<PAGE> 1
1997 Annual Report To Stockholders
(PICTURE)
Letter to Stockholders:
TRACTOR SUPPLY COMPANY is the leader in the farm store business. We operate 228
stores in 26 states with over 2,700 associates and we set the pace in our
industry. Tractor Supply Company is the most innovative, first to market with
new products, best at developing people, and most consistent building the
infrastructure to support future growth.
(continued on page 2)
--------------
(TRACTOR SUPPLY COMPANY LOGO)
<PAGE> 2
(PICTURE)
COMPANY PROFILE Since its founding as a mail order tractor parts business in
1938, Tractor Supply Company has grown to be one of the largest retail farm
store chains in America. The Company supplies the daily farming and maintenance
needs of its target customers: hobby, part-time and full-time farmers and
ranchers, as well as suburban customers, contractors and tradesmen. At the close
of fiscal 1997, the Company operated 228 retail farm stores in 26 states.
Tractor Supply Company stores typically range in size from 12,000 to 14,000
square feet of inside selling space and utilize at least as many square feet of
outside selling space. An average store displays a comprehensive selection of
over 12,000 different products including farm maintenance products (fencing,
tractor parts and accessories, agricultural spraying equipment and tillage
parts); animal products (specialty feeds, supplements, equine supplies,
medicines, veterinary supplies and livestock feeders); general maintenance
products (air compressors, welders, generators, pumps, plumbing and tools); lawn
and garden products (riding mowers, tillers and fertilizers); light truck
equipment; and work clothing. The stores are located in rural communities and in
the outlying areas of large cities where farming and ranching is a significant
factor in the local economy. The Company employs over 2,700 people. Tractor
Supply Company has been a public company since February 1994. Its stock is
traded on The Nasdaq National Market under the symbol "TSCO".
(PICTURE)
<TABLE>
<CAPTION>
NUMBER OF STORES BY STATE
<S> <C>
Texas 35
Ohio 30
Michigan 21
Tennessee 20
Indiana 18
Kentucky 12
Illinois 11
Iowa 9
North Carolina 8
North Dakota 8
Kansas 7
Arkansas 6
Minnesota 6
Missouri 6
Nebraska 6
Pennsylvania 5
Virginia 5
South Dakota 4
Alabama 2
Maryland 2
Oklahoma 2
Mississippi 1
Montana 1
New York 1
South Carolina 1
Wisconsin 1
---
Total 228
===
</TABLE>
<PAGE> 3
Tractor Supply Company
Financial Highlights
------------------
(in thousands, except where noted)
<TABLE>
<CAPTION>
FISCAL YEAR PERCENT
--------------------- INCREASE
1997 1996 (DECREASE)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS:
Net sales $509,052 $449,029 13.4
Income before income taxes 19,933 22,081 (9.7)
Net income 11,761 13,236 (11.1)
Net income per share-basic ($) 1.34 1.50 (10.7)
FINANCIAL POSITION:
Total assets 224,080 195,582 14.6
Cash and short-term investments 8,477 12,948 (34.5)
Stockholders' equity 104,889 92,966 12.8
Long-term debt to equity (%) 29.7 22.8 30.3
STATISTICS:
Number of stores (#) 228 208 9.6
Square footage at year end 2,807 2,544 10.3
Average sales per store 2,233 2,159 3.4
Net sales per square foot ($) 191 185 3.2
</TABLE>
Net Sales for
1993-1997
(in millions)
(GRAPH)
Total Number of
Stores (at Year End)
1993-1997
(GRAPH)
Five-Year
Compound
Growth Rate
- - Net Sales
- - Income From Operations
- - Net Income
(GRAPH)
1
<PAGE> 4
WHILE 1997 WAS A YEAR OF TRANSITION AND REORGANIZATION, WE BELIEVE WE ARE TAKING
THE STEPS NECESSARY TO BUILD A STRONG FOUNDATION TO BETTER SUPPORT THE COMPANY'S
GROWTH PLANS.
Tractor Supply Company
Letter to Stockholders
----------
(continued from cover)
Last year was one of reorganization, rejuvenation, and reaffirming the basis
for future growth and success. We feel confident that we are positioned today
for future continuous meaningful sales and profit growth. We are disappointed in
last year's financial performance and are determined to deliver consistent
profitable growth in future years.
For 1997, total sales were up 13.4% and comparable store sales were up 3.1%.
We opened 22 new stores, relocated one store and closed two stores. Net income
decreased 11.1% to $11.8 million and net income per share decreased 10.7% to
$1.34 per share.
OUR RICH HISTORY Tractor Supply Company was founded in 1938 and we will
celebrate our 60th anniversary this year. The Company started as a tractor parts
mail order business focusing on the maintenance needs of America's farmers and
today, 60 years later, we are still focused on the basic maintenance needs of
America's farmers and ranchers. The landscape has changed, the customer has
changed, and the methods of agriculture have changed, however our focus has
stayed relatively consistent. Competitors have come and competitors have gone in
the farm store business--a couple of the nation's largest retailers have even
tried their hand at the farm store market. We are proud of our heritage, proud
of our company, and proud of our people.
OUR CUSTOMER COMMITMENT The Tractor Supply Company team has a winning attitude.
We passionately believe in our customer, our niche, our organization, and our
core business principles. We are committed to providing superior customer value
by being the most dependable supplier, providing the best customer service,
guaranteeing satisfaction on every purchase, and providing the lowest prices in
our business. Superior customer value for every customer is our winning formula.
THE FARM STORE MARKET NICHE We have a unique market niche serving the basic
maintenance needs of America's farmers and ranchers and have great confidence in
the future potential of this market. Our core customer, the "hobby and
part-time" farmer and rancher, is a growing segment of the country's
demographics. Our efforts are clearly focused on this well-defined and very
special niche in the retail market place.
STRONGER EXECUTIVE TEAM The Tractor Supply Company Executive team has been
substantially strengthened. First, Mr. Gerald Brase joined the Company in
October as our Senior Vice-President of Merchandising and Marketing. In his
short tenure with the Company, we have experienced substantial improvements in
business process and basic merchandising, a massive rollout of new and upgraded
merchandise programs and a bolder, more aggressive approach to our marketing
efforts. Second, Mr. Michael Brown joined the Company in January of this year as
the Senior Vice-President of Store Operations. Soon we expect to see the impact
of Mike on improved operations of the stores and are confident that Jerry and
Mike will together make substantial contributions to sales growth and profit
growth.
REJUVENATING THE PRODUCT MIX At Tractor Supply Company we focus on consistency,
we focus on our customer, and we focus on our core products. By the time you
read this letter, the entire right half and the center sections of every Tractor
Supply Company store will have been completely re-merchandised, re-assorted, and
re-positioned. Many of these changes were piloted last year and we are confident
that the total package will yield meaningful sales improvements starting this
spring. Our goal is to keep improving the merchandise mix to be most responsive
to our customers.
Tractor Supply Company works closely with its vendor business partners to
build strong, long-term relationships that help assure that we are the leader in
each of our key businesses. We believe that working closely with vendors gives
us competitive advantage. We collaborate on new products, new presentations,
sales promotions, product knowledge training, and use technology jointly to take
time and money out of the business process.
2
<PAGE> 5
(PICTURE)
BOLD NEW MARKETING INITIATIVES We are focused on growing our business with bold
and innovative marketing programs. Beginning this spring, we will be increasing
our print advertising, significantly expanding the use of radio, and, for the
first time, initiating regular television advertising. We are thrilled to
announce that nationally known equine expert, John Lyons, is our new spokesman
supporting our bold new initiatives in the horse care area. We are equally
thrilled to announce that Country Music Entertainer of the Year, George Strait,
is our new national spokesman. Tractor Supply Company has been one of America's
best-kept retail secrets, but this year that will change.
GROWTH STRATEGIES Tractor Supply Company is a rapid growth company. In 1990
total sales were $200,000,000 and last year sales exceeded $500,000,000--a half
billion dollars! The Company has grown two and a half fold in the last seven
years and we expect that rapid growth to continue. Our vision is to double sales
to over a billion dollars in the year 2001 through both new stores and growth in
existing stores.
During the last three years we have opened 65 new stores and now operate 228
stores in 26 states. Our goal is to open 18 new stores this year and 30 new
stores next year and, by the year 2000, to be operating more than 300 stores.
INVESTING IN THE INFRASTRUCTURE At Tractor Supply Company we take a long-term
view of our business by making continuous investments for future growth and
success. Developing top quality people is one of our principal focuses. We
regularly recruit agricultural business students on major college campuses for
our Executive Training Program. The entire sales force participated in our sales
training program last year and we are now hearing regular success stories on how
the training has paid off in better service and bigger sales. At Tractor Supply
Company our people work in a positive, enthusiastic environment where there are
opportunities for everyone. We focus on continually improving the strength of
our team.
We also use technology to achieve competitive advantage. The information from
the recently completed point-of-sale system provides for much better analysis of
sales, expenses and control issues, which all help enhance the bottom line. In
addition, we track sales data on over 350,000 key farm and ranch customers and
are now marketing directly to them. Our district managers use laptop computers
for analyzing sales and inventory to quickly react to changing trends. We
recently embarked on installation of world-class merchandise, inventory and
distribution systems that will help us manage the business even more
efficiently. Technology is our friend and we will use it to build our business.
