SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 200549
-------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
- -- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- -- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24902
CENTRAL TRACTOR FARM & COUNTRY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 42-1425562
(State or Other Jurisdiction of Incorporation) (I.R.S.
Employer No.)
3915 Delaware Avenue, Des Moines, Iowa 50316-0330
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (515) 266-3101
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 28, 1998: 100. All of the registrant's stock is
held by CT Holding, Inc. and is not publicly traded.
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
INDEX
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheets, January 31, 1998
(unaudited) and November 1, 1997................................................................3
Condensed consolidated statements of income (unaudited), for the
three months ended January 31, 1998 and February 1, 1997........................................4
Condensed consolidated statements of cash flows (unaudited), for the
three months ended January 31, 1998 and February 1, 1997........................................5
Notes to condensed consolidated financial statements (unaudited)................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..........................................................................8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.....................................................................12
ITEM 2. CHANGES IN SECURITIES.................................................................12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS......................................................................12
ITEM 5. OTHER INFORMATION.....................................................................12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................12
INDEX TO EXHIBITS.................................................................,....................14
Exhibit 12 - Statement Re: Computation of Ratio of
Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule (electronic copy only)
Exhibit 99 - Important Factors Regarding Forward-Looking Statements
</TABLE>
2
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<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Balance Sheets
(In thousands except share data)
January 31, November 1,
1998 1997
----------- ------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,757 $ 7,378
Recoverable income taxes 2,513 2,513
Trade receivables, net 6,538 7,264
Inventory 217,500 222,117
Deferred income taxes 3,215 4,000
Other 2,671 3,136
-------- --------
Total current assets 238,194 246,408
Property, improvements and equipment, net 42,964 43,195
Goodwill, net 134,855 135,612
Other assets 9,197 9,020
-------- --------
Total assets $425,210 $434,235
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to bank $ 51,030 $ 60,750
Current portion of long-term debt and capital
lease obligations 3,167 3,170
Accounts payable 69,718 68,015
Accrued expenses and other liabilities 28,778 28,834
-------- --------
Total current liabilities 152,693 160,769
Long-term debt, less current portion 150,500 152,000
Other long-term liabilities 1,880 1,919
-------- --------
Total liabilities 305,073 314,688
Stockholder's equity:
Common stock, $.01 par value: Authorized
shares-3,000; issued and outstanding
shares-100 (wholly-owned by CT Holding,Inc.) -- --
Additional paid-in capital 118,920 118,920
Retained earnings 1,217 627
-------- --------
Total stockholder's equity 120,137 119,547
-------- --------
Total liabilities and stockholder's equity $425,210 $434,235
======== ========
</TABLE>
Note: The balance sheet at November 1, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands)
Three months ended
---------------------------------------
SUCCESSOR | PREDECESSOR
----------------- | ----------------
January 31, 1998 | February 1, 1997
----------------- | ----------------
<S> <C> <C>
Net sales $144,393 | $ 71,479
Cost of sales 102,774 | 51,070
-------- | --------
Gross profit 41,619 | 20,409
|
Selling, general and administrative expenses 34,094 | 17,614
Amortization of intangibles 866 | 257
-------- | --------
Operating income 6,659 | 2,538
|
Interest expense 5,284 | 525
-------- | --------
Income before income taxes 1,375 | 2,013
Income taxes 785 | 872
-------- | --------
Net income $ 590 | $ 1,141
======== | ========
|
Ratio of earnings to fixed |
charges 1.2x | 3.0x
======== | ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
---------------------------------------
SUCCESSOR | PREDECESSOR
----------------- | ----------------
January 31, 1998 | February 1, 1997
----------------- | ----------------
<S> <C> <C>
Operating activities |
Net income $ 590 | $ 1,141
Adjustments to reconcile net income to net |
cash provided by (used in) operations: |
Depreciation and amortization 2,447 | 1,175
Deferred income taxes 785 | 748
Changes in operating assets and liabilities 7,459 | (10,531)
-------- | --------
Net cash provided by (used in) operating activities 11,281 | (7,467)
|
Investing activities |
Purchases of property, improvements and equipment (1,107) | (1,386)
Other (532) | (813)
-------- | --------
Net cash used in investing activities (1,639) | (2,199)
|
Financing activities |
Net (repayments) borrowings under line of credit (9,720) | 24,231
Payments on long-term debt (1,500) | (16,000)
Other (43) | 209
-------- | --------
Net cash (used in) provided by financing activities (11,263) | 8,440
|
-------- | --------
Net decrease in cash and cash equivalents (1,621) | (1,226)
|
Cash and cash equivalents at beginning of period 7,378 | 3,809
-------- | --------
Cash and cash equivalents at end of period $ 5,757 | $ 2,583
======== | ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
Central Tractor Farm & Country, Inc. is a wholly-owned subsidiary of CT
Holding, Inc. ("CT Holding"), an affiliate of J.W. Childs Equity Partners, L.P.
