANUARY 2, 1993
--------------- ---------------
(000'S OMITTED)
Manufacturing inventories:
Raw materials.............................. $ 14,795 $ 13,520
Work-in-process and finished goods......... 54,992 46,126
--------------- ---------------
69,787 59,646
Merchandise inventories...................... 266,279 276,957
--------------- ---------------
$ 336,066 $ 336,603
--------------- ---------------
--------------- ---------------
NOTE 3--PROPERTIES
Properties owned or leased under capital leases consisted of:
JANUARY 1, 1994 JANUARY 2, 1993
-------------------- --------------------
OWNED LEASED OWNED LEASED
-------- ------- -------- -------
(000'S OMITTED)
Buildings and improvements.................... $166,055 $ -- $171,479 $ --
Machinery and warehouse equipment............. 76,330 -- 77,591 --
Office equipment.............................. 55,191 -- 50,408 --
Transportation equipment...................... 18,778 15,337 16,297 15,337
-------- ------- -------- -------
316,354 15,337 315,775 15,337
Less accumulated depreciation and
amortization................................ 164,731 8,568 152,250 6,383
-------- ------- -------- -------
151,623 6,769 163,525 8,954
Land.......................................... 12,696 -- 14,959 --
-------- ------- -------- -------
$164,319 $ 6,769 $178,484 $ 8,954
-------- ------- -------- -------
-------- ------- -------- -------
NOTE 4--LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
JANUARY 1, 1994 JANUARY 2, 1993
--------------- ---------------
(000'S OMITTED)
Senior note at 8.60%.......................... $50,000 $50,000
Term loan:
7.75%....................................... 6,200 6,200
Canadian prime (5.50% and 7.25%)............ 3,777 3,932
Industrial Revenue Bonds:
5.94%....................................... 4,000 4,000
8.25%....................................... 1,150 2,950
--------------- ---------------
65,127 67,082
Less amounts due within one year.............. 1,150 1,800
--------------- ---------------
$63,977 $65,282
--------------- ---------------
--------------- ---------------
F-10
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The proceeds from the 8.60% senior note were used for operations. Principal
payments starting in 1995 are due in increasing amounts through maturity in
2007. Under the senior note agreement, the Company is required to meet certain
financial ratios and covenants.
The two term loans relate to the Canadian acquisition and are due in 1997.
The 5.94% issuance of bonds relates to financing the expansion of a
distribution center. On October 1, 1994 and every three-year period thereafter,
the interest rate 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
October 1, 1994 and every three-year period thereafter until maturity in 2003.
The 8.25% issuance of bonds relates to financing the construction of a
distribution center.
Total maturities of long-term debt for fiscal years 1994, 1995, 1996, 1997,
1998, and thereafter are $1,150,000, $1,000,000, $2,000,000, $12,977,000,
$4,000,000 and $44,000,000 respectively.
In addition, the Company has various short-term lines of credit available
under informal agreements with lending banks, cancelable by either party under
specific circumstances, which amount to $56,500,000 at January 1, 1994. There
were $23,287,000 borrowings under these agreements at January 1, 1994. The
Company pays commitment fees for these lines.
The fair value of the 8.6% senior note was approximately $54,375,000 and
$51,250,000 at January 1, 1994 and January 2, 1993, respectively. The fair value
was estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rate for similar borrowings. The carrying amounts of the
Company's other long term borrowings and short-term lines of credit approximate
fair value.
NOTE 5--CAPITAL LEASES AND OTHER LEASE COMMITMENTS
Capitalized leases expire at various dates and generally provide for
purchase options but not renewals. Purchase options provide for purchase prices
at either fair market value or a stated value which is related to the lessor's
book value at expiration of the lease term.
