-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LGosu5XMwzS9lc/Obu6G9FL6nDtVUcegNm1tROWcnNSd6NBpD6/7m/P9wk9Rs71M BHeTyqYE1598upTnqH3F4g== 0000908737-98-000116.txt : 19980202 0000908737-98-000116.hdr.sgml : 19980202 ACCESSION NUMBER: 0000908737-98-000116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971101 FILED AS OF DATE: 19980130 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL TRACTOR FARM & COUNTRY INC CENTRAL INDEX KEY: 0000928156 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY [5200] IRS NUMBER: 421425562 STATE OF INCORPORATION: DE FISCAL YEAR END: 1029 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-19613 FILM NUMBER: 98518598 BUSINESS ADDRESS: STREET 1: 3915 DELAWARE AVE CITY: DES MOINES STATE: IA ZIP: 50316 BUSINESS PHONE: 5152663101 MAIL ADDRESS: STREET 1: 3915 DELAWARE AVE CITY: DES MOINES STATE: IA ZIP: 50316 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] X For the fiscal year ended November 1, 1997 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _________ to _________ Commission file number 0-24902 CENTRAL TRACTOR FARM & COUNTRY, INC. Delaware 42-1425562 (State of incorporation) (I.R.S. Employer I.D. No.) 3915 Delaware Avenue Des Moines, Iowa 50316-0330 (515) 266-3101 (Address and telephone number of principal executive offices) 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] All of the registrant's stock (100 shares as of January 30, 1998) is held by CT Holding, Inc. and is not publicly traded. CENTRAL TRACTOR FARM & COUNTRY, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED NOVEMBER 1, 1997 Page PART I Item 1. Business.......................................................... 1 Item 2. Properties........................................................ 8 Item 3. Legal Proceedings................................................. 8 Item 4. Submission of Matters to a Vote of Security-Holders............... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 10 Item 6. Selected Financial Data.......................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 11 Item 8. Financial Statements and Supplementary Data...................... 15 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......................................... 15 PART III Item 10. Directors and Executive Officers of the Registrant............... 16 Item 11. Executive Compensation........................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management... 20 Item 13. Certain Relationships and Related Transactions................... 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 21 References herein to "fiscal" years are references to Central Tractor Farm & Country, Inc.'s 52- or 53-week fiscal year, which ends on the Saturday nearest October 31 in that year. ITEM 1. BUSINESS Overview Central Tractor Farm & Country, Inc., a Delaware corporation, along with its subsidiary Country General, Inc., (collectively the "Company" or "CT"), is an agricultural specialty retailer with 228 stores (as of December 31, 1997) serving the agricultural, hardware and related needs of rural consumers, especially part-time and full-time farmers, hobby gardeners, skilled tradespersons and do-it-yourself ("DIY") customers. CT was founded in 1935 and has established itself as a market leader in the agricultural specialty market, having strong name recognition and a loyal customer base. The Company's stores offer a wide selection of agricultural products such as tractor parts and accessories, feed, fencing materials and animal health supplies, specialty hardware and paint, lawn and garden items, rural automotive parts and accessories, workwear, pet supplies and general consumer merchandise. The Company has also established national visibility for its products and services through its catalog operation, which has an annual circulation of approximately 685,000. Acquisition of the Company by J.W. Childs On November 27, 1996, the Board of Directors of the Company approved, and the Company entered into, a merger agreement (the "Merger Agreement") with J.W. Childs Equity Partners, L.P. and two of its affiliates (collectively "Childs") that provided for the acquisition of the Company by Childs in a two-stage transaction (the "Acquisition"). The Merger Agreement provided that following the acquisition by Childs of all of the Company shares held by affiliates of Butler Capital Corporation (collectively, "BCC"), an affiliate of Childs would merge with and into the Company (the "Merger") and Childs would acquire the remaining shares of the Company held by public shareholders ("Merger Consideration") for $14.25 per share in cash. The Merger was completed on March 27,1997. Concurrent with the execution of the Merger Agreement, Childs entered into agreements (the "Securities Purchase Agreements") with BCC and with certain members of the Company's management (the "Management Shareholders") pursuant to which Childs agreed to purchase at a price of $14.00 per share 100% of BCC's shares and 36.4% of the Management Shareholders' shares representing approximately 64.0% and 1.4% of the Company's outstanding common stock, respectively (collectively the "Securities Purchases"). As of January 2, 1997, Childs had consummated the Securities Purchases and paid related expenses utilizing (i) $65.4 million of cash equity and, (ii) $35.1 million of borrowings under an interim margin loan facility (the "Margin Loan Facility"). In connection with the Securities Purchases, the Company entered into a term loan and a revolving credit facility (the "New Credit Facility") and used a portion of such facilities to refinance existing debt of the Company, including a $16.0 million convertible note held by BCC. The New Credit Facility was amended at the time of the Country General acquisition discussed below. See "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." On March 27, 1997, the Company consummated a public offering of $105.0 million aggregate principal amount of Senior Notes. The net proceeds from the offering were used to repay borrowings under the Margin Loan Facility, pay the Merger Consideration, repay a portion of the outstanding borrowings under the New Credit Facility and pay fees and expenses of the Acquisition. 1 The Acquisition was accounted for as a purchase. The total purchase price has been allocated to the tangible and intangible assets and the liabilities of the Company based upon their respective fair values. The cost of the Acquisition over the allocated fair value of the underlying tangible net assets is as follows (in thousands): Cost of acquiring the outstanding common stock of the Company from predecessor shareholders $159,393 Fair value of underlying tangible net assets 70,267 -------- Excess of cost of acquisition over the allocated fair value of the underlying tangible net assets $ 89,126 ======== As a result of the Acquisition, the Company is wholly-owned subsidiary of CT Holding, Inc. ("Holding"), an affiliate of Childs, and a new basis of accounting has been reflected in the Company's financial statements reflecting the fair values for the Company's assets and liabilities as of March 27, 1997. The financial statements of the Company for periods prior to March 27, 1997, are presented on the historical cost basis of accounting. Acquisitions Effective June 26, 1997, the Company acquired all of the outstanding capital stock of Country General, Inc. ("Country General") for approximately $137.0 million (including related costs and expenses) in cash, subject to post-closing adjustment (the "Country General Acquisition"). Country General operates a chain of 114 agricultural specialty retail stores. The Company funded the acquisition price in part from a $49.75 million cash equity contribution from Holding, and the remainder from funds drawn under the amended and restated New Credit Facility (see "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources"). The Country General Acquisition was accounted for as a purchase. The purchase price was allocated to the tangible and intangible assets and the liabilities based on fair values, as follows (in thousands): Total purchase price $136,995 Fair value of underlying tangible net assets 88,756 -------- Excess of cost of acquisition over the allocated fair value of the underlying tangible net assets $ 48,239 ======== In May 1997, the Company acquired 4 retail stores and certain net operating assets from Donald A. Walsh, Inc. ("Walsh"), a privately owned specialty retailer for approximately $2.5 million. The transaction was accounted for as a purchase. The results of operations of Country General and Walsh are included in the accompanying consolidated statements of income from the respective date of purchase. Expansion Plan Since the beginning of fiscal 1993, the Company has increased the number of its retail stores from 47 to 228. From fiscal 1993 through fiscal 1995, the Company opened twenty new stores, acquired two stores and closed three stores. In fiscal 1996, the Company opened 14 new stores and acquired 31 stores from Big Bear Farm Stores, Inc. ("Big Bear"). In fiscal 1997, the Company opened 4 new stores and acquired 118 stores primarily through the Country General Acquisition. Five stores were closed in 1997. The integration of the Big Bear stores into the Company's systems was completed during fiscal 1997. The Company plans to complete the integration of the Country General stores into the Company's systems during fiscal 1998. The Company plans to add an additional 20 stores in both fiscal 1999 and fiscal 2000 through further penetration of the 2 Northeastern and Midwestern United States markets and through expansion into the Southeastern United States. Management intends to achieve this growth through new store openings and selective acquisitions. On a preliminary basis, the Company has identified potential new markets outside of its existing markets that management believes are attractive candidates for one or more new CT stores. The number of actual new CT store openings in the next three years may differ materially from the Company's current projections if the Company makes a major acquisition or is unable to find attractive store locations to rent at reasonable prices, negotiate acceptable lease terms or acquire small regional farm store chains at reasonable prices. The Company seeks to locate stores in high traffic shopping districts whenever possible in order to attract customers who prefer to do much of their shopping at one time and place. As with the majority of its existing stores, the Company intends to lease its new stores. The estimated cash required to open a new, leased, large prototype store (approximately 22,000 square feet) is $850,000 and the estimated cash required to open a new, leased, small prototype store (approximately 11,000 square feet) averages $600,000 (in each case, including inventory net of accounts payable and excluding an average of approximately $125,000 in pre-opening expenses). Of these estimated cash expenditures, approximately half is used for initial inventory (net of accounts payable), and the balance is used for capital expenditures, principally leasehold improvements, fixtures and equipment. The Company also intends to continue to opportunistically relocate existing stores. These relocations reflect, in most cases, the expiration of an existing lease coupled with an opportunity to move to a more demographically and/or physically attractive site. The Company relocated one store during fiscal 1997. Retail Stores CT stores focus on agricultural and agricultural related products. The Company segments its merchandising mix into seven key product categories: agricultural products (including tractor parts and accessories), specialty hardware, lawn and garden products, workwear products, rural automotive parts and accessories, pet supplies and general consumer products. Sale of agricultural and related products represent approximately 60% of CT's total net sales. The growth and percentage of total store sales for each retail product category for fiscal 1997, fiscal 1996, and fiscal 1995, and a description of each product category, are set forth below: Fiscal Year ----------------------------- 1997 1996 1995 ---- ---- ---- Agricultural (including tractor parts 26.8% 24.0% 23.2% and accessories) Specialty Hardware 17.7% 20.6% 21.6% Lawn & Garden 18.4% 19.6% 19.3% Workwear 9.3% 8.4% 7.3% Rural Automotive Parts & Accessories 14.3% 14.8% 16.0% Pet Supplies 6.6% 6.3% 5.4% General Consumer 6.9% 6.3% 7.2% ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== Agricultural Products. CT stores' agricultural product line consists of approximately 6,000 stock keeping units ("SKUs") supplying the needs of the part-time and full-time farmer, including tractor parts, tillage and harvesting parts, fencing materials and animal health supplies. This product line consists largely of consumable products and other items requiring replacements on a regular basis. This product line accounted for $110.5 million, $67.3 million and $55.9 million of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. CT emphasizes consumable agricultural supplies that are purchased frequently by its customers and does not sell heavy equipment such as tractors or combines. Specialty Hardware. CT's speciality hardware line consists of approximately 9,000 SKUs with an emphasis on products with agricultural applications. These products accounted for $72.7 million, $57.9 million and $51.9 million of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. CT stores carry a broad range of 3 high-quality hardware with an emphasis on recognized branded professional products, including hand tools, power tools, mechanical tools, electrical products, including outdoor lighting, security lighting and motors, welders, air compressors, generators, paints (as well as a competitively-priced private-label brand), plumbing supplies and heating/energy equipment, including stoves, space heaters and fans. Lawn and Garden Products. CT's lawn and garden products consist of approximately 2,000 SKUs, including lawn and garden tools, nursery stock, fertilizers, lawn fencing and weed killers. These products accounted for $75.8 million, $54.8 million and $46.3 million of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. To differentiate itself from other retailers, CT also stocks a selection of lawn mowers ranging from competitively priced items to full-featured riding lawn mowers. CT assembles and tests the lawn mowers and sells a full assortment of parts for follow-up service needs. CT stores offer seasonal bedding plants, trees and shrubs in their garden centers. Workwear. CT's workwear products, including products sold under the Carhartt, Walls and Iron Age brand names, are targeted at the specialized needs of its outdoor-oriented customers who require high quality functional apparel. This product category consists of approximately 3,000 SKUs, including premium quality insulated outerwear, overalls, flannel shirts and work jeans. These products accounted for $38.1 million, $23.5 million and $17.6 million of the Company's total revenue in fiscal years 1997, 1996, and 1995, respectively. The Company has been expanding its workwear line in its new stores to include quality non-insulated workwear, bib overalls, twill pants and hunting clothing. Rural Automotive Parts and Accessories. CT's rural automotive parts and accessories consist of approximately 4,000 SKUs, including a core selection of automotive parts, batteries and accessories for rural vehicles, primarily for pick-up trucks and tractors. The products accounted for $58.6 million, $41.4 million and $38.4 million of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. CT also stocks a small assortment of general automotive items as a convenience to its customers, including oil and lubrication products and anti-freeze. In addition to brand name products, certain of the Company's automotive products are offered under CT's own private label. Pet Supplies. CT's pet supplies consist of approximately 1,000 SKUs, including dog and cat foods, wild bird feed, and rabbit supplies. These products accounted for $27.2 million, $17.7 million and $13.0 million of the Company's total revenue in fiscal years 1997, 1996, and 1995, respectively. The pet supplies sold by CT include economically priced large sizes, such as 50 pound bags of dog food. Certain of these items are sold under CT's private label. CT has been expanding its pet supplies product category. General Consumer Products. CT's general consumer products line consists of approximately 2,000 SKUs, including farm replicas and collectible toys, hunting accessories, camping items and outdoor living needs. These products accounted for $28.3 million, $17.8 million and $17.2 million of the Company's total revenue in fiscal years 1997, 1996, and 1995, respectively. CT stores also offer seasonal merchandise such as charcoal grills and coolers in the summer. Store Operations The Company utilizes large and small store formats in order to enable management to enhance CT's return on investment in light of varying population density. The Company's small stores average 11,000 square feet of indoor selling space and had average comparable store sales of $2.5 million in fiscal 1997. The large stores average 22,000 square feet of indoor selling space and had average comparable store