<PAGE> 1
[Photo]
Cover Page
[TSC] TRACTOR SUPPLY CO
Where America's Farmers Shop
Record Financial Performance
Aggressive Growth Plans
Customer-Driven Merchandise Initiatives
Spreading the Word-New Marketing Initiatives
1998 ANNUAL REPORT
<PAGE> 2
[Photo] -- Store Front
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 operators of retail farm
stores 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 rural customers, contractors and tradesmen. At the close of fiscal 1998,
the Company operated 243 retail farm stores in 26 states. Tractor Supply Company
stores typically range in size from 12,000 to 14,000 square feet of inside 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, 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 is
a significant factor in the local economy. The Company employs approximately
3,100 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".
NUMBER OF STORES BY STATE
[Map]
<TABLE>
<S> <C> <C> <C> <C> <C>
Texas 41 Kansas 7 Oklahoma 2
Ohio 33 Arkansas 6 South Carolina 2
Michigan 21 Minnesota 6 Mississippi 1
Tennessee 21 Missouri 6 Montana 1
Indiana 18 Nebraska 6 New York 1
Kentucky 12 Virginia 6 Wisconsin 1
---
Illinois 11 Pennsylvania 5 Total 243
===
North Carolina 10 South Dakota 4
Iowa 9 Alabama 3
North Dakota 8 Maryland 2
</TABLE>
Visit us on the Web at www.tractorsupplyco.com
<PAGE> 3
1
TRACTOR SUPPLY COMPANY
FINANCIAL HIGHLIGHTS
(in thousands, except where noted)
<TABLE>
<CAPTION>
Fiscal Year Percent
----------------------- Increase
1998 1997 (Decrease)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Results:
Net sales $ 600,677 $ 509,052 18.0%
Income before income taxes 25,292 19,933 26.9
Net income 14,800 11,761 25.8
Net income per share - basic ($) 1.69 1.34 26.1
Net income per share - assuming dilution ($) 1.68 1.34 25.4
Financial Position:
Total assets 264,649 224,080 18.1
Cash and short-term investments 18,201 8,477 114.7
Stockholders' equity 119,976 104,889 14.4
Long-term debt to equity (%) 30.9 29.7 4.0
Statistics:
Number of stores (#) 243 228 6.6
Square footage at year end 3,014 2,807 7.4
Average sales per store 2,472 2,233 10.7
Net sales per square foot ($) 206 191 7.9
</TABLE>
[Bar Graph] [Bar Graph] [Bar Graph]
Net Sales Total number of 5-year compound
1994/1998 stores 1994/1998 growth rate
<PAGE> 4
2
TRACTOR SUPPLY COMPANY
Letter To Stockholders
Last year marked a tremendous milestone for Tractor Supply Company. Sales
exceeded the magic six hundred million-dollar mark and profits set a new
record. In addition I can confidently say that our leadership team is the
strongest ever. The future for our company and for our special niche in the
retail market looks very bright.
[Joe Scarlett]
[Picture]
FINANCIAL RESULTS - annual sales increased 18% and the more important measure
of comparable store sales grew by a very strong 10.9%. Net income was $14.8
million, up 26% for the year. On a per-share basis Tractor Supply earned $1.68
compared to $1.34 in 1997. Sales and profit growth out-paced most other retail
companies last year.
MARKET NICHE - we have a very special and unique niche in the retail market
serving the basic maintenance needs of farm, ranch and rural customers. Staying
very close to our customers is the way we so effectively respond to their
changing needs. We continually define and re-define our merchandising,
marketing and operations. Tractor Supply Company is the leader in the farm and
ranch business because we take the best care of our customer.
SALES GROWTH - driving comparable store sales is our principal focus at Tractor
Supply. We start by providing the very best customer service. Then product
assortments are continually changed and improved to best respond to customer
needs. Diligent attention to staying in stock in the basic maintenance products
is another essential element in our sales growth. When we talk about sales at
Tractor Supply Company "we only talk about comparable store sales growth"
because that is the key component that drives profit improvement.
MARKETING - 1998 marked the first year of the new Tractor Supply Company
marketing program. Print advertising was the most aggressive ever and we aired
over 200,000 commercials in our first serious radio effort. We also advertised
nationally on three cable television networks for the first time. Our spokesmen
country music superstar George Strait and renowned horse trainer John Lyons
were both featured in radio and TV commercials.
<PAGE> 5
3
NEW STORE GROWTH - Tractor Supply successfully opened 15 new stores last year
that are meeting or exceeding our expectations. In 1999 we will return to 12%
unit growth by opening 30 additional stores.
INFRASTRUCTURE - Tractor Supply is committed to infrastructure investment that
supports future growth. We are now operating SAP retail systems, which are
considered the most advanced retail systems in the world. We are proud to say
the project was completed under budget and in record time. Logistics operations
will easily meet future needs through both capacity growth and efficiency
improvements. We will progressively and prudently expand all aspects of
infrastructure capacity to support growth.
LEADERSHIP TEAM - the organization is making major strides forward with the
added leadership from our two new senior vice-presidents. Jerry Brase has
driven major product assortment changes and spearheaded new marketing
initiatives. Mike Brown's influence on systems, processes, shrinkage reduction
and development of the field management team is making a positive difference.
The Executive team today is more focused, aligned and committed than ever
before.
OUR PEOPLE - Tractor Supply Company is fortunate to have over 3,000 dedicated
hard-working associates who all contribute to our success. People make the
difference in business. Our people are the best.
OUTLOOK - we expect 6% to 8% same store sales growth, 12% new store unit growth
and consistent annual 20% net income improvement. Our niche is clearly defined,
our management team is in place and focused, and there is a positive spirit
throughout the organization. The outlook for Tractor Supply Company is the best
ever!
I am more confident about the future of our company today than at any time in
my 20 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, President 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, the impact of the Year 2000 issue 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.