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments, as of
January 1, 1994:
FISCAL YEARS (000'S OMITTED)
-----------------------------------------------------------
1994..................................................... $ 2,545
1995..................................................... 1,834
1996..................................................... 1,485
1997..................................................... 1,025
1998..................................................... 751
1999..................................................... 416
-------
Net minimum lease payments................................. 8,056
Less amount representing interest.......................... 589
-------
Present value of net minimum lease payments................ 7,467
Less amounts due within one year........................... 2,243
-------
$ 5,224
-------
-------
The Company also is committed under cancelable operating leases for certain
transportation equipment which, in certain cases, also provide for contingent
rental arrangements and purchase options. The Company made contingent rental
payments relating to operating leases of $575,000, $616,000 and $483,000 for
fiscal years 1993, 1992 and 1991, respectively. Rental expense under operating
leases for fiscal years 1993, 1992, and 1991 was $7,536,000, $6,850,000 and
$5,583,000, respectively.
F-11
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--CAPITALIZATION
Promissory (subordinated) and instalment notes consisted of:
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
Promissory (subordinated) notes--
Due currently................................................ $ 51 $ 56
Due on December 31, 1993--8%................................. -- 24,734
Due on December 31, 1993--11%................................ -- 18,393
Due on December 31, 1994--8 1/2%............................. 26,173 26,739
Due on December 31, 1994--9 1/2%............................. 30,321 31,548
Due on December 31, 1995--7 1/2%............................. 21,324 22,686
Due on December 31, 1995--10%................................ 36,257 38,259
Due on December 31, 1996--9 1/2%............................. 28,930 30,324
Due on December 31, 1996--6%................................. 27,187 --
Due on December 31, 1997--10%................................ 18,138 24,668
Due on December 31, 1998--8%................................. 29,266 30,090
Due on December 31, 1999--8% (issued 1993)................... 27,827 28,863
Due on December 31, 2000--6 1/2% (to be issued).............. 26,752 --
Instalment notes at interest rates of 8% to 10% with maturities
through 1997................................................. 4,062 4,575
---------- ----------
276,288 280,935
Less amounts due within one year............................... 58,292 45,240
---------- ----------
$ 217,996 $ 235,695
---------- ----------
---------- ----------
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 substantial 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.
Due to the uncertainty of the ultimate maturities of the promissory notes,
management believes it is impracticable to estimate their fair value. The
carrying amount of the instalment notes at January 1, 1994 and January 2, 1993
approximates fair value.
Total maturities of promissory and instalment notes for fiscal years 1994,
1995, 1996, 1997, 1998, and thereafter are $58,292,000, $58,826,000,
$56,812,000, $18,513,000, $29,266,000 and $54,579,000, respectively.
NOTE 7--INCOME TAXES
Effective January 3, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes" (See Note 1). As permitted under the new rules, prior years'
financial statements have not been restated.
The cumulative effect of adopting SFAS No. 109 as of January 3, 1993 was
not material to the consolidated financial statements of the Company.
At January 1, 1994, the Company has alternative minimum tax credit
carryforwards of approximately $1,000,000 which do not expire. The carryforwards
are available to offset future federal tax liabilities.
F-12
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of January 1, 1994 resulted primarily from alternative minimum tax credit
carryforwards and temporary differences between income tax and financial
reporting for depreciation, vacation pay and contributions to fund retirement
plans.