sales of $4.1 million in fiscal 1997. Small stores generally carry a smaller selection of workwear and seasonal and other general consumer products than large stores. In addition, the Company looks for store sites that have 15,000 to 20,000 square feet of outdoor selling space. This outdoor selling space is primarily used for displaying lawn and garden products, fencing, tractor accessories and livestock watering and feeding equipment. Both CT prototype stores are designed to provide customers with ease in locating desired products and are clean and colorful in order to provide an overall enjoyable shopping environment. The use of informative directional signing 4 adds to the ease of the customer's shopping experience. Plan-o-grams are utilized to set merchandise assortments in the seven core product categories to ensure uniformity of presentation, ease of shopping for the customer and to facilitate inventory management, replenishment and restocking. The agricultural products department is prominently featured in each store and is identified by the parts desks. The parts desk is the focal point for CT's new and used tractor parts program. In addition , the parts desk enables CT to offer a high level of customer service, ranging from answering technical questions regarding various products to the special ordering of hard to find parts. Each parts desk is managed by the store's agricultural product specialist who has access to the CT catalog and other inventory sources to quickly obtain needed parts. Each store is managed by a store manager who is responsible for all aspects of the store operations, including the hiring and training of store associates, work scheduling, inventory control, expense control, customer service and associate morale. Typically, the store manager is supported by an assistant manager and core department heads, along with an average of 15 sales associates. Store operations are coordinated through seventeen district managers each of whom is currently responsible for seven to twenty-one retail stores. In addition, the Company has developed and implemented consistent store standards, processes and best practices for the chain. The Company has established an internal store management training program which focuses training on store operations, systems, financial matters, human resources and sales. To support the Company's planned expansion and its management training programs, the Company has implemented a long-range personnel plan that provides for internal promotions, coupled with recruitment of college graduates and hiring of individuals with previous retail experience. Store associates receive training which emphasizes customer service, sales, product knowledge and store procedures. All CT store operations' management, including district managers, store managers and assistant managers are compensated based on job performance, and participate in an incentive program, which is based on the store/district exceeding a targeted level of profitability. The Company also has established an incentive program for all store associates that focuses on sales and profitability. Other Operations The CT catalog offers a broad assortment of new, used and rebuilt tractor parts and agricultural componentry, including approximately 25,000 SKUs. In fiscal 1997, catalog sales were $7.6 million. The catalog will be distributed nationally to approximately 685,000 households in rural and agricultural communities in fiscal 1998. The breadth of this distribution provides the Company with name recognition among agricultural consumers in areas outside of its core geographical markets. As a consequence, the Company anticipates some customer familiarity with the Company when it expands into new areas. The Company also sells tractor parts and other items, on a wholesale basis, to other agricultural retailers and distributors. In recent years, the Company has been reducing the number of products offered and the number of customers served by this unit. In fiscal 1997, the Company's wholesale business generated sales of $3.5 million. Purchasing and Distribution The Company maintains a staff of nine merchandise buyers, each of whom is responsible for specific product categories, at its headquarters in Des Moines, Iowa. The purchasing and inventory control process is controlled centrally by the Company's point of sale ("POS") and automatic replenishment systems. See "-- Corporate Offices and Management Information Systems." The Company purchases its merchandise from approximately 1,500 vendors, none of which accounted for more than 10% of the Company's purchases during fiscal 1997. The Company generally maintains multiple sources of supply for its products in order to minimize the risk of supply disruption and to improve its negotiating position. The Company has no long-term contractual commitments with any of its vendors. The Company operates a 135,000 square-foot distribution center in Des Moines, Iowa, a 155,000 square-foot distribution center in Youngstown, Ohio, and a 300,000 square foot distribution center in Grand Island, Nebraska from which it currently supplies the majority of its retail stores' inventory needs. The Des Moines facility is used to handle the small part items and to receive purchases sourced from vendors located in the Midwest. The Youngstown facility 5 serves primarily as a flow-through distribution station. The Grand Island facility primarily services the newly acquired Country General stores. Approximately 35% of total purchases, consisting mainly of high volume commodity items are shipped by vendors directly to individual store locations. Merchandise from the distribution centers is shipped to each store through supply orders generated by an automated replenishment system. The Company transports most of its merchandise to each store once a week from the distribution centers through a major contract carrier. The contract carrier's truck fleet delivers all warehouse shipments and most of the truckloads of merchandise which is shipped directly from vendors to store locations. The Company expects that its current distribution facilities will be sufficient to accommodate its planned expansion through fiscal 2000. Corporate Offices and Management Information Systems To facilitate the Company's expansion plan and to maintain consistent store operations, CT has centralized specific functions of its operations, including accounting, the development of policies and procedures, store layouts, visual merchandise presentation, inventory management, merchandise procurement and allocations, marketing and advertising, human resources and real estate. This centralization effectively utilizes the experience and resources of the Company's senior management and provides a high level of consistency throughout the chain. The Company has invested considerable resources in its management information and control systems, which were developed beginning in 1981 and have been expanded and improved yearly. These systems provide support for the purchase and distribution of merchandise and help to improve the manner in which CT stores, the corporate offices and distribution centers are operated. All CT stores (including all of the acquired Country General Stores) use the Company's POS system to capture sales information at the SKU level. Through the POS system, the Company can monitor customer purchases and inventory levels with respect to every item of merchandise in each store daily. The Company has implemented scanning capabilities in the receiving process of its distribution centers and currently plans to expand this to the picking and shipping process. Electronic Data Interchange ("EDI") is used to send purchase orders to certain of its largest suppliers. CT intends to expand its use of EDI to communicate invoicing, shipments and sales activity to and from most major suppliers. The Company also has an automated inventory replenishment system which uses POS information, and facilitates the timely replenishment of both the stores and the warehouses. The sales and inventory information used in this system is updated on a daily basis. This system also provides for minimum stocking levels for lower volume items enabling CT to carry a large number of SKUs at a minimum of inventory carrying expense. Competition The Company faces competition primarily from other chain and single-store agricultural specialty retailers, general merchandise retailers and home centers. Some of these competitors have substantially greater financial and other resources than the Company. Currently, most of the Company's stores do not compete directly in the markets of other agricultural specialty retail chains. However, the Company's expansion plans will likely result in new stores being located in markets currently served by one or more of these chains, and there can be no assurance that these chains, certain of which have announced expansion plans, will not expand into the Company's markets. Expansion by the Company into markets currently served by its competitors or expansion by competitors into the Company's markets could have a material adverse effect on the Company's business, financial condition or results of operation. In addition, the Company competes in over 90% of its markets (which the Company defines as a 30 mile radius around a store) with general merchandise retailers and/or home centers and expects these retailers to be in many of the markets targeted for expansion. The Company believes that its merchandise mix and level of customer service successfully differentiate it from general merchandise retailers and home centers, and as a result the Company has to date been able to operate profitably despite competition from general merchandise retailers and home centers. However, in the past certain general merchandise retailers and home centers have modified their product mix and marketing strategies 6 in an apparent effort to compete more effectively in the Company's markets. There can be no assurances that these efforts will not continue or that the Company will continue to be able to compete successfully against current and future competition. Advertising and Promotions The Company's primary advertising occurs through the bi-weekly distribution of approximately 5.0 million color circulars distributed as newspaper inserts, at retail stores and by direct mail. In order to focus its marketing on the many farmers in the Company's markets, the Company also advertises in geographically zoned editions of leading farming industry magazines. In addition, the Company runs periodic special events promoted through local flyers, circulars and radio advertising. Seasonality Unlike many specialty retailers, the Company has historically generated positive operating income in each of its four fiscal quarters. However, because the Company is an agricultural specialty retailer, its sales necessarily fluctuate with the seasonal needs of the agricultural community. The Company responds to this seasonality by attempting to manage inventory levels (and the associated working capital requirements) to meet expected demand, and by varying its use of part-time employees. Historically, the Company's sales and operating income have been highest in the third quarter of each fiscal year due to the farming industry's planting season and the sale of seasonal products. Working capital needs are highest during the second quarter. The Company expects these trends to continue for the foreseeable future. Employees As of November 1, 1997, CT had approximately 4,500 employees (approximately 2,400 in full-time and approximately 2,100 in part-time positions). The Company believes its relations with its employees is good. 7 ITEM 2. PROPERTIES As of December 31, 1997, the Company had 228 retail stores located in 27 states as follows: State Number of Stores Nebraska 47 Iowa 30 New York 22 Pennsylvania 17 Colorado 15 Minnesota 12 South Dakota 11 Georgia 7 Virginia 7 Ohio 7 Kansas 7 Kentucky 6 North Dakota 5 Wisconsin 5 Indiana 4 Maryland 4 Wyoming 4 New Jersey 3 Texas 3 Montana 2 Missouri 2 Oklahoma 2 Tennessee 2 Massachusetts 1 Illinois 1 Vermont 1 Delaware 1 -- Total 228 === The Company owns 55 of the stores and leases the remaining 173 stores. In addition the corporate headquarters and three distribution centers are leased. The Company's corporate headquarters are located adjacent to its distribution center in Des Moines, Iowa. The Company generally negotiates retail store leases with an initial term between five and seven years, with two or three renewal periods of five years each, exercisable at the Company's option. In fiscal 1997, the Company paid an average of $5.63 per square foot in retail store occupancy expenses, including rent, taxes, common area charges, repairs and maintenance. Rent expenses generally do not vary based on sales, and generally increase 10- 15% at the beginning of each option period. ITEM 3. LEGAL PROCEEDINGS The Company has been notified by the U.S. Environmental Protection Agency that it may have potential liability for cleanup costs associated with the cleanup of a dumpsite near Owensburg, Kentucky. To date, the only articles of waste identified as possibly once belonging to the Company are certain empty battery acid containers. The Company believes that any liability it might have as a result of this action would be as a de minimis contributor and will not have a material effect on the Company's financial position, liquidity or results of operations. The Company is not a party to any other legal proceedings, other than routine claims and lawsuits arising in the ordinary course of business. The Company does not believe that such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on the Company's business. Compliance with federal, state and local laws 8 and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, a material effect upon the capital expenditures, earnings or competitive position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Central Tractor Farm & Country, Inc. Common Stock is held entirely by Holding. See "Item 1. Business - Acquisition of the Company by J.W. Childs." The Company has not paid any cash dividends on its common stock. Although the Company may pay limited cash dividends on its common stock after consummation of the Acquisition, the Company's ability to pay cash dividends is restricted by the New Credit Facility. ITEM 6. SELECTED FINANCIAL DATA
Pro Forma Successor Predecessor ----------- ---------- ----------------------------------------------------------------------- Period of Period of seven five Fiscal year months months Fiscal Year End ended ended ended -------------------------------------------------------- November 1, November 1, March 26, November 2, October 28, October 29, October 30, 1997 (7) 1997 1997 1996 1995 1994 1993 ----------- ------ -------- ----------- ----------- ----------- ----------- (In thousands of dollars) Net sales $600,157 $305,122 $106,048 $293,020 $251,703 $231,064 $202,589 Income (loss) from continuing operations 3,418 1,365 (1,247) 8,744 8,185 5,181 3,270 Ratio (deficiency) of earnings to fixed charges (1) 1.3x 1.3x (1,881) 5.3x 5.8x 2.5x 2.0x Number of stores at end of period (2) 228 228 112 111 66 55 50 Comparable store sales per square foot of indoor selling space (3) 191(6) 222 224 240 218 Comparable store sales increases (decreases)(4) (4.7%)(6) 1.0% (1.6%) 10.0% 4.2% Balance Sheet Data (at end of period): Working capital $85,639 $ 63,803 $ 62,496 $ 50,442 $ 37,055 Total assets 434,235 159,238 149,977 139,416 113,241 Long-term debt, less current portion (5) 153,171 17,341 16,862 16,959 37,536 Stockholders' equity 119,547 90,063 81,277 75,735 24,287 - ---------------- (1) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and 20.0% of the rent expense from operating leases which the Company believes is a reasonable approximation of the interest factor included in the rent. For the five month period ended, March 26, 1997 earnings were insufficient to cover fixed charges by $1,881. (2) Net of three store closings in fiscal 1994 and five store closings in fiscal 1997. (3) Comparable sales per square foot of indoor selling space and calculated by dividing store sales by total indoor selling square footage for stores open and operated by CT at least twelve months in each fiscal year. (4) Percentage change in store sales as compared to sales for the same stores for the prior year for stores open and operated by CT for at least twelve months in each year. The 1.0% increase in comparable store sales in 1996 has been adjusted to reflect a comparable 52 week year. Comparable store sales grew 2.9% without such adjustment. The 4.7% decrease in comparable store sales in 1997 has been adjusted to reflect that fiscal year 1996 was a 53 week year. Comparable store sales declined 6.5% without such adjustment. (5) Excluding, in fiscal 1995 and prior years, long-term debt from discontinued operations. See footnote (10) in the Notes to Consolidated Financial Statements. (6) Calculations are for the fiscal year ended November 1, 1997. (7) Adjusted to give effect to the Acquisition, the Country General Acquisition, and the related financings, as though these transactions had occurred at the beginning of fiscal 1997. See "Unaudited Pro Forma Results of Operations for Year ended November 1, 1997" in Part IV herein.