OUTLOOK I am more confident about the future of our Company today than at any
time in my 19 years with Tractor Supply Company. I am confident because of the
strength of our current Executive and Management team. We are the farm store
leader in every respect.
/s/ Joe Scarlett
-------------------------
Joe Scarlett
Chairman of the Board and
Chief Executive Officer
----------
As with any business, all phases of the Company's operations are subject to
influences outside its control. This report contains certain forward-looking
statements. These statements include reference to certain factors, any one, or a
combination, of which could materially affect the results of the Company's
operations. These factors include general economic cycles affecting consumer
spending, weather factors, pricing and other competitive factors, the timing and
acceptance of new products in the stores, the mix of goods sold, capital market
conditions in general and the seasonality of the Company's business.
Forward-looking statements made by or on behalf of the Company are based on a
knowledge of its business and the environment in which it operates, but because
of the factors listed above, actual results could differ materially from those
reflected by any forward-looking statements. Consequently, all of the
forward-looking statements made are qualified by these cautionary statements and
there can be no assurance that the actual results or developments anticipated by
the Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company or its business and
operations.
3
<PAGE> 6
BY LISTENING TO CUSTOMERS AND BEING RESPONSIVE TO THEIR NEEDS, WE SUCCESSFULLY
REINTRODUCED A LADIES WORKWEAR LINE OF CLOTHING TO OUR PRODUCT OFFERING.
(PICTURE)
WALK BEHIND MOWERS ARE AN INTEGRAL COMPONENT OF THE COMPANY'S FULL-LINE OF LAWN
AND GARDEN PRODUCTS.
(PICTURE)
THE COMPANY'S COMPLETELY RE-ASSORTED AND SIGNIFICANTLY IMPROVED POWER WASHER
PRODUCT LINE IS OUR STRONGEST EVER.
(PICTURE)
AN ALL NEW, FULL LINE OF HILL'S SCIENCE DIET(R) PRODUCTS, THE ENVY OF MANY
OTHER RETAILERS, WAS ROLLED OUT AS PART OF OUR ALL NEW PET DEPARTMENT.
(PICTURE)
4
<PAGE> 7
(PICTURE)
SIGNIFICANTLY ENHANCED PET DEPARTMENT: One of our major initiatives to
rejuvenate the product mix is the significantly enhance pet department. Based on
early indications, we expect that this all new pet department will generate
double-digit sales increases in fiscal 1998 at a slightly improved gross margin
rate.
5
<PAGE> 8
TILLERS ARE ANOTHER INTEGRAL COMPONENT OF THE COMPANY'S FULL-LINE OF LAWN AND
GARDEN PRODUCTS.
(PICTURE)
OUR POWER TOOL PRODUCT OFFERING WAS SUBSTANTIALLY EXPANDED LATE IN 1997.
(PICTURE)
THE COMPANY SIGNIFICANTLY RE-MERCHANDISED AND EXPANDED ITS ANIMAL HEALTH
DEPARTMENT. EPRINEX IS NOT ONLY AN EXAMPLE OF A DYNAMIC NEW PRODUCT IN THIS
IMPROVED ANIMAL HEALTH DEPARTMENT, BUT IT IS ALSO AN EXAMPLE OF THE COMPANY
BEING FIRST TO MARKET WITH A NEW PRODUCT.
(PICTURE)
PRODUCER'S PRIDE BRAND, OUR NEW PRIVATE LABEL ECONOMY FEED LINE, COMPLIMENTS OUR
ALREADY WELL ESTABLISHED PRIVATE LABEL HIGH-END FEED LINE, DUMOR BRAND.
(PICTURE)
6
<PAGE> 9
(PICTURE)
COMPLETELY REVAMPED EQUINE DEPARTMENT: Another one of our major initiatives to
rejuvenate the product mix is the expanded and completely revamped equine
department. Based on early indications, we expect that this all new equine
department will also generate double-digit sales increases in fiscal 1998 at a
slightly improved gross margin rate.
7
<PAGE> 10
Tractor Supply Company
Five-Year Selected Financial and Operating Highlights
----------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------
(in thousands, except per share and operating data)
DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1,
1997 1996 1995 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Sales $ 509,052 $ 449,029 $ 383,903 $ 329,967 $ 279,213
Gross margin 131,542 116,651 98,656 88,187 71,743
Selling, general and
administrative expenses 104,661 88,827 73,587 65,790 54,788
Depreciation and amortization 4,509 3,385 2,524 1,845 1,655
-------------------------------------------------------------------------
Income from operations 22,372 24,439 22,545 20,552 15,300
Interest expense, net 2,439 2,358 1,730 1,798 3,840
-------------------------------------------------------------------------
Income before income taxes 19,933 22,081 20,815 18,754 11,460
Income tax provision 8,172 8,845 8,293 7,496 4,531
-------------------------------------------------------------------------
Net income $ 11,761 $ 13,236 $ 12,522 $ 11,258 $ 6,929
-------------------------------------------------------------------------
Net income applicable to
common stockholders $ 11,705 $ 13,039 $ 12,165 $ 10,788 $ 6,459
---------------------------------------------------------------------------
Net income per share - basic (a) $ 1.34 $ 1.50 $ 1.40 $ 1.28 $ 0.99
-------------------------------------------------------------------------
Weighted average common
shares outstanding (b) 8,724,915 8,718,000 8,718,000 8,433,934 6,518,000
OPERATING DATA:
Gross margin 25.8% 26.0% 25.7% 26.7% 25.7%
Selling, general and
administrative expenses 20.5% 19.8% 19.2% 19.9% 19.6%
Income from operations 4.4% 5.4% 5.9% 6.2% 5.5%
Net income 2.3% 2.9% 3.3% 3.4% 2.5%
Number of stores:
Beginning of year 208 185 165 152 150
New stores 22 23 20 13 6
Closed stores (2) -- -- -- (4)
-------------------------------------------------------------------------
End of year 228 208 185 165 152
--------------------------------------------------------------------------
Number of relocated stores 1 4 2 4 4
Number of remodeled stores (c) -- 1 6 2 2
Total selling square
footage at period-end (d) 2,806,864 2,543,575 2,237,755 1,929,396 1,738,348
Average sales per store (in thousands) $ 2,233 $ 2,159 $ 2,075 $ 2,000 $ 1,837
Net sales per square foot of selling space $ 191 $ 185 $ 178 $ 178 $ 163
Comparable store sales increase (e) 3.1% 2.5% 3.1% 11.7% 7.0%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 82,869 $ 65,954 $ 63,850 $ 46,184 $ 27,414
Total assets 224,080 195,582 174,129 146,248 116,786
Long-term debt, less current portion (f) 31,134 21,166 25,858 12,266 40,006
Redeemable preferred stock -- 1,763 3,525 5,875 5,875
Stockholders' equity 104,889 92,966 79,951 67,817 17,279
</TABLE>
(a) Basic net income per share is calculated based on the weighted average
number of common shares outstanding applied to net income applicable to
common stockholders.
(b) Weighted average common shares outstanding have been adjusted to give effect
to an approximately 50 for 1 stock split consummated on February 14, 1994 in
connection with the Company's initial public offering consummated on
February 25, 1994.
(c) Includes remodelings costing more than $150,000.
(d) Total selling square footage includes normal selling space and excludes
office, stockroom, receiving space and outside selling space.
(e) Comparable store sales increases are calculated on a 52-week basis,
excluding relocations, using all stores open at least one year.
(f) Long-term debt includes borrowings under the Company's principal revolving
credit agreements and amounts outstanding under its capital lease
obligations, excluding the current portions of each.
8
<PAGE> 11
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
-------------
The following discussion and analysis describes certain factors affecting
Tractor Supply Company's (the "Company") results of operations for the three
fiscal years ended December 27, 1997 and its liquidity and capital resources.
This discussion should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Annual Report. The following discussion
and analysis also contains certain historical and forward-looking information.
The forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 ("the Act"). All
statements, other than statements of historical facts, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such things as future capital expenditures (including
the amount and nature thereof), business strategy, expansion and growth of the
Company's business operations and other such matters are forward-looking
statements. To take advantage of the safe harbor provided by the Act, the
Company is identifying certain factors that could cause actual results to differ
materially from those expressed in any forward-looking statements, whether oral
or written, made by or on behalf of the Company.
All phases of the Company's operations are subject to influences outside its
control. Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include general economic
cycles affecting consumer spending, weather factors, operating factors affecting
customer satisfaction, consumer debt levels, pricing and other competitive
factors, the ability to identify suitable locations and negotiate favorable
lease agreements on new and relocated stores, the timing and acceptance of new
products in the stores, the mix of goods sold, the continued availability of
favorable credit sources and other capital market conditions and the seasonality
of the Company's business. Forward-looking statements made by or on behalf of
the Company are based on a knowledge of its business and the environment in
which it operates, but because of the factors listed above, actual results could
differ materially from those reflected by any forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business and operations.