Significant components of the provision (benefit) for income taxes are as
follows:
LIABILITY
METHOD DEFERRED METHOD
--------- ------------------------
FOR THE YEARS ENDED
-------------------------------------
JANUARY JANUARY DECEMBER
1, 2, 28,
1994 1993 1991
--------- --------- -----------
(000'S OMITTED)
Current:
Federal...................................... $ 343 $ 551 $ 2,051
State........................................ 22 152 326
Foreign...................................... 237 122 --
--------- --------- -----------
Total current................................ 602 825 2,377
--------- --------- -----------
Deferred:
Federal...................................... 1,582 (497) (2,051)
State........................................ 317 (14) (173)
Foreign...................................... 81 75 --
--------- --------- -----------
Total deferred............................... 1,980 (436) (2,224)
--------- --------- -----------
$ 2,582 $ 389 $ 153
--------- --------- -----------
--------- --------- -----------
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 1993 and 34% in 1992 and 1991 is as follows:
LIABILITY
METHOD DEFERRED METHOD
--------- ------------------------
FOR THE YEARS ENDED
-------------------------------------
JANUARY JANUARY DECEMBER
1, 2, 28,
1994 1993 1991
--------- --------- -----------
(000'S OMITTED)
Tax at U.S. statutory rate.................... $ 20,862 $ 20,746 $ 20,257
Effects of:
Patronage dividend.......................... (19,054) (20,706) (20,515)
State income taxes, net of federal tax
benefit.................................. 220 91 101
Other, net.................................. 554 258 310
--------- --------- -----------
$ 2,582 $ 389 $ 153
--------- --------- -----------
--------- --------- -----------
NOTE 8--CASH FLOW
The Company's noncash financing and investing activities in fiscal years
1992 and 1991 include acquisitions of transportation and warehouse equipment by
entering into capital leases. In fiscal year 1992, ownership of a distribution
center previously under capital lease was transferred to the Company. Also in
fiscal year 1992, a wholly-owned subsidiary of the Company acquired certain
assets, in part, by assuming debt. In fiscal year 1991, the Company acquired a
new distribution center by assuming debt. These transactions aggregate
$12,527,000 and $11,382,000 in fiscal years 1992 and 1991, respectively. In
addition, the annual
F-13
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
patronage dividend and promissory (subordinated) note renewals relating to
noncash operating and financing activities are as follows:
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
Patronage dividend payable in cash...................... $ 16,614 $ 18,570 $ 18,423
Promissory (subordinated) notes......................... 20,852 22,711 26,875
Class B nonvoting common stock.......................... 2,086 4,934 2,800
Instalment notes........................................ 2,939 2,485 2,996
Member indebtedness..................................... 11,949 12,201 9,245
---------- ---------- ------------
$ 54,440 $ 60,901 $ 60,339
---------- ---------- ------------
---------- ---------- ------------
Promissory (subordinated) note renewals................. $ 27,187 $ 22,686 $ 26,328
---------- ---------- ------------
---------- ---------- ------------
Cash paid for interest during fiscal years 1993, 1992 and 1991, totalled
$32,056,000, $31,638,000 and $28,668,000, respectively. Cash paid for income
taxes during fiscal years 1993, 1992 and 1991 totalled $1,387,000, $1,771,000
and $2,380, 000, respectively.
NOTE 9--RETIREMENT PLANS
The components of net pension cost for the Company administered pension
plans consisted of:
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28,
1994 1993 1991
---------- ---------- ------------
(000'S OMITTED)
Income:
Actual return on plan assets.......................... $ 7,486 $ 2,856 $ 10,202
Amortization of excess plan assets.................... 920 920 920
---------- ---------- ------------
8,406 3,776 11,122
---------- ---------- ------------
Expenses:
Service cost-benefits earned during year.............. 4,556 3,633 3,196
Interest on projected benefit obligation.............. 6,266 5,738 5,314
Deferral of excess (deficiency) of actual over
estimated return on plan assets.................... 1,042 (3,060) 4,972
---------- ---------- ------------
11,864 6,311 13,482
---------- ---------- ------------
Net pension cost........................................ $ 3,458 $ 2,535 $ 2,360
---------- ---------- ------------
---------- ---------- ------------
The discount rate and the rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7 1/2% and 4 1/2%, respectively, in fiscal year 1993 compared to
9% and 6%, respectively, in fiscal years 1992 and 1991. These changes in
actuarial assumptions did not have a material impact on net pension cost for
fiscal year 1993 and the Company does not anticipate that these changes will
have a material impact on net pension cost in future years. In fiscal years
1993, 1992 and 1991, the expected long-term rate of return on assets was 9 1/2%.
Plan assets are composed primarily of corporate equity and debt securities.