("Childs"). The consolidated financial statements include Central Tractor Farm &
Country, Inc. and its wholly-owned subsidiary, Country General, Inc.
(hereinafter collectively "the Company").
The condensed unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions for the
Securities and Exchange Commission's Form 10-Q and Article 10 of Regulation S-X,
and do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The condensed unaudited consolidated financial statements include the
accounts of the Company and its subsidiary. All material intercompany items and
transactions have been eliminated in the consolidation. In the preparation of
the condensed unaudited consolidated financial statements, all adjustments
(consisting of normal recurring accruals) have been made which are, in the
opinion of management, necessary for the fair and consistent presentation of
such financial statements. The operating results for the interim periods are not
necessarily indicative of the results that may be expected for the year.
It is suggested that the condensed unaudited consolidated financial
statements contained herein be read in conjunction with the statements and notes
in the Company's Annual Report on Form 10-K for the year ended November 1, 1997
("Form 10-K").
NOTE 2. Acquisitions
As more fully described in the Company's Form 10-K for the year ended
November 1, 1997, the Company was acquired, effective March 27, 1997, by Childs
for approximately $159,393 (the "Acquisition"). The Acquisition was partially
funded by a public offering of $105,000 aggregate principal amount of Senior
Notes. The Acquisition was accounted for as a purchase and a new basis of
accounting has been reflected in the Company's financial statements reflecting
the fair values for the Company's assets and liabilities as of March 27, 1997.
The financial statements of the Company for periods prior to March 27, 1997 are
presented on the historical cost basis of accounting. A line has been placed in
the financial statements to distinguish
6
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between Predecessor and Successor activity.
Effective June 26, 1997, the Company acquired all of the outstanding
capital stock of Country General, Inc. ("Country General"), an agricultural
specialty retailer, for approximately $136,995 (the "Country General
Acquisition"). Country General operates a chain of 114 agricultural retail
stores. The transaction was accounted for as a purchase. As more fully described
in the Company's Form 10-K, the Country General Acquisition was partially funded
by a $49,750 cash equity contribution from CT Holding and the remainder by funds
drawn on the Company's amended and restated credit facility, which provides for
a $50,000 6-year term loan facility and a $100,000 revolving credit facility
(collectively, the "Credit Facility").
Country General's accounts and transactions are included in the
accompanying condensed consolidated financial statements from the date of
acquisition.
In allocating the purchase price to the assets and liabilities based on
fair values, a $3,358 reserve was recorded for the estimated cost, principally
lease liabilities, to close nine acquired stores during fiscal 1998; and a
$2,866 reserve was recorded for the cost of severance payments to identified
employees in connection with the closing of Country General's corporate
headquarters. As of January 31, 1998 and November 1, 1997, the reserve for
severance had been reduced to $1,788 and $2,722, respectively, as a result of
payments to terminated employees. No material changes to the store closing
reserve had been made as of January 31, 1998.