The Company's fiscal year ends on the Saturday closest to December 31. Fiscal
years 1997, 1996 and 1995 consisted of 52 weeks.
OVERVIEW
Since its founding as a mail order tractor parts business in 1938, the
Company has grown to be one of the largest retail farm store chains in America.
The Company supplies the daily farming and maintenance needs of its target
customers: hobby, part-time and full-time farmers and ranchers, as well as
suburban customers, contractors and tradesmen. The Company's stores typically
range in size from 12,000 to 14,000 square feet of inside selling space and
utilize at least as many square feet of outside selling space. An average store
displays a comprehensive selection of over 12,000 different products including
farm maintenance products (fencing, tractor parts and accessories, agricultural
spraying equipment and tillage parts); animal products (specialty feeds,
supplements, equine supplies, medicines, veterinary supplies and livestock
feeders); general maintenance products (air compressors, welders, generators,
pumps, plumbing and tools); lawn and garden products (riding mowers, tillers and
fertilizers); light truck equipment; and work clothing. The stores are located
in rural communities and in the outlying areas of large cities where farming and
ranching is a significant factor in the local economy. The Company does not sell
large tractors, combines, bulk chemicals or bulk fertilizers.
On February 25, 1994, the Company consummated an initial public offering (the
"Offering") whereby the Company sold 2,200,000 shares of common stock, par value
$.008 per share, at an initial offering price to the public of $20.00 per share.
In connection with the Offering, the Company received net proceeds of
approximately $39.8 million (after deducting underwriting discounts and
commissions and expenses of the Offering), repaid all of the borrowings then
outstanding under its old revolving credit agreement (approximately $22.7
million), paid off the mortgage notes on 34 of its existing store locations
(approximately $10.1 million) and paid off all of the amounts outstanding under
subordinated promissory notes (aggregating approximately $.2 million).
Over the past four fiscal years since the Offering, the Company has opened 13
new retail farm stores in fiscal 1994, 20 new stores in fiscal 1995, 23 new
stores in fiscal 1996 and 22 new stores in fiscal 1997. These new stores have
increased the Company's market presence in the Southwest, primarily in Texas,
and in the Southeast, primarily in
9
<PAGE> 12
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------
Tennessee, Kentucky, Alabama and North Carolina. This expansion brings the
Company's total store count to 228 (in 26 states) as of December 27, 1997. The
Company plans to open an additional 18 stores in fiscal 1998, approximately
three of which are scheduled to open in the first quarter of fiscal 1998, 30 in
fiscal 1999 and additional stores thereafter. Over the past four fiscal years
since the Offering, the Company has also relocated eleven stores (four in fiscal
1994, two in fiscal 1995, four in fiscal 1996 and one in fiscal 1997) and
completed major remodelings on nine of its existing stores. In total over the
past four fiscal years since the Offering, the Company has opened, relocated or
remodeled 98 stores.
Between fiscal year 1994 and fiscal year 1997, net sales increased from
$330.0 million to $509.1 million and net income increased from $11.3 million to
$11.8 million, reflecting a three-year compound annual growth rate of 15.5% and
1.5%, respectively. Between fiscal year 1992 and fiscal year 1997, net sales
increased from $251.5 million to $509.1 million and net income increased from
$4.9 million to $11.8 million, reflecting a five-year compound annual growth
rate of 15.1% and 19.3%, respectively. The Company generated these growth rates
primarily from increases in comparable store sales and, more recently, through
new store openings and relocations of existing stores. Comparable stores sales
increased 3.1%, 2.5% and 3.1% in fiscal 1997, 1996 and 1995, respectively. Since
1992, the 79 new or relocated stores that have been open more than one year have
generated average net sales that are approximately 19.0% per annum greater than
those of existing stores.
SEASONALITY AND WEATHER
The Company's business is highly seasonal. Historically, the Company's sales
and profits have been the highest in the second and fourth fiscal quarters of
each year due to the farming industry's planting and harvesting seasons and the
sale of seasonal products. The Company has typically operated at a net loss in
the first fiscal quarter of each year. Unseasonable weather and excessive rain,
drought, or early or late frosts may also affect the Company's sales. The
Company believes, however, that the impact of adverse weather conditions is
somewhat mitigated by the geographic dispersion of its stores.
The Company experiences a buildup of inventory and accounts payable during
its first fiscal quarter each year for purchases of seasonal product in
anticipation of the April through June selling season and again during its third
fiscal quarter in anticipation of the October through December selling season.
The Company's unaudited quarterly operating results for each fiscal quarter
of 1997 and 1996 are shown below (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $ 96,409 $159,493 $118,438 $134,712 $509,052
Gross margin 24,153 41,259 30,273 35,857 131,542
Income (loss) from operations (964) 12,149 3,221 7,966 22,372
Net income (loss) (926) 6,988 1,552 4,147 11,761
Net income (loss) per share - basic (.11) .80 .18 .47 1.34
Net income (loss) per share -
assuming dilution (.11) .80 .18 .47 1.34
1996
Net sales $ 81,157 $146,717 $104,990 $116,165 $449,029
Gross margin 20,562 37,797 27,130 31,162 116,651
Income (loss) from operations (938) 13,698 4,456 7,223 24,439
Net income (loss) (964) 7,868 2,286 4,046 13,236
Net income (loss) per share - basic (.12) .90 .26 .46 1.50
Net income (loss) per share -
assuming dilution (.12) .89 .26 .46 1.49
</TABLE>
10
<PAGE> 13
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1,
1997 1996 1995 1994 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 74.2 74.0 74.3 73.3 74.3
------------------------------------------------------------------------
Gross margin 25.8 26.0 25.7 26.7 25.7
Selling, general and administrative expenses 20.5 19.8 19.2 19.9 19.6
Depreciation and amortization 0.9 0.8 0.6 0.6 0.6
------------------------------------------------------------------------
Income from operations 4.4 5.4 5.9 6.2 5.5
Interest expense, net 0.5 0.5 0.4 0.5 1.4
------------------------------------------------------------------------
Income before income taxes 3.9 4.9 5.5 5.7 4.1
Income tax provision 1.6 2.0 2.2 2.3 1.6
------------------------------------------------------------------------
Net income 2.3% 2.9% 3.3% 3.4% 2.5%
------------------------------------------------------------------------
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 13.4% to $509.1 million in fiscal 1997 from $449.0
million in fiscal 1996. This increase resulted primarily from, in order of
relative importance, new store openings and relocations, and, to a lesser
extent, a comparable store sales increase of 3.1% (calculated on a 52 week
basis, excluding relocations, using all stores open at least one year).
Comparable store sales for fiscal 1997, benefiting from an aggressive inventory
in-stock position as well as from several significant merchandising "relays" (a
new economy feed line, a significantly enhanced animal health product line, a
completely revamped equine product line, and a new ladies workwear line of
clothing were rolled out to approximately 150 stores during fiscal 1997), were
up 3.1% despite unseasonably cool and excessively rainy spring weather
conditions and unseasonably warm winter weather conditions in November and
December. The Company opened 22 new stores, closed two stores and relocated one
store in fiscal 1997. The Company opened 23 new stores and relocated four stores
during fiscal 1996. At December 27, 1997, the Company operated 228 retail farm
stores versus 208 stores at the end of the prior fiscal year.
The Company slowed down its new store unit growth rate beginning in June 1997
for a period of approximately 18 months (opening 22 new stores in fiscal 1997
rather than the 25 originally contemplated, with current plans calling for the
opening of 18 new stores in fiscal 1998 rather than the 28 originally
contemplated) in order to focus its efforts on rejuvenating the merchandise mix
and improving comparable store sales. The Company anticipates resuming its
approximate 12% overall new store unit growth rate each year beginning in fiscal
1999 (the Company has presently identified over 200 potential new markets).
The Company is undertaking major steps to build a stronger foundation to
better support the Company's growth plans going forward. Some of the major steps
taken recently include (i) strengthening the executive management team with the
hiring of Gerald W. Brase, Senior Vice President of Merchandising and Marketing,
and Michael E. Brown, Senior Vice President of Operations, (ii) rejuvenating the
merchandising mix by "relaying" a significant portion of over 150 stores in a
relatively short period of time (several additional major "Spring 1998
Merchandising Initiatives" are already under way in the first quarter of fiscal
1998, of which the new "lawn and garden merchandising relay" is probably the
most powerful new merchandising presentation the Company has implemented to
date), (iii) investing in the infrastructure, both in people (the Company is
planning a considerable increase in its commitment to store payroll in fiscal
1998) and in technology to create competitive advantage (in addition to
continually enhancing the new point-of-sale system, aggressively pursuing
"electronic data interchange" (EDI) with the Company's vendor partners, and
introducing lap-top computers with full "intranet" capabilities to the field
operators, the Company has selected SAP America, Inc. ("SAP") to be its
"world-class long-term solution" with respect to merchandising and distribution
systems, which are planned to be implemented by mid-1999), (iv) improving the
internal processes
11
<PAGE> 14
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------
(which range from tightening shrinkage control programs to implementing a new
grand opening process for all new stores); and (v) improving the marketing and
advertising programs (the Company has already signed John Lyons, a renowned
equine specialist, as its national equine spokesman and, with the support of its
vendor partners, the Company plans to further improve the "reach" and
"frequency" of its advertising mainly through the expanded use of radio and, for
the first time, through the use of a national television campaign which will
feature George Strait, a renowned country music entertainer, as national
spokesman for the Company).