Benefits are based on years of service and the employee's compensation during
the last ten years of employment, offset by a percentage of
F-14
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Social Security retirement benefits. Trusteed net assets and actuarially
computed benefit obligations for the Company administered pension plans are
presented below:
JANUARY 1, JANUARY 2,
1994 1993
---------- ----------
(000'S OMITTED)
Assets:
Total plan assets at fair value..................................... $ 81,726 $ 73,705
---------- ----------
---------- ----------
Obligations:
Accumulated benefit obligation--
Vested........................................................... $ 55,605 $ 41,382
Non-vested....................................................... 8,704 5,039
Effect of projected compensation increases.......................... 24,110 21,863
---------- ----------
Total obligations................................................... 88,419 68,284
---------- ----------
Net excess assets (liabilities):
Unrecognized--
Unamortized excess assets at original date....................... 9,563 10,483
Net actuarial gain (loss)........................................ (5,773) 5,706
Prior service costs.............................................. (6,170) (6,836)
Recognized accrued pension cost..................................... (4,313) (3,932)
---------- ----------
Total net excess assets (liabilities)............................... (6,693) 5,421
---------- ----------
Total obligations and net excess assets (liabilities)................. $ 81,726 $ 73,705
---------- ----------
---------- ----------
The Company also participates in union-sponsored defined contribution
plans. Pension costs related to these plans were $702,000, $556,000 and $522,000
for fiscal years 1993, 1992 and 1991, respectively.
F-15
35
COTTER & COMPANY
------------------------
SCHEDULE IV - INDEBTEDNESS OF AND TO
RELATED PARTIES - NOT CURRENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 1, 1994
(000'S OMITTED)
INDEBTEDNESS OF(1) INDEBTEDNESS TO(2)
------------------------------------------------- ----------------------------------------------------
BALANCE AT BALANCE BALANCE AT BALANCE
BEGINNING AT END BEGINNING AT END
NAME OF PERSON OF YEAR ADDITIONS DEDUCTIONS(3) OF YEAR OF YEAR ADDITIONS(4) DEDUCTIONS(5) OF YEAR
- ---------------------- ---------- --------- ------------- -------- ---------- ------------ ------------- --------
Year ended January 1,
1994:
Stockholder -
Members $6,738 $ 6,607 $ 2,574 $ 10,771 $ 235,695 $ 57,383 $75,082 $217,996
---------- --------- ------------- -------- ---------- ------------ ------------- --------
---------- --------- ------------- -------- ---------- ------------ ------------- --------
Year ended January 2,
1993:
Stockholder -
Members $5,071 $ 3,939 $ 2,272 $ 6,738 $ 235,289 $ 54,435 $54,029 $235,695
---------- --------- ------------- -------- ---------- ------------ ------------- --------
---------- --------- ------------- -------- ---------- ------------ ------------- --------
Year ended December
28, 1991:
Stockholder -
Members $5,990 $ 1,235 $ 2,154 $ 5,071 $ 215,452 $ 60,365 $40,528 $235,289
---------- --------- ------------- -------- ---------- ------------ ------------- --------
---------- --------- ------------- -------- ---------- ------------ ------------- --------
- ---------------
(1) Consists of notes receivable.
(2) Consists of promissory (subordinated) notes and installment notes.
(3) Consists of amounts reclassed to current.
(4) Includes promissory notes to be issued in payment of patronage dividends of
$26,752, $28,863 and $30,707 in fiscal 1993, 1992 and 1991, respectively.
Also includes installment notes related to the conversion of Class B stock
of $3,444, $2,886 and $3,330 in fiscal 1993, 1992 and 1991, respectively.
(5) Includes amounts reclassed to current of $58,292, $45,240 and $35,406 in
fiscal 1993, 1992 and 1991, respectively. Also includes amounts applied
against member indebtedness of $5,876, $6,192 and $3,763 in fiscal 1993,
1992 and 1991, respectively.