<PAGE> 6
[Picture]
Products
In order to build on the success of our 1998 efforts, we have remerchandised
our Hardware, Plumbing, Electrical, Paint, Truck Accessories, Towing
Accessories and Lubricant Departments in the first quarter of 1999.
<PAGE> 7
5
CUSTOMER-DRIVEN
MERCHANDISE INITIATIVES
In 1998, Tractor Supply undertook an aggressive remerchandising program
designed to better satisfy the needs of our target customer--the hobby,
part-time and full-time farmer. By soliciting and listening to feedback from
our customers and our store associates, we developed a remerchandising strategy
that is exciting our customers and driving sales. Each year, we will use the
first quarter to complete that year's major new merchandising initiatives.
In 1998, we rolled out new merchandising initiatives by expanding our Equine,
Pet Supplies, Animal Health and Feed Departments. In addition, we refined our
product offering in our Apparel Department and our Agricultural Supplies
Department. The Lawn & Garden Departments were remerchandised in the "center
court" of our stores to better take advantage of high-margin, add-on sales
opportunities. By focusing on these key categories, we have begun to attract
more female shoppers while better serving the needs of our existing customers.
These departments all experienced high double-digit comparable store sales
growth.
In order to build on the success of our 1998 efforts, we have remerchandised
our Hardware, Plumbing, Electrical, Paint, Truck Accessories, Towing
Accessories and Lubricant Departments in the first quarter of 1999. The product
mix and merchandising techniques in these departments have been refined to
better focus on the needs of our core customer. In addition, we have expanded
Electrical Fencing, added a brand new Tractor Parts program, and have
remerchandised our Equine Department to maintain the growth begun last year.
These departments represent above-average gross margins, which will help
improve our margin, as well as driving comparable store sales.
In the future, we will continue to evolve our merchandising mix and
presentation by listening even more closely to our target customer, and
changing to better satisfy their expressed needs. Being customer-driven and
willing to change is part of the unique culture of Tractor Supply. It is also
one of the reasons we say Tractor Supply is a "60 YEAR OLD NEW COMPANY"!
[Photo] [Photo] [Photo] [Photo]
Products Products Products Products
<PAGE> 8
[Photo]
George Strait & John Lyons
The highlight of our 1998 marketing program was the addition of two Company
spokesmen: country music legend George Strait and nationally recognized horse
trainer John Lyons.
<PAGE> 9
7
SPREADING THE WORD-
NEW MARKETING INITIATIVES
In retail, change only matters if your customer gets the message. In 1998,
Tractor Supply embarked on changing the perception of Tractor Supply as
"AMERICA'S BEST KEPT RETAIL SECRET." With the support of our key vendor
partners, the Company implemented a "world-class" marketing program in 1998.
The goals of our marketing and advertising programs were to increase
top-of-mind awareness of Tractor Supply among our potential customer base and
attract new customers to Tractor Supply.
To accomplish these objectives, we built a marketing program designed to appeal
to our customer's lifestyle. The 1998 marketing program was carefully crafted
to reach our target audience in the most cost effective and efficient means.
Our media program included the following:
- - EXPANDED PRINT ADVERTISING PROGRAM - Featuring 21 circulars and four
quarterly Blue Book catalogs aimed at our core customer
- - RADIO ADVERTISING IN ALL MARKETS - Over 225,000 radio spots on the most
listened to country music radio station in each market
- - TELEVISION ADVERTISING ON NATIONAL NETWORK CABLE - Over 1,250 television
spots on TNN (The Nashville Network), CMT (Country Music Television) and
The Weather Channel.
The highlight of our 1998 marketing program was the addition of two Company
spokesmen: country music legend GEORGE STRAIT and nationally recognized horse
trainer JOHN LYONS. George Strait helped Tractor Supply "connect" with our
target customer and their lifestyle, and John Lyons gave instant credibility to
the Company's new merchandising initiative in the Equine Department.
If comparable store sales increases, increased transaction counts, and national
recognition are measures of a marketing program's success, then, based on
Tractor Supply's record performance in 1998, our new marketing programs were
truly "world-class."
In 1999, the Company plans to build on the success of its 1998 program. We will
further expand our print advertising program with an all new "event marketing"
campaign and the largest ever Blue Book reference catalog. For the first time,
this 384-page reference catalog will also be available over the Internet on the
Company's very active Web site. The Company's relationship with George Strait
and John Lyons will be taken to the next level as they "discover" the unique
selling proposition that is Tractor Supply!
Tractor Supply's marketing program is all about building a long-term
relationship with its customer. The Company's marketing programs are all
designed to "personalize" the Tractor Supply shopping experience and strengthen
our bond with our customer.