NOTE 3. DEFERRED CATALOG COSTS
The direct cost of printing and mailing the Company's annual mail order
catalog is deferred and amortized against mail order revenues over the year the
catalog is in use. The amount of unamortized deferred catalog costs at January
31, 1998 and February 1, 1997 was $595 and $56, respectively, and $48 at
November 1, 1997.
7
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CENTRAL TRACTOR FARM & COUNTRY, INC.
Certain statements in this Report may contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of
1995). All forward-looking statements involve uncertainty, and actual future
results and trends may differ materially depending on a variety of factors. For
a discussion identifying some important factors that could cause actual results
or trends to differ materially from those anticipated in the forward-looking
statements contained herein, please see Exhibit 99 to this Report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
First Quarter of Fiscal 1998 Compared to First Quarter of Fiscal 1997
Net sales for the first quarter of fiscal 1998 were $144.4 million, an
increase of $72.9 million, or 102.0%, as compared to total net sales for the
first quarter of fiscal 1997 of $71.5 million. This increase was due principally
to the acquisition of 118 stores in fiscal 1997, primarily through the Country
General Acquisition. Net sales includes $68.7 million of Country General sales
during the first quarter of fiscal 1998. In addition, the Company had a full
quarter of operations for the 4 new stores opened in fiscal 1997 and a
comparable store sales increase of 2.3% for Central Tractor stores.
Gross profit for the first quarter of fiscal 1998 was $41.6 million, an
increase of $21.2 million or 103.9%, as compared to $20.4 million for the first
quarter of fiscal 1997. Gross profit as a percentage of net sales remained
relatively constant at 28.8% for the first quarter of fiscal 1998, as compared
to 28.6% for the first quarter of fiscal 1997.
Selling, general and administrative (SGA) expenses for the first
quarter of fiscal 1998 were $34.1 million, an increase of $16.5 million, or
93.6%, as compared to the first quarter of fiscal 1997. This increase was due
primarily to costs related to the operation of the Country General stores and
other stores opened and acquired during fiscal 1997. SGA expenses as a
percentage of net sales decreased to 23.6% for the first quarter of fiscal 1998
as compared to 24.6% for the first quarter of fiscal 1997, due primarily to
proportionately higher levels of SGA expenses in the first quarter of fiscal
1997 in stores opened and acquired during fiscal 1996.
Amortization of intangibles was $0.9 million for the first quarter of
fiscal 1998 and $0.3 million for the first quarter of fiscal 1997. The increase
is due to the additional goodwill incurred in the Acquisition and the Country
General Acquisition.
8
<PAGE>
Operating income for the first quarter of fiscal 1998 was $6.7 million,
an increase of $4.2 million, or 162.3%, as compared to $2.5 million for the
first quarter of fiscal 1997. Operating income as a percentage of net sales
increased to 4.6% for the first quarter of fiscal 1998 from 3.6% for the first
quarter of fiscal 1997. The increase was the result of the factors affecting
sales, gross profit and SGA as discussed above.
Interest expense for the first quarter of fiscal 1998 was $5.3 million,
an increase of $4.8 million as compared to $0.5 million for the first quarter of
fiscal 1997. This increase was primarily due to the additional debt incurred to
the fund the Acquisition, the Country General Acquisition and the short term
borrowing needs of the consolidated entity.
Income taxes for the first quarter of fiscal 1998 were $0.8 million, a
decrease of $0.1 million as compared to the first quarter of fiscal 1997. Income
tax as a percentage of pretax earnings was 57.1% in 1998, compared to 43.3% in
1997. This increase is due primarily to amortization of goodwill related to the
Acquisition, which is not deductible for income tax purposes.
Net income for the first quarter of fiscal 1998 was $0.6 million, as
compared to $1.1 million for the first quarter of fiscal 1997 as a result of the
factors discussed above.