The gross margin rate decreased .2 percentage points to 25.8% of sales
in fiscal 1997 from 26.0% in fiscal 1996 mainly due to higher shrinkage expense.
As a percent of sales, selling, general and administrative expenses increased
.7 percentage points to 20.5% for fiscal 1997 from 19.8% for fiscal 1996. On an
absolute basis, selling, general and administrative expenses increased 17.8% to
$104.7 million for fiscal 1997 from $88.8 million in fiscal 1996. The increase
in expenses on a percentage of sales basis was primarily due to costs associated
with new stores, the incremental costs of certain planned infrastructure
investments (such as the new point-of-sale system and related "frame relay
costs") as well as the leverage loss attributable to the soft comparable store
sales performance. The increase in absolute dollars was primarily due to costs
associated with new store openings and relocations (new and relocated stores
have considerably higher occupancy costs, primarily rent, than the existing
store base), and, to a lesser extent, from a reserve for management
reorganization costs (primarily severance, related benefits and other costs
associated with changes in certain management personnel) totaling approximately
$1.2 million pretax (or approximately $.7 million net of tax). Depreciation and
amortization expense increased 33.2% over the prior year due mainly to costs
associated with new and relocated stores.
Net interest expense increased 3.4% over the prior year. The increase in
interest expense reflects additional borrowings under the Credit Agreement to
fund the Company's growth and expansion plans, resulting in a higher average
outstanding balance under the revolving credit loan in fiscal 1997 compared to
fiscal 1996.
The Company's effective tax rate increased 0.9 percentage points to 41.0% in
fiscal 1997 from 40.1% in fiscal 1996 primarily due to a higher effective state
income tax rate in fiscal 1997.
As a result of the foregoing factors, net income decreased 11.1% to $11.8
million in fiscal 1997 from $13.2 million in fiscal 1996. As a percent of sales,
net income decreased 0.6 percentage points to 2.3% of sales in fiscal 1997 from
2.9% of sales in fiscal 1996. Excluding the effect of the reserve for management
reorganization costs, net income for fiscal 1997 would have been approximately
$12.5 million, a decrease of 5.8% from fiscal 1996 or, as a percentage of sales,
2.4% for fiscal 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 17.0% to $449.0 million in fiscal 1996 from $383.9
million in fiscal 1995. This increase resulted primarily from, in order of
relative importance, new store openings and relocations, and, to a lesser
extent, a comparable store sales increase of 2.5% (calculated on a 52 week
basis, excluding relocations, using all stores open at least one year). To
stimulate comparable store sales, the Company has critically reevaluated the
business and developed new merchandising and marketing strategies (the focus of
which will be on the Company's core customer, the American farmer and rancher)
to accelerate the rate of change in product offerings over the next several
years. The Company's goal is to aggressively pursue and introduce new and
innovative products and product lines, enhance existing product assortments and
improve in-stock position in key product categories. The Company believes these
efforts will rejuvenate the stores, create excitement with the customers and
store associates and build stronger comparable store sales. The Company opened
23 new stores and relocated four stores in fiscal 1996. The Company opened 20
new stores and relocated two stores during fiscal 1995. At December 28, 1996,
the Company operated 208 retail farm stores versus 185 stores at the end of the
prior fiscal year.
The gross margin rate increased .3 percentage points to 26.0% of sales in
fiscal 1996 from 25.7% in fiscal 1995. This increase resulted primarily due to
the positive mix effect of sales of lower margin merchandise representing a
smaller portion of total sales in fiscal 1996 compared to fiscal 1995, an
improved gross margin rate in certain product categories and a reduction in the
LIFO provision, partially offset by higher freight costs.
As a percent of sales, selling, general and administrative expenses increased
.6 percentage points to 19.8% for fiscal 1996 from 19.2% for fiscal 1995. On an
absolute basis, selling, general and administrative expenses increased 20.7% to
$88.8 million for fiscal 1996 from $73.6 million in fiscal 1995. The increase in
expenses on a percentage of sales basis
12
<PAGE> 15
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------
was a result of the leverage loss resulting from the soft comparable store sales
performance. The increase in absolute dollars was primarily attributable to
costs associated with new store openings and relocations (new and relocated
stores have considerably higher occupancy costs, primarily rent, than the
existing store base). Depreciation and amortization expense increased 34.1% over
the prior year due mainly to costs associated with new and relocated stores.
Net interest expense increased 36.3% to $2.4 million in fiscal 1996 from $1.7
million in fiscal 1995. The increase in interest expense reflects additional
borrowings under the Credit Agreement to fund the Company's growth and expansion
plans, resulting in a higher average outstanding balance under the revolving
credit loan in fiscal 1996 compared to fiscal 1995.
The Company's effective tax rate increased 0.3 percentage points to 40.1% in
fiscal 1996 from 39.8% in fiscal 1995 primarily due to a higher effective state
income tax rate in fiscal 1996.
As a result of the foregoing factors, net income increased 5.7% to $13.2
million in fiscal 1996 from $12.5 million in fiscal 1995. As a percent of sales,
net income decreased 0.4 percentage points to 2.9% of sales in fiscal 1996 from
3.3% of sales in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company's primary ongoing cash
requirements are those necessary for the Company's expansion, remodeling and
relocation programs, including inventory purchases and capital expenditures. The
Company's primary ongoing sources of liquidity are funds provided from
operations, commitments available under its credit agreement and short-term
trade credit. The Company's inventory and accounts payable levels typically
build in the first and again in the third fiscal quarters in anticipation of the
spring and fall selling seasons.
At December 27, 1997, the Company's inventories had increased $27.6 million
to $151.7 million from $124.1 million at December 28, 1996. The increase was
primarily attributable to development of new products and expanded product
lines, an aggressive inventory in-stock position, and, to a lesser extent,
additional inventory for new stores. Short-term trade credit, which represents a
source of financing for inventory, increased $5.1 million to $52.7 million at
December 27, 1997 from $47.6 million at December 28, 1996. Trade credit arises
from the Company's vendors granting extended payment terms for inventory
purchases. Payment terms vary from 30 days to 180 days depending on the
inventory product.
At December 27, 1997, the Company had working capital of $82.9 million, which
represented a $16.9 million increase from December 28, 1996. This increase
resulted primarily from an increase in inventory (attributable mainly to the
factors described above) without a corresponding increase in accounts payable
and from an increase in prepaid expenses (mainly certain prepaid rent payments
and construction-in-progress costs pertaining to certain planned sale/leaseback
transactions) offset, in part, by an increase in accrued expenses (mainly
incremental costs relating to new stores) and a decrease in cash and cash
equivalents. The Company's working capital increased $2.1 million in fiscal 1996
to $66.0 million from $63.9 million in fiscal 1995. This increase resulted
primarily from an increase in cash and cash equivalents and trade receivables
offset, in part, by an increase in accrued expenses (mainly incremental costs
relating to new stores) and a decrease in prepaid expenses (mainly lower
construction-in-progress costs compared to the previous year).
In August 1994, the Company entered into a new revolving credit agreement
with The First National Bank of Boston, as agent and for itself (the "Agent")
and First American National Bank (the "Credit Agreement"). Under the Credit
Agreement, the Company originally had available total commitments aggregating at
any one time up to a maximum of $30 million.
In July 1996, the Company entered into an amendment (the "First Amendment")
to its Credit Agreement with the Agent and First American National Bank whereby
the Company (i) increased the maximum total commitments available under the
Credit Agreement from $30 million to $45 million and (ii) extended the
expiration date of the Credit Agreement from August 31, 1997 to August 31, 1999
(the date upon which any remaining borrowings must be repaid). At December 27,
1997, the Company had $23.4 million of borrowings outstanding under the Credit
Agreement. The Company expects to continue borrowing amounts under the Credit
Agreement from time to time to fund its growth and expansion programs and as a
source of additional working capital.
Operations used net cash of $5.1 million in fiscal 1997, generated net cash
of $21.2 million in fiscal 1996 and used $11.3 million in fiscal 1995. The use
of cash in fiscal 1997 resulted primarily from inventories increasing at a
faster
13
<PAGE> 16
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------
rate than accounts payable compared to the prior year and, to a lesser extent,
from higher prepaid expenses (mainly certain rent payments and
construction-in-progress costs) and a decrease in income taxes currently payable
compared to fiscal 1996 due to timing of payments. The cash generated in fiscal
1996 resulted primarily from inventories increasing at approximately the same
rate as accounts payable (compared to inventories increasing at a significantly
faster rate than accounts payable in fiscal 1997 and 1995), as well as from a
decrease in prepaid expenses and an increase in accrued expenses compared to the
prior year.