[Photo] [Photo] [Photo] [Photo]
Commercial Commercial Commercial Commercial
screen shot screen shot screen shot screen shot
<PAGE> 10
8
TRACTOR SUPPLY COMPANY
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------
(in thousands, except per share and operating data)
DECEMBER 26, DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales $ 600,677 $ 509,052 $ 449,029 $ 383,903 $ 329,967
Gross margin 154,638 131,542 116,651 98,656 88,187
Selling, general and administrative expenses 120,734 104,661 88,827 73,587 65,790
Depreciation and amortization 5,342 4,509 3,385 2,524 1,845
-----------------------------------------------------------------------------
Income from operations 28,562 22,372 24,439 22,545 20,552
Interest expense, net 3,270 2,439 2,358 1,730 1,798
-----------------------------------------------------------------------------
Income before income taxes 25,292 19,933 22,081 20,815 18,754
Income tax provision 10,492 8,172 8,845 8,293 7,496
-----------------------------------------------------------------------------
Net income $ 14,800 $ 11,761 $ 13,236 $ 12,522 $ 11,258
=============================================================================
Net income applicable to common stockholders $ 14,800 $ 11,705 $ 13,039 $ 12,165 $ 10,788
=============================================================================
Net income per share - basic (a) $ 1.69 $ 1.34 $ 1.50 $ 1.40 $ 1.28
=============================================================================
Weighted average common shares outstanding 8,742,187 8,724,915 8,718,000 8,718,000 8,433,934
OPERATING DATA:
Gross margin 25.7% 25.8% 26.0% 25.7% 26.7%
Selling, general and administrative expenses 20.1% 20.5% 19.8% 19.2% 19.9%
Income from operations 4.7% 4.4% 5.4% 5.9% 6.2%
Net income 2.5% 2.3% 2.9% 3.3% 3.4%
Number of stores:
Beginning of year 228 208 185 165 152
New stores 15 22 23 20 13
Closed stores -- (2) -- -- --
-----------------------------------------------------------------------------
End of year 243 228 208 185 165
=============================================================================
Number of relocated stores 1 1 4 2 4
Number of remodeled stores (b) -- -- 1 6 2
Total selling square footage at period end (c) 3,014,196 2,806,864 2,543,575 2,237,755 1,929,396
Average sales per store (in thousands) $ 2,472 $ 2,233 $ 2,159 $ 2,075 $ 2,000
Net sales per square foot of selling space $ 206 $ 191 $ 185 $ 178 $ 178
Comparable store sales increase (d) 10.9% 3.1% 2.5% 3.1% 11.7%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 95,530 $ 82,869 $ 65,954 $ 63,850 $ 46,184
Total assets 264,649 224,080 195,582 174,129 146,248
Long-term debt, less current portion (e) 37,132 31,134 21,166 25,858 12,266
Redeemable preferred stock -- -- 1,763 3,525 5,875
Stockholders' equity 119,976 104,889 92,966 79,951 67,817
</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) Includes remodelings costing more than $150,000.
(c) Total selling square footage includes normal selling space and
excludes office, stockroom, receiving space and outside selling space.
(d) Comparable store sales increases are calculated on a 52-week
basis, excluding relocations, using all stores open at least one year.
(e) Long-term debt includes borrowings under the Company's principal
revolving credit agreements, term loan agreements and amounts
outstanding under its capital lease obligations, excluding the current
portions of each.
<PAGE> 11
9
TRACTOR SUPPLY COMPANY
MANAGEMENTS' 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 26, 1998 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, the impact of the
Year 2000 issue, 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 1998, 1997 and 1996 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 operators of retail farm stores 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 rural
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, 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 is a significant factor
in the local economy. The Company does not sell large tractors, combines, bulk
chemicals or bulk fertilizers.
Over the past five fiscal years since the Company's initial public offering in
February 1994 (the "Offering"), the Company has opened 93 new retail farm
stores: 13 in fiscal 1994, 20 in fiscal 1995, 23 in fiscal 1996, 22 in fiscal
1997 and 15 in fiscal 1998. These new stores have increased the Company's market
presence in the Southwest, primarily in Texas, and in the Southeast, primarily
in Tennessee, Kentucky and North Carolina. This expansion brings the Company's
total store count to 243 (in 26 states) as of December 26, 1998. The Company
plans to open an additional 30 stores in fiscal 1999, approximately six of which
are scheduled to open in the first quarter of fiscal 1999, 33 in fiscal 2000 and
additional stores thereafter. Over the past five fiscal years since the
Offering, the Company has also relocated twelve stores (four in fiscal 1994, two
in fiscal 1995, four in fiscal 1996, one in fiscal 1997 and one in fiscal 1998)
and completed major remodelings on nine of its existing stores. In total over
the past five fiscal years since the Offering, the Company has opened, relocated
or remodeled 114 stores.
<PAGE> 12
10
TRACTOR SUPPLY COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Between fiscal year 1994 and fiscal year 1998, net sales increased from $330.0
million to $600.7 million and net income increased from $11.3 million to $14.8
million, reflecting a four-year compound annual growth rate of 16.2% and 7.1%,
respectively. Between fiscal year 1993 and fiscal year 1998, net sales increased
from $279.2 million to $600.7 million and net income increased from $6.9 million
to $14.8 million, reflecting a five-year compound annual growth rate of 16.6%
and 16.4%, respectively. The Company generated these growth rates primarily from
increases in comparable store sales and through new store openings and
relocations of existing stores. Comparable stores sales increased 10.9%, 3.1%,
and 2.5% in fiscal 1998, 1997 and 1996, respectively. Since 1993, the 99 new or
relocated stores that have been open more than one year have generated average
net sales that are approximately 21.7% 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, excessive rain,
drought, and 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
1998 and 1997 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>
1998
Net sales $ 105,587 $196,081 $140,628 $158,381 $600,677
Gross margin 26,489 49,248 36,433 42,468 154,638
Income (loss) from operations (1,710) 16,273 4,486 9,513 28,562
Net income (loss) (1,502) 9,168 2,137 4,997 14,800
Net income (loss) per share - basic (.17) 1.05 .24 .57 1.69
Net income (loss) per share - assuming dilution (.17) 1.04 .24 .56 1.68
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
</TABLE>
<PAGE> 13
11
TRACTOR SUPPLY COMPANY
MANAGEMENTS' 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 26, DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 74.3 74.2 74.0 74.3 73.3
---------------------------------------------------------------------
Gross margin 25.7 25.8 26.0 25.7 26.7
Selling, general and administrative expenses 20.1 20.5 19.8 19.2 19.9
Depreciation and amortization 0.9 0.9 0.8 0.6 0.6
---------------------------------------------------------------------
Income from operations 4.7 4.4 5.4 5.9 6.2
Interest expense, net 0.5 0.5 0.5 0.4 0.5
---------------------------------------------------------------------
Income before income taxes 4.2 3.9 4.9 5.5 5.7
Income tax provision 1.7 1.6 2.0 2.2 2.3
---------------------------------------------------------------------
Net income 2.5% 2.3% 2.9% 3.3% 3.4%
=====================================================================
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased 18.0% to $600.7 million in fiscal 1998 from $509.1 million
in fiscal 1997. This increase resulted primarily from a comparable store sales
increase of 10.9% (calculated on a 52-week basis, excluding relocations, using
all stores open at least one year) and, to a lesser extent, new store openings
and relocations. Comparable store sales for fiscal 1998 benefited from the
"remerchandising" of the "right-side" (including expanding the Equine, Pet
Supplies, Animal Health and Feed Departments and refining the Apparel and
Agricultural Supplies Departments) and portions of the "center aisle" (mainly
enhancing the Lawn and Garden Departments) of all stores early in fiscal 1998,
the new and more aggressive marketing programs, an improved inventory in-stock
position and favorable spring season and later winter weather conditions. The
Company opened 15 new stores and relocated one store during fiscal 1998. The
Company opened 22 new stores, closed two stores and relocated one store in
fiscal 1997. At December 26, 1998, the Company operated 243 retail farm stores
versus 228 stores at the end of the prior fiscal year.