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the selected consolidated financial data and the consolidated financial statements of the Company and related notes thereto. Results of Operations The following table sets forth, for the periods indicated, certain items in the Company's Statements of Income expressed as a percentage of net sales. All amounts and percentages for the fiscal year ended November 1, 1997 include the activity for the periods of the seven-months ended November 1, 1997 and the five-months ended March 26, 1997 on a combined basis. Fiscal Year Ended --------------------------------------- November 1, November 2, October 28, 1997 1996 1995 ------------ ------------ ------------ Net sales 100.0% 100.0% 100.0% Gross profit 29.1 29.3 29.5 Selling, general and administrative expenses 24.6 23.3 23.2 Amortization of intangibles .6 .3 .3 ----- ----- ----- Operating income 3.9 5.7 6.0 Interest expense 3.5 .6 .5 ----- ----- ----- Income before income taxes .4 5.1 5.5 Income taxes .4 2.1 2.3 ----- ----- ----- Income from continuing operations 0.0% 3.0% 3.2% ===== ===== ===== Fiscal 1997 Compared to Fiscal 1996 Net sales for the fiscal year ended November 1, 1997 were $411.2 million, an increase of $118.2 million, or 40.3%, as compared to net sales for the fiscal year ended November 2, 1996 of $293.0 million. The increase was due principally to the acquisition of 118 stores, primarily through the Country General Acquisition. Net sales includes $99.4 million of Country General sales since the date of the acquisition. In addition, the Company opened 4 new stores in 1997 and had a full year of operations for 45 stores opened or purchased in fiscal 1996. This increase was offset by a decrease in comparable store sales of $16.7 million or 6.5%. The decrease in comparable store sales was due primarily to the fact that fiscal year 1997 consisted of 52 weeks while fiscal year 1996 consisted of 53 weeks and a mild winter followed by a cool spring and dry summer in the Northeast where most of the comparable stores are located. Gross profit for fiscal 1997 was $119.5 million, an increase of $33.7 million, or 39.3%, as compared to $85.8 million for fiscal 1996. Gross profit as a percentage of sales remained relatively constant at 29.1% for fiscal 1997, as compared to 29.3% for fiscal 1996. Selling, general, and administrative expenses for fiscal 1997 were $101.2 million, an increase of $33.0 million, or 48.4%, over fiscal 1996. This increase was due primarily to costs related to the acquisition and operation of the Country General stores and costs related to new store openings. Selling, general, and administrative expenses as a percentage of sales increased to 24.6% in fiscal 1997 as compared to 23.3% in fiscal 1996. This increase is attributable to higher selling, general and administrative expenses as a percentage of sales at the Country General stores. CT stores percentage in 1997 was 23.9% versus 26.9% for Country General. The percentage for CT stores increased over the prior year 11 primarily due to decreased sales volume in comparable stores. Management expects to see a decrease as a percentage of sales in the selling, general and administrative expenses of the Country General stores in 1998. Amortization of intangibles was $2.2 million for fiscal 1997 and $.9 million in fiscal 1996. The increase is due to the additional goodwill incurred in the Acquisition and the Country General Acquisition. Operating income for fiscal 1997, was $16.2 million, a decrease of $.5 million, or 3.0%, as compared to fiscal 1996. Operating income as a percentage of sales decreased to 3.9% in fiscal 1997 from 5.7% in fiscal 1996. The decrease resulted from the factors affecting net sales, gross profit, selling, general and administrative expenses and amortization of intangibles discussed above. Interest expense for fiscal 1997 was $14.7 million, an increase of $13.0 million, as compared to $1.7 million for fiscal 1996. This increase was primarily due to the additional debt incurred to fund the Acquisition and the Country General Acquisition and the additional short term borrowing needs of the consolidated entity. Income tax expense related to continuing operations for fiscal 1997, was $1.4 million, a decrease of $4.8 million, or 77.4% as compared to $6.2 million for fiscal 1996. Income taxes as a percentage of pretax earnings were 92.3% in fiscal 1997 as compared to 41.7% in fiscal 1996. The increase is due primarily to amortization of goodwill related to the Acquisition, which is not deductible for income tax purposes. Fiscal 1996 Compared to Fiscal 1995 Net sales for the fiscal year ended November 2, 1996 were $293.0 million, an increase of $41.3 million, or 16.4%, as compared to net sales for the fiscal year ended October 28, 1995 of $251.7 million. This increase was due to a comparable store sales increase of approximately 1.0% (net of sales attributable to an extra (53rd) week in fiscal 1996), sales during such extra week, the opening of 14 new stores in fiscal 1996, a full year of operations for the eleven new stores opened in fiscal 1995 as compared to a partial year for those stores during fiscal 1995 and the acquisition of the Big Bear stores in May 1996. The increase in comparable store sales was primarily due to a comparable store sales increase of 13.8% during the fourth quarter of fiscal 1996 as compared to the fourth quarter of fiscal 1995. This increase in comparable store sales during the fourth quarter was the result of normal weather conditions during fiscal 1996 as compared to unusual and severe drought conditions during fiscal 1995. Gross profit for fiscal 1996 was $85.8 million, an increase of $11.4 million, or 15.3%, as compared to $74.4 million for fiscal 1995. Gross profit as a percentage of sales was 29.3% for fiscal 1996, as compared to 29.5% for fiscal 1995. This decrease is primarily attributable to the sale of lower margin products in the Big Bear stores prior to their conversion to the CT store format. Selling, general, and administrative expenses for fiscal 1996, were $68.2 million, an increase of $9.9 million, or 17.0%, for fiscal 1995. This increase was due primarily to costs related to new store openings and costs related to stores acquired and operated in the Big Bear acquisition. Selling, general, and administrative expenses as a percentage of sales increased to 23.3% in fiscal 1996 as compared to 23.2% in fiscal 1995. This increase is attributable to higher selling, general and administrative expenses as a percentage of sales at the new Big Bear stores, partially offset by a decrease in selling, general and administrative expenses as a percentage of sales at CT's existing stores. Management expects that the completion of the conversion of the Big Bear stores to the CT store format will improve selling, general and administrative expenses as a percentage of sales. Amortization of intangibles was $0.9 million for fiscal 1996 and 1995. Operating income for fiscal 1996, was $16.7 million, an increase of $1.5 million, or 9.5%, as compared to fiscal 1995. Operating income as a percentage of sales decreased to 5.7% in fiscal 1996 from 6.0% in fiscal 1995. The decrease resulted from the factors affecting net sales, gross profit, and selling, general and administrative expenses discussed above. 12 Interest expense for fiscal 1996 was $1.7 million, an increase of $0.4 million, or 27.7% as compared to $1.3 million for fiscal 1995. This increase was primarily due to an increase in interest related to short-term borrowings under the Company's line of credit agreement. Income tax expense related to continuing operations for fiscal 1996, was $6.2 million, an increase of $0.5 million, or 8.8% as compared to $5.7 million for fiscal 1995. Income taxes as a percentage of pretax earnings were 41.7% in fiscal 1996 as compared to 41.1% in fiscal 1995. This increase was primarily due to the effect of a reduction of prior year over accrual in fiscal 1995. Liquidity and Capital Resources In addition to cash to fund operations, CT's primary on-going cash requirements are those necessary for the Company's expansion and relocation programs, including inventory purchases and capital expenditures, and debt service. The Company's primary sources of liquidity have been funds provided from operations, borrowings pursuant to the Company's revolving and term credit facilities, short term trade credit and additional equity investments. On November 1, 1997, the Company had working capital of $85.6 million, an increase of $21.8 million, as compared to working capital of $63.8 million on November 2, 1996. This increase resulted primarily from an increase in inventory, partially offset by increases in accounts payable, accrued expenses, and borrowings under the Company's revolving credit facility. On November 1, 1997, the Company's inventories were $222.1 million, an increase of $114.9 million, as compared to $107.2 million at November 2, 1996. This increase reflected inventory for new stores and inventory for the stores acquired in the Country General Acquisition. The increase in inventory was funded with cash from operations, short-term trade credit, additional borrowing under the Company's revolving credit facility, and an additional equity investment of $49.8 million. Continuing operations of the Company used $0.5 million of net cash in fiscal 1997, generated $5.0 million of net cash in fiscal 1996, and used $6.0 million of net cash in fiscal 1995. The decrease in net cash generated in fiscal 1997, as compared to fiscal 1996, resulted primarily from a decrease in income from continuing operations, a larger increase in inventory, and an increase in recoverable income taxes, partially offset by an increase in accounts payable and accrued expenses, as compared to a decrease in fiscal 1996, an increase in depreciation and amortization and a larger increase in deferred income taxes. The increase in net cash generated in fiscal 1996, as compared to fiscal 1995, resulted primarily from a smaller increase in inventory and an increase in income from continuing operations, partially offset by a reduction in accounts payable in fiscal 1996, as compared to an increase in fiscal 1995. The Company's capital expenditures were $6.2 million and $8.8 million for fiscal 1997 and 1996, respectively. The majority of capital expenditures were for store fixtures, equipment and leasehold improvements for new and existing stores. The Company presently expects its capital expenditures for renewal and replacement costs at existing stores and distribution centers in fiscal 1998 to be approximately $5.0 million. During fiscal 1997, the Company was acquired by an affiliate of J.W. Childs Equity Partners, L.P. and thereafter became a wholly owned subsidiary of Holding. See "Item 1. Business - Acquisition of the Company by J.W. Childs" and Notes to Consolidated Financial Statements. In connection with the Acquisition, on March 27, 1997, the Company consummated a public offering of $105.0 million aggregate principal amount of 10 5/8% Senior Notes (the "Senior Notes"). The net proceeds of the offering were used to repay borrowings of $35.9 million under the Margin Loan Facility, pay the Merger Consideration of $51.8 million, pay fees and expenses of the Acquisition, and reduce outstanding short-term borrowings. The Senior Notes mature on April 1, 2007 with interest payable semiannually in arrears on April 1 and October 1. The Senior Notes may be redeemed beginning April 1, 2002 at a price of 105.3125% of the principal amount decreasing approximately 1.77% annually thereafter until April 1, 2005 at which time they are redeemable at face value. Furthermore, notwithstanding the foregoing the Company may redeem up to 35% of the original aggregate principal amount of the Senior Notes at a price of 110% of the principal amount with the net cash proceeds of a public equity offering within 60 days of closing such offering. In addition, effective June 26, 1997, the Company acquired all of the outstanding capital stock of Country General. The acquisition was accounted for as a purchase and the Company will elect to treat the purchase as a purchase of all 13 of the assets of Country General for Federal income tax purposes. See "Item 1. Business - Acquisitions" and Notes to the Consolidated Financial Statements. In connection with the Country General Acquisition, on July 3, 1997, the Company entered into an amended and restated credit facility (the "Credit Facility") which consists of a $50.0 million, six-year term loan facility, which was fully funded, and a $100.0 million revolving credit facility under which borrowings of $60.8 million and letters of credit totaling $8.4 million were outstanding as of November 1, 1997. The term loan must be repaid in semiannual installments beginning December 31, 1997, plus annual prepayments based on the Company's excess cash flow, as defined. The minimum annual installments are as follows: fiscal years 1998 - $3.0 million; 1999 - $3.0 million; 2000 - $6.0 million; 2001 - - $8.0 million; 2002 - $12.0 million; and 2003 - $18.0 million. The Credit Facility will mature on June 30, 2003. Borrowings under the Credit Facility will bear interest at rates based upon prime or the Eurodollar Rate plus a margin. At November 1, 1997, the interest rate on the term loan was 8.19% and the interest rate on the revolving credit facility was 8.06%. The Credit Facility contains covenants which require the Company to maintain a minimum consolidated net worth, a minimum earnings before taxes, interest, depreciation and amortization (EBITDA), a minimum ratio of EBITDA to cash interest payable, and a maximum ratio of debt to EBITDA. The covenants also restrict, among other things, the payment of dividends, incurrence of debt, and disposition of assets. The Credit Facility is secured by substantially all of the assets of the Company. The Company anticipates that its principal uses of cash in the foreseeable future will be working capital requirements, debt service requirements and capital expenditures, as well as expenditures relating to acquisitions. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Credit Facility, will be adequate to meet its anticipated requirements in the foreseeable future for working capital, capital expenditures and interest payments. The Company expects that if it were to pursue a significant acquisition, it would arrange prior to the acquisition any additional debt or equity financing required to fund the acquisition. There can be no assurance, however, that the Company's business will continue to generate sufficient cash flow from operations in the future to service its debt, and the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing or to reduce its capital spending. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. Seasonality Unlike many specialty retailers, the Company has historically generated positive operating income in each of its four fiscal quarters. However, because the Company is an agricultural specialty retailer, its sales necessarily fluctuate with the seasonal needs of the agricultural community. The Company responds to this seasonality by attempting to manage inventory levels (and the associated working capital requirements) to meet expected demand, and by varying its use of part-time employees. Historically, the Company's sales and operating income have been highest in the third quarter of each fiscal year due to the farming industry's planting season and the sale of seasonal products. Working capital needs are highest during the second quarter. The Company expects these trends to continue for the foreseeable future. Inflation Management does not believe its operations have been materially affected by inflation. Year 2000 The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted. The expenditures for the modifications and conversions are not expected to have a material impact on 14 the operations of the Company. However, if such modifications and conversions are not completed timely, the Year 2000 problem may have a material impact on the operations of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included at pages F-1 through F-27. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each of the Company's directors, executive officers and other significant employees. All of the Company's officers are elected annually and serve at the discretion of the Board of Directors.