F-16
36
COTTER & COMPANY
------------------
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 1, 1994
(000'S OMITTED)
OWNED
OTHER
BALANCE AT RETIREMENTS CHANGES BALANCE AT
BEGINNING ADDITIONS AND ADD (DEDUCT) END
CLASSIFICATION OF YEAR AT COST TRADE-INS DESCRIBE(A) OF YEAR
- --------------------------------------- ---------- --------- ------------ ------------ ----------
Year ended January 1, 1994:
Land................................. $ 14,959 $ 16 $ 2,200 $ (79) $ 12,696
Buildings and improvements........... 171,479 2,531 7,684 (271) 166,055
Machinery and warehouse equipment.... 77,591 1,936 3,125 (72) 76,330
Office equipment..................... 50,408 5,166 394 11 55,191
Transportation equipment............. 16,297 3,685 1,199 (5) 18,778
---------- --------- ------------ ------------ ----------
$ 330,734 $13,334 $ 14,602 $ (416) $ 329,050
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
Year ended January 2, 1993:
Land................................. $ 12,948 $ 2,067 $ 56 $ -- $ 14,959
Buildings and improvements........... 159,984 11,692 197 -- 171,479
Machinery and warehouse equipment.... 74,343 4,696 1,448 -- 77,591
Office equipment..................... 46,410 6,200 2,202 -- 50,408
Transportation equipment............. 14,877 2,286 866 -- 16,297
---------- --------- ------------ ------------ ----------
$ 308,562 $26,941 $ 4,769 $ -- $ 330,734
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
Year ended December 28, 1991:
Land................................. $ 10,903 $ 2,045 $ -- $ -- $ 12,948
Buildings and improvements........... 146,918 13,233 167 -- 159,984
Machinery and warehouse equipment.... 69,044 5,299 -- -- 74,343
Office equipment..................... 40,127 7,625 1,342 -- 46,410
Transportation equipment............. 15,171 1,172 1,466 -- 14,877
---------- --------- ------------ ------------ ----------
$ 282,163 $29,374 $ 2,975 $ -- $ 308,562
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
LEASED UNDER CAPITAL LEASES
OTHER
BALANCE AT EXPIRATIONS CHANGES BALANCE AT
BEGINNING ADDITIONS OR ADD (DEDUCT) END
CLASSIFICATION OF YEAR AT COST TERMINATIONS DESCRIBE OF YEAR
- --------------------------------------- ---------- --------- ------------ ------------ ----------
Year ended January 1, 1994:
Buildings and improvements........... $ -- $ -- $ -- $ -- $ --
Machinery and warehouse equipment.... -- -- -- -- --
Office equipment..................... -- -- -- -- --
Transportation equipment............. 15,337 -- -- -- 15,337
---------- --------- ------------ ------------ ----------
$ 15,337 $ -- $ -- $ -- $ 15,337
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
Year ended January 2, 1993:
Buildings and improvements........... $ 4,606 $ -- $ 4,606 $ -- $ --
Machinery and warehouse equipment.... -- -- -- -- --
Office equipment..................... -- -- -- -- --
Transportation equipment............. 11,912 3,425 -- -- 15,337
---------- --------- ------------ ------------ ----------
$ 16,518 $ 3,425 $ 4,606 $ -- $ 15,337
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
Year ended December 28, 1991:
Buildings and improvements........... $ 4,606 $ -- $ -- $ -- $ 4,606
Machinery and warehouse equipment.... 1,277 -- 1,277 -- --
Office equipment..................... 72 -- 72 -- --
Transportation equipment............. 12,082 2,100 2,270 -- 11,912
---------- --------- ------------ ------------ ----------
$ 18,037 $ 2,100 $ 3,619 $ -- $ 16,518
---------- --------- ------------ ------------ ----------
---------- --------- ------------ ------------ ----------
- ---------------
(a) Deductions are due to the effect of exchange rate changes on translating
property, plant, and equipment of foreign subsidiaries in accordance with
FASB Statement No. 52 "Foreign Currency Translation."