The Company plans to remerchandise the remaining approximately 60% of the inside
of all stores, consisting of the entire "left-side" of the store (including
Tools, Hardware, Plumbing, Electrical, Paint, Truck Accessories, Towing
Accessories and Lubricant Departments) and portions of the center aisle (mainly
Electrical Fencing) and "agricultural sections" (including Tractor Parts and the
Equine Department), in 1999. The Company believes that these remerchandising
efforts rejuvenate the stores, create excitement with the customers and store
associates and build stronger comparable store sales.
The gross margin rate decreased .1 percentage point to 25.7% of sales in fiscal
1998 from 25.8% in fiscal 1997. This decrease resulted primarily from lower
gross margin rates in certain product categories (mainly due to additional
seasonal markdowns and more aggressive promotional activities, principally
additional discounting of select items in the Company's print advertising and
additional discounting associated with the new stores' grand openings), offset,
in part, by leverage improvements in both freight and shrinkage expense.
As a percent of sales, selling, general and administrative expenses decreased .4
percentage points to 20.1% for fiscal 1998 from 20.5% for fiscal 1997. On an
absolute basis, selling, general and administrative expenses increased 15.4% to
$120.7 million for fiscal 1998 from $104.7 million in fiscal 1997. The decrease
in expenses on a percentage of sales basis resulted primarily from the Company's
on-going efforts to control increases in its operating expenses as well as from
the leverage gain attributable to the strong comparable store sales performance.
The increase in absolute dollars was primarily attributable to costs associated
with new store openings (new stores have considerably higher occupancy costs,
primarily rent, than the existing store base), as well as higher incentive
accurals.
During fiscal 1998, the Company implemented new marketing and advertising
programs including (i) increased print advertising (ii) significantly expanded
radio advertising, and (iii) for the first time, a national television
advertising campaign featuring John Lyons, renowned horse trainer and national
equine spokesman for the Company, and George Strait, renowned country music
entertainer and national spokesman for the Company. The Company received
marketing support funds totalling approximately $8.5 million from certain of its
vendors to cover a portion of the costs of these new programs.
<PAGE> 14
12
TRACTOR SUPPLY COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Depreciation and amortization expense increased 18.5% over the prior year due
mainly to costs associated with new and relocated stores.
Net interest expense increased 34.1% in fiscal 1998 from fiscal 1997. The
increase in interest expense reflects additional borrowings to fund the
Company's growth and expansion plans, resulting in a higher average outstanding
debt balance in fiscal 1998 compared to fiscal 1997.
The Company's effective tax rate increased 0.5 percentage points to 41.5% in
fiscal 1998 from 41.0% in fiscal 1997 primarily due to a higher effective state
income tax rate in fiscal 1998.
As a result of the foregoing factors, net income increased 25.8% to $14.8
million in fiscal 1998 from $11.8 million in fiscal 1997. As a percent of sales,
net income increased 0.2 percentage points to 2.5% of sales in fiscal 1998 from
2.3% of sales in fiscal 1997.
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 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, benefitting 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.
In June 1997, the Company slowed down its new store unit growth rate for a
period of approximately 18 months (opening 22 new stores in the fiscal 1997
rather than the 25 originally contemplated, with plans calling for the opening
of 15 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 undertook major steps to build a stronger foundation to better
support the Company's growth plans going forward. Some of the major steps taken
included (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 Store 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" were completed in the first quarter of 1998, of which
the new lawn and garden merchandising relay was probably the most powerful new
merchandising presentation the Company had implemented to date), (iii) investing
in the infrastructure, both in people (the Company increased its commitment to
store payroll in 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 all field
operators, the Company selected SAP America, Inc. ("SAP") to be its "world-class
long-term solution" with respect to merchandising and distribution systems),
(iv) improving internal processes (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 signed John
Lyons, a renowned equine specialist, as its Company's national equine spokesman
and, with the support of its vendor partners, the Company further improved 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 featured 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 shinkage 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
<PAGE> 15
13
TRACTOR SUPPLY COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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% in fiscal 1997 from fiscal 1996. 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.
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 26, 1998, the Company's inventories had increased $20.0 million to
$171.7 million from $151.7 million at December 27, 1997. The increase was
primarily attributable to development of new products and expanded product
lines, an aggressive inventory in-stock position in basic products and, to a
lesser extent, additional inventory for new stores. Short-term trade credit,
which represents a source of financing for inventory, increased $8.2 million to
$60.9 million at December 26, 1998 from $52.7 million at December 27, 1997.