Cash used in investing activities of $7.5 million, $6.8 million and $8.5
million for fiscal 1997, 1996 and 1995, respectively, resulted primarily from
capital expenditures for new, relocated and remodeled stores, partially offset
by proceeds from the sale of certain properties (primarily land and buildings).
Financing activities in fiscal 1997 provided $8.2 million in cash which
represented a $14.7 million increase over the $6.6 million in cash used in
fiscal 1996. This increase resulted primarily from net borrowings of
approximately $11.4 million under the Credit Agreement in fiscal 1997 compared
to net repayments of approximately $3.1 million in fiscal 1996 offset in part,
by scheduled repayments of long-term debt and capital lease obligations totaling
approximately $1.8 million in fiscal 1997 versus approximately $1.5 million in
fiscal 1996 and the repurchase of 1,763 shares of Series B Preferred Stock for
approximately $1.8 million (including accrued dividends) compared to the
repurchase of 1,762 shares of Series B Preferred Stock for approximately $1.8
million (including accrued dividends) in fiscal 1996. Financing activities in
fiscal 1996 used $6.6 million in cash which represented a $17.6 million increase
over the $11.0 million in cash provided in fiscal 1995. This increase resulted
primarily from net repayments of approximately $3.1 million under the Credit
Agreement in fiscal 1996 compared to net borrowings of approximately $15.1
million in fiscal 1995 and, to a lesser extent, from scheduled repayments of
long-term debt and capital lease obligations totaling approximately $1.5 million
in fiscal 1996 versus approximately $1.4 million in fiscal 1995, partially
offset by a lower cash outlay for the repurchase of 1,762 shares of series B
Preferred Stock for approximately $1.8 million (including accrued dividends)
compared to the repurchase of 2,350 shares of Series B Preferred Stock for
approximately $2.4 million (including accrued dividends) in fiscal 1995.
The Company's capital additions were $9.1 million, $9.6 million and $10.1
million in fiscal 1997, 1996 and 1995, respectively. The majority of the capital
additions were for store fixtures, equipment and leasehold improvements for new
stores and remodeling of existing stores. The Company expects that its capital
expenditures for fiscal 1998 will be approximately $9.0 million to $11.0
million, consisting primarily of leasehold improvements and, to a lesser extent,
fixtures and equipment, assuming successful implementation of its growth
strategy through 18 planned new store openings. However, the Company cannot
predict with certainty the amount of such expenditures because such new stores
may be constructed, leased or acquired from others. The estimated cash required
to open a new store is approximately $.8 to $1.0 million, the majority of which
is for the initial acquisition of inventory and capital expenditures,
principally leasehold improvements, fixtures and equipment, and the balance of
which is for store opening expenses.
In fiscal 1997, the Company completed the installation of its major financial
systems, thereby providing the Company with advanced point-of-sale and financial
information systems which are fully Year 2000 compliant (processing concerns
created by the change in the century and traditional two-digit year fields
embedded in most data processing systems is commonly referred to as the "Year
2000" concern). The Company's new point-of-sale and financial systems were
designed and installed with Year 2000 compliance in mind and contain provisions
for full four-digit year fields, thus enabling processing to take place for
transactions which go beyond the year 1999.
In addition to these systems, the Company operates its merchandising and
inventory replenishment/distribution systems with software that was developed in
the early 1980's and that is not Year 2000 compliant. However, early in fiscal
1997, the Company began planning for the replacement of this software with a new
merchandise and warehouse management system designed by SAP which, once
installed, will be completely integrated with existing systems and fully Year
2000 compliant. The Company has critically evaluated the time frame for
implementation and is confident that the SAP system can be installed and
operational by June 1999, timing which affords the Company some flexibility
prior to the need to execute transactions with Year 2000 ramifications. The
total estimated cost for the full installation of these systems (not solely Year
2000 compliance efforts) is approximately $10.0 million.
The Company had previously identified in its strategic plan the need to
update or replace its merchandising and inventory replenishment/distribution
systems, primarily as a means of accommodating the Company's store growth
14
<PAGE> 17
Tractor Supply Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------
plans and the burden such growth plans would place on the Company's existing
systems. Further, the absence of Year 2000 compliance was also considered and a
preliminary plan for compliance had been designed. Consequently, if needed to
ensure full Year 2000 compliance of the existing systems, the Company is
prepared to execute a separate plan which entails the installation of a new RISC
AS/400 computer which will permit more efficient operations and allow easier
conversion of existing code to bring the existing systems into Year 2000
compliance. This process has been established as a stand-by measure, should the
installation of new SAP systems be delayed beyond a time frame which would
reasonably permit timely recovery. If needed, this plan will commence in
September 1998 and be complete by March 1999, at an approximate cost of $1
million.
The Company's financial information systems interface with third party
software which is heavily dependent on date fields. These "sub-systems"
primarily involve EDI and outside payroll processing services. The vendors
supplying the critical translation routines are currently in the process of
completing required modifications to be Year 2000 compliant by the end of fiscal
1998.
As a fundamental business consideration, the Company depends heavily on its
vendors to meet the purchasing requirements dictated by the Company's business
needs. To that end, the Company plans to explore with each of its critical
vendors the impact the Year 2000 issue will have on their ability to source
products for the Company and process purchase orders with delivery requirements
and terms involving the Year 2000. The Company expects each of these vendors
will likewise take measures to address the risks imposed by the Year 2000 and
adequately prepare their own processing systems so that their businesses will
not be interrupted as a result of this issue. Accordingly, the Company does not
expect any significant interruption in its ability to source its product needs
with existing vendors. As an ongoing measure, the Company will continue to
address this risk with each new vendor to ensure similar safeguards.
Finally, the Company further recognizes the potential impact the Year 2000
issue may have relative to its customers, creditors and other service providers.
The Company has reviewed its exposure to business interruption or substantial
loss in these areas and believes no risk of material adverse consequences
presently exists or that any risks previously identified will be resolved before
the end of fiscal 1999.
The Company believes that its cash flow from operations, borrowings available
under the Credit Agreement and short-term trade credit will be sufficient to
fund the Company's operations and its growth and expansion plans over the next
several years.
The Company does not believe its operations have been materially affected by
inflation. The Company has been successful, in many cases, in reducing or
mitigating the effects of inflation principally by taking advantage of vendor
incentive programs, economies of scale from increased volume of purchases and
selective buying from the most competitive vendors without sacrificing quality.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 128, "Earnings per Share." This Statement establishes
standards for computing and presenting earnings per share (EPS), simplifying the
standards previously provided in APB Opinion 15. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The impact of this statement on the Company's
earnings per share has been reflected on the face of the income statement.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." For fiscal years beginning after December 15, 1997, these
statements respectively require (i) the reporting and display of comprehensive
income and its components and (ii) the reporting of certain information about
operating segments and related information about the products and services of
such segments. The Company does not anticipate the adoption of these statements
to have a significant impact on the reporting of results of operations.
15
<PAGE> 18
Tractor Supply Company
Report of Independent Accountants
----------
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF TRACTOR SUPPLY COMPANY
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Tractor Supply Company at
December 27, 1997 and December 28, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 27,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Nashville, Tennessee
January 22, 1998
16
<PAGE> 19
Tractor Supply Company
Balance Sheets
----------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,477 $ 12,948
Accounts receivable, net 5,180 4,930
Inventories 151,749 124,082
Prepaid expenses 4,201 1,657
----------------------
Total current assets 169,607 143,617
----------------------
Land 6,851 7,679
Buildings and improvements 45,903 40,114
Machinery and equipment 22,362 18,117
Construction in progress 843 2,499
----------------------
75,959 68,409
Accumulated depreciation and amortization (23,551) (18,883)
----------------------
Property and equipment, net 52,408 49,526
----------------------
Deferred income taxes 710 1,064
Other assets 1,355 1,375
----------------------
Total assets $ 224,080 $ 195,582
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,708 $ 47,591
Accrued expenses 21,188 15,973
Current maturities of long-term debt 737 665
Current portion of capital lease obligations 731 1,020
Income taxes currently payable 2,310 2,897
Deferred income taxes 9,064 9,517
----------------------
Total current liabilities 86,738 77,663
----------------------
Revolving credit loan 23,419 12,000
Other long-term debt 5,177 5,914
Capital lease obligations 2,538 3,252
Other long-term liabilities 424 949
Excess of fair value of assets acquired over cost less accumulated
amortization of $2,695 and $2,515, respectively 895 1,075
Redeemable preferred stock -- 1,763
Commitments (Note 4)
Stockholders' equity:
Common stock, 100,000,000 shares authorized; $.008 par value; 8,731,218 and
8,718,000 shares issued and outstanding in 1997 and 1996, respectively 70 70
Additional paid-in capital 41,926 41,685
Retained earnings 62,893 51,211
----------------------
Total stockholders' equity 104,889 92,966
----------------------
Total liabilities and stockholders' equity $ 224,080 $ 195,582
----------------------
</TABLE>
The accompany notes are an integral part of this statement.