Name Age Positions ---- --- --------- James T. McKitrick 52 President, Chief Executive Officer, Director Dean Longnecker 49 Executive Vice President, COO, Secretary, Director John R. Pearson 49 Executive Vice President, Sales John W. Childs 56 Director Jerry D. Horn 59 Director Steven G. Segal 37 Director Adam L. Suttin 30 Director Jeffrey B. Swartz 36 Director William E. Watts 43 Director Habib Y. Gorgi 41 Director Peter Lamm 46 Director Richard C. Dresdale 41 Director George D. Miller 55 Senior Vice President, Merchandising Denny Starr 44 Senior Vice President, Finance, CFO Jeffrey A. Stanton 47 Senior Vice President, Administration David E. Enos 38 Senior Vice President, Information Systems/Logistics Daniel Cunningham 62 Vice President, Parts and Service Jack P. Feichtner 51 Vice President, Advertising
James T. McKitrick, President and Chief Executive Officer, joined the Company in July 1992. He has over 30 years experience in retailing, including 20 years at Kmart Corporation. Prior to joining CT, Mr. McKitrick was President and Chief Executive Officer of Builder's Emporium, a California-based home improvement center chain. Previously, he was with Ames Department Stores from 1987 through 1990, were he held the positions of Executive Vice President, Chairman of Zayre Discount Store Division, and President and Chief Executive Officer of G.C. Murphy Division, a $900 million variety store chain. Mr. McKitrick also served as President and Chief Executive Officer of Warehouse Club, Inc. from 1986 through 1987 and Executive Vice President of Merchandising for T.G.&Y. Stores Company from 1984 through 1986. From 1963 through 1984, Mr. McKitrick was with the Kmart Corporation. Dean Longnecker, Executive Vice President, Chief Operating Officer, has held his current position since 1997. He joined CT in 1980 as Controller and was promoted to Executive Vice President of Finance in 1985. Mr. Longnecker was employed at Payless Cashways from 1973 until 1980, most recently as Treasurer. He received a B.S. from Iowa State University in 1970 and C.P.A. in 1972. John R. Pearson, Executive Vice President, Sales, joined Central Tractor in October 1997. Previously he was with Tractor Supply Center for 27 years, with the last 10 years in senior management and the most recent position being held as Senior Vice President, Merchandising. John W. Childs has been President of J.W. Childs Associates since July 1995. Prior to that time, he was an executive at Thomas H. Lee Company from May 1987, most recently holding the position of Senior Managing Director. He is a director of Big V Supermarkets, Inc., Cinnabon, Inc., The Edison Project, Inc., Chevys, Inc., DESA International, Inc., Playtex Products, Inc., and Select Beverages, Inc. Jerry D. Horn has been Chairman of the Board of General Nutrition Companies, Inc., a 3,000 store vitamin and nutritional supplement retail chain operating under the GNC name, since October 1991 and, prior to that was President 16 and Chief Executive Officer since 1985. Mr. Horn is Chairman of the Board of Cinnabon, Inc. and has been a Managing Director of J.W. Childs Associates since July 1995. Steven G. Segal is Senior Managing Director of J.W. Childs Associates and has been an executive of J.W. Childs Associates since July 1995. Prior to that time, he was an executive at Thomas H. Lee Company from August 1987, most recently holding the position of Managing Director. He is a director of International DiverseFoods, Inc., Empire Kosher Poultry, Inc., Big V Supermarkets, Inc., Cinnabon, Inc., Jillian's Entertainment Holdings, Inc. and Fitz and Floyd, Inc. Adam L. Suttin is a Managing Director of J.W. Childs Associates and has been an executive of J.W. Childs Associates since July 1995. Prior to that time, he was an executive at Thomas H. Lee Company from August 1989, most recently holding the position of Associate. He is a director of Empire Kosher Poultry, Inc. and DESA International, Inc. Jeffrey B. Swartz has been Chief Operating Officer of Timberland Co., a manufacturer and marketer of branded footwear and apparel, since May 1991, and has worked for that company in various positions since June 1986. William E. Watts has been President, Chief Executive Officer and a Director of General Nutrition Companies, Inc. since October 1991 and, prior to that, held various positions with its predecessor since 1984. Habib Y. Gorgi is President of the general partners of Fleet Equity Partners VII, L.P. and the general partner of Silverado III, L.P., which is the general partner of Chisholm Partners and has worked at Fleet Equity Partners since 1986. He is a director of La Petite Academy, Dines Industrial Group, Rosina Food Products, Savage Sports Corporation, Simonds Industries and FTD Corporation. Mr. Gorgi received a bachelor's degree from Brown University and a master's degree from Columbia University. Peter Lamm, is President of Fenway Partners, a New York-based private investment firm with $527 million under management. Mr. Lamm was previously Managing Director of Butler Capital Corporation (BCC) and a general partner of each of the BCC funds. Mr. Lamm currently serves as a director on Van de Kamp's, Aurora Foods, Iron Age Corporation, Delimex, Blue Capital and Beckley-Cardy. Richard C. Dresdale, is a founding partner of Fenway Partners, a New York-based private investment firm with $527 million under management. Mr. Dresdale was previously a principal at Clayton, Dubilier & Rice, Inc. (CD&R). Mr. Dresdale is a director of Aurora Foods, Delimex, Blue Capital, MW Windows, Bear Archery and Remington Arms Company. George D. Miller, Senior Vice President, Merchandising, joined CT in June 1996. Previously, he was Vice President, Merchandising, with Home Base, a California-based home improvement center chain from 1993 through 1996. Mr. Miller was employed by Sears, Roebuck & Company from 1968 through 1993, most recently as Senior Merchandise Manager. He received B.S. and M.B.A. degrees from Indiana University. Denny Starr, Senior Vice President, Finance, Chief Financial Officer, joined the Company in October 1989 as Assistant Controller. He previously served as Assistant Controller of The Witten Group, a holding company with operations in manufacturing, real estate and finance, from 1986 through 1989. He was an Audit Manager with McGladrey & Pullen from 1982 until 1986. Mr. Starr received his B.A. from the University of Iowa in 1982 and C.P.A. in 1982. Jeffery A. Stanton, Senior Vice President, Administration, joined the Company in June 1992. Previously, he was employed by R.R. Donnelly & Sons and Meredith/Burda Corporation from 1985 through 1992, as well as Reichardt's Inc., a specialty retailer, from 1972 through 1985. Mr. Stanton received a B.B.A. degree from the University of Iowa in 1972. David E. Enos, Senior Vice President, Information Systems/Logistics, has held his current position since 1990. Mr. Enos joined CT in 1981. Previously, he was employed at Meredith/Burda Corporation from 1979 through 1981. He received an A.A.S. degree in Data Processing from DMACC in 1979. 17 Daniel Cunningham, Vice President, Parts and Service, joined CT in 1958. Mr. Cunningham has held several positions within the Company, including store operations, mail order and the Company's tractor parts area. Mr. Cunningham was promoted to his current position in 1991. Jack P. Feichtner, Vice President, Advertising, joined CT in July 1995. He was previously with Kmart Corporation for 27 years, where his most recent position was Director, Advertising. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth compensation earned for all services rendered to the Company during fiscal 1997, fiscal 1996, and fiscal 1995, as applicable, by the Company's chief executive officer and four other executive officers who were employed by the Company as such during fiscal 1997 (collectively, the "Named Executives").
Long-Term Compensation Annual Compensation Awards ----------------------------------------------------- --------------- Number of Securities All Other Name and Principal Fiscal Salary(1) Bonus Underlying Compensation Position During 1997 Year ($) ($) Options ($) - -------------------- ------------ --------------- ---------------- --------------- --------------- James T. McKitrick 1997 399,423 -- -- 9,586 (2) President, Chief 1996 365,000 91,250 -- 9,863 (2) Executive Officer 1995 350,000 70,000 -- 4,357 (2) Dean Longnecker 1997 254,327 -- -- 2,043 (2) Executive Vice 1996 234,000 58,500 -- 5,131 (2) President, Chief Operating Officer 1995 225,000 45,000 15,000 4,152 (2) George D. Miller (3) 1997 172,308 -- -- 2,907 (2) Senior Vice 1996 108,462 15,190 60,000 5,128 (4) President, Merchandising 1995 -- -- -- -- John R. Pearson (5) 1997 15,923 -- -- 158,856 (6) Executive Vice President, Sales 1996 -- -- -- -- 1995 -- -- -- -- Denny Starr 1997 123,558 -- -- 6,438 (2) Senior Vice President, Finance, 1996 89,167 23,000 -- 5,942 (2) Chief Financial Officer 1995 83,308 20,000 -- 3,562 (2) - ---------- (1) Includes compensation deferred at the Named Executive's election under the Company's Profit Sharing Plan. (2) Represents amounts contributed by the Company during each fiscal year, as applicable, to the Named Executive's Profit Sharing Plan account. (3) Mr. Miller joined the Company in May 1996. (4) Represents payments or reimbursement of certain moving and relocating expenses. (5) Mr. Pearson joined the Company effective October 6, 1997. (6) Represents payments associated with the hiring of Mr. Pearson.
Employment Arrangements with Executive Officers Prior to the Acquisition, Mr. McKitrick was employed as President and Chief Executive Officer pursuant to an employment agreement dated September 16, 1994. Under this agreement, Mr. McKitrick received a salary of $385,000, subject to increases determined annually by the compensation committee (which increases must at least equal increases in the consumer price index). In addition, Mr. McKitrick was eligible for an annual bonus of up to 60% of his salary, based on financial targets and non-quantitative performance objectives established by the compensation committee at the beginning of each fiscal year. If his employment was terminated by the Company other than for cause or because of death or disability, or because the Company either removed him or failed to elect him as President and Chief Executive Officer, the Company would pay to Mr. McKitrick his base salary (reduced by compensation received from 18 other businesses) from the date of termination to the later of November 1, 1997 and the first anniversary of such termination. Pursuant to the employment agreement, Mr. McKitrick was granted an option to acquire, at an exercise price equal to the initial public offering price, up to 112,512 shares of Common Stock on the seventh anniversary of the original date of grant, with accelerated vesting in fiscal 1996 through 1998 if certain EBITDA targets were met. Mr McKitrick's employment agreement also contained certain confidentiality and non-competition requirements . Prior to the Acquisition, Mr. Longnecker was employed as Executive Vice President, Chief Operating Officer pursuant to an agreement dated September 16, 1994. Under this agreement, Mr. Longnecker received a salary of $250,000, subject to salary increases determined annually by the compensation committee (which increases must at least equal increases in the consumer price index). In addition, Mr. Longnecker was eligible for an annual bonus of up to 48% of his salary, based on financial targets and non-quantitative performance objectives established by the compensation committee at the beginning of the fiscal year. If his employment was terminated by the Company other than for cause or because of death or disability, or because the Company either removed him or failed to retain him as Executive Vice President, Chief Operating Officer, the Company would pay to Mr. Longnecker his base salary (reduced by compensation received from other businesses) from the date of termination to the first anniversary of such termination. Mr. Longnecker's employment agreement also contained certain confidentiality and non-competition provisions. As part of the Acquisition, on January 2, 1997, James T. McKitrick and G. Dean Longnecker sold to Childs for $14.00 per share, 81,810 and 64,489 shares, respectively, of the Company's outstanding common stock, in accordance with the terms of the Securities Purchase Agreements entered into at the same time as the Merger Agreement. Additionally, the Securities Purchase Agreements provide that at the closing of the Merger, Mr. McKitrick would exchange outstanding options to purchase 183,935 shares of Company common stock having an aggregate exercise price of $0.6 million for options to acquire shares of Holding common stock valued at $2.6 million and that Mr. Longnecker would exchange 71,429 shares of Company common stock for shares of Holding common stock valued at $1.0 million. The Securities Purchase Agreements also contain provisions regarding the continued employment of Messrs. McKitrick and Longnecker in their current capacities after the Merger (the "New Employment Agreements"). Mr. McKitrick's New Employment Agreement provides for a base salary of $435,000, and Mr. Longnecker's provides for a base salary of $265,000, subject in each case to annual increases as determined by the Board of Directors (which increases must at least equal increases in the consumer price index). Additionally, Messrs. McKitrick and Longnecker are eligible for annual cash bonuses if the Company achieves certain operation cash flow targets, which bonuses are not subject to any ceilings contained in the New Employment Agreements. Mr. McKitrick's New Employment agreement provides for severance payments equal to his base salary for 18 months if his employment is terminated (other than in the case of death, disability or for cause) or if he is not reelected as President and Chief Executive Officer, reduced by any compensation he should earn during such 18-month period from other businesses. Mr. Longnecker's New Employment Agreement provides for severance payments equal to his base salary for 12 months if his employment is terminated (other than in the case of death, disability or for cause) or if he is not reelected as Executive Vice President, Chief Operating Officer, not subject however, to reduction for any compensation earned from other businesses. The New Employment Agreements also contemplated that Messrs. McKitrick and Longnecker will participate along with other management personnel in two stock option plans of Holding involving 4.5% and 3.2% of Holding's outstanding common stock and common stock equivalents on a fully diluted basis, respectively. Allocations of options among the management group are to be made in the first instance by the Chief Executive Officer of the Company, subject to ratification by Holding's Board of Directors. Such allocations have not been made as of the date of this filing. The management stock options will be subject to vesting based on the Company's achievement of certain operating cash flow targets. Additionally, the New Employment Agreements contemplate that Messrs. McKitrick and Longnecker will receive additional stock options which vest if the Company is sold within six years after the effective time of the Merger and the realized value of the common equity of the original investment group in Holding should equal or exceed ten times the value thereof at the time of the Merger. Mr. McKitrick's and Mr. Longnecker's options under this program are to 19 acquire an aggregate number of shares of common stock of Holding equal to 1.25% and 0.75%, respectively, of the total outstanding common stock and common stock equivalents of Holding on a fully diluted basis. In addition various other executives of the Company have employment agreements that contain, among other items, one year severance provisions under certain circumstances as well as various bonus provisions. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of November 1, 1997, Holding holds 100% of the outstanding stock of the Company. All outstanding options were repurchased in connection with the Acquisition or exchanged for options to acquire shares of Holding common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Two of the Company's suppliers, Iron Age Corporation ("Iron Age") and Walls Industries, Inc. ("Walls"), are controlled by certain BCC affiliates that were stockholders during a portion of the predecessor period. Iron Age is a manufacturer and distributor of work boots and protective footwear. Walls is a manufacturer of insulated and non- insulated workwear, rugged outdoor and hunting apparel and casual outerwear. The Company believes that the terms of its purchases from Iron Age and Walls are at least as favorable to the Company as could be obtained from other suppliers. In fiscal 1997, the Company's purchases from Iron Age and Walls totaled $1.6 million for the five month period ended March 26,1997. On November 26, 1997, Childs acquired control of one of the Company's suppliers, DESA Internatioanl, Inc. ("DESA"). DESA is a manufacturer and marketer of zone heating/home comfort products and specialty tools. In fiscal 1997, the Company's purchases from DESA totaled $172 thousand. Certain investment funds managed by BCC owned a majority of the outstanding common stock of the Company during a portion of the predecessor period. The BCC Funds also held the 7% convertible notes which were retired in connection with the purchase of the BCC common stock. Interest paid on such notes was approximately $171,000 for the five months ended March 26, 1997. In connection with the Acquisition, Childs was paid an advisory and financing fee of $1.7 million in consideration of services regarding the planning, structuring and negotiating of the Acquisition and related financings. For the period of seven months ended November 1, 1997, Childs was paid a management and consulting services fee of $140,000 under a five year agreement, renewable annually thereafter, requiring annual payments of $240,000, subject to limitations of the Company's debt agreements. In connection with the consummation of the Acquisition, Holding loaned $250,000 to George Miller and $25,000 to Jack Feichtner to partially fund their investment in Holding common stock. In addition, on December 23, 1997, Holding loaned $250,000 to John Pearson to partially fund his investment in Holding common stock. The loans are due in ten years and require payments of interest at the applicable interest rate under the Credit Facility. Additionally, Messrs. McKitrick and Longnecker are parties to a Stockholders Agreement dated as of December 23, 1996 applicable to all shares of Holding common stock or vested options to acquire such common stock held now or hereafter acquired by them. The Stockholders Agreement, among other terms, permits Holding to "call" their shares and vested options on their termination of employment for any reason. Additionally, if either Mr. McKitrick of Mr. Longnecker is terminated for any reason other than for cause or without good reason (as those terms are defined in the Stockholders Agreement), he has the right to "put" his shares or vested options to Holding. Depending on the circumstances, the price for shares of Holding common stock purchased in connection with a call or put under the Stockholders Agreement will range from cost to seven times EBITDA. The put and call features of the Stockholders Agreement terminate on completion of a public offering of Holding common stock with aggregate net proceeds of $50.0 million or more. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statements. See the Index to Financial Statements appearing at page F-1. 2. Financial Statement Schedules. The following Consolidated Financial Statement Schedule is included at page F-27: Schedule II - Valuation and Qualifying Accounts No other Financial Statement Schedules have been presented since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 3. Exhibits. The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference. Exhibit No. Description 3(i).1 -- Restated Certificate of Incorporation, filed as exhibit 3(i).1 to the Company's Registration Statement on Form S-1 (File #33-82620) originally filed on August 9, 1994 and incorporated herein by reference. 3(i).2 -- Certificate of Merger dated October 5, 1994, filed as exhibit 3(i).2 to the Company's Registration Statement on Form S-1 (File #33-82620) originally filed on August 9, 1994 and incorporated herein by reference. 3(ii) -- By-Laws of the Company, filed as exhibit 3(ii) to the Company's Registration Statement on Form S-1 (File #33-82620) originally filed on August 9, 1994 and incorporated herein by reference. 4.1 -- Form of Common Stock Certificate of the Company, filed as exhibit 4.1 to the Company's Registration Statement on Form S-1 (File #33-82620) originally filed on August 9, 1994 and incorporated herein by reference. 4.2 -- Indenture relating to the Senior Notes, the form of which was filed as exhibit 4.4 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-19613) originally filed on March 19, 1997 and incorpoated herein by reference. 10.1 -- Employment Agreement between the Company and James T. McKitrick dated as of September 16, 1994, filed as exhibit 10.5 to the Company's Registration Statement on Form S-1 (File #33- 82620) originally filed on August 9, 1994 and incorporated herein by reference. 10.2 -- Employment Agreement between the Company and Dean Longnecker dated as of September 16, 1994, filed as exhibit 10.6 to the Company's Registration Statement on Form S-1 (File #33- 82620) originally filed on August 9, 1994 and incorporated herein by reference. 21 10.3 -- Asset Purchase Agreement By and Between Central Tractor Farm & Country, Inc., (the "Buyer") and Big Bear Farm Stores, Inc. (the "Seller") dated May 22, 1996, filed as exhibit 10.15 to the Company's 10-Q originally filed on September 9, 1996 and incorporated herein by reference. 10.4 -- Agreement Plan of Merger dated November 27, 1996 by and among Central Tractor Farm & Country, Inc., J.W. Childs Equity Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition I, Inc., filed as an exhibit to the Company's 8-K originally filed on December 3, 1996 and incorporated herein by reference. 10.5 -- Securities Purchase Agreement dated as of November 27, 1996 by and among Central Tractor Farm & Country, Inc., J.W. Childs Equity Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition I, Inc., filed as an exhibit to the Company's 8-K originally filed on December 3, 1996 and incorporated herein by reference. 10.6 -- Securities Purchase Agreement, dated as of November 6, 1996, by and among Mezzanine Lending Associates I, L.P., Mezzanine Lending Associates II, L.P., Mezzanine Lending Associates III, L.P., Senior Lending Associates I, L.P., BCC Industrial Services, JWC Acquisition I, Inc., J.W. Childs Equity Partners, L.P., Central Tractor Farm & Country, Inc. filed as an exhibit to JWCAC's Schedule 13D originally filed on December 9, 1996 and incorporated herein by reference. 10.7 -- Letter Agreement, dated as of November 27, 1996 between JWC Acquisition I, Inc. and Mr. James T. McKitrick, filed as an exhibit to JWCAC's Schedule 13D originally filed on December 9, 1996 and incorporated herein by reference. 10.8 -- Letter Agreement, dated as of November 27, 1996 between JWC Acquisition I, Inc. and Mr. G. Dean Longnecker, filed as an exhibit to JWCAC's Schedule 13D originally filed on December 9, 1996 and incorporated herein by reference. 10.9 -- Employment Agreement between the Company and George D. Miller dated May 6, 1996, filed as exhibit 10.25 to the Company's Registration Statement on Form S-1 (File #333-19613) originally filed on January 10, 1997 and incorporated herein by reference. 10.10 -- Credit Agreement dated as of December 23, 1996 among the Company, Holding, JWCAC, certain banks, financial institutions and other institutional lenders listed therein, Fleet, as administrative agent, and NationsBank, as co-agent, filed as exhibit 10.22 to the Company's 10-K originally filed on January 31, 1997 and incorporated herein by reference. 10.11 -- Stock Purchase Agreement, dated June 26, 1997 by and between the Company and ConAgra, Inc. and the Amended and Restated Credit Agreement, dated as of July 3, 1997, filed as exhibits to the Company's Form 8-K filed on July 3, 1997 and incorporated herein by reference. 12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges 21 -- Subsidiaries of the Company 27 -- Financial Data Schedule 99 -- Important Factors Regarding Forward-Looking Statements (b) Reports on Form 8-K Filed During the Last Quarter of Fiscal 1997 Form 8-K/A (Amendment No. 1) filed September 16, 1997 - Included financial statements for Country General, Inc., which was acquired by the Company as of June 26, 1997. 22 (c) See Item 14(a)(3) of this report. (d) See Item 14(a)(2) of this report. 23
INDEX TO FINANCIAL STATEMENTS Central Tractor Farm & Country, Inc. and Predecessor Historical Financial Statements: Report of Ernst & Young LLP................................................................................F-2 Consolidated Balance Sheets as of November 1, 1997 and November 2, 1996....................................F-3 Consolidated Statements of Income for periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997 and years ended November 2, 1996 and October 28, 1995.................F-5 Consolidated Statements of Changes in Stockholders' Equity for periods of seven-months ended November 1, 1997 and five-months ended March 26,1997 and years ended November 2, 1996 and October 28, 1995..................................................................F-6 Consolidated Statements of Cash Flows for periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997 and years ended November 2, 1996 and October 28, 1995.................F-7 Notes to Consolidated Financial Statements.................................................................F-9 Country General, Inc. Historical Financial Statements: Report of Deloitte & Touche LLP..............................................................................* Balance Sheets as of May 24, 1997 and May 25, 1996.......................................................... * Statements of Income for the years ended May 24, 1997 and May 25, 1996...................................... * Statements of Stockholder's Equity for the years ended May 24, 1997 and May 25, 1996.........................* Statements of Cash Flows for the years ended May 24, 1997 and May 25, 1996...................................* Notes to Financial Statements................................................................................* Pro Forma Financial Information: Unaudited Pro Forma Results of Operations, Year ended November 1, 1997....................................F-25 Notes to Unaudited Pro Forma Results of Operations........................................................F-26 Schedule II - Valuation and Qualifying Accounts................................................................F-27 * These financial statements were originally filed with the Company's Form 8-K/A (Amendment No. 1) filed September 16, 1997 and are incorporated herein by reference
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Central Tractor Farm & Country, Inc. We have audited the accompanying consolidated balance sheets of Central Tractor Farm & Country, Inc. ("Successor"), a wholly-owned subsidiary of CT Holding, Inc., as of November 1, 1997 and its "Predecessor" as of November 2, 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows of the Successor for the seven-month period ended November 1, 1997 and the Predecessor for the five-month period ended March 26, 1997 and for each of the years ended November 2, 1996 and October 28, 1995. Our audits also included the financial statement schedule listed in Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Central Tractor Farm & Country, Inc. at November 1, 1997 and its Predecessor at November 2, 1996, and the consolidated results of operations and cash flows of the Successor for the seven-month period ended November 1, 1997 and the Predecessor for the five-month period ended March 26, 1997 and for each of the years ended November 2, 1996 and October 28, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Des Moines, Iowa December 19, 1997 F-2
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) Successor | Predecessor ------------- | -------------- November 1, | November 2, 1997 | 1996 ------------- | -------------- | Assets (Note 4) | Current assets: | Cash and cash equivalents $ 7,378 | $ 3,809 Recoverable income taxes 2,513 | -- Trade and other receivables, less allowances of $386 in 1997 | and $50 in 1996 7,264 | 992 Inventory 222,117 | 107,203 Deferred income taxes (Note 7) 4,000 | -- Other 3,136 | 2,368 -------- | -------- Total current assets 246,408 | 114,372 | Property, improvements and equipment: | Land 1,963 | -- Buildings and improvements 4,934 | -- Leasehold improvements 12,788 | 12,803 Furniture and fixtures 24,731 | 23,766 Capitalized property rights (Note 5) 867 | 2,859 Automobiles and trucks 628 | 1,065 -------- | -------- 45,911 | 40,493 | Less allowances for depreciation and amortization 2,716 | 16,036 -------- | -------- 43,195 | 24,457 | Goodwill, net of amortization of $1,753 in 1997 | and $4,592 in 1996 135,612 | 19,018 Other assets, principally deferred financing costs in 1997 9,020 | 1,391 | -------- | -------- Total assets $434,235 | $159,238 ======== | ========
F-3
Successor | Predecessor ------------- | ------------ November 1, | November 2, 1997 | 1996 ------------- | ------------ Liabilities and stockholders' equity Current liabilities: | Bank line of credit (Note 4) $ 60,750 | $ 3,669 Accounts payable 68,015 | 41,081 Accrued payroll and bonuses 5,847 | 3,631 Deferred income taxes (Note 7) -- | 913 Accrued income taxes 508 | 4 Other accrued expenses 22,479 | 1,101 Current portion of long-term debt and capital lease obligations 3,170 | 170 -------- | -------- Total current liabilities 160,769 | 50,569 | Long-term debt, less current portion (Notes 4 and 11) 152,000 | 16,000 Capital lease obligations, less current portion (Note 5) 1,171 | 1,341 Deferred income taxes (Note 7) 748 | 1,265 -------- | -------- Total liabilities 314,688 | 69,175 | Stockholders' equity (Notes 3 and 6): | Preferred stock, $.01 par value: authorized shares -none in | 1997 and 5,000,000 in 1996; none issued or outstanding -- | -- Common stock, $.01 par value: authorized shares - 3,000 in | 1997 and 45,000,000 in 1996; issued and outstanding shares | - 100 in 1997 (wholly-owned by CT Holding, Inc.) and | 10,589,082 in 1996 -- | 106 Stock warrant outstanding -- | 665 Additional paid-in capital 118,920 | 69,709 Retained earnings 627 | 19,583 -------- | -------- Total stockholders' equity 119,547 | 90,063 | Commitments (Notes 5 and 8) -- | -- -------- | -------- Total liabilities and stockholders' equity $434,235 | $159,238 ======== | ========
See accompanying notes. F-4
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF INCOME (In thousands) Successor | Predecessor ------------------ | ----------------------------------------------------- | | Period of seven | Period of five Fiscal year ended months ended months ended November 2, October 28, November 1, 1997 | March 26, 1997 1996 1995 ------------------ | ----------------- --------------- ------------------ | Net sales $ 305,122 | $ 106,048 $ 293,020 $ 251,703 Cost of sales 216,342 | 75,281 207,228 177,340 --------- | --------- --------- --------- Gross profit 88,780 | 30,767 85,792 74,363 | Selling, general and administrative | expenses, including amounts with | related parties (Note 11) 72,142 | 29,045 68,197 58,294 Amortization of intangibles 1,753 | 415 938 862 --------- | --------- --------- --------- Operating income 14,885 | 1,307 16,657 15,207 | Interest expense, including amounts | with related parties (Note 11) 11,463 | 3,188 1,663 1,302 --------- | --------- --------- --------- Income (loss) from continuing | operations before income taxes 3,422 | (1,881) 14,994 13,905 | Income taxes (credits) (Note 7) 2,057 | (634) 6,250 5,720 --------- | --------- --------- --------- Income (loss) from continuing | operations 1,365 | (1,247) 8,744 8,185 | Discontinued operations (Notes 7 and 10): | Income from discontinued | operations, net of income taxes | of $474 -- | -- -- 812 Loss on sale of Herschel | Corporation, net of $665 income | tax benefit -- | -- -- (3,455) --------- | --------- --------- --------- Loss from discontinued operations -- | -- -- (2,643) --------- | --------- --------- --------- Net income (loss) $ 1,365 | $ (1,247) $ 8,744 $ 5,542 ========= | ========= ========= ========= | Ratio (deficiency) of earnings to fixed charges 1.3x | $ (1,881) 5.3x 5.8x ========= | ========= ========= =========
See accompanying notes. F-5