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 26, 1998, the Company had working capital of $95.5 million, which
represented a $12.6 million increase from December 27, 1997. This increase
resulted primarily from an increase in inventory (attributable mainly to the
factors described above) without a corresponding increase in accounts payable,
an increase in cash and cash equivalents and an increase in prepaid expenses
(mainly construction-in-progress costs pertaining to planned sale/leaseback
transactions respecting certain 1999 new stores) offset, in part, by an increase
in accrued expenses (mainly incremental costs relating to new stores and
incentives) and an increase in current debt maturities (attributable mainly to
the Company's new fixed-rate term loan agreement). The Company's working capital
increased $16.9 million in fiscal 1997 to $82.9 million from $66.0 million in
fiscal 1996. This increase resulted primarily from an increase in inventory
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 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.
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
<PAGE> 16
14
TRACTOR SUPPLY COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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).
In March 1998, the Company entered into an amendment (the "Second Amendment") to
its Credit Agreement with BankBoston, N.A. (successor to First National Bank of
Boston), a national banking association, as agent, and for itself, in its
capacity as a lender thereunder, First American National Bank, a national
banking association, and SunTrust Bank Nashville, N.A. ("SunTrust"), a national
banking association, whereby the Company (i) increased the maximum total
commitments available under the Credit Agreement from $45 million to $60 million
and (ii) extended the expiration date of the Credit Agreement from August 31,
1999 to August 31, 2002 (the date upon which any remaining borrowings must be
repaid). At December 26, 1998, the Company had $19.0 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.
In June 1998, the Company entered into a new loan agreement (the "Loan
Agreement") and term note (the "Term Note") with SunTrust pursuant to which the
Company borrowed $15 million. The Term Note bears interest at the rate of 6.75%
per annum until its maturity in June 2005. The Term Note requires monthly
payments equal to $178,572, plus accrued interest, through June 2005. There are
no compensating balance requirements associated with the Loan Agreement. The
Loan Agreement is unsecured. The Loan Agreement contains certain restrictions
regarding additional indebtedness; employee loans; business operations;
guarantees; investments; mergers, consolidations and sales of assets;
transactions with subsidiaries; and liens. In addition, the Company must comply
with certain quarterly restrictions regarding net worth, working capital, ratios
of total liabilities to net worth and interest coverage and current ratio
requirements.
Operations provided net cash of $15.5 million in fiscal 1998, used $5.1 million
in fiscal 1997 and provided net cash of $21.2 million in fiscal 1996. The
generation of cash in fiscal 1998 resulted primarily from an increase in accrued
expenses (mainly due to higher incentive accruals), an increase in net income
and, to a lesser extent, an increase in income taxes currently payable compared
to fiscal 1997 due to timing of payments, offset, in part, by inventories
increasing at a slower rate than accounts payable compared to the prior year.
The use of cash in fiscal 1997 resulted primarily from inventories increasing at
a faster 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.
Cash used in investing activities of $14.3 million, $7.5 million and $6.8
million for fiscal 1998, 1997 and 1996, respectively, resulted primarily from
capital expenditures for the new merchandise and warehouse management systems
(in 1998) as well as, from new, relocated and remodeled stores, partially offset
by proceeds from the sale of certain properties (primarily land and buildings).
Financing activities in fiscal 1998 provided $8.5 million in cash which
represented a $.3 million increase over the $8.2 million in cash provided in
fiscal 1997. This increase resulted primarily from borrowings of $15.0 million
under the Loan Agreement in fiscal 1998 compared to net borrowings of
approximately $11.4 million under the Credit Agreement in fiscal 1997 offset, in
part, by net repayments of approximately $4.4 million under the Credit Agreement
and scheduled repayments of long-term debt and capital lease obligations
totaling approximately $2.4 million in fiscal 1998 versus approximately $1.7
million in fiscal 1997. Financing activities in fiscal 1997 provided $8.2
million in cash which represented a $14.8 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.
The Company's capital additions were $14.5 million, $9.1 million and $9.6
million in fiscal 1998, 1997 and 1996, respectively. The majority of the capital
additions were for the new merchandise and warehouse management systems and, to
a lesser extent, store fixtures, equipment and leasehold improvements for new
stores and remodeling of existing stores. The Company expects that its capital
expenditures for fiscal 1999 will be approximately $13.0 million to $15.0
million, consisting primarily of leasehold improvements and, to a lesser extent,
fixtures and equipment, assuming successful implementation of its growth
strategy through 30 planned new store openings. However, the Company cannot
predict with certainty the amount of such expenditures because such new stores
may be
<PAGE> 17
15
TRACTOR SUPPLY COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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.
YEAR 2000 READINESS PLANS
During fiscal 1998, the Company made substantial progress in its planned
installation of a new merchandise and warehouse management system. In February
1999, the Company concluded the remaining conversion effort and completed the
system installation, thus achieving full Year 2000 compliance for its remaining
processing systems. This installation was the one remaining significant
requirement for the Company to achieve Year 2000 compliance prior to the need to
execute transactions with Year 2000 implications (the processing concern created
by the change in the century and the traditional two-digit year fields embedded
in most data processing systems is commonly referred to as the "Year 2000"
issue). The total estimated cost of the Company's Year 2000 remediation efforts,
of which the full installation of this system was the major component, is
approximately $10.0 million.
The Company's information systems interface with third party software that is
heavily dependent on date fields. These "sub-systems" primarily involve
electronic data interchange (EDI) and outside payroll processing services.
During fiscal 1998, the vendors supplying the critical translation routines
supplied upgraded versions and made other modifications to remedy the Year 2000
compliance issues surrounding these applications.
In fiscal 1997, the Company completed the installation of an advanced
point-of-sale system which is fully Year 2000 compliant. This new point-of-sale
system was designed and installed with Year 2000 compliance in mind and contains
provisions for full four-digit year fields, thus enabling processing to take
place for transactions which go beyond the year 1999.
