-----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, V9k6C/i+VMh7bMMORrsfO56VQWj2/U+afm9/TsghT3jWjRP11ZDmF/44Mc6H4Swn tl8G1Duzkerplz09EAfGgg== 0000908737-99-000029.txt : 19990201 0000908737-99-000029.hdr.sgml : 19990201 ACCESSION NUMBER: 0000908737-99-000029 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 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-K405 SEC ACT: SEC FILE NUMBER: 333-19613 FILM NUMBER: 99516911 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-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended October 31, 1998 OR Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission file number 0-24902 CENTRAL TRACTOR FARM & COUNTRY, INC. (Exact Name of Registrant as Specified in Its Charter) 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 29, 1999) 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 OCTOBER 31, 1998 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 7A. Quantitative and Qualitative Disclosures About Market Risk.......................15 Item 8. Financial Statements and Supplementary Data..................................... 16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......................................................... 16 PART III Item 10. Directors and Executive Officers of the Registrant.............................. 17 Item 11. Executive Compensation.......................................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 21 Item 13. Certain Relationships and Related Transactions.................................. 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 22
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 215 stores (as of December 31, 1998) serving the agricultural, hardware and related needs of rural consumers, especially part-time and full-time farmers, hobby gardeners, skilled trades persons 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 675,000. 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 "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 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 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 72,050 -------- Excess of cost of acquisition over the allocated fair value of the underlying tangible net assets $ 87,343 ======== As a result of the Acquisition, the Company is a 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 $138.6 million (including related costs and expenses) in cash (the "Country General Acquisition"). Country General operated 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 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 $138,563 Fair value of underlying tangible net assets 86,788 -------- Excess of cost of acquisition over the allocated fair value of the underlying tangible net assets $ 51,775 ======== 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. In addition, in January 1999, the Company acquired nine retail stores and certain net operating assets from H.C. Shaw Co., a privately owned specialty retailer for approximately $7.0 million, subject to post-closing adjustments. The transaction will be accounted for as a purchase. Expansion Plan Since the beginning of fiscal 1996, the Company has increased the number of its retail stores from 66 to 215. 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 3 new stores and acquired 118 stores primarily through the Country General 2 Acquisition. Five stores were closed in 1997. In fiscal 1998, the Company opened 1 new store and closed 14 stores (including 12 stores acquired from Country General, for which the closure was reserved in connection with the acquisition). Currently in fiscal 1999, the Company has opened 2 new stores and closed 1 store. The integration of the Big Bear stores and the Country General stores into the Company's systems was completed during fiscal 1997 and fiscal 1998, respectively. The Company plans to add an additional 25 stores in each of fiscal 1999 and fiscal 2000 through further penetration of the Northeastern and Midwestern United States markets and through expansion into the Southeastern and Western 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 two years may differ materially from the projections outlined above 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 $100,000 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. 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 1998, fiscal 1997, and fiscal 1996, and a description of each product category, are set forth below:
Fiscal Year ----------------------------------------- 1998 1997 1996 ---- ---- ---- Agricultural (including tractor parts 26.6% 26.8% 24.0% and accessories) Specialty Hardware 17.6% 17.7% 20.6% Lawn & Garden and Seasonal 17.4% 18.4% 19.6% Workwear 10.2% 9.3% 8.4% Rural Automotive Parts & Accessories 14.3% 14.3% 14.8% Pet Supplies 7.0% 6.6% 6.3% General Consumer 6.9% 6.9% 6.3% ------ ------ ------ 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 3 other items requiring replacements on a regular basis. This product line accounted for $156.3 million, $110.5 million and $67.3 million of the Company's total revenue in fiscal years 1998, 1997 and 1996, 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 $103.6 million, $72.7 million and $57.9 million of the Company's total revenue in fiscal years 1998, 1997 and 1996, respectively. CT stores carry a broad range of 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) and plumbing supplies. Lawn and Garden and Seasonal 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 $102.1 million, $75.8 million and $54.8 million of the Company's total revenue in fiscal years 1998, 1997 and 1996, 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. CT stores also offer heating/energy equipment, including stoves, space heaters and fans. 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 $59.8 million, $38.1 million and $23.5 million of the Company's total revenue in fiscal years 1998, 1997, and 1996, 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 $83.9 million, $58.6 million and $41.4 million of the Company's total revenue in fiscal years 1998, 1997 and 1996, 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 $40.9 million, $27.2 million and $17.7 million of the Company's total revenue in fiscal years 1998, 1997, and 1996, 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 and sporting goods, including guns and ammunition, hunting accessories, camping items and outdoor living needs. These products accounted for $40.6 million, $28.3 million and $17.8 million of the Company's total revenue in fiscal years 1998, 1997, and 1996, respectively. CT stores also offer seasonal merchandise such as charcoal grills and coolers in the summer. 4 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 10,000 square feet of indoor selling space and had average store sales of $1.6 million in fiscal 1998. The large stores average 24,000 square feet of indoor selling space and had average store sales of $3.9 million in fiscal 1998. 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 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 sixteen district managers each of whom is currently responsible for eleven to twenty 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 1998, catalog sales were $8.2 million. The catalog will be distributed nationally to approximately 675,000 households in rural and agricultural communities in fiscal 1999. 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 1998, the Company's wholesale business generated sales of $3.2 million. 5 Purchasing and Distribution The Company maintains a staff of ten 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 1998. 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 material long-term contractual commitments with any of its vendors. The Company operates a 135,000 square-foot distribution center in Des Moines, Iowa, a 175,000 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 and Grand Island facilities serve primarily as flow-through distribution stations. 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 and receive invoices from 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. 6 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 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 5.8 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 October 31, 1998, CT had approximately 4,500 employees (approximately 2,200 in full-time and approximately 2,300 in part-time positions). The Company believes its relations with its employees is good. 7 ITEM 2. PROPERTIES As of December 31, 1998, the Company had 215 retail stores located in 25 states as follows: State Number of Stores Nebraska 47 Iowa 27 New York 23 Pennsylvania 17 Colorado 15 Minnesota 12 South Dakota 11 Kansas 7 Virginia 7 Kentucky 6 Ohio 6 North Dakota 5 Wisconsin 5 Indiana 4 Maryland 4 Wyoming 4 New Jersey 3 Missouri 2 Montana 2 Oklahoma 2 Tennessee 2 Delaware 1 Illinois 1 Massachusetts 1 Vermont 1 --- Total 215 === The Company owns 53 of the stores and leases the remaining 162 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 1998, the Company paid an average of $5.02 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, the Company's ability to pay cash dividends is restricted by the Credit Facility. ITEM 6. SELECTED FINANCIAL DATA