Liquidity and Capital Resources
In addition to cash to fund operations, the Company's primary on-going
cash requirements are those necessary for the Company's expansion and relocation
programs, including inventory purchases and capital expenditures, and debt
service. The Company's primary sources of liquidity have been funds provided
from operations, borrowings pursuant to the Company's revolving and term credit
facilities, short-term trade credit and additional equity investments.
On January 31, 1998, the Company had working capital of $85.5 million,
which was a $0.1 million decrease from working capital of $85.6 million on
November 1, 1997. This decrease resulted primarily from the repayment of $9.7
million on the Company's revolving credit facility, offset by a decrease in
inventory and changes in other current assets and liabilities.
Net cash provided by operating activities increased to $11.3 million
for the first quarter of fiscal 1998. This was an increase of $18.8 million from
the first quarter of fiscal 1997, which resulted in $7.5 million of cash used in
operating activities. This increase resulted primarily from an increase in
accounts payable and accrued expenses in the first quarter of fiscal 1998, as
compared to a decrease in the first quarter of fiscal 1997, and a larger
decrease in inventory during the first quarter of fiscal 1998 as compared to the
same period in the prior year. The Company's capital expenditures were $1.1
million and $1.4 million for the first quarter of fiscal 1998 and 1997,
respectively. In addition, the Company had net repayments of debt of $11.3
million during the first quarter of fiscal 1998 as compared to net borrowings of
$8.2 million during the first quarter of fiscal 1997.
9
<PAGE>
In connection with the Acquisition, the Company consummated a public
offering of $105.0 million aggregate of 10 5/8% Senior Notes (the "Senior
Notes"). The Senior Notes mature on April 1, 2007 with interest payable
semiannually in arrears on April 1 and October 1. The Senior Notes may be
redeemed beginning April 1, 2002 at a price of 105.3125% of the principal amount
decreasing approximately 1.77% annually thereafter until April 1, 2005 at which
time they are redeemable at face value. Furthermore, notwithstanding the
foregoing, the Company may redeem up to 35% of the original aggregate principal
amount of the Senior Notes at a price of 110% of the principal amount with the
net cash proceeds of a public equity offering within 60 days of closing such
offering.
In connection with the Country General Acquisition, on July 3, 1997,
the Company amended and restated the Credit Facility (consisting of a $50.0
million, six-year term loan facility, which has been fully funded, and a $100.0
million revolving credit facility, under which $51.0 million was outstanding as
of January 31, 1998). The Credit Facility will mature on June 30, 2003 and
borrowings will bear interest at rates based upon prime or Eurodollar rates plus
an applicable margin.
The Company anticipates that its principal uses of cash in the
foreseeable future will be working capital requirements, debt service
requirements and capital expenditures, as well as expenditures relating to
acquisitions. Based upon current and anticipated levels of operations, the
Company believes that its cash flow from operations, together with amounts
available under the Credit Facility, will be adequate to meet its anticipated
requirements in the foreseeable future for working capital, capital expenditures
and interest payments. The Company expects that if it were to pursue a
significant acquisition, it would arrange prior to the acquisition any
additional debt or equity financing required to fund the acquisition.
There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt, and the Company may be required to refinance all or a portion
of its existing debt or to obtain additional financing or to reduce its capital
spending. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
Seasonality
Unlike many specialty retailers, the Company has historically generated
positive operating income in each of its four fiscal quarters. However, because
the Company is an agricultural specialty retailer, its sales necessarily
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
its use of part-time employees. Historically, the Company's sales and operating
income have been highest in the third quarter of each fiscal year due to the
farming industry's planting season and the sale of seasonal products. Working
capital needs are highest during the second quarter. The Company expects these
trends to continue for the foreseeable future.
10
<PAGE>
Inflation
Management does not believe its operations have been materially
affected by inflation.
Year 2000
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. The expenditures for the modifications and conversions
are not expected to have a material impact on the operations of the Company.
However, if such modifications and conversions are not completed timely, the
Year 2000 problem may have a material impact on the operations of the Company.