F-17
37
COTTER & COMPANY
------------------
SCHEDULE VI--ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 1, 1994
(000'S OMITTED)
OWNED
ADDITIONS OTHER
BALANCE AT CHARGED TO RETIREMENTS CHANGES BALANCE AT
BEGINNING COST AND AND ADD (DEDUCT) END
CLASSIFICATION OF YEAR EXPENSES TRADE-INS DESCRIBE(A) OF YEAR
- --------------------------------------- ---------- ---------- ----------- ------------ ----------
Year ended January 1, 1994:
Buildings and improvements........... $ 57,140 $ 4,757 $ 2,299 $ (6) $ 59,592
Machinery and warehouse equipment.... 53,416 5,050 3,123 (1) 55,342
Office equipment..................... 30,717 6,872 322 (6) 37,261
Transportation equipment............. 10,977 2,688 1,128 (1) 12,536
---------- ---------- ----------- ------ ----------
$ 152,250 $ 19,367 $ 6,872 $(14) $ 164,731
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
Year ended January 2, 1993:
Buildings and improvements........... $ 51,432 $ 5,708 $ -- $ -- $ 57,140
Machinery and warehouse equipment.... 49,576 5,261 1,421 -- 53,416
Office equipment..................... 26,170 6,668 2,121 -- 30,717
Transportation equipment............. 9,419 2,345 787 -- 10,977
---------- ---------- ----------- ------ ----------
$ 136,597 $ 19,982 $ 4,329 $ -- $ 152,250
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
Year ended December 28, 1991:
Buildings and improvements........... $ 46,145 $ 5,372 $ 85 $ -- $ 51,432
Machinery and warehouse equipment.... 44,410 5,166 -- -- 49,576
Office equipment..................... 20,403 6,357 590 -- 26,170
Transportation equipment............. 8,623 2,144 1,348 -- 9,419
---------- ---------- ----------- ------ ----------
$ 119,581 $ 19,039 $ 2,023 $ -- $ 136,597
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
LEASED UNDER CAPITAL LEASES
ADDITIONS OTHER
BALANCE AT CHARGED TO RETIREMENTS CHANGES BALANCE AT
BEGINNING COST AND AND ADD (DEDUCT) END
CLASSIFICATION OF YEAR EXPENSES TRADE-INS DESCRIBE OF YEAR
- --------------------------------------- ---------- ---------- ----------- ------------ ----------
Year ended January 1, 1994:
Buildings and improvements........... $ -- $ -- $ -- $ -- $ --
Machinery and warehouse equipment.... -- -- -- -- --
Office equipment..................... -- -- -- -- --
Transportation equipment............. 6,383 2,185 -- -- 8,568
---------- ---------- ----------- ------ ----------
$ 6,383 $ 2,185 $ -- $ -- $ 8,568
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
Year ended January 2, 1993:
Buildings and improvements........... $ 1,635 $ 69 $ 1,704 $ -- $ --
Machinery and warehouse equipment.... -- -- -- -- --
Office equipment..................... -- -- -- -- --
Transportation equipment............. 4,585 1,798 -- -- 6,383
---------- ---------- ----------- ------ ----------
$ 6,220 $ 1,867 $ 1,704 $ -- $ 6,383
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
Year ended December 28, 1991:
Buildings and improvements........... $ 1,559 $ 76 $ -- $ -- $ 1,635
Machinery and warehouse equipment.... 1,202 75 1,277 -- --
Office equipment..................... 70 2 72 -- --
Transportation equipment............. 5,320 1,535 2,270 -- 4,585
---------- ---------- ----------- ------ ----------
$ 8,151 $ 1,688 $ 3,619 $ -- $ 6,220
---------- ---------- ----------- ------ ----------
---------- ---------- ----------- ------ ----------
- ---------------
(a) Deductions are due to the effect of exchange rate changes on translating
property, plant, and equipment of foreign subsidiaries in accordance with
FASB Statement No. 52 "Foreign Currency Translation."
F-18
38
COTTER & COMPANY
------------------
SCHEDULE IX--SHORT-TERM BORROWINGS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 1, 1994
(000'S OMITTED)
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
BALANCE AT INTEREST RATE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE SHORT-TERM END OF AT END OF DURING THE DURING THE DURING THE
BORROWINGS YEAR(a) YEAR(a) YEAR YEAR YEAR
- -------------------------------------- ---------- ------------- ----------- ----------- -------------
Year ended January 1, 1994:
Amounts payable to banks............ $ 23,287 3.53% $ 65,422 $30,509 3.81%
Year ended January 2, 1993:
Amounts payable to banks............ $ 293 7.25% $ 139,164 $44,218 4.38%
Year ended December 28, 1991:
Amounts payable to banks............ $ 21,282 5.92% $ 61,000 $13,234 6.20%
- ---------------
(a) For fiscal year 1992, the balance and weighted average interest rate at the
end of the year is for borrowing by Cotter Canada Hardware and Variety
Cooperative, Inc. for its Canadian operations.