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 continues to work with each of its critical
vendors to determine 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 continues to expect
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.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement No. 133 in June 1998
and Statement No. 134 in October 1998. These statements respectively address
accounting issues surrounding (a) derivative instruments and hedging activities
and (b) mortgage-backed securities. The Company does not anticipate the adoption
of these statements to have a significant impact on the reporting of results of
operations or financial position.
<PAGE> 18
16
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 26, 1998 and December 27, 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 26,
1998, 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/ PricewaterhouseCoopers LLP
Nashville, Tennessee
January 20, 1999
<PAGE> 19
17
TRACTOR SUPPLY COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,201 $ 8,477
Accounts receivable, net 5,578 5,180
Inventories 171,749 151,749
Prepaid expenses 6,301 4,201
-------------------------
Total current assets 201,829 169,607
-------------------------
Land 6,871 6,851
Buildings and improvements 49,437 45,903
Machinery and equipment 23,121 22,362
Construction in progress 8,818 843
-------------------------
88,247 75,959
Accumulated depreciation and amortization (28,339) (23,551)
-------------------------
Property and equipment, net 59,908 52,408
-------------------------
Deferred income taxes 1,426 710
Other assets 1,486 1,355
-------------------------
Total assets $ 264,649 $ 224,080
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,900 $ 52,708
Accrued expenses 29,610 21,188
Current maturities of long-term debt 3,138 737
Current portion of capital lease obligations 553 731
Income taxes currently payable 4,134 2,310
Deferred income taxes 7,964 9,064
-------------------------
Total current liabilities 106,299 86,738
-------------------------
Revolving credit loan 19,000 23,419
Term loan 11,786 --
Other long-term debt 4,361 5,177
Capital lease obligations 1,985 2,538
Other long-term liabilities 527 424
Excess of fair value of assets acquired over cost less accumulated
amortization of $2,875 and $2,695, respectively 715 895
Commitments (Note 5)
Stockholders' equity:
Common stock, 100,000,000 shares authorized; $.008 par value; 8,748,105 and
8,731,218 shares issued and outstanding in 1998 and 1997, respectively 70
70
Additional paid-in capital 42,213 41,926
Retained earnings 77,693 62,893
-------------------------
Total stockholders' equity 119,976 104,889
-------------------------
Total liabilities and stockholders' equity $ 264,649 $ 224,080
=========================
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 20
18
TRACTOR SUPPLY COMPANY
STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $600,677 $509,052 $449,029
Cost of Merchandise Sold 446,039 377,510 332,378
------------------------------------
Gross Margin 154,638 131,542 116,651
Selling, General and Administrative Expenses 120,734 104,661 88,827
Depreciation and Amortization 5,342 4,509 3,385
------------------------------------
Income from Operations 28,562 22,372 24,439
Interest Expense, Net 3,270 2,439 2,358
------------------------------------
Income Before Income Taxes 25,292 19,933 22,081
Income Tax Provision 10,492 8,172 8,845
------------------------------------
Net Income $ 14,800 $ 11,761 $ 13,236
====================================
Net Income Per Share - Basic $ 1.69 $ 1.34 $ 1.50
====================================
Net Income Per Share - Assuming Dilution $ 1.68 $ 1.34 $ 1.49
====================================
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 21
19
TRACTOR SUPPLY COMPANY
STATEMENTS 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 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
Issuance of common stock under employee
stock purchase plan (16,887 shares) 287 287
Net income 14,800 14,800
----------------------------------------------------
Stockholders' equity at
December 26, 1998 $ 70 $ 42,213 $ 77,693 $ 119,976
=====================================================
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 22
20
TRACTOR SUPPLY COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,800 $ 11,761 $ 13,236
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,342 4,509 3,385
Loss (gain) on disposition of property and equipment 1,353 (23) (904)
Deferred income taxes (1,816) (99) (261)
Change in assets and liabilities:
Accounts receivable (398) (326) (1,200)
Inventory (20,000) (27,667) (11,382)
Prepaid expenses (2,100) (2,555) 3,360
Accounts payable 8,192 5,117 11,066
Accrued expenses 8,422 5,236 4,336
Income taxes currently payable 1,824 (551) 181
Other (131) (539) (636)
--------------------------------------
Net cash provided by (used in) operating activities 15,488 (5,137) 21,181
--------------------------------------
Cash flows from investing activities:
Capital expenditures (14,505) (9,120) (9,635)
Proceeds from sale of property and equipment 233 1,636 2,871
--------------------------------------
Net cash used in investing activities (14,272) (7,484) (6,764)
--------------------------------------
Cash flows from financing activities:
Net borrowings (repayment) under revolving credit loan (4,419) 11,419 (3,093)
Borrowings under term loan agreement 15,000 -- --
Repayments under term loan agreement (893) -- --
Principal payments under capital lease obligations (731) (1,003) (880)
Repayment of long-term debt (736) (665) (600)
Net proceeds from sale of common stock 287 241 --
Redemption of preferred stock -- (1,763) (1,762)
Payment of preferred stock dividend -- (79) (221)
--------------------------------------
Net cash provided by (used in) financing activities 8,508 8,150 (6,556)
---------------------------------------
Net increase (decrease) in cash 9,724 (4,471) 7,861
Cash and cash equivalents at beginning of year 8,477 12,948 5,087
--------------------------------------
Cash and cash equivalents at end of year $ 18,201 $ 8,477 $ 12,948
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (NOTE 1):
Cash paid during the year for:
Interest $ 3,231 $ 2,583 $ 2,723
Income taxes 10,310 8,643 9,196
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 23
21
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 rural customers, contractors and tradesmen. The
Company, which was founded in 1938, operated 243 retail farm stores in 26 states
as of December 26, 1998.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. Fiscal
years 1998, 1997 and 1996 consist of 52 weeks.
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
terms of the Company's term loan agreement include a fixed interest rate which
approximates current market rates. The Company's fixed rate debt has an
approximate current value of $6.0 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, 3
and 4).