Successor | Predecessor ------------------------------ | -------------------------------------------------- Period of | Period of seven | five Fiscal year months | months Fiscal Year End ended ended | ended -------------------------------------- October November 1, | March November October 28, October 29, 31, 1998 1997 | 26, 1997 2, 1996 1995 1994 ----------- ------------ | --------- ---------- ----------- ----------- | (In thousands of dollars) Net sales $ 587,195 $ 305,122 | $ 106,048 $ 293,020 $ 251,703 $ 231,064 Income (loss) from continuing | operations 9,975 1,365 | (1,247) 8,744 8,185 5,181 Ratio (deficiency) of earnings to | fixed charges (1) 1.8x 1.3x | (1,881) 5.3x 5.8x 2.5x Number of stores at end of period (2) 214 227 | 112 111 66 55 Comparable store sales per square | foot of indoor selling space (3) 180 191(6) | 222 224 240 Comparable store sales increases | (decreases)(4) 4.6% (4.7%)(6) | 1.0% (1.6%) 10.0% Balance Sheet Data (at end of period): | Working capital $ 98,409 $ 85,639 | $ 63,803 $ 62,496 $ 50,442 Total assets 418,845 434,235 | 159,238 149,977 139,416 Long-term debt, less current portion (5) 150,011 153,171 | 17,341 16,862 16,959 Stockholders' equity 129,757 119,547 | 90,063 81,277 75,735 (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, five store closings in fiscal 1997 and 14 store closings in fiscal 1998. (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. (6) Calculations are for the fiscal year ended November 1, 1997.
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 ---------------------------------------------- October 31, November 1, November 2, 1998 1997 1996 ---------- ----------- ----------- Net sales 100.0% 100.0% 100.0% Gross profit 30.1 29.1 29.3 Selling, general and administrative expenses 22.9 24.6 23.3 Amortization of intangibles .6 .6 .3 ----- ----- ----- Operating income 6.6 3.9 5.7 Interest expense 3.5 3.5 .6 ----- ----- ----- Income before income taxes 3.1 .4 5.1 Income taxes 1.4 .4 2.1 ----- ----- ----- Income from continuing operations 1.7% 0.0% 3.0% ===== ===== =====
Fiscal 1998 Compared to Fiscal 1997 Net sales for the fiscal year ended October 31, 1998 were $587.2 million, an increase of $176.0 million, or 42.8%, as compared to net sales for the fiscal year ended November 1, 1997 of $411.2 million. The increase was due principally to the fact that the Country General stores had a full year of sales in fiscal 1998 compared to four months in fiscal 1997. Net sales includes $257.3 million and $99.4 million of Country General sales in fiscal 1998 and fiscal 1997, respectively. In addition, the Company had an increase in comparable store sales of $13.2 million or 4.6% and had a full year of operations for the 4 stores acquired from Walsh and the 3 stores opened in 1997. The increase in comparable store sales was due primarily to the fact that fiscal year 1998 had warm early spring weather conditions while fiscal year 1997 had 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 1998 was $177.0 million, an increase of $57.5 million, or 48.1%, as compared to $119.5 million for fiscal 1997, principally as a result of the increase in net sales. Gross profit as a percentage of sales increased to 30.1% for fiscal 1998, as compared to 29.1% for fiscal 1997. The increase in gross profit percentage is a result of the increased purchasing power obtained as a result of the Country General Acquisition. Selling, general, and administrative expenses for fiscal 1998 were $134.6 million, an increase of $33.4 million, or 33.0%, over fiscal 1997. This increase was due primarily to costs related to the operation of the Country General stores and new stores opened in fiscal 1997 for a full year in fiscal 1998. Selling, general, and administrative expenses 11 as a percentage of sales decreased to 22.9% in fiscal 1998 as compared to 24.6% in fiscal 1997. This decrease is attributable to completion of the integration of the Country General stores and increased sales volume. Amortization of intangibles was $3.6 million for fiscal 1998 and $2.2 million in fiscal 1997. The increase is due to a full year of amortization of the additional goodwill incurred in the Acquisition and the Country General Acquisition. Operating income for fiscal 1998, was $38.8 million, an increase of $22.6 million, or 139.9%, as compared to fiscal 1997. Operating income as a percentage of sales increased to 6.6% in fiscal 1998 from 3.9% in fiscal 1997. The increase resulted from the factors affecting net sales, gross profit, selling, general and administrative expenses and amortization of intangibles discussed above. Interest expense for fiscal 1998 was $20.5 million, an increase of $5.8 million, as compared to $14.7 million for fiscal 1997. This increase was primarily due to a full year of interest expense on the additional debt incurred to fund the Acquisition and the Country General Acquisition. Income tax expense for fiscal 1998, was $8.4 million, an increase of $7.0 million, or 490.3% as compared to $1.4 million for fiscal 1997. Income taxes as a percentage of pretax earnings were 45.7% in fiscal 1998 as compared to 92.3% in fiscal 1997. The decrease is due primarily to amortization of goodwill related to the Acquisition, which is not deductible for income tax purposes, being spread over a larger income base in fiscal 1998. 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 3 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 primarily due to decreased sales volume in comparable stores. 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. 12 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. 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 October 31, 1998, the Company had working capital of $98.4 million, an increase of $12.8 million, as compared to working capital of $85.6 million on November 1, 1997. This increase resulted primarily from a decrease in accrued expenses, and borrowings under the Company's revolving credit facility partially offset by an increase in accounts payable and decreases in accounts receivable, inventory and deferred income taxes. On October 31, 1998, the Company's inventories were $217.1 million, a decrease of $5.0 million, as compared to $222.1 million at November 1, 1997. This decrease is primarily a result of the store closings in fiscal 1998. On October 31, 1998, the Company's accounts payable were $78.3 million, an increase of $10.3 million, as compared to $68.0 million at November 1, 1997. This increase is primarily a result of the Company negotiating improved terms with its vendors. Continuing operations of the Company generated $37.2 million of net cash in fiscal 1998, used $0.5 million of net cash in fiscal 1997, and generated $5.0 million of net cash in fiscal 1996. The increase in net cash generated in fiscal 1998, as compared to fiscal 1997, resulted primarily from an increase in net income from continuing operations, a larger increase in accounts payable, and a net decrease in inventory compared to a net increase in 1997. The decrease in net cash generated in fiscal 1997, as compared to fiscal 1996, resulted primarily from a decrease in net 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 Company's capital expenditures were $4.8 million and $6.2 million for fiscal 1998 and 1997, 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 new store openings and for renewal and replacement costs at existing stores and distribution centers in fiscal 1999 to be approximately $19.5 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. 