17
<PAGE> 20
Tractor Supply Company
Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $509,052 $449,029 $383,903
Cost of merchandise sold 377,510 332,378 285,247
-----------------------------------------
Gross margin 131,542 116,651 98,656
Selling, general and administrative expenses 104,661 88,827 73,587
Depreciation and amortization 4,509 3,385 2,524
-----------------------------------------
Income from operations 22,372 24,439 22,545
Interest expense, net 2,439 2,358 1,730
-----------------------------------------
Income before income taxes 19,933 22,081 20,815
Income tax provision 8,172 8,845 8,293
-----------------------------------------
Net income $ 11,761 $ 13,236 $ 12,522
-----------------------------------------
Net income per share - basic $ 1.34 $ 1.50 $ 1.40
-----------------------------------------
Net income per share - assuming dilution $ 1.34 $ 1.49 $ 1.40
-----------------------------------------
</TABLE>
The accompany notes are an integral part of this statement.
18
<PAGE> 21
Tractor Supply Company
Statement of Changes in Stockholders' Equity
----------
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stockholders' equity at
December 31, 1994 $ 70 $ 41,685 $26,062 $ 67,817
Preferred stock dividend (388) (388)
Net income 12,522 12,522
----------------------------------------------------
Stockholders' equity at
December 30, 1995 70 41,685 38,196 79,951
Preferred stock dividend (221) (221)
Net income 13,236 13,236
----------------------------------------------------
Stockholders' equity at
December 28, 1996 70 41,685 51,211 92,966
Preferred stock dividend (79) (79)
Issuance of common stock under employee
stock purchase plan (13,218 shares) 241 241
Net income 11,761 11,761
----------------------------------------------------
Stockholders' equity at
December 27, 1997 $ 70 $ 41,926 $62,893 $104,889
----------------------------------------------------
</TABLE>
The accompany notes are an integral part of this statement.
19
<PAGE> 22
Tractor Supply Company
Statements of Cash Flows
----------
(in thousands)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,761 $ 13,236 $ 12,522
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,509 3,385 2,524
Gain on sale of property and equipment (23) (904) (278)
Deferred income taxes (99) (261) (275)
Change in assets and liabilities:
Accounts receivable (326) (1,200) (1,566)
Inventory (27,667) (11,382) (26,384)
Prepaid expenses (2,555) 3,360 (3,302)
Accounts payable 5,117 11,066 4,572
Accrued expenses 5,236 4,336 704
Income taxes currently payable (551) 181 (1,017)
Other (539) (636) 1,151
---------------------------------------------------
Net cash provided by (used in) operating activities (5,137) 21,181 (11,349)
---------------------------------------------------
Cash flows from investing activities:
Capital expenditures (9,120) (9,635) (10,109)
Proceeds from sale of property and equipment 1,636 2,871 1,582
---------------------------------------------------
Net cash used in investing activities (7,484) (6,764) (8,527)
---------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayment) under revolving credit loan 11,419 (3,093) 15,093
Principal payments under capital lease obligations (1,003) (880) (849)
Repayment of long-term debt (665) (600) (542)
Net proceeds from sale of common stock 241 -- --
Redemption of preferred stock (1,763) (1,762) (2,350)
Payment of preferred stock dividend (79) (221) (388)
---------------------------------------------------
Net cash provided by (used in) financing activities 8,150 (6,556) 10,964
---------------------------------------------------
Net increase (decrease) in cash (4,471) 7,861 (8,912)
Cash and cash equivalents at beginning of year 12,948 5,087 13,999
---------------------------------------------------
Cash and cash equivalents at end of year $ 8,477 $ 12,948 $ 5,087
---------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(NOTE 1):
Cash paid during the year for:
Interest $ 2,583 $ 2,723 $ 1,732
Income taxes 8,643 9,196 8,876
</TABLE>
The accompany notes are an integral part of this statement.
20
<PAGE> 23
Tractor Supply Company
Notes to Financial Statements
----------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Tractor Supply Company is a specialty retailer which supplies the daily
farming and maintenance needs of its target customers: hobby, part-time and
full-time farmers and ranchers, as well as suburban customers, contractors and
tradesmen. The Company, which was founded in 1938, operated 228 retail farm
stores in 26 states as of December 27, 1997.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. Fiscal
years 1997, 1996 and 1995 consist of 52 weeks.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes to
conform with the current year presentation.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles inherently requires estimates and assumptions by
management that affect the reported amounts of assets and liabilities, revenues
and expenses and related disclosures. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company has cash and cash equivalents, short-term trade receivables and
payables and long-term debt instruments, including capital leases. The carrying
values of cash and cash equivalents, trade receivables and trade payables equal
current fair value. The terms of the Company's revolving credit agreement
include variable interest rates which approximate current market rates. The
Company's fixed rate debt has an approximate fair value of $6.3 million, bearing
interest at 10.32% which is above current rates available; however, the related
debt agreement includes certain pre-payment penalties which make refinancing
uneconomical (Notes 2 and 3).
Inventories
Inventories, which consist primarily of farm maintenance and animal products,
general maintenance products, lawn and garden products, light truck equipment
and work clothing, are stated at cost, which is less than market value, with
cost being determined on the last-in, first-out (LIFO) method. If the first-in,
first-out (FIFO) method of accounting for inventory had been used, inventories
would have been approximately $6,370,000 and $6,163,000 higher than reported at
December 27, 1997 and December 28, 1996, respectively.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128-Earnings per Share ("SFAS 128"). SFAS
128 requires companies with complex capital structures that have publicly held
common stock or common stock equivalents to present both basic and diluted
earning per share ("EPS") on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS previously required by
Accounting Principles Board Opinion No. 15 ("APB 15"). Basic EPS is calculated
as income available to common stockholders divided by the weighted average
number of shares outstanding during the period. Diluted EPS (previously referred
to as fully diluted EPS) is calculated using the "if converted" method for
convertible securities and the treasury stock method for options and warrants.
The weighted average number of shares of common stock outstanding for fiscal
1997, 1996 and 1995 was 8,724,915, 8,718,000 and 8,718,000, respectively. The
net income available to common stockholders for fiscal 1997, 1996 and 1995 was
$11,705,000, $13,039,000 and $12,165,000, respectively, after giving effect to
preferred stock dividends of $56,000 in fiscal 1997, $197,000 in fiscal 1996 and
$357,000 in fiscal 1995.
Excess of Fair Value of Assets Acquired Over Cost
On December 26, 1982, the Company began operations with the acquisition of
certain assets and assumption of certain obligations. The unallocated excess of
fair value of assets acquired over cost was approximately $3,590,000 and is
being amortized over 20 years on a straight-line basis.
21
<PAGE> 24
Tractor Supply Company
Notes to Financial Statements
----------
Property and Equipment
The Company owns the land and buildings of 74 of its stores. Property and
equipment are carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets. Generally,
buildings are depreciated over 31 years and machinery and equipment is
depreciated over seven years.
Revenue Recognition
The Company recognizes revenue at the time of customer purchase.
Income Taxes
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Store Opening Costs
Costs incurred in connection with opening new stores are expensed as
incurred.
Advertising Costs
Advertising costs primarily consist of expenses incurred in connection with
newspaper circulars and, to a lesser extent, radio and newspaper advertisements
and other promotions. Expenses incurred are charged to operations at the time
the related advertising first takes place. Advertising expense for fiscal 1997,
1996 and 1995 was approximately $8,771,000, $8,157,000 and $6,837,000,
respectively.
Stock-based Compensation Plans
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plan and its stock purchase plan (Note 9).
Cash Flows
The Company considers temporary cash investments, with an original maturity
of three months or less, to be cash equivalents.
NOTE 2-REVOLVING CREDIT AGREEMENT:
In August 1994, the Company entered into a new revolving credit agreement
with The First National Bank of Boston, as agent and for itself (the "Agent")
and First American National Bank (the "Credit Agreement"). Under the Credit
Agreement, the Company originally had available total commitments aggregating at
any one time up to a maximum of $30 million.
In July 1996, the Company entered into an amendment (the "First Amendment")
to its Credit Agreement with the Agent and First American National Bank whereby
the Company (i) increased the maximum total commitments available under the
Credit Agreement from $30 million to $45 million and (ii) extended the
expiration date of the Credit Agreement from August 31, 1997 to August 31, 1999
(the date upon which any remaining borrowings must be repaid). There were no
changes to any of the other material terms and conditions of the Credit
Agreement as a result of the First Amendment.
All borrowings under the Credit Agreement bear interest, at the Company's
option, at either the base rate of the Agent (8.50% at December 27, 1997) plus
.25% per annum or the LIBOR rate (5.97% at December 27, 1997) plus .75% per
annum provided, however, that upon the occurrence of certain events, the
interest rate increases to the base rate of the Agent plus .50% per annum or the
LIBOR rate plus 1.0% per annum. The Company is also required to pay, quarterly
in arrears, a commitment fee of .25% per annum on the average daily unused
portion of the credit line. There are no compensating balance requirements
associated with the Credit Agreement. The Credit Agreement is unsecured.