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 $6,497,000 and $6,370,000 higher than reported at
December 26, 1998 and December 27, 1997, 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. Basic EPS is
calculated as income available to common stockholders divided by the weighted
average number of shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and the
treasury stock method for options and warrants as prescribed by APB 15 (Note 8).
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.
<PAGE> 24
22
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 1998,
1997 and 1996 was approximately $9,239,000, $8,771,000 and $8,157,000,
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 11).
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.
In March 1998, the Company entered into an amendment (the "Second Amendment") to
its Credit Agreement with BankBoston, N.A. (successor to First National Bank of
Boston), a national banking association, as agent, and for itself, in its
capacity as a lender thereunder, First American National Bank, a national
banking association, and SunTrust Bank Nashville, N.A. ("SunTrust"), a national
banking association, whereby the Company (i) increased the maximum total
commitments available under the Credit
<PAGE> 25
23
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
Agreement from $45 million to $60 million and (ii) extended the expiration date
of the Credit Agreement from August 31, 1999 to August 31, 2002 (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 Second Amendment, provided, however, that the financial covenants must be
tested quarterly as of the end of each fiscal quarter, based on a rolling
four-quarters basis, rather than at the end of each fiscal year.
All borrowings under the Credit Agreement bear interest, at the Company's
option, at either the base rate of the Agent (7.75% at December 26, 1998) plus
.25% per annum or the LIBOR rate (5.54% at December 26, 1998) 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
quarterly restrictions (based on a rolling four-quarters basis) 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 26, 1998.
NOTE 3 - TERM LOAN AGREEMENT:
In June 1998, the Company entered into a new loan agreement (the "Loan
Agreement") and term note (the "Term Note") with SunTrust pursuant to which the
Company borrowed $15 million. The Term Note bears interest at the rate of 6.75%
per annum until its maturity in June 2005. The Term Note requires monthly
payments equal to $178,572, plus accrued interest, through June 2005. There are
no compensating balance requirements associated with the Loan Agreement. The
Loan Agreement is unsecured. The Loan Agreement contains certain restrictions
regarding additional indebtedness; employee loans; business operations;
guarantees; investments; mergers, consolidations and sales of assets;
transactions with subsidiaries; and liens. In addition, the Company must comply
with certain quarterly 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 26,
1998.
NOTE 4 - OTHER LONG-TERM DEBT:
Other long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Mortgage Notes $ 5,177 $ 5,914
Less: current maturities (816) (737)
----------------------
$ 4,361 $ 5,177
======================
</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.
<PAGE> 26
24
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
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 26, 1998.
The combined aggregate maturities of the Mortgage Notes are as follows (in
thousands):
<TABLE>
<S> <C>
1999 $ 816
2000 905
2001 1,003
2002 1,112
2003 1,232
2004 109
</TABLE>
NOTE 5 - 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 1998, 1997 and
1996 was approximately $32,421,000, $27,557,000 and $21,358,000 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>
1999 $ 787 $ 19,867
2000 464 18,402
2001 464 17,752
2002 464 15,344
2003 462 14,507
Thereafter 799 70,989
-----------------------
Total minimum lease payments 3,440 $ 156,861
Amount representing interest (902) ==========
---------
Present values of net minimum lease payments 2,538
Less: current portion (553)
---------
Long-term capital lease obligations $ 1,985
=========
</TABLE>
<PAGE> 27
25
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 10,111 $ 6,720 $ 7,442
State 2,197 1,551 1,664
------------------------------------
Total current 12,308 8,271 9,106
------------------------------------
Deferred tax expense:
Federal (1,671) (116) (229)
State (145) 17 (32)
------------------------------------
Total deferred (1,816) (99) (261)
------------------------------------
Total provision $ 10,492 $ 8,172 $ 8,845
====================================
</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>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Current tax assets:
Inventory valuation $ 4,367 $ 3,852
Other 2,509 1,543
------------------------
6,876 5,395
-------------------------
Current tax liabilities:
Inventory basis difference 14,186 13,977
Other 654 482
------------------------
14,840 14,459
-------------------------
Net current tax liabilities $ 7,964 $ 9,064
========================
Non-current tax assets:
Capital lease obligation basis difference $ 807 $ 1,017
Fixed assets basis difference 319 338
Other 1,629 1,356
------------------------
2,755 2,711
------------------------
Non-current tax liabilities:
Depreciation 954 1,582
Capital lease assets basis difference 375 419
------------------------
1,329 2,001
------------------------
Net non-current tax assets $ 1,426 $ 710
========================
</TABLE>
<PAGE> 28
26
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $ 8,852 $ 6,977 $ 7,729
Tax effect of:
State income taxes, net of federal tax benefit 1,432 1,008 1,082
Amortization of negative goodwill (63) (63) (63)
Other 271 250 97
--------------------------------------
$ 10,492 $ 8,172 $ 8,845
======================================
</TABLE>
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 7 - 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 semiannually 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).
<PAGE> 29
27
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - NET INCOME PER SHARE:
Net income per share is calculated as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic net income per share:
Net income $ 14,800 8,742 $ 1.69
--------
Stock options outstanding 68
------------------------
Diluted net income per share $ 14,800 8,810 $ 1.68
=====================================
1997
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
- -----------------------------------------------------------------------------------
Basic net income per share:
Net income $ 11,761
Less: preferred stock dividends (57)
----------
11,704 8,725 $ 1.34
=========
Stock options outstanding --
------------------------
Diluted net income per share $ 11,704 8,725 $ 1.34
======================================
1996
-----------------------------------------
PER SHARE
INCOME SHARES AMOUNT
- -------------------------------------------------------------------------------------
Basic net income per share:
Net income $ 13,236
Less: preferred stock dividends (197)
----------
13,039 8,718 $ 1.50
=========
Stock options outstanding 10
------------------------
Diluted net income per share $ 13,039 8,728 $ 1.49
========================================
</TABLE>
NOTE 9 - 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 1998, 1997 and 1996. All the
<PAGE> 30
28
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
officers have repaid their outstanding obligations under these notes to the
Company. The balance of these capitalized lease obligations, included in total
capital lease obligations at December 26, 1998, was $1,552,000.