13 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 has elected to treat the purchase as a purchase of all 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, under which $47.0 million of borrowings were outstanding as of October 31, 1998, and a $100.0 million revolving credit facility under which borrowings of $32.1 million and letters of credit totaling $6.7 million were outstanding as of October 31, 1998. The term loan must be repaid in semiannual installments plus annual prepayments based on the Company's excess cash flow, as defined. The minimum annual installments are as follows: fiscal years 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 October 31, 1998, the interest rate on the term loan was 8.1% and the interest rate on the revolving credit facility was 8.2%. The Credit Facility agreement contains covenants which require the Company to maintain a minimum consolidated net worth, a minimum earnings before interest, taxes, 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. In March of 1998, the Company entered into an interest rate swap agreement (the "Swap Agreement") with a bank to reduce the impact of changes in interest rates on its floating term loan facility. Accordingly, the Swap Agreement was entered into for purposes other than trading. The Swap Agreement had an initial notional amount of $48,500. The notional amount decreases in tandem with the outstanding balance on the Company's term loan facility until the Swap Agreement's maturity on March 30, 2001 and was $47,000 at October 31, 1998. The Swap Agreement fixes the interest rate on the term loan facility at 5.8525%, plus the applicable margin, resulting in an effective rate of 8.23% at October 31, 1998. The Company is exposed to interest rate risk in the event of nonperformance by the counter party to the Swap Agreement. However, the Company does not anticipate nonperformance by the bank. 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. 14 Inflation Management does not believe its operations have been materially affected by inflation. Year 2000 The Year 2000 issue, common to most companies, concerns the inability of information and noninformation systems to recognize and process date-sensitive information after 1999 due to the use of only the last two digits to refer to a year. This problem could affect both information systems (software and hardware) and other equipment that relies on microprocessors. Management has completed a company-wide evaluation of this impact on its computer systems, applications and other date-sensitive equipment. Systems and equipment that are not Year 2000 compliant have been identified and remediation efforts are in process. Management estimates that nearly 90 percent of remediation efforts were completed as of December 31, 1998. All remediation efforts and testing of product/equipment are expected to be completed by May 1, 1999. The Company is also in the process of monitoring the progress of material third parties (vendors and suppliers) in their efforts to become Year 2000 compliant. Those third parties include, but are not limited to: product suppliers, third party benefit administrators, third party logistic providers, insurance institutions, mainframe computer services suppliers, financial institutions and utilities. The Company has requested confirmation from all material third parties as to when they will be Year 2000 compliant. Through December 31, 1998, the Company had received confirmations from approximately 50% of the third parties that were sent these requests. Through December 31, 1998, the Company has spent approximately $1.4 million to address Year 2000 issues. Total costs to address Year 2000 issues are currently estimated not to exceed $2.0 million and consist primarily of costs for the remediation of internal systems, including internal programming time. Funds for these costs are expected to be provided by the operating cash flows of the Company. The majority of the internal system remediation efforts relate to the staff costs of on-staff systems engineers and, therefore, are not necessarily incremental costs. The Company could be faced with severe consequences if Year 2000 issues are not identified and resolved in a timely manner by the Company and material third parties. A worst-case scenario would result in the short-term inability of the Company to sell products in its stores due to unresolved Year 2000 issues. This would result in lost revenues; however, the amount would be dependent on the length and nature of the disruption, which cannot be predicted or estimated. In light of the possible consequences, the Company is devoting the resources needed to address Year 2000 issues in a timely manner. Management receives monthly updates as to project status. While management expects a successful resolution of these issues, there can be no guarantee that material third parties, on which the Company relies, will address all Year 2000 issues on a timely basis or that their failure to timely and successfully address all issues would not have an adverse effect on the Company. The Company is in the process of updating its business interruption contingency plans to take into account potential Year 2000-related business interruptions. Management expects these revisions to be completed by June 1, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The market risk inherent in the Company's financial instruments subject to such risks, is the potential market value loss arising from adverse changes in interest rates. The Company's financial instruments subject to market risk are held for purposes other than trading. 15 Interest Rate Swap Agreements The Company uses interest rate swap agreements to reduce exposure to interest rate fluctuations on its term debt. At October 31, 1998, the Company had an interest rate swap agreement that effectively converted all its outstanding bank term debt from floating interest rates to a fixed interest rate of 5.8525 percent plus the applicable margin. This agreement covers $47.0 million notional amount of debt. At October 31, 1998, $47.0 million of term debt was outstanding. Since interest rates on the debt are effectively fixed, changes in interest rates would have no impact on future interest expense related to this debt. Therefore, there is no earnings or liquidity risk associated with the interest rate swap agreement. The fair market value of the interest rate swap is the estimated amount, based on discounted cash flows, the Company would pay or receive to terminate the swap agreement. At October 31, 1998, the fair market value of the swap agreement was immaterial to the Company. Adverse changes in interest rates, however, would result in an increased cost to terminate the swap agreement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included at pages F-1 through F-25. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 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 53 President, Chief Executive Officer, Director Dean Longnecker 50 Executive Vice President, COO, Secretary, Director John W. Childs 57 Director Jerry D. Horn 60 Director Steven G. Segal 38 Director Adam L. Suttin 31 Director Jeffrey B. Swartz 37 Director William E. Watts 44 Director Habib Y. Gorgi 42 Director Peter Lamm 47 Director Richard C. Dresdale 42 Director John R. Pearson 50 Executive Vice President, Sales Denny Starr 45 Senior Vice President, Finance, CFO Jeffrey A. Stanton 48 Senior Vice President, Operations David E. Enos 39 Senior Vice President, Information Systems/Logistics
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 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., The Edison Project, Inc., Chevys, Inc., DESA International, Inc., Pan Am International Flight Academy, Inc. and Beltone Electronics, 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 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 17 recently holding the position of Managing Director. He is a director of Universal Hospital Services, Inc., National Nephrology Associates, Inc., International DiverseFoods, Inc., Big V Supermarkets, Inc., Jillian's Entertainment Holdings, Inc., Fitz and Floyd, Inc. and is Chairman of the Board of Empire Kosher Poultry 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 Executive Officer of Timberland Co., a manufacturer and marketer of branded footwear and apparel, since 1998, 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 Skyline Chili, Roadrunner Freight Systems, 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 and Bear Archery. 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. 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, Operations, 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. 18 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth compensation earned for all services rendered to the Company during fiscal 1998, fiscal 1997, and fiscal 1996, as applicable, by the Company's chief executive officer and five other executive officers who were employed by the Company as such during fiscal 1998 (collectively, the "Named Executives").