The average amount outstanding for fiscal years 1993, 1992, and 1991 was
computed by averaging the daily balances during the fiscal year. The weighted
average interest rates were computed by dividing interest expense by the average
amount outstanding.
F-19
39
INDEX TO EXHIBITS
EXHIBITS
ENCLOSED DESCRIPTION
-------- -----------
3-A Amended and Restated Certificate of Incorporation of Cotter &
Company dated May 10, 1993.
3-B By-Laws of Cotter & Company as amended and restated through June
1, 1993.
21 Subsidiaries.
EXHIBITS
INCORPORATED
BY REFERENCE
--------------
4-A Article Fourth of the Certificate of Incorporation of the Company, setting
forth the designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions of the Class A Common Stock and
Class B Common Stock of the Company. Article Twelfth of the Certificate of
Incorporation of the Company, setting forth certain limitations on the rights
of shareholders to bring an action against directors for breach of the duty
of care. Incorporated by reference -- Exhibit 3-A to the Company's Form 10-K
Annual Report for the year ended January 1, 1994.
4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to:
certain qualifications, limitations and restrictions on the Common Stock of
the Company; the Member agreement between the Company and its shareholders;
the payment of patronage dividends; dividends; qualifying shares; and
valuation of Class B Common Stock of the Company issued as part of the annual
patronage dividend. Incorporated by reference -- Exhibit 3-B to the Company's
Form 10-K Annual Report for the year ended January 1, 1994.
4-C Specimen certificate of Class A Common Stock. Incorporated by reference --
Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836).
4-D Specimen certificate of Class B Common Stock. Incorporated by reference --
Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836).
4-E Promissory (Subordinated) Note form effective for the year-ending December
31, 1986 and thereafter. Incorporated by reference -- Exhibit 4-H to
Registration Statement on Form S-2 (No. 33-20960).
4-F Instalment Note form. Incorporated by reference -- Exhibit 4-F to
Registration Statement on Form S-2 (No. 2-82836).
4-G Copy of Note Agreement with Prudential Insurance Company of America dated
April 13, 1992 securing 8.60% Senior Notes in the principal sum of
$50,000,000 with a maturity date of April 1, 2007. Incorporated by reference
-- Exhibit 4-J to Post-Effective Amendment No. 2 to Registration Statement on
Form S-2 (No. 33-39477).
10-A Form of "Retail Member Agreement with Cotter & Company" between the Company
and its Members that offer primarily hardware, variety merchandise 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 Pension Plan, amended and restated as of January 1, 1989.
Incorporated by reference -- Exhibit 10-D to Post-Effective Amendment No. 2
to Registration Statement on Form S-2 (No. 33-39477).
E-1
40
EXHIBITS
INCORPORATED
BY REFERENCE
--------------
10-D Cotter & Company Employees' Savings and Compensation Deferral Plan, amended
and restated as of July 1, 1992. Incorporated by reference -- Exhibit 10-E to
Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No.
33-39477).
10-E Supplemental Retirement Plan between Cotter & Company and selected executives
of the Company dated December 30, 1988. Incorporated by reference -- Exhibit
10-V to Post-Effective Amendment No. 1 to Registration Statement on Form S-2
(No. 33-20960).
10-F First Amendment to Supplemental Retirement Plan between Cotter & Company and
selected executives of the Company. Incorporated by reference -- Exhibit 10-Q
to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (No.
33-39477).
10-G 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-H Employment Agreement between Cotter & Company and Daniel A. Cotter dated
October 15, 1984. Incorporated by reference -- Exhibit 10-N to Post-Effective
Amendment No. 2 to Registration Statement on Form S-2 (No. 2-82836).
10-I Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel
A. Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by
reference -- Exhibit 10-N to Registration Statement on Form S-2 (No.
33-39477).
SUPPLEMENTAL
INFORMATION
- ------------
(a) Notice of Annual Meeting of Stockholders on April 5, 1994.
(b) Proxy solicited by the Board of Directors.
(c) Cotter & Company Consolidated Financial Statements. (Included
herein in response to Item 8.)
E-2