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 1998
and 1997 and $384,000 in fiscal 1996.
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
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 1998, 1997 and 1996.
NOTE 10 - 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 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 1998 and 1997 were approximately
$822,000 and $733,000, respectively.
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 merged plan for fiscal 1996 was approximately $565,000.
<PAGE> 31
29
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCK-BASED COMPENSATION PLANS:
Fixed Stock Option Plan
The Company has a stock option plan for officers, directors (including
nonemployee 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 generally vest one-third each year
beginning on the third anniversary date of the grant and expire after ten years,
provided, however, that options granted to non-employee directors vest one-third
each year beginning on the first anniversary of the grant.
Plan activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 48,000 $ 16.67
Canceled (33,250) $ 19.49
--------
Outstanding at December 26, 1998 514,750 $ 19.21
========
</TABLE>
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 PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 $21.50 - $27.00 18,500 5.19 $ 21.80 18,500
1995 $21.31 - $22.13 34,000 6.10 $ 22.10 11,334
1996 $21.38 - $25.13 91,750 7.11 $ 21.74 0
1997 $17.75 - $20.00 322,500 8.51 $ 18.41 0
1998 $14.44 - $24.31 48,000 9.14 $ 16.67 0
------- ------
514,750 29,834
======= ======
</TABLE>
<PAGE> 32
30
TRACTOR SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
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 proforma net
income and net income per share, for fiscal 1998, 1997 and 1996, would have been
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 14,800 $ 11,761 $ 13,236
Proforma $ 14,271 $ 11,437 $ 13,058
Net income per share - basic
As reported $ 1.69 $ 1.34 $ 1.50
Proforma $ 1.63 $ 1.30 $ 1.48
Net income per share - diluted
As reported $ 1.68 $ 1.34 $ 1.49
Proforma $ 1.62 $ 1.30 $ 1.47
</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>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 33.3% 30.8% 25.0%
Risk-free interest rate 6.0% 6.5% 6.75%
Average expected life (years) 9.14 7.25 6.0
Dividend yield 0% 0% 0%
Weighted average fair value $ 9.26 $ 8.97 $ 8.92
</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. Pursuant to the terms of the ASPP, the Company issued 16,887 and
13,218 shares of common stock in fiscal 1998 and 1997, respectively.
<PAGE> 33
31
TRACTOR SUPPLY COMPANY
DIRECTORS AND OFFICERS
DIRECTORS
- ------------------------------------------------------------------------------
JOSEPH H. SCARLETT, JR.
Chairman of the Board, President
and Chief Executive Officer
Tractor Supply Company
THOMAS O. FLOOD
Senior Vice President-
Administration and Finance
and Chief Financial Officer
Tractor Supply Company
THOMAS J. HENNESY, III
Retired Vice Chairman
of the Board
Tractor Supply Company
JOSEPH D. MAXWELL
Retired Vice President
Tractor Supply Company
S.P. BRAUD (1)*(2)*
Retired Chief Financial Officer
Service Merchandise Company, Inc.
and President and Director
Braud Design/Build, Inc.
JOSEPH M. RODGERS (1) (2)
Chairman of the Board
The JMR Group, an investment
firm, and former U.S.
Ambassador to France
- ----------------
(1) Audit Committee Member
(2) Compensation Committee Member
(*) Committee Chairman
OFFICERS
- ------------------------------------------------------------------------------
JOSEPH H. SCARLETT, JR.
Chairman of the Board, President
and Chief Executive Officer
GERALD W. BRASE
Senior Vice President-
Merchandising and Marketing
MICHAEL E. BROWN
Senior Vice President-
Store Operations
THOMAS O. FLOOD
Senior Vice President-
Administration and Finance
and Chief Financial Officer
JOHN W. ATKINS
Vice President-Farm Merchandising
JOHN E. CORBIN
Vice President-Operations (Region III)
BLAKE A. FOHL
Vice President-Marketing
LAWRENCE GOLDBERG
Vice President-Logistics
LEO H. HABERER
Vice President-Real Estate
STEPHEN E. HULL
Vice President-Real Estate
MICHAEL J. KINCAID
Vice President-Controller,
Treasurer and Secretary
GARY M. MAGONI
Vice President-Operations (Region I)
STANLEY L. RUTA
Vice President-Operations (Region II)
DAISY L. VANDERLINDE
Vice President-Human Resources
<PAGE> 34
32
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
BankBoston, N.A.
Shareholder Services
P.O. Box 644, Mail Stop 45-02-09
Boston, Massachusetts 02102
(781) 575-3400
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
4400 Harding Road
Nashville, Tennessee 37205
STOCK EXCHANGE LISTING
The Nasdaq National Market
Ticker Symbol: TSCO
WORLD WIDE WEB
www.tractorsupplyco.com
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., April 22, 1999 at
the Company's Store Support Center, 320 Plus Park Boulevard, Nashville,
Tennessee 37217
NUMBER OF STOCKHOLDERS
As of January 31, 1999 there were approximately 65 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>
FISCAL 1998:
First Quarter $23 1/4 $13 3/4
Second Quarter $26 1/2 $20 5/8
Third Quarter $26 $18
Fourth Quarter $27 $18 1/2
HIGH LOW
- -------------------------------------------------------------------------------
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
</TABLE>
<PAGE> 35
[TSC] TRACTOR
SUPPLY CO
Where America's Farmers Shop
Tractor Supply Company
320 Plus Park Boulevard
Nashville, Tennessee 37217
(615) 366-4600
www.tractorsupplyco.com