Annual Compensation ---------------------------------------------- All Other Name and Principal Fiscal Salary(1) Bonus Compensation Position During 1998 Year ($) ($) ($) - -------------------- ------ ---------- ---------- ------------ James T. McKitrick 1998 435,000 224,743 5,000 (2) President, Chief 1997 399,423 -- 9,586 (2) Executive Officer 1996 365,000 91,250 9,863 (2) Dean Longnecker 1998 265,000 136,912 4,587 (2) Executive Vice 1997 254,327 -- 2,043 (2) President, Chief Operating Officer 1996 234,000 58,500 5,131 (2) John R. Pearson (3) 1998 207,000 106,947 -- Executive Vice President, Sales 1997 15,923 -- 158,856 (4) 1996 -- -- -- Denny Starr 1998 148,077 62,954 5,000 (2) Senior Vice President, Finance, 1997 123,558 -- 6,438 (2) Chief Financial Officer 1996 89,167 23,000 5,942 (2) Jeffrey A. Stanton 1998 145,385 61,998 5,000 (2) Senior Vice President, Operations 1997 108,692 -- 9,465 (2) 1996 100,860 20,300 9,507 (2) David E. Enos 1998 147,692 61,998 5,000 (2) Senior Vice President, Information 1997 106,731 -- 8,276 (2) Systems/Logistics 1996 87,115 17,500 8,942 (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. Pearson joined the Company effective October 6, 1997. (4) Represents payments associated with the hiring of Mr. Pearson.
Employment Arrangements with Executive Officers 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 provided 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 "Employment Agreements"). Mr. McKitrick's 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 19 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 Employment Agreements. Mr. McKitrick's 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 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 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. A portion of such allocations were made during fiscal year 1998. The management stock options are subject to accelerated vesting based on the Company's achievement of certain operating cash flow targets. The following table provides certain information concerning options to purchase Holding common stock during fiscal 1998 to each Named Executive Officer of the Company.
Options Granted in Last Fiscal Year Individual Grants ---------------------------------------------------------------- Potential Realizable Value At Number of Assumed Annual Rates Of Shares Percent Of Stock Price Appreciation For Underlying Total Options Option Term Options Granted to Exercise or ------------------------------ Granted Employees In Base Price Name (#) Fiscal Year ($/share) Expiration Date 5% ($) 10% ($) - ------------------------------------------------------------------------------------------------------------------------------ James T. McKitrick 25,550 24.5% $60.00 June 1, 2008 $964,000 $2,443,000 Dean Longnecker 15,400 14.7% $60.00 June 1, 2008 $581,000 $1,473,000 John R. Pearson 15,400 14.7% $60.00 June 1, 2008 $581,000 $1,473,000 Denny Starr 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000 Jeffrey A. Stanton 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000 David E. Enos 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000
Additionally, the 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 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. 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of October 31, 1998, 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 DESA International, Inc. ("DESA"), are controlled by certain stockholders of Holding. Iron Age is a manufacturer and distributor of work boots and protective footwear. DESA is a manufacturer and marketer of zone heating/home comfort products and specialty tools. The Company believes that the terms of its purchases from Iron Age and DESA are at least as favorable to the Company as could be obtained from other suppliers. In fiscal 1998, the Company's purchases from Iron Age and DESA totaled $5.0 million. For fiscal 1998 and the period of seven months ended November 1, 1997, Childs was paid a management and consulting services fee of approximately $240,000 and $140,000 respectively, under a five-year agreement, annually renewable thereafter, requiring annual payments of $240,000, subject to limitations of the Company's debt agreements. In addition, during fiscal 1998 Fenway Partners, a stockholder of Holding, was paid a management fee of $120,000. In connection with the consummation of the Acquisition and subsequent employee stock purchases, Holding loaned amounts to certain employees of the Company to partially fund their investment in Holding common stock. The loans, which totaled $748,000 at October 31, 1998, are due in ten years and bear interest at an interest rate of 8.5%. 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. 21 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-25: 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 incorporated 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. 22 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 -- 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. 10.10 -- 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 8-K filed on July 3, 1997 and incorporated herein by reference. 10.11 -- Letter Amendment, dated as of February 18, 1998, to Amended and Restated Credit Agreement, filed as exhibit 10.1 to the Company's 10-Q originally filed on September 15, 1998 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 23 (b) Reports on Form 8-K Filed During the Last Quarter of Fiscal 1998 None (c) See Item 14(a)(3) of this report. (d) See Item 14(a)(2) of this report. 24 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR FINANCIAL STATEMENTS Year ended October 31, 1998 and periods of seven- months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996