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands) Periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and years ended November 2, 1996 and October 28, 1995 Stock Additional Retained Total Common Warrant Paid-In Earnings Stockholders' Stock Outstanding Capital (Deficit) Equity -------------- -------------- -------------- -------------- -------------- Predecessor - ----------- Stockholders' equity at October 29, 1994 $ 106 $ 665 $ 69,667 $ 5,297 $ 75,735 Net income -- -- -- 5,542 5,542 -------- -------- -------- -------- -------- Stockholders' equity at October 28, 1995 106 665 69,667 10,839 81,277 Exercise of common stock options -- -- 42 -- 42 Net income -- -- -- 8,744 8,744 -------- -------- -------- -------- -------- Stockholders' equity at November 2, 1996 106 665 69,709 19,583 90,063 Exercise of common stock options -- -- 252 -- 252 Net loss -- -- -- (1,247) (1,247) -------- -------- -------- -------- -------- Stockholders' equity at March 26, 1997 $ 106 $ 665 $ 69,961 $ 18,336 $ 89,068 ======== ======== ======== ======== ======== Successor - --------- Initial capitalization of the Company after merger of JWC Acquisition I on March 27, 1997 $ -- $ 69,170 $ (738) $ 68,432 Capital contribution from parent (Note 3) -- 49,750 -- 49,750 Net income -- -- 1,365 1,365 -------- -------- -------- -------- Stockholders' equity at November 1, 1997 $ -- $118,920 $ 627 $119,547 ======== ======== ======== ========
See accompanying notes. F-6
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Successor | Predecessor ------------ | --------------------------------------- Period of | seven | Period of five months | months ended | ended Fiscal year ended November 1, | March 26, November 2, October 28, 1997 | 1997 1996 1995 ------------ | ------------- ------------ ------------ Operating activities Income (loss) from continuing operations $ 1,365 | $ (1,247) $ 8,744 $ 8,185 Adjustments to reconcile income (loss) from | continuing operations to net cash provided by | (used in) continuing operations: | Depreciation and amortization of property, | improvements and equipment 2,716 | 1,490 3,056 2,523 Amortization of intangibles and other deferred | assets 2,253 | 414 998 862 Loss on sale of assets -- | -- 20 24 Deferred income taxes 1,871 | 1,328 1,100 800 Changes in operating assets and liabilities: | Recoverable income taxes (1,119) | (1,885) -- -- Trade and other receivables (871) | 144 83 586 Inventory 1,957 | (11,894) (4,549) (18,830) Other current assets 946 | (924) (972) 128 Accounts payable 1,895 | 1,468 (3,806) 1,593 Accrued expenses 1,139 | (1,524) 287 (1,838) -------- | -------- -------- -------- 12,153 | (12,630) 4,961 (5,967) | Loss from discontinued operations -- | -- -- (2,643) Adjustments to reconcile loss from discontinued | operations to net cash provided by discontinued | operations: | Loss on sale of Herschel Corporation -- | -- -- 4,120 Depreciation and amortization of property, | improvements and equipment -- | -- -- 559 Amortization of intangibles -- | -- -- 561 Deferred income taxes -- | -- (367) (618) Changes in operating assets and liabilities -- | -- 13,520 (651) -------- | -------- -------- -------- -- | -- 13,153 1,328 -------- | -------- -------- -------- Net cash provided by (used in) operating activities 12,153 | (12,630) 18,114 (4,639) F-7 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) Successor | Predecessor ------------ | --------------------------------------- Period of | seven | Period of five months | months ended | ended Fiscal year ended November 1, | March 26, November 2, October 28, 1997 | 1997 1996 1995 ------------ | ------------- ------------ ------------ Investing activities Purchases of property, improvements and equipment $ (3,816) | $ (2,419) $ (8,789) $ (6,332) Acquisition of Central Tractor Farm & Country, Inc. | (Predecessor) (155,963) | -- -- -- Acquisition of Big Bear Farm Stores, Inc. in 1996 | and Country General, Inc. in 1997 (Note 11) (136,995) | -- (5,650) -- Other 206 | (1,348) 255 (74) Discontinued operations -- | -- -- (400) --------- | --------- --------- --------- Net cash used in investing activities (296,568) | (3,767) (14,184) (6,806) | Financing activities | Borrowings under line of credit 206,106 | 113,119 86,782 67,020 Repayments on line of credit (170,650) | (91,494) (89,902) (61,208) Proceeds from issuance of long-term debt 155,000 | 8,000 -- -- Payments on long-term debt (8,000) | (16,000) (17) (372) Payments on capitalized lease obligations (101) | (69) (120) (186) Proceeds from issuance of common stock and capital | contributions 115,489 | 252 42 6,703 Cash of Central Tractor at date of acquisition 1,220 | -- -- -- Financing costs relating to new line of credit, term | loan and Senior Notes (8,764) | -- -- -- Other 1,003 | -- -- -- --------- | --------- --------- --------- Net cash provided by (used in) financing activities 291,303 | 13,808 (3,215) 11,957 --------- | --------- --------- --------- Net increase (decrease) in cash and cash equivalents 7,378 | (2,589) 715 512 | Cash and cash equivalents at beginning of period -- | 3,809 3,094 2,582 --------- | --------- --------- --------- Cash and cash equivalents at end of period $ 7,378 | $ 1,220 $ 3,809 $ 3,094 ========= | ========= ========= ========= | Supplemental disclosures of cash flow information | Cash paid during the period for interest $ 10,294 | $ 1,746 $ 1,991 $ 1,491 Cash paid during the period for income taxes 327 | 412 5,675 5,324
See accompanying notes. F-8 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and years ended November 2, 1996 and October 28, 1995 (In thousands of dollars, except where indicated) 1. Basis of Presentation and Acquisition of the Company Central Tractor Farm & Country, Inc. ("the Company") is a wholly-owned subsidiary of CT Holding, Inc. ("CT Holding"), an affiliate of J. W. Childs Equity Partners, L.P. ("Childs"). As a result of the acquisition of the Company discussed below, effective March 27, 1997, a new basis of accounting has been reflected in the Company's financial statements reflecting the fair values for the Company's assets and liabilities at that date ("Successor"). The financial statements of the Company for periods prior to March 27, 1997 are presented on the historical cost basis of accounting ("Predecessor"). A line has been placed in the financial statements to distinguish between Predecessor and Successor activity. On November 27, 1996, the Board of Directors of the Company approved, and the Company entered into, a merger agreement (the "Merger Agreement") with Childs, CT Holding and its subsidiary, JWC Acquisition I, Inc., that provided for the acquisition of the Company by CT Holding in a two-stage transaction. The Merger Agreement provided that following the acquisition of all of the Company's common stock held by affiliates of Butler Capital Corporation (collectively "BCC"), CT Holding's subsidiary would merge with and into the Company (the "Merger") and CT Holding would acquire the remaining shares of common stock of the Company held by public shareholders. The Merger was completed on March 27, 1997. On March 27, 1997, the Company consummated a public offering of $105.0 million aggregate principal amount of Senior Notes. The net proceeds from the offering were used to pay the Merger consideration, repay certain outstanding borrowings, and pay fees and expenses of the acquisition. The acquisition of the Company was accounted for as a purchase. The purchase price for the common stock was approximately $159.4 million, including related costs and expenses, of which $156.0 million was paid in cash and $3.4 million in common stock of CT Holding. The cash portion was funded from the proceeds of capital stock issued by CT Holding, and the Senior Note borrowings by the Company. The purchase price was allocated to the tangible and intangible assets and the liabilities of the Company based on fair values, as follows: F-9 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 1. Basis of Presentation and Acquisition of the Company (continued) Inventory $124,284 Property, improvements and equipment 25,387 Accounts receivable and other assets 8,207 Goodwill 89,126 Bank line of credit (23,554) Accounts payable and accrued expenses (51,809) Long-term debt and capitalized lease obligations (9,442) Deferred income taxes (2,806) -------- $159,393 ======== 2. Summary of Accounting Policies and Other Matters Business and Principles of Consolidation The consolidated financial statements include the Company and its wholly-owned subsidiary, Country General, Inc. (hereinafter collectively "the Company"). The Company operates agricultural specialty retail stores located in the Midwest, Northeast, and Southeast United States. The Company also sells merchandise on a wholesale basis under various distributor agreements throughout the United States. With the sale (see Note 10) of the net operating assets of Herschel Corporation, continuing operations of the Company constitute one business segment for financial reporting purposes. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to October 31. All significant intercompany transactions have been eliminated from the consolidated financial statements. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments, including repurchase agreements and commercial paper, are carried at cost, which approximates market. F-10 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 2. Summary of Accounting Policies and Other Matters (continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Trade Receivables Most of the Company's retail sales are cash or credit card sales, while wholesale sales and some retail sales are on account. The Company generally does not require collateral for sales on account. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers of the Company and their geographic dispersion. The allowance for doubtful accounts is based on a current analysis of receivable delinquencies and historical loss experience. Inventory Inventory is recorded at cost, including warehousing and freight costs, determined principally by the last-in, first-out (LIFO) method, which is not in excess of market. The Company reviews its inventory for slow-moving, obsolete or otherwise unsalable items on a regular basis throughout the year, including at the time of physical inventory counts. Write downs are made for any estimated losses to be incurred with respect to slow-moving, obsolete or otherwise unsalable inventory as such inventory is identified. Inventories valued using the LIFO method were approximately $134 and $5,081 at November 1, 1997 and November 2, 1996, respectively, less than the amounts of such inventories valued at current cost. Property, Improvements and Equipment Property, improvements and equipment are carried at cost less allowances for depreciation and amortization. Depreciation and amortization expense is computed primarily on a basis of the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 10 to 39 years Leasehold improvements (not in excess of underlying lease terms) 5 to 20 years Furniture and fixtures 5 to 15 years Automobiles and trucks 3 to 10 years F-11 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 2. Summary of Accounting Policies and Other Matters (continued) Certain long-term lease transactions have been accounted for as capital leases. The property rights recorded under direct financing leases are amortized on a straight-line basis over the lesser of the useful life or the respective terms of the leases. Goodwill Goodwill is being amortized utilizing the straight-line method over periods of 40 years. The carrying value of goodwill is reviewed continually to determine whether any impairment has occurred. This review takes into consideration the recoverability of the unamortized amounts based on the estimated undiscounted cash flows of the related businesses to the respective carrying value of the goodwill. To the extent that the estimated undiscounted future cash flows are less than the carrying value of the assets, an impairment loss can be measured based upon various methods, including undiscounted cash flows, discounted cash flows and fair value. Based upon undiscounted cash flows, no impairment of goodwill was determined to exist and, accordingly, no measurement was required. Deferred Financing Costs Deferred financing costs are amortized over the term of the related debt. Deferred Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on the difference between financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash equivalents and accounts receivable and payable: Carrying amounts reported in the Company's consolidated balance sheets based on historical cost approximate estimated fair value for these instruments, due to their short-term nature. The fair value of the bank line of credit, bank term loan, and Senior Notes is estimated to approximate their carrying value as of November 1, 1997. F-12 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 2. Summary of Accounting Policies and Other Matters (continued) Returns and Warranties Costs relating to merchandise returns from sales at retail stores and through distributors are not significant and generally are accounted for as they occur. Catalogs, Sale Flyers and Advertising Costs The direct cost of printing and mailing the Company's annual mail order catalog is deferred and amortized against mail order revenues over the year the catalog is in use. The direct cost of printing and distributing sale flyers is deferred and amortized over the life of the flyer which is generally two weeks or less. Other advertising costs are expensed as incurred. Unamortized amounts relating to the costs of the annual catalog and periodic sale flyers amounted to $923, $950 and $610 at November 1, 1997, March 26, 1997 and November 2, 1996, respectively. Advertising expenses were approximately $7,755, $3,286, $8,841 and $7,228 for the seven-month and five-month periods of 1997 and for fiscal 1996 and 1995, respectively. Store Pre-Opening Costs Direct costs, which consist principally of rent, employee compensation and travel costs for merchandise set-up and supplies, incurred in setting up new stores for opening are deferred and amortized over the first twenty-six weeks of store operations. The amount of unamortized store pre-opening costs at November 1, 1997, March 26, 1997, and November 2, 1996 amounted to $104, $1,203 and $1,123, respectively. Emerging Accounting Issues The Company is not aware of any accounting standards which have been issued and which will require the Company to change its current accounting policies or adopt new policies, the effect of which would be material to the Company's financial statements. F-13 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 3. Acquisitions Effective June 26, 1997, the Company acquired all of the outstanding capital stock of Country General, Inc. (Country General) for approximately $137.0 million (including related costs and expenses) in cash, subject to post-closing adjustment. Country General operates a chain of 114 agricultural specialty retail stores. The Company funded the acquisition price in part from a $49,750 cash equity contribution from its parent, CT Holding, and the remainder from funds drawn under the Company's amended and restated Credit Facility. The acquisition was accounted for as a purchase. The purchase price was allocated to the tangible and intangible assets and the liabilities based on fair values, as follows: Inventory $ 99,790 Accounts receivables and other assets 6,334 Property, improvements and equipment 16,708 Goodwill 48,239 Deferred income taxes 7,929 Accounts payable and accrued expenses (42,005) --------- $ 136,995 ========= Included in the amount allocated to accrued expenses is a $3,358 reserve for the estimated cost, principally lease liabilities, to close nine acquired stores during fiscal 1998; and a $2,866 reserve for the costs of severance payments to identified employees in connection with the closing of Country General's corporate headquarters. As of November 1, 1997, the reserve for severance had been reduced to $2,722 as a result of payments to terminated employees. On May 31, 1996, the Predecessor acquired 31 retail stores and related net operating assets from Big Bear Farm Stores, Inc. (Big Bear), an agricultural specialty retailer, for approximately $5,650 in cash. The acquisition was accounted for as a purchase. The purchase price was allocated to the tangible and intangible assets and the liabilities based on fair values as follows: Inventory $ 8,780 Accounts receivable and other assets 206 Leaseholds and equipment 517 Deferred income taxes 135 Goodwill 2,666 Accounts payable and accrued expenses (6,654) ------- $ 5,650 ======= The results of operations of Country General and Big Bear are included in the accompanying consolidated statements of income from the respective date of purchase. F-14 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 3. Acquisitions (continued) Pro Forma Results of Operations Pro forma results of operations (in thousands) presented below are based on the historical results of operations of the Company, as Successor, and its Predecessor, adjusted to give effect to: (i) the acquisition of the Company described in Note 1; (ii) the acquisitions of Country General and Big Bear described above; and (iii) the debt financing arrangements