The Credit Agreement contains certain restrictions regarding additional
indebtedness; employee loans; business operations; guarantees; investments;
mergers, consolidations and sales of assets; transactions with subsidiaries or
affiliates; and liens. In addition, the Company must comply with certain annual
restrictions regarding net worth, working capital, ratios of total liabilities
to net worth and interest coverage and current ratio requirements. The Company
was in compliance with all covenants at December 27, 1997.
22
<PAGE> 25
Tractor Supply Company
Notes to Financial Statements
-----------
NOTE 3-OTHER LONG-TERM DEBT:
Other long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Mortgage Note $ 5,914 $ 6,579
Less: current maturities (737) (665)
----------------------------
$ 5,177 $ 5,914
----------------------------
</TABLE>
In April 1988, the Company issued notes (the "Mortgage Notes") to Mutual Life
Insurance Company of New York and MONY Life Insurance Company of America
pursuant to a Note Agreement which was amended in April 1991, February 1992 and
July 1993 (the "Mortgage Loan Agreement"). The Mortgage Notes bear interest at a
minimum 10.32% rate until their maturity in January 2004. The Mortgage Notes
require monthly payments, including interest, of approximately $109,000 through
January 2004.
The Mortgage Loan Agreement is secured by first mortgages on certain of the
Company's existing properties. The Mortgage Loan Agreement contains certain
restrictions regarding sales of assets, mergers, consolidations, investments,
sales or discounting of receivables, operating leases and, unless the Company
satisfies certain net income, indebtedness and tangible net worth tests, cash
dividends on and redemptions of capital stock. In addition, the Company must
comply with certain restrictions regarding tangible net worth, working capital,
funded debt, ratios of indebtedness to capitalization, FIFO inventory to current
debt, interest coverage, fixed charge coverage, earnings coverage and current
ratio requirements. The Company was in compliance with these restrictions at
December 27, 1997.
The combined aggregate maturities of the Mortgage Notes for each of the next
five years are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 737
1999 817
2000 905
2001 1,003
2002 1,112
</TABLE>
NOTE 4-LEASES:
The Company leases office, warehouse/distribution and retail space,
transportation equipment and other equipment under various noncancelable
operating leases. The leases have varying terms and expire at various dates
through June 2020. The store leases typically have initial terms of between 10
and 15 years, with one to three renewal periods of five years each, exercisable
at the Company's option. Generally, most of the leases require the Company to
pay taxes, insurance and maintenance costs.
Rent expense for all noncancelable operating leases for fiscal 1997, 1996 and
1995 was approximately $27,557,000, $21,358,000 and $16,057,000 respectively.
Future minimum payments, by year and in the aggregate, under leases with
initial or remaining terms of one year or more consist of the following (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
- -----------------------------------------------------------------------------
<S> <C> <C>
1998 $ 1,028 $ 18,030
1999 787 17,491
2000 464 16,104
2001 464 15,663
2002 464 13,570
Thereafter 1,261 77,875
----------------------
Total minimum lease payments 4,468 $ 158,733
---------
Amount representing interest (1,199)
-------
Present values of net minimum lease payments 3,269
Less: current portion (731)
-------
Long-term capital lease obligations $ 2,538
-------
</TABLE>
23
<PAGE> 26
Tractor Supply Company
Notes to Financial Statements
----------
Note 5-INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $6,720 $7,442 $6,999
State 1,551 1,664 1,569
--------------------------------
Total current 8,271 9,106 8,568
--------------------------------
Deferred tax expense:
Federal (116) (229) (238)
State 17 (32) (37)
--------------------------------
Total deferred (99) (261) (275)
--------------------------------
Total provision $8,172 $8,845 $8,293
--------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
DECEMBER 27, DECEMBER 28,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Current tax assets:
Inventory valuation $ 3,852 $ 3,339
Other 1,543 1,378
--------------------------------
5,395 4,717
--------------------------------
Current tax liabilities:
Inventory basis difference 13,977 13,922
Other 482 312
--------------------------------
14,459 14,234
--------------------------------
Net current tax liabilities $ 9,064 $ 9,517
--------------------------------
Non-current tax assets:
Capital lease obligation basis difference $ 1,017 $ 1,304
Fixed assets basis difference 338 458
Other 1,356 1,382
--------------------------------
2,711 3,144
--------------------------------
Non-current tax liabilities:
Depreciation 1,582 1,613
Capital lease assets basis difference 419 467
--------------------------------
2,001 2,080
--------------------------------
Net non-current tax assets $ 710 $ 1,064
--------------------------------
</TABLE>
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $ 6,977 $ 7,729 $ 7,285
Tax effect of:
State income taxes, net of federal tax benefit 1,008 1,082 1,020
Amortization of negative goodwill (63) (63) (63)
Other 250 97 51
-----------------------------------
$ 8,172 $ 8,845 $ 8,293
-----------------------------------
</TABLE>
24
<PAGE> 27
Tractor Supply Company
Notes to Financial Statements
-------------------
A substantial portion of the current deferred tax liability of the Company
relates to the tax treatment of certain inventory and other assets acquired by
the Company in connection with an acquisition in 1982. Recent cases cast some
doubt as to whether the Company's tax position with respect to such inventory
and other assets would be sustained if challenged. If the Company were
challenged on its tax position, no assurance can be given as to the outcome.
However, the Company believes, based upon its understanding of the resolution of
similar situations by others, that it has established adequate reserves and
that, accordingly, resolution of this issue would not have a material adverse
effect on its results of operations or financial position.
NOTE 6-CAPITAL STOCK:
The authorized capital stock of the Company consists of common stock and
preferred stock. In April 1997, the stockholders of the Company approved an
amendment to the Company's Restated Certificate of Incorporation, as amended, to
increase the number of authorized shares of Common Stock from 9,500,000 shares
to 100,000,000 shares. The Company is also authorized to issue 40,000 shares of
Preferred Stock, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors.
In May 1991, in accordance with a Plan of Reorganization and Exchange
Agreement, the Company reacquired 2,890,151 shares of common stock in exchange
for 5,875 shares of Series B Preferred Stock (the "Preferred Stock") and cash.
The Preferred Stock has a par value of $1 per share and a stated value and
liquidation preference of $1,000 per share. Dividends on the Preferred Stock are
cumulative and payable semi-annually on May 1st and November 1st at a rate of
8.0% per annum on the stated value of the outstanding shares, increasing to 10%
on May 1, 1999, 11% on May 1, 2000, 12% on May 1, 2001 and 13% thereafter. On
May 26, 1995, the Company repurchased 2,350 shares of the Series B Preferred
Stock at a total repurchase price of approximately $2,363,000 (including accrued
dividends totaling approximately $13,000). On May 24, 1996, the Company
repurchased 1,762 shares of the Series B Preferred Stock at a total repurchase
price of approximately $1,771,000 (including accrued dividends totaling
approximately $9,000). On May 23, 1997, the Company repurchased the remaining
1,763 shares of the Series B Preferred Stock at a total repurchase price of
approximately $1,772,000 (including accrued dividends totaling approximately
$9,000).
NOTE 7-RELATED PARTY TRANSACTIONS:
In 1986, the Company entered into capitalized sale-leaseback transactions
with certain officers of the Company for seven of its stores. The Company sold,
leased back and provided the financing for seven of its real properties at
estimated fair values totaling $2,575,000. The related gains arising from the
sale of these properties have been deferred and are being amortized on a
straight-line basis over the terms of the related leases. Properties under
capital leases acquired through sale-leaseback transactions have been reduced by
the related deferred gains on the properties and are classified with property
and equipment. The leases have basic terms of 20 years with options to renew for
two successive five-year terms. The Company has an option to purchase the leased
properties after December 31, 1995. Rent payments under these leases were
approximately $425,000 in fiscal 1997 and 1996 and $319,000 in fiscal 1995. All
the officers have repaid their outstanding obligations under their notes to the
Company. The balance of these capitalized lease obligations, included in total
capital lease obligations at December 27, 1997, was $1,692,000.
The Company leases its management headquarters from a partnership in which
certain stockholders of the Company are general partners. The remaining lease
term is ten years, with the Company having exercised both remaining five-year
renewal options in fiscal 1996, with monthly rent set at $35,000 and $39,000 per
month, respectively. Rent payments under this lease were $417,000 in fiscal 1997
and $384,000 in fiscal 1996 and 1995.
The Company leased one of its stores from a corporation in which certain
executive officers and directors of the Company are the sole shareholders,
directors and executive officers. The initial term of the lease is twenty years,
commencing in September 1991 and ending in August 2011, subject to renewal at
the option of the Company for two successive five-year terms. Monthly rent
ranged from $8,437 for the first five years to $9,375 for the final five years
of the initial term. The related land was leased by the lessor from the Company
pursuant to a ground lease agreement dated July 1, 1994 providing for a
fifty-year lease term, commencing in July 1991 and ending in June 2011 and
annual rental payments that range from $15,000 to $24,300. In October 1996, the
Board approved a proposed transaction to relocate this store to a larger
facility. In June 1997, the Company (i) acquired the store building from the
lessor for $650,000, (ii) canceled the ground lease agreement with the lessor
respecting said property, (iii) sold the store (building and land) to an
unrelated real estate developer for $750,000 (which is approximately $650,000
below the appraised value of said property), and (iv) leased a new larger store
from the same developer (said new store having been built by the developer on a
nearby site owned by them of approximately four acres and in accordance with the
Company's specifications), pursuant to which the Company received a discounted
25
<PAGE> 28
Tractor Supply Company
Notes to Financial Statements
-----------------------------
rent (approximately $6.30 per square foot initially compared to the market rate
of approximately $8.60 per square foot or approximately $750,000 over the
fifteen year initial lease) in consideration for the reduced purchase price on
the store building and land.