Index to Financial Statements Report of Ernst & Young LLP.............................................................F-2 Consolidated Balance Sheets as of October 31, 1998 and November 1, 1997.................F-3 Consolidated Statements of Income for year ended October 31, 1998 and periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996....................F-5 Consolidated Statements of Changes in Stockholders' Equity for year ended October 31, 1998 and periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996..........................................................F-6 Consolidated Statements of Cash Flows for year ended October 31, 1998 and periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996....................F-7 Notes to Consolidated Financial Statements..............................................F-9
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 October 31, 1998 and November 1, 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows of the Successor for the year ended October 31, 1998 and the seven-month period ended November 1, 1997 and its "Predecessor" for the five-month period ended March 26, 1997 and for the year ended November 2, 1996. 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 and schedule 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 October 31, 1998 and November 1, 1997, and the consolidated results of operations and cash flows of the Successor for the year ended October 31, 1998 and the seven-month period ended November 1, 1997 and the Predecessor for the five-month period ended March 26, 1997 and for the year ended November 2, 1996, 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 7, 1998 F-2
CENTRAL TRACTOR FARM & COUNTRY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) October 31 November 1 1998 1997 --------------------------- Assets (Note 4) Current assets: Cash and cash equivalents $ 6,971 $ 7,378 Recoverable income taxes 3,134 2,513 Trade and other receivables, less allowances of $386 in 1998 and 1997 4,648 7,264 Inventory 217,064 222,117 Deferred income taxes (Note 7) -- 4,000 Other 3,010 3,136 ------------------------- Total current assets 234,827 246,408 Property, improvements and equipment: Land 1,821 1,963 Buildings and improvements 5,210 4,934 Leasehold improvements 13,384 12,788 Furniture and fixtures 27,590 24,731 Capitalized property rights (Note 5) 867 867 Automobiles and trucks 703 628 ------------------------- 49,575 45,911 Less allowances for depreciation and amortization 7,948 2,716 ------------------------- 41,627 43,195 Goodwill, net of amortization of $5,080 in 1998 and $1,753 in 1997 134,037 135,612 Other assets, principally deferred financing costs 8,354 9,020 ------------------------- Total assets $418,845 $434,235 ========================= F-3 October 31 November 1 1998 1997 -------------------------- Liabilities and stockholder's equity Current liabilities: Bank line of credit (Note 4) $ 32,075 $ 60,750 Accounts payable 78,322 68,015 Accrued payroll and bonuses 8,272 5,847 Accrued income taxes -- 508 Other accrued expenses 14,084 22,479 Deferred income taxes (Note 7) 506 -- Current portion of long-term debt and capital lease obligations 3,159 3,170 ------------------------- Total current liabilities 136,418 160,769 Long-term debt, less current portion (Note 4) 149,000 152,000 Capital lease obligations, less current portion (Note 5) 1,011 1,171 Deferred income taxes (Note 7) 2,659 748 ------------------------- Total liabilities 289,088 314,688 Stockholder's equity (Notes 3 and 6): Common stock, $.01 par value: 3,000 authorized shares; 100 shares issued and outstanding (wholly-owned by CT Holding, Inc.) -- -- Additional paid-in capital 119,155 118,920 Retained earnings 10,602 627 ------------------------- Total stockholder's equity 129,757 119,547 Commitments (Notes 5 and 8) -- -- ------------------------- Total liabilities and stockholder's equity $418,845 $434,235 ========================= See accompanying notes.
F-4
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF INCOME (In thousands) Successor | Predecessor ------------------------------- | ------------------------------ Fiscal year Period of seven | Period of five Fiscal year ended months ended | months ended ended October 31 November 1 | March 26 November 2 1998 1997 | 1997 1996 ------------ ------------- | ----------- ----------- | Net sales $ 587,195 $ 305,122 | $ 106,048 $ 293,020 Cost of sales 410,179 216,342 | 75,281 207,228 --------- --------- --------- --------- Gross profit 177,016 88,780 | 30,767 85,792 | Selling, general and administrative expenses, | including amounts with related parties (Note | 10) 134,623 72,142 | 29,045 68,197 Amortization of intangibles 3,552 1,753 | 415 938 --------- --------- | --------- --------- Operating income 38,841 14,885 | 1,307 16,657 | Interest expense, including amounts with | related parties (Note 10) 20,466 11,463 | 3,188 1,663 --------- --------- | --------- --------- Income (loss) before income taxes 18,375 3,422 | (1,881) 14,994 | Income taxes (credits) (Note 7) 8,400 2,057 | (634) 6,250 --------- --------- | --------- --------- Net income (loss) $ 9,975 $ 1,365 | $ (1,247) $ 8,744 ========= ========= | ========= ========= | Ratio (deficiency) of earnings to fixed charges 1.8x 1.3x | $ (1,881) 5.3x ========= ========= | ========= ========= See accompanying notes.
F-5
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands) Fiscal year ended October 31, 1998, and periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996 Stock Additional Retained Total Common Warrant Paid-In Earnings Stockholders' Stock Outstanding Capital (Deficit) Equity -------------------------------------------------------------------------------- Predecessor 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 --------- ------------------------------------------- Stockholder's equity at November 1, 1997 -- 118,920 627 119,547 Net income -- -- 9,975 9,975 Capital contribution from parent -- 235 -- 235 --------- ------------------------------------------- Stockholder's equity at October 31, 1998 $ -- $ 119,155 $ 10,602 $ 129,757 ========= =========================================== See accompanying notes.