relating to the acquisitions, as though these transactions had occurred at the beginning of fiscal 1996. Year ended November 1, November 2, 1997 1996 --------------- -------------- Net sales $600,157 $613,538 Operating income 28,828 28,897 Net income 3,418 4,147 4. Line of Credit and Long-Term Debt On July 3, 1997, the Company entered into an amended and restated Credit Facility with a bank which consists of a $50.0 million, six-year term loan facility, which was fully funded, and a $100.0 million revolving credit facility under which borrowings of $60,750 and letters of credit totaling $8,443 were outstanding as of November 1, 1997. The Credit Facility will mature on June 30, 2003. Borrowings under the Credit Facility will bear interest at rates based upon prime or the Eurodollar Rate plus a margin. At November 1, 1997, the interest rate on the Term Loan was 8.19% and the interest rate on the Revolving Credit Facility was 8.06%. The Credit Facility agreement contains covenants which require the Company to maintain a minimum: consolidated net worth; earnings before taxes, interest, depreciation and amortization (EBITDA); ratio of EBITDA to cash interest payable; and ratio of debt to EBITDA. The covenants also restrict, among other things, the payment of dividends, incurrence of debt, and disposition of assets. The Credit Facility is secured by substantially all of the assets of the Company. F-15 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 4. Line of Credit and Long-Term Debt (continued) Long-term debt consisted of the following: Successor | Predecessor ------------- | ------------- November 1, | November 2, 1997 | 1996 ------------- | ------------- | 10-5/8% Senior Notes due 2007 $105,000 | $ -- Bank term loan 50,000 | -- 7% Convertible notes -- | 16,000 -------- | -------- 155,000 | 16,000 Less current portion 3,000 | -- -------- | -------- $152,000 | $ 16,000 ======== | ======== The Senior Notes mature on April 1, 2007 with interest payable semiannually in arrears on April 1 and October 1. The Senior Notes may be redeemed beginning April 1, 2002 at a price of 105.3125% of the principal amount decreasing approximately 1.77% annually thereafter until April 1, 2005 at which time they are redeemable at face value. Furthermore, notwithstanding the foregoing the Company may redeem up to 35% of the original aggregate principal amount of the Senior Notes at a price of 110% of the principal amount with the net cash proceeds of a public equity offering within 60 days of closing such offering. The bank term loan must be repaid in semiannual installments beginning December 31, 1997, plus annual prepayments based on the Company's excess cash flow, as defined. The minimum annual installments are as follows: fiscal years 1998 - $3,000; 1999 - $3,000; 2000 - $6,000; 2001 - $8,000; 2002 - $12,000; and 2003 - $18,000. 5. Lease Obligations The Company has entered into certain long-term lease agreements for the use of warehouses, certain retail store facilities and computer equipment. These leases have been accounted for as purchases of property rights and designated as capitalized leases. Amortization expense relating to such property rights recorded under capitalized leases was $86, $59, $125 and $130 for the seven-month and five-month periods of 1997 and for fiscal 1996 and 1995, respectively. The net book value of property rights recorded under capital leases was $781 and $926 at November 1, 1997 and November 2, 1996, respectively. F-16 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 5. Lease Obligations (continued) As of November 1, 1997, the debt associated with the capitalized property rights is represented by the present value of the minimum lease payments as follows: Fiscal year ended in: 1998 $ 325 1999 293 2000 293 2001 293 2002 293 After 2002 442 ------- Total minimum lease payments 1,939 Less amount representing interest 598 ------- Present value of minimum lease payments 1,341 Less current installments 170 ------- $1,171 ======= The Company also has entered into certain noncancelable operating leases for the use of real estate, automobiles and trucks, and office equipment. Aggregate rental expense for operating leases was approximately $9,299, $4,069, $9,294 and $7,833 for the seven-month and five-month periods of 1997 and for fiscal 1996 and 1995, respectively. The following is a summary of minimum rental commitments as of November 1, 1997, for operating leases: Automobile Office Fiscal Year-End Real Estate and Trucks Equipment Total - ----------------------- --------------- ------------- ------------ --------- 1998 $14,161 $ 552 $ 52 $14,765 1999 11,428 395 46 11,869 2000 8,991 301 17 9,309 2001 5,869 215 2 6,086 2002 3,854 - - 3,854 After 2002 5,865 - - 5,865 ------- ------ ---- ------- $50,168 $1,463 $117 $51,748 ======= ====== ==== ======= F-17 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 6. Stock Options Stock Options The Predecessor had stock option arrangements with various officers, directors and other members of management which it accounted for under the provisions of APB Opinion No. 25 and related interpretations. All outstanding options were purchased or exchanged for CT Holding common stock in connection with the acquisition of the Company. Neither the Company, nor its parent, CT Holding has any capital shares reserved for or any outstanding stock options at November 1, 1997. 7. Income Taxes The Company's consolidated results of operations are included in the consolidated tax returns of its parent, CT Holding. The entities in the consolidated tax returns have adopted a policy of allocating income tax expense or benefit based on a separate return concept. This generally results in profitable companies recognizing income tax expense as if the individual company filed a separate return and loss companies recognizing an income tax benefit to the extent their losses contribute to reduce consolidated income taxes currently or in the future. Deferred income taxes reflect the net tax effect of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
Successor | Predecessor --------------------- | -------------------- November 1, 1997 | November 2, 1996 --------------------- | -------------------- Deferred tax liabilities: | Differences in depreciation and cost basis of property, | improvements and equipment $ 2,428 | $ 1,766 Differences in cost basis of inventories due to LIFO and | uniform capitalization 5,423 | 1,320 Prepaid advertising 369 | 244 Store pre-opening costs 42 | 449 Other - | 9 --------- | --------- Total deferred tax liabilities 8,262 | 3,788
F-18
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 7. Income Taxes (continued) Successor | Predecessor --------------------- | -------------------- November 1, 1997 | November 2, 1996 --------------------- | -------------------- Deferred tax assets: | Net operating loss carryforward $ 1,369 | $ - Capital loss carryforward 920 | 920 Differences in amortization and cost basis of intangibles 87 | - Allowance for doubtful accounts 214 | 20 Excess and obsolete inventory reserves 5,355 | 160 Compensation and employee benefit accruals 2,222 | 218 Operating leases 368 | 273 Accrued profit sharing contributions 287 | 356 Stock warrant - | 266 Accrued store closing costs 1,362 | 32 Capitalized property rights and lease obligations treated | as operating leases for income tax purposes 223 | 234 Other 27 | 51 -------- | -------- 12,434 | 2,530 | Less valuation allowance for capital loss carryforward (920) | (920) -------- | -------- Total deferred tax assets 11,514 | 1,610 -------- | -------- Net deferred tax assets (liabilities) $ 3,252 | $ (2,178) ======== | ========
The Company has a net operating loss carryforward of approximately $3.4 million which will expire in the year 2012. A capital loss carryforward of approximately $2.3 million which relates to the sale of Herschel will expire in the year 2001. F-19 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated)
7. Income Taxes (continued) Components of income tax expense (benefit) are as follows: Successor | Predecessor -------------------- | ----------------------------------------------- | Fiscal year ended Period of seven | Period of five months ended | months ended November 2, October 28 November 1, 1997 | March 26, 1997 1996 1995 -------------------- | ----------------- ---------------- -------------- Continuing operations: | Current: | Federal $ 148 | $(1,541) $ 3,951 $ 3,768 State 38 | (421) 1,199 1,152 ------- | ------- ------- ------- 186 | (1,962) 5,150 4,920 Deferred 1,871 | 1,328 1,100 800 ------- | ------- ------- ------- 2,057 | (634) 6,250 5,720 Discontinued operations: | Current -- | -- 367 427 Deferred -- | -- (367) (618) ------- | ------- ------- ------- -- | -- -- (191) ------- | ------- ------- ------- Total $ 2,057 | $ (634) $ 6,250 $ 5,529 ======= | ======= ======= ======= Total reported income tax expense differs from the tax that would have resulted by applying the statutory expected federal income tax rate to income before taxes. The reasons for these differences are as follows: Successor | Predecessor -------------------- | ----------------------------------------------- | Fiscal year ended Period of seven | Period of five months ended | months ended November 2, October 28 November 1, 1997 | March 26, 1997 1996 1995 -------------------- | ----------------- ---------------- -------------- Income tax at federal statutory rate $ 1,163 | $ (639) $ 5,098 $ 3,764 Increases in taxes resulting from: | State income taxes, net of federal | income tax effect 306 | (79) 833 897 Goodwill amortization 391 | 72 178 215 Capital loss carryforward -- | -- -- 755 Other, net 197 | 12 141 102 Reduction of prior year overaccruals -- | -- -- (204) ------- | ------- ------- ------- $ 2,057 | $ (634) $ 6,250 $ 5,529 ======= | ======= ======= =======
F-20 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 8. Employment Commitments The Company has employment agreements with two officers of the Company which provide for annual salaries amounting to approximately $700. Upon termination of employment for death, disability or without cause, compensation may be continued for a period not to exceed eighteen months. 9. Profit Sharing Plan The Company has a profit sharing plan covering all employees who meet certain eligibility requirements. The plan provides for discretionary employer contributions and allows voluntary participant contributions. Company contributions are determined by its Board of Directors. The Company accrued expense in connection with the profit sharing plan of $729, $85, $881 and $804 for the seven-month and five-month periods of 1997 and for fiscal 1996 and 1995, respectively. 10. Discontinued Operations During fiscal 1996, the Company completed the sale of its wholly-owned subsidiary, Herschel Corporation (Herschel), a manufacturer and wholesale distributor of equipment parts for use in the farming industry. Herschel is reported as a discontinued segment of the business; accordingly, its operating results are segregated in the fiscal 1995 consolidated statement of income. Summarized financial information of Herschel's income from discontinued operations follows: Fiscal year ended October 28, 1995 ------------------------ Net sales $22,970 Income before income taxes 1,286 Income taxes 474 Income from discontinued operations 812 F-21 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 11. Transactions with Related Parties Certain investment funds managed by Butler Capital Corporation ("BCC") owned a majority of the outstanding common stock of the Company (see Note 1 regarding acquisition by Childs and CT Holding). The BCC Funds also held the 7% convertible notes (see Note 4) which were retired in connection with the purchase of the BCC common stock. Interest paid on such notes was approximately $171, $1,425 and $883 for the period of five months ended March 26, 1997 and for fiscal 1996 and 1995, respectively. Included in costs associated with acquiring the Company and related deferred financing costs is an advisory and financing fee of $1.7 million paid to Childs in consideration of services regarding the planning, structuring and negotiating of the acquisition and related financings. For the period of seven months ended November 1, 1997, Childs was paid a management and consulting services fee of approximately $140 under a five-year agreement, annually renewable thereafter, requiring annual payments of $240. The Company purchases inventory from two suppliers who are controlled by the BCC Funds. Purchases from these suppliers aggregated approximately $1,605, $6,228 and $6,254 for the period of five months ended March 26, 1997 and for fiscal 1996 and 1995, respectively. 12. Guarantee of Senior Notes The Senior Notes described in Note 4 are guaranteed jointly and severally, fully and unconditionally by Country General, the Company's wholly-owned subsidiary. As a result of the acquisition of Country General by the Company as discussed in Note 2, a new basis of accounting has been reflected in Country General's financial statements reflecting the fair values for Country General's assets and liabilities at that date. F-22 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 12. Guarantee of Senior Notes (continued) Summarized financial information for Country General as of year-end and from the date of acquisition, is as follows:
November 1, 1997 -------------------- Balance sheet data Current assets: Accounts receivable $ 6,049 Inventory 102,571 Other 7,702 --------- 116,322 Property and equipment, net of allowances for depreciation 16,673 Other noncurrent assets, principally goodwill and deferred financing costs 53,109 --------- $ 186,104 ========= Current liabilities, principally accounts payable and accrued expenses $ 38,696 Noncurrent liabilities, principally amounts due to related parties 11,434 Stockholder's equity 135,974 --------- $ 186,104 ========= Period of four months ended November 1, 1997 --------------------- Income statement data Net sales $ 99,381 Cost of sales 71,095 --------- Gross profit 28,285 Selling, general and administrative and other expenses 26,719 --------- Operating income 1,567 Interest expense to related party 3,201 --------- Loss before income taxes (1,634) Income tax credit (613) --------- Net loss $ (1,021) ========= Cash flow data Net cash flows provided by (used in): Operating activities $ (1,736) Investing activities, principally capital expenditures (415) Financing activities, principally change in amounts due to related parties, less payment of deferred financing costs of $2,340 5,548
F-23 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 13. Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the years ended November 1, 1997 and November 2, 1996:
Predecessor Successor ---------------------------------- | ----------------------------------------------- | First February 2, 1997 | March 27,1997 Third Fourth Quarter to March 26, 1997 | to May 3, 1997 Quarter Quarter ------------- ------------------ | -------------- ----------- --------- Fiscal year ended November 1, 1997: | Net sales $ 71,479 $ 34,569 | $ 35,168 $ 129,216 $ 140,738 Gross profit 20,409 10,358 | 10,634 36,649 41,497 Operating income (loss) 2,538 (1,231) | 2,832 9,519 2,534 Net income (loss) as reported 1,141 (1,848) | 732 1,305 (2,076) Restatements (540)(1) -- | -- 1,404(2) -- --------- --------- | --------- --------- --------- Net income (loss) as restated 601 (1,848) | 732 2,709 (2,076) Ratio (deficiency) of earnings | to fixed charges 1.6x (910) | 1.8x 1.9x (2,871) Predecessor -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------- Fiscal year ended November 2, 1996: Net sales $69,967 $62,989 $86,169 $73,895 Gross profit 18,862 19,245 25,417 22,268 Operating income 2,580 3,368 6,972 3,737 Net income 1,280 1,684 3,937 1,843 Ratio of earnings to fixed charges 3.8x 4.1x 8.7x 4.3x - ---------- (1) The restatement of net income for the first quarter of 1997 reflects the after-tax effect of bridge loan financing costs and interest expense incurred during the first quarter by JWC Acquisition I, Inc. prior to its merger into the Company on March 27, 1997. The bridge loan was retired from the proceeds of the Senior Notes issued by the Company on March 27, 1997 and, accordingly, the financing costs and interest expense were "pushed- down" to the Predecessor results of operations of the Company during the period the bridge loan was outstanding. The period from February 2, 1997 to March 26, 1997, as reported, reflects the effect of the "push-down" of such costs. (2) The restatement of net income for the third quarter of 1997 reflects the after-tax effect of financing costs expensed in that quarter relating to the Company's Credit Facility which were subsequently recorded as a deferred asset.