The Company also leases one store location from an S corporation owned by
certain officers of the Company. Rent payments under this lease were
approximately $101,000 in each of the fiscal years 1997, 1996 and 1995.
NOTE 8-RETIREMENT BENEFIT PLANS:
The Company has a defined contribution benefit plan, the Tractor Supply
Company Restated 401(k) Retirement Plan (the "Plan"), which provides retirement
and other benefits for the Company's employees. Employees become eligible for
participation upon completion of 12 consecutive months of employment and 1,000
hours or more of service. The Company matches 100% of the first 3% of the
employee's elective contributions plus an additional 50% of any additional
elective contribution (limited to 5% of the employee's total compensation).
Company contributions to the Plan during fiscal 1997 were approximately
$733,000.
Effective March 26, 1994, the Company's Employee Stock Ownership Plan
("ESOP") was merged into the Plan (formerly known as the TSC Industries, Inc.
Employee 401(k) Retirement Plan). At December 28, 1996, the Plan owned 978,912
shares of the Company's common stock. In 1997, the Company further amended the
Plan to, among other things, provide participants, to the extent applicable,
with the ability to direct the investment of their ESOP funds (consisting of the
Tractor Supply Company common stock and cash) and eliminate the "five year break
in service" payout provision previously continued therein, and simultaneously,
filed a registration statement with the Securities and Exchange Commission
covering the 978,912 shares of the Company's common stock then held by the Plan.
Expense for the Plan for fiscal 1996 and 1995 was approximately $565,000 and
$579,000, respectively.
NOTE 9-STOCK-BASED COMPENSATION PLANS:
Fixed Stock Option Plan
The Company has a stock option plan for officers, directors (including
non-employee directors) and key employees which reserves 1,000,000 shares of
common stock for future issuance under the plan. According to the terms of the
plan, the per share exercise price of options granted shall not be less than the
fair market value of the stock on the date of grant and such options will expire
no later than ten years from the date of grant. In the case of a stockholder
owning more than 10% of the outstanding voting stock of the Company, the
exercise price of an incentive stock option may not be less than 110% of the
fair market value of the stock on the date of grant and such options will expire
no later than five years from the date of grant. Also, the aggregate fair market
value of the stock with respect to which incentive stock options are exercisable
on a tax deferred basis for the first time by an individual in any calendar year
may not exceed $100,000. Options granted vest one-third each year beginning on
the third anniversary date of the grant and expire after ten years.
Plan activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 30,000 $21.68
Granted 52,750 $22.09
Canceled (6,750) $21.71
Outstanding at December 30, 1995 76,000 $21.97
Granted 135,500 $21.62
Canceled (26,500) $21.56
Outstanding at December 28, 1996 185,000 $21.77
Granted 350,500 $18.44
Canceled (35,500) $21.29
Outstanding at December 27, 1997 500,000 $19.47
</TABLE>
26
<PAGE> 29
Tractor Supply Company
Notes to Financial Statements
-----------------------------
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE OPTIONS
YEAR EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 $21.50 - $27.00 21,000 6.18 $ 21.76 21,000
1995 $21.31 - $22.13 37,750 7.10 $ 22.10 0
1996 $21.38 - $25.13 96,250 8.10 $ 21.73 0
1997 $17.75 - $20.00 345,000 9.51 $ 18.42 0
-------- ------
500,000 21,000
-------- ------
</TABLE>
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method prescribed by FASB Statement No. 123, the Company's pro forma
net income and earnings per share for fiscal 1997, 1996 and 1995 would have been
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 11,761 $ 13,236 $ 12,522
Pro forma $ 11,437 $ 13,058 $ 12,451
Net income per share - basic As reported $ 1.34 $ 1.50 $ 1.40
Pro forma $ 1.30 $ 1.48 $ 1.39
Net income per share - assuming dilution As reported $ 1.34 $ 1.49 $ 1.40
Pro forma $ 1.30 $ 1.47 $ 1.39
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 30.8% 25.0% 25.0%
Risk-free interest rate 6.5% 6.75% 6.75%
Average expected life (years) 7.25 6.0 6.5
Dividend yield 0% 0% 0%
Weighted average fair value $8.97 $ 8.92 $9.45
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
IN July 1996, the Company adopted the 1996 Associate Stock Purchase Plan (the
"ASPP") to allow eligible employees of the Company the opportunity to purchase,
through payroll deductions, shares of common stock of the Company at a 15%
discount. In August 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the shares of common stock to be
sold under the ASPP. The ASPP was approved by the Company's stockholders in
April 1997, authorizing the sale of up to 1,000,000 shares of common stock under
the ASPP. During fiscal 1997, an additional 13,218 shares of common stock were
issued by the Company under the ASPP.
27
<PAGE> 30
Tractor Supply Company
Directors and Officers
----------
<TABLE>
<CAPTION>
Directors
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOSEPH H. SCARLETT, JR. THOMAS J. HENNESY, III JOSEPH M. RODGERS (1) (2)
Chairman of the Board Retired Vice Chairman Chairman of the Board
and Chief Executive Officer of the Board The JMR Group, an investment
Tractor Supply Company Tractor Supply Company firm, and former U.S.
Ambassador to France
THOMAS O. FLOOD JOSEPH D. MAXWELL
Senior Vice President- Retired Vice President (1) Audit Committee Member
Administration and Finance, Tractor Supply Company (2) Compensation Committee Member
Treasurer and Chief Financial (*) Committee Chairman
Officer S.P. BRAUD (1)*(2)*
Tractor Supply Company Retired Chief Financial Officer
Service Merchandise Company, Inc.
and President and Director
Braud Design/Build, Inc.
Officers
- -----------------------------------------------------------------------------------------------------------------------------------
JOSEPH H. SCARLETT, JR. JOHN E. CORBIN JAMES R. MCMURRAY
Chairman of the Board and Vice President-Operations Vice President-Information
Chief Executive Officer (Region III) Technology and Chief
Information Officer
GERALD W. BRASE BLAKE A. FOHL
Senior Vice President- Vice President-Marketing STANLEY L. RUTA
Merchandising and Marketing Vice President-Operations
LAWRENCE GOLDBERG (Region II)
MICHAEL E. BROWN Vice President-Logistics
Senior Vice President- DAISY L. VANDERLINDE
Store Operations LEO H. HABERER Vice President-Human Resources
Vice President-Real Estate
THOMAS O. FLOOD
Senior Vice President- MICHAEL J. KINCAID
Administration and Finance, Vice President-Controller
Treasurer and Chief Financial and Secretary
Officer
GARY M. MAGONI
JOHN W. ATKINS Vice President-Operations
Vice President-Farm (Region I)
Merchandising
</TABLE>
28
<PAGE> 31
Tractor Supply Company
Corporate Information
----------------------
Store Support Center
Tractor Supply Company
320 Plus Park Boulevard
Nashville, Tennessee 37217
(615) 366-4600
Transfer Agent and Registrar
The First National Bank of Boston
Shareholder Services
P.O. Box 644, Mail Stop 45-02-09
Boston, Massachusetts 02102
(781) 575-3400
Independent Accountants
Price Waterhouse LLP
4400 Harding Road
Nashville, Tennessee 37205
Stock Exchange Listing
The Nasdaq National Market
Ticker Symbol: TSCO
World Wide Web
http://www.tractorsupplyco.com
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m., April 23, 1998
at the Company's Store Support Center, 320 Plus Park Boulevard, Nashville,
Tennessee 37217
Number of Stockholders
As of January 31, 1998 there were approximately 62 stockholders of record.
This number excludes individual stockholders holding stock under nominee
security position listings.
Form 10-K
A copy of the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be sent to any stockholder upon written
request to the Company's investor relations firm:
Corporate Communications, Inc.
523 Third Avenue South
Nashville, Tennessee 37210
(615) 254-3376
Quarterly Stock Price Range
<TABLE>
<CAPTION>
HIGH LOW
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997:
First Quarter $ 21 $ 18 1/4
Second Quarter $ 21 1/2 $ 17 1/4
Third Quarter $ 20 5/8 $ 16 1/4
Fourth Quarter $ 22 $ 13 3/4
FISCAL 1996:
First Quarter $ 27 1/2 $ 19 3/4
Second Quarter $ 27 1/4 $ 22
Third Quarter $ 23 1/2 $ 20 3/4
Fourth Quarter $ 22 3/4 $ 19 5/8
</TABLE>
<PAGE> 32
Tractor Supply Company
320 Plus Park Boulevard
Nashville, Tennessee 37217
(615) 366-4600
------------------
(TRACTOR SUPPLY COMPANY LOGO)