F-6
CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Successor | Predecessor ---------------------------------- | -------------------------------- Fiscal year Period of seven | Period of five Fiscal year ended months ended | months ended ended October 31 November 1 | March 26 November 2 1998 1997 | 1997 1996 ----------- --------------- | -------------- ------------- Operating activities | Net income (loss) from continuing operations $ 9,975 $ 1,365 | $ (1,247) $ 8,744 Adjustments to reconcile net income (loss) from | continuing operations to net cash provided by (used in) continuing operations: | Depreciation and amortization of property, | improvements and equipment 5,221 2,716 | 1,490 3,056 Amortization of intangibles and other deferred | assets 4,604 2,253 | 414 998 Loss on sale of assets -- -- | -- 20 Deferred income taxes 6,417 1,871 | 1,328 1,100 Changes in operating assets and liabilities: | Recoverable income taxes (621) (1,119) | (1,885) -- Trade and other receivables 2,616 (871) | 144 83 Inventory 5,053 1,957 | (11,894) (4,549) Other current assets 126 946 | (924) (972) Accounts payable 10,307 1,895 | 1,468 (3,806) Accrued expenses (6,478) 1,139 | (1,524) 287 --------- --------- | --------- --------- 37,220 12,152 | (12,630) 4,961 | Adjustments for net cash provided by | discontinued operations: | Deferred income taxes -- -- | -- (367) Changes in operating assets and liabilities -- -- | -- 13,520 --------- --------- | --------- --------- -- -- | -- 13,153 --------- --------- | --------- --------- Net cash provided by (used in) operating | activities 37,220 12,152 | (12,630) 18,114 | Investing activities | Purchases of property, improvements and | equipment (4,842) (3,816) | (2,419) (8,789) 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) (1,568) (136,995) | -- (5,650) Other 394 206 | (1,348) 255 --------- --------- | --------- --------- Net cash used in investing activities (6,016) (296,568) | (3,767) (14,184) F-7 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) Successor | Predecessor ---------------------------------- | -------------------------------- Fiscal year Period of seven | Period of five Fiscal year ended months ended | months ended ended October 31 November 1 | March 26 November 2 1998 1997 | 1997 1996 ----------- --------------- | -------------- ------------- Financing activities | Borrowings under line of credit $ 273,645 $ 206,106 | $ 113,119 $ 86,782 Repayments on line of credit (302,320) (170,650) | (91,494) (89,902) Proceeds from issuance of long-term debt -- 155,000 | 8,000 -- Payments on long-term debt (3,000) (8,000) | (16,000) (17) Payments on capitalized lease obligations (171) (101) | (69) (120) Proceeds from issuance of common stock and | capital contributions 235 115,489 | 252 42 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 -- 1,494 | -- -- --------- --------- | --------- --------- Net cash (used in) provided by financing | activities (31,611) 291,794 | 13,808 (3,215) --------- --------- | --------- --------- Net (decrease) increase in cash and cash | equivalents (407) 7,378 | (2,589) 715 | Cash and cash equivalents at beginning of period 7,378 -- | 3,809 3,094 --------- --------- | --------- --------- Cash and cash equivalents at end of period $ 6,971 $ 7,378 | $ 1,220 $ 3,809 ========= ========= | ========= ========= | Supplemental disclosures of cash flow | information | Cash paid during the period for interest $ 19,838 $ 10,294 | $ 1,746 $ 1,991 Cash paid during the period for income taxes 355 327 | 412 5,675 See accompanying notes.
F-8 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31, 1998, and periods of seven-months ended November 1, 1997 and five-months ended March 26, 1997, and year ended November 2, 1996 (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 and stock options 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 final 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 9,990 Goodwill 87,343 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. 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. With this sale, 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 $0 and $134 at October 31, 1998 and November 1, 1997, 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 October 31, 1998. 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) Interest Rate Swap Agreements The differential to be paid or received in connection with interest rate swap agreements is accrued as interest rates change and is recognized over the life of the agreements. 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 $394, $923 and $950 at October 31, 1998, November 1, 1997 and March 26, 1997, respectively. Advertising expenses were approximately $15,127, $7,755, $3,286 and $8,841 for fiscal 1998, the seven-month and five-month periods of 1997 and for fiscal 1996, respectively. Store Pre-Opening Costs Prior to fiscal 1998, direct costs, which consisted principally of rent, employee compensation and travel costs for merchandise set-up and supplies, incurred in setting up new stores for opening were deferred and amortized over the first twenty-six weeks of store operations. Beginning in fiscal 1998, all such costs are currently expensed. The effect of this change in accounting on fiscal 1998 results of operations was immaterial. The amount of unamortized store pre-opening costs at October 31, 1998, November 1, 1997, and March 26, 1997 amounted to $0, $104 and $1,203, 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 $138.6 million (including related costs and expenses) in cash, including $1.6 million related to post closing adjustments finalized during fiscal 1998. Country General operated 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 final 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 5,824 Property, improvements and equipment 17,174 Goodwill 51,775 Deferred income taxes 9,229 Accounts payable and accrued expenses (45,229) -------- $138,563 ======== In initially allocating the purchase price to the assets and liabilities based on fair values, a $3,358 reserve was recorded in 1997 for the estimated cost, principally lease liabilities, to close nine acquired stores; and a $2,866 reserve was recorded in 1997 for the cost of severance payments to identified employees in connection with the closing of Country General's corporate headquarters. During March of 1998, the decision was made to actually close twelve of the acquired stores. As of October 31, 1998, the inventory liquidation and store closing process and the termination of employees at Country General's closed corporate headquarters has been completed. During fiscal 1998, in connection with the final purchase price adjustments, the reserve for store closings was increased by $1,522 as a result of the additional closed stores, and the reserve for severance payments was decreased by $704; these adjustments resulted in a net increase in goodwill of $818. As of October 31, 1998 and November 1, 1997, the reserve for closed stores was $3,435 and $3,358, respectively, consisting primarily of remaining lease costs for the closed stores. As of October 31, 1998 and November 1, 1997, the reserve for severance had been reduced to $224 and $2,722, respectively, as a result of payments to terminated employees and the final purchase price adjustments. 