F-24 CENTRAL TRACTOR FARM & COUNTRY, INC. UNAUDITED PRO FORMA RESULTS OF OPERATIONS Year ended November 1, 1997 (In thousands of dollars) Pro forma results of operations for the year ended November 1, 1997 presented below are based on the historical results of operations of Central Tractor Farm & Country, Inc. ("the Company"), as Successor, and its Predecessor, adjusted to give effect to: (i) the acquisition of the Company as of March 27, 1997; (ii) the acquisition of Country General, Inc. as of June 26, 1997; and (iii) debt financing arrangements relating to the acquisitions, as though these transactions had occurred at the beginning of fiscal 1997. The pro forma adjustments are based upon available data that the Company believes are reasonable. However, the pro forma results of operations for the year ended November 1, 1997 are not necessarily indicative of the Company's results of operations that might have occurred had the aforementioned transactions been completed as of the dates indicated above and do not purport to represent what the Company's results of operations might be for any future date. The Unaudited Pro Forma Results of Operations should be read in conjunction with the consolidated financial statements of the Company and the information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The acquisitions of the Company and Country General, Inc. were accounted for using the purchase method of accounting.
Historical Results of Operations ----------------------------------------------------------- Central Tractor Farm & Country, Inc. ------------------------------------ Country Successor Predecessor General, Inc. --------- ----------- ------------- Seven months Five months Pro Forma for ended ended Eight months year ended November 1, March 26, ended June 25, Pro Forma November 1, 1997 1997 1997 Adjustments 1997 ---------------- -------------- ----------------- --------------- ---------------- Net sales $ 305,122 $ 106,048 $ 188,987 $ 600,157 Cost of sales 216,342 75,281 135,603 427,226 --------- --------- --------- --------- Gross profit 88,780 30,767 53,384 172,931 Selling, general and administrative expenses 72,142 29,045 39,382 $ 100(1) 140,669 Amortization of intangibles 1,753 415 -- 1,266(2) 3,434 --------- --------- --------- --------- --------- Operating income 14,885 1,307 14,002 (1,366) 28,828 Interest expense 11,463 3,188 3,570 3,829(3) 22,050 --------- --------- --------- --------- --------- Income before income 3,422 (1,881) 10,432 (5,195) 6,778 taxes Income taxes 2,057 (634) 4,197 (2,260)(4) 3,360 --------- --------- --------- --------- --------- Net income $ 1,365 $ (1,247) $ 6,235 $ (2,935) $ 3,418 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (5) 1.3x =========
F-25 CENTRAL TRACTOR FARM & COUNTRY, INC. NOTES TO UNAUDITED PRO FORMA RESULTS OF OPERATIONS (In thousands of dollars) (1) Represents an annual management fee of $240 charged by J. W. Childs Associates, L.P. pro rated for the five months ended March 26, 1997. (2) Represents the incremental amount of goodwill amortization (over periods of 40 years) as a result of the increase in goodwill attributable to the acquisition of the Company and the acquisition of Country General, Inc. (3) Represents the incremental amount of interest expense relating to the acquisition of the Company and the acquisition of Country General computed as follows: Interest expense related to new debt and remaining debt outstanding after the acquisitions: Senior Notes $ 11,156 Term Loan 4,100 Revolving Credit Facility 5,321 Amortization of deferred financing costs 1,298 Interest on capital leases 175 -------- 22,050 Less historical interest expense: Successor (11,463) Predecessor (3,188) Country General, Inc. (3,570) -------- Pro forma adjustment $ 3,829 ======== Interest expense was calculated using the following average rates: (a) Senior Notes - 10.625%; (b) Term Loan - 8.2%; and (c) Revolving Credit Facility - 8.0%. Interest expense related to the Revolving Credit Facility was based on an annual average of approximately $66,500 of borrowings outstanding. (4) Represents the reduction in income tax to record the income tax benefit related to the pro forma adjustments for the management fee, the portion of the incremental amount of goodwill amortization relating to the Country General, Inc. acquisition that is tax deductible, and incremental interest expense, computed using an effective income tax rate of 40%. No tax benefit was provided relating to the portion of the incremental amount of goodwill amortization relating to the acquisition of the Company, since such amounts will not be deductible for income tax purposes. (5) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs, and 20.0% of the rent expense from operating leases which the Company believes is a reasonable approximation of the interest factor in the rent. F-26 CENTRAL TRACTOR FARM & COUNTRY, INC. Valuation and Qualifying Accounts Schedule II Allowance for Trade Receivables ----------------- Balance at October 29,1994 $(168,000) Credited to expense 30,500 Write-off of uncollectible accounts 65,500 --------- Balance at October 28, 1995 (72,000) Credited to expense 20,500 Write-off of uncollectible accounts 1,500 --------- Balance at November 2, 1996 (50,000) Credited to expense 4,700 --------- Balance at March 26, 1997 (45,300) Debited to expense (54,436) Write-off of uncollectible accounts 49,736 Acquired from Country General, Inc. (336,000) --------- Balance at November 1, 1997 $(386,000) ========= F-27 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL TRACTOR FARM & COUNTRY, INC. DATED: January 30, 1998 By: /s/ James T. McKitrick James T. McKitrick, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. DATED: January 30, 1998 /s/ James T. McKitrick President and Chief Executive Officer, Director James T. McKitrick (Principal Executive Officer) /s/ Dean Longnecker Executive Vice President and Chief Operating Dean Longnecker Officer, Director /s/ Denny L. Starr Senior Vice President, Finance and Chief Denny L. Starr Financial Officer (Principal Financial and Accounting Officer) /s/ John W. Childs Director John W. Childs /s/ Jerry D. Horn Director Jerry D. Horn /s/ Stephen G. Segal Director Stephen G. Segal /s/ Adam L. Suttin Director Adam L. Suttin /s/ Jeffrey B. Swartz Director Jeffrey B. Swartz /s/ William E. Watts Director William E. Watts /s/ Habib Y. Gorgi Director Habib Y. Gorgi /s/ Peter Lamm Director Peter Lamm ___________________ Director Richard C. Dresdale EX-12 2 Exhibit 12
CENTRAL TRACTOR FARM & COUNTRY, INC. SCHEDULE REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands) Fiscal 1997 ---------------------------------- Pro Forma 7 months ended 5 months ended Fiscal Fiscal 1997 November 1, 1997 March 26, 1997 1996 1995 ------ ---------------- --------------- ------ ----- Income before income taxes $ 6,778 3,422 (1,881) 14,994 13,905 ======= ======= ======= ======= ======= Fixed charges: Interest expense $22,050 11,463 3,188 1,663 1,302 Portion of rent expense representing interest 3,418 1,860 814 1,859 1,567 ------- ------- ------- ------- ------- Total fixed charges $25,468 13,323 4,002 3,522 2,869 ======= ======= ======= ======= ======= Earnings before income taxes and fixed charges $32,246 16,745 2,121 18,516 16,774 ======= ======= ======= ======= ======= Ratio (deficiency) of earnings to fixed charges 1.3X 1.3X $(1,881) 5.3X 5.8X ======= ======= ======= ======= =======
EX-21 3 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following is the Company's significant subsidiary: Country General, Inc., a Delaware corporation EX-27 4
5 This schedule contains summary financial information extracted from the financial statements of Central Tractor Farm & Country, Inc. at and for the period ended November 1, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR NOV-01-1997 NOV-03-1996 NOV-01-1997 7,378 0 7,650 386 222,117 246,408 45,911 2,716 434,235 160,769 153,171 0 0 0 119,547 434,235 411,170 411,170 291,623 291,623 103,355 50 14,651 1,541 1,423 118 0 0 0 118 0 0
EX-99 5 EXHIBIT 99 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS The following factors, among others, could cause the Company's actual results and performance to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by or on behalf of the Company from time to time. Ability to Achieve Future Growth The Company's ability to profitably open stores in accordance with its expansion plan and to increase the financial performance of its existing stores will be a significant factor in achieving future growth. The Company's ability to profitably open stores will depend, in part, on matters not completely within the Company's control including, among other things, locating and obtaining store sites that meet the Company's economic, demographic, competitive and financial criteria, and the availability of capital on acceptable terms. Further, increases in comparable store sales will depend, in part, on the soundness and successful execution of the Company's merchandising strategy. Seasonality The Company is an agricultural specialty retailer, and consequently its sales fluctuate with the seasonal needs of the agricultural community. The Company responds to this seasonality by attempting to manage inventory levels (and the associated working capital requirements) to meet expected demand, and by varying to a degree its use of part-time employees. Historically, the Company's sales and operating income have been highest in the second and third quarters of each fiscal year due to the farming industry's planting season and the sale of seasonal products. Weather, Business Conditions and Government Policy Unseasonable weather and excessive rain, drought, or early or late frosts may affect the Company's sales and operating income. In addition, the Company's sales volume and income from operations depend significantly upon expectations and economic conditions relevant to consumer spending and the farm economy. Regional Economy The majority of the Company's existing stores are located in the Northeastern United States, the Midwestern United States and the Southeastern United States. As a result, the Company's sales and profitability are largely dependent on the general strength of the economy in these regions. Competition The Company faces competition primarily from other chain and single-store agricultural specialty retailers, and from mass merchandisers. Some of these competitors have substantially greater financial and other resources than the Company. Currently, most of the Company's stores do not compete directly in the markets of other agricultural specialty retail chains. However, the Company's expansion plans will likely result in new stores being located in markets currently serviced by one or more of these chains, and there can be no assurance that these chains, certain of which have announced expansion plans, will not expand into the Company's markets. In addition, the Company competes in over half of its markets with mass merchandisers. The Company believes that its merchandise mix and level of customer service currently successfully differentiate it from mass merchandisers, and that as a result the Company has to date not been significantly impacted by competition from mass merchandisers. However, in the past certain mass merchandisers have modified their product mix and marketing strategies in an effort apparently intended to permit them to compete more effectively in the Company's markets, and it is likely that these effort will continue by these and other mass merchandisers. -----END PRIVACY-ENHANCED MESSAGE-----