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: 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) 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. 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. Pro forma results of operations for 1997 and 1996 have not been adjusted for the effect of the twelve acquired Country General stores which were closed during fiscal 1998. 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 $32,075 and letters of credit totaling $6,710 were outstanding as of October 31, 1998. 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 October 31, 1998, the interest rate on the Term Loan was 8.1% and the interest rate on the Revolving Credit Facility was 8.2%. 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) 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. Long-term debt consisted of the following: October 31 November 1 1998 1997 --------------------------- 10-5/8% Senior Notes due 2007 $105,000 $105,000 Bank term loan 47,000 50,000 -------------------------- 152,000 155,000 Less current portion 3,000 3,000 -------------------------- $149,000 $152,000 ========================== 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. In March of 1998, the Company entered into an interest rate swap agreement (the "Swap Agreement") with a bank to reduce the impact of changes in interest rates on its floating term loan facility. Accordingly, the Swap Agreement was entered into for purposes other than trading. The Swap Agreement has an initial notional amount of $48,500. The notional amount decreases in tandem with the outstanding balance on the Company's term loan facility until the Swap Agreement's maturity on March 30, 2001 and was $47,000 at October 31, 1998. The Swap Agreement fixes the interest rate on the term loan facility at 5.8525%, plus the applicable margin, resulting in an effective rate of 8.23% at October 31, 1998. The Company is exposed to interest rate risk in the event of nonperformance by the counter party to the Swap Agreement. However, the Company does not anticipate nonperformance by the bank. F-16 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) The bank term loan must be repaid in semiannual installments, plus annual prepayments based on the Company's excess cash flow, as defined. The minimum annual installments are as follows: fiscal years 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 $145, $86, $59 and $125 for fiscal 1998, the seven-month and five-month periods of 1997 and for fiscal 1996, respectively. The net book value of property rights recorded under capital leases was $636 and $781 at October 31, 1998 and November 1, 1997, respectively. As of October 31, 1998, 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: 1999 $ 293 2000 293 2001 293 2002 293 2003 257 After 2003 185 ------- Total minimum lease payments 1,614 Less amount representing interest 444 ------- Present value of minimum lease payments 1,170 Less current installments 159 ------- $1,011 ======= 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 $14,602, $9,299, $4,069 and $9,294 for fiscal 1998 and the seven-month and five-month periods of 1997 and for fiscal 1996, respectively. F-17 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 5. Lease Obligations (continued) The following is a summary of minimum rental commitments as of October 31, 1998, for operating leases:
Automobile Office Fiscal Year-End Real Estate and Trucks Equipment Total - ------------------------------------------------------------------------------------------------------- 1999 $14,637 $457 $46 $15,140 2000 11,691 - 17 11,708 2001 8,553 - 2 8,555 2002 6,440 - - 6,440 2003 4,369 - - 4,369 After 2003 6,022 - - 6,022 ---------------------------------------------------------------------- $51,712 $457 $65 $52,234 ======================================================================
6. Stock Options CT Holding has stock option arrangements with various officers and other members of management of the Company which it accounts for under the provisions of APB Opinion No. 25 and related interpretations. No compensation expense has been recognized by CT Holding or the Company in connection with such stock option arrangements. Under FASB Statement No. 123, certain pro forma information is required as if CT Holding had accounted for stock options under the alternative fair value method of Statement 123 with the resultant compensation expense "pushed-down" to the Company. CT Holding used a Minimum Valuation model to determine the per unit fair value of the options at the grant date. The following assumptions were used in the valuation: Risk-free interest rate 5.65% Expected dividend yield None Expected volatility None Expected life of option 7 years F-18 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 6. Stock Options (continued) For purposes of pro forma disclosures, the estimated fair value of the options at the grant date is amortized to expense over the vesting period of the options. Pro forma stock option compensation expense for the year ended October 31, 1998 is not indicative of what annual pro forma expense may be in the future. Pro forma net income of the Company for fiscal 1998 is approximately $9,729. Pro forma results for the period of seven months ended November 1, 1997 would not differ from amounts as reported since no stock option compensation expense would be recognized during that period. The Company had no capital shares reserved for issuance under any outstanding stock option or other agreements at October 31, 1998. 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:
October 31 November 1 1998 1997 --------------------------- Deferred tax liabilities: Differences in depreciation and cost basis of property, improvements and equipment $ 3,392 $ 2,428 Differences in cost basis of inventories due to LIFO and uniform capitalization 5,623 5,423 Prepaid advertising 158 369 Store pre-opening costs -- 42 Differences in amortization and cost basis of intangibles 584 -- --------------------------- Total deferred tax liabilities 9,757 8,262
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) October 31 November 1 1998 1997 --------------------------- Deferred tax assets: Net operating loss carryforward $ 1,105 $ 1,369 Capital loss carryforward 920 920 Allowance for doubtful accounts 154 214 Excess and obsolete inventory reserves 2,120 5,355 Compensation and employee benefit accruals 1,319 2,509 Operating leases 308 368 Accrued store closing costs 1,374 1,362 Capitalized property rights and lease obligations treated as operating leases for income tax purposes 212 223 Other -- 114 ------------------------ 7,512 12,434 Less valuation allowance for capital loss carryforward (920) (920) ------------------------ Total deferred tax assets 6,592 11,514 ------------------------ Net deferred tax (liabilities) assets $ (3,165) $ 3,252 ========================
The Company has a net operating loss carryforward of approximately $2.8 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.
Components of income tax expense (benefit) are as follows: Successor | Predecessor ------------------------------------ | --------------------------------- | Fiscal year Period of seven | Period of five Fiscal year ended months ended | months ended ended October 31 November 1 | March 26 November 2 1998 1997 | 1997 1996 ------------------------------------ | --------------------------------- Continuing operations: | Current: | Federal $ -- $ 148 | $(1,541) $3,951 State 200 38 | (421) 1,199 ------------------------------ | ----------------------------- 200 186 | (1,962) 5,150 Deferred 8,200 1,871 | 1,328 1,100 ------------------------------ | ----------------------------- 8,400 2,057 | (634) 6,250 Discontinued operations: | Current -- -- | -- 367 Deferred -- -- | -- (367) ------------------------------ | ----------------------------- -- -- | -- -- ------------------------------ | ----------------------------- Total $8,400 $2,057 | $ (634) $6,250 ============================== | =============================
F-20 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 7. Income Taxes (continued) 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 Period of seven | Period of five Fiscal year ended months ended | months ended ended October 31 November 1 | March 26 November 2 1998 1997 | 1997 1996 ------------------------------------ | --------------------------------- Income tax at federal statutory | rate $6,248 $1,163 | $(639) $5,098 Increases in taxes resulting from: | State income taxes, net of | federal income tax effect 1,214 306 | (79) 833 Goodwill amortization 766 391 | 72 178 Other, net 172 197 | 12 141 ---------------------------------- | ----------------------------- $8,400 $2,057 | $(634) $6,250 ================================== | =============================
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 without cause or for certain other circumstances, 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 $0, $729, $85 and $881 for fiscal 1998 and the seven-month and five-month periods of 1997 and for fiscal 1996, respectively. F-21 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 10. 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 which were retired in connection with the purchase of the BCC common stock. Interest paid on such notes was approximately $171 and $1,425 for the period of five months ended March 26, 1997 and for fiscal 1996, 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 fiscal 1998 and the period of seven months ended November 1, 1997, Childs was paid a management and consulting services fee of approximately $240 and $140, respectively, under a five-year agreement, annually renewable thereafter, requiring annual payments of $240. In addition, during fiscal 1998 Fenway Partners, a stockholder of CT Holding, was paid a management fee of $120. The Company purchases inventory from two suppliers who are controlled by stockholders of CT Holding. Purchases from these suppliers aggregated approximately $4,999 and $6,092 for fiscal 1998 and fiscal 1997, respectively. The Company purchased inventory from two suppliers who were controlled by the BCC Funds. Purchases from these suppliers aggregated approximately $1,605 and $6,228 for the period of five months ended March 26, 1997 and for fiscal 1996, respectively. 11. 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 3, 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) 11. Guarantee of Senior Notes (continued)
Summarized financial information for Country General is as follows: October 31 November 1 1998 1997 ------------- ----------- Balance sheet data Current assets: Accounts receivable $ 3,437 $ 6,049 Inventory 104,777 102,571 Other 3,569 7,702 ----------------------------- 111,783 116,322 Property and equipment, net of allowances for depreciation 15,598 16,673 Other noncurrent assets, principally goodwill and deferred financing costs 52,170 53,109 ----------------------------- $ 179,551 $ 186,104 ============================= Current liabilities, principally accounts payable and accrued expenses $ 28,159 $ 38,696 Noncurrent liabilities, principally amounts due to related 5,262 11,434 parties Stockholder's equity 146,130 135,974 ----------------------------- $ 179,551 $ 186,104 ============================= Period of four Fiscal year months ended ended November 1 1997 October 31 (from date of 1998 acquisition) ------------------------------- Income statement data Net sales $ 257,342 $ 99,381 Cost of sales 178,918 71,095 ----------------------------- Gross profit 78,424 28,286 Selling, general and administrative and other expenses 53,151 26,719 ----------------------------- Operating income 25,273 1,567 Interest expense to related party 9,167 3,201 ----------------------------- Income (loss) before income taxes 16,106 (1,634) Income taxes (credits) 6,488 (613) ----------------------------- Net income (loss) $ 9,618 $ (1,021) ============================= F-23 CENTRAL TRACTOR FARM & COUNTRY, INC. AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except where indicated) 11. Guarantee of Senior Notes (continued) Period of four Fiscal year months ended ended November 1 1997 October 31 (from date of 1998 acquisition) ------------------------------- Cash flow data Net cash flows provided by (used in): Operating activities $ 2,586 $ (1,736) Investing activities, principally capital expenditures (3,575) (415) Financing activities, principally change in amounts due to related parties, less payment of deferred financing costs of $2,340 in 1997 (5,192) 5,548
12. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the unaudited quarterly results of operations for the years ended October 31, 1998 and November 1, 1997: Successor ------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------ Fiscal year ended October 31, 1998: Net sales $144,393 $143,717 $167,859 $131,226 Gross profit 41,619 42,501 51,146 41,750 Operating income 6,659 8,168 15,696 8,318 Net income 590 1,375 6,597 1,413 Ratio of earnings to fixed charges 1.2x 1.4x 3.1x 1.6x Predecessor | Successor ---------------------------- | ---------------------------------------- | February 2, | March 27, 1997 to | 1997 to First March 26, | May 3, Third Fourth Quarter 1997 | 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) 601 (1,848) | 732 2,709 (2,076) Ratio (deficiency) of earnings | to fixed charges 1.6x (910) | 1.8x 1.9x (2,871) |
F-24 CENTRAL TRACTOR FARM & COUNTRY, INC. Valuation and Qualifying Accounts Schedule II Allowance for Trade Receivables ----------------- 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) Debited to expense (174,279) Write-off of uncollectible accounts 174,279 --------- Balance at October 31, 1998 $(386,000) ========= F-25 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 29, 1999 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 29, 1999 /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) ____________________ Director John W. Childs /s/ Jerry D. Horn Director Jerry D. Horn /s/ Steven G. Segal Director Steven 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 /s/ Richard C. Dresdale 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 ---------------------------------- 7 months ended 5 months ended Fiscal Fiscal 1998 November 1, 1997 March 26, 1997 1996 ----------- ---------------- -------------- ------- Income before income taxes $18,375 3,422 (1,881) 14,994 ======= ======= ======= ======= Fixed charges: Interest expense $20,466 11,463 3,188 1,663 Portion of rent expense representing interest 2,920 1,860 814 1,859 ------- ------- ------- ------- Total fixed charges $23,386 13,323 4,002 3,522 ======= ======= ======= ======= Earnings before income taxes and fixed charges $41,761 16,745 2,121 18,516 ======= ======= ======= ======= Ratio (deficiency) of earnings to fixed charges 1.8x 1.3x $(1,881) 5.3x ======= ======= ======= =======
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 audited financial statements of Central Tractor Farm & Country, Inc. at and for the period ended October 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR OCT-31-1998 NOV-02-1997 OCT-31-1998 6,971 0 5,034 386 217,064 234,827 49,575 7,948 418,845 136,418 150,011 0 0 0 129,757 418,845 587,195 587,195 410,179 410,179 138,175 174 20,466 18,375 8,400 9,975 0 0 0 9,975 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 third quarter 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-----