11
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CENTRAL TRACTOR FARM & COUNTRY, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - See Index to Exhibits included elsewhere herein.
(b) FORM 8-K None
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 16, 1998 Central Tractor Farm & Country, Inc.
/s/Denny L. Starr
Denny L. Starr
Senior Vice President, Finance and
Chief Financial Officer
13
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CENTRAL TRACTOR FARM & COUNTRY, INC.
INDEX TO EXHIBITS
Page
EXHIBIT 12 Statement Re: Computation of Ratio of Earnings
to Fixed Charges.............................................15
EXHIBIT 27 Financial Data Schedule (electronic copy only)...............16
EXHIBIT 99 Important Factors Regarding Forward-Looking Statements.......17
14
CENTRAL TRACTOR FARM & COUNTRY, INC.
Schedule Regarding Computation of Ratio of Earnings to Fixed Charges
(In thousands except ratios)
Exhibit 12
Three months ended
---------------------------------------
SUCCESSOR | PREDECESSOR
----------------- | ----------------
January 31, 1998 | February 1, 1997
----------------- | ----------------
|
|
Fixed Charges: |
Interest expense $5,284 | $ 525
Portion of rent expense |
representing interest 756 | 482
------ | ------
6,040 | 1,007
====== | ======
|
|
|
Earnings: |
Income before income taxes 1,375 | 2,013
Fixed charges 6,040 | 1,007
------ | ------
$7,415 | $3,020
====== | ======
|
|
Ratio of earnings to fixed charges 1.2x | 3.0x
====== | ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of Central Tractor Farm & Country at and for the
period ended January 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Oct-31-1998
<PERIOD-START> Nov-02-1997
<PERIOD-END> Jan-31-1998
<CASH> 5,757
<SECURITIES> 0
<RECEIVABLES> 6,924
<ALLOWANCES> 386
<INVENTORY> 217,500
<CURRENT-ASSETS> 238,194
<PP&E> 47,018
<DEPRECIATION> 4,054
<TOTAL-ASSETS> 425,210
<CURRENT-LIABILITIES> 152,693
<BONDS> 150,500
0
0
<COMMON> 0
<OTHER-SE> 120,137
<TOTAL-LIABILITY-AND-EQUITY> 425,210
<SALES> 144,393
<TOTAL-REVENUES> 144,393
<CGS> 102,774
<TOTAL-COSTS> 102,774
<OTHER-EXPENSES> 34,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,284
<INCOME-PRETAX> 1,375
<INCOME-TAX> 785
<INCOME-CONTINUING> 590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 590
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual
results and performance to differ materially from those contained in
forward-looking statements made in this report and presented elsewhere by or on
behalf of the Company from time to time.
Ability to Achieve Future Growth
The Company's ability to profitably open stores in accordance with its
expansion plan and to increase the financial performance of its existing stores
will be a significant factor in achieving future growth. The Company's ability
to profitably open stores will depend, in part, on matters not completely within
the Company's control including, among other things, locating and obtaining
store sites that meet the Company's economic, demographic, competitive and
financial criteria, and the availability of capital on acceptable terms.
Further, increases in comparable store sales will depend, in part, on the
soundness and successful execution of the Company's merchandising strategy.
Seasonality
The Company is an agricultural specialty retailer, and consequently its
sales fluctuate with the seasonal needs of the agricultural community. The
Company responds to this seasonality by attempting to manage inventory levels
(and the associated working capital requirements) to meet expected demand, and
by varying to a degree its use of part-time employees. Historically, the
Company's sales and operating income have been highest in the second and third
quarters of each fiscal year due to the farming industry's planting season and
the sale of seasonal products.
Weather, Business Conditions and Government Policy
Unseasonable weather and excessive rain, drought, or early or late
frosts may affect the Company's sales and operating income. In addition, the
Company's sales volume and income from operations depend significantly upon
expectations and economic conditions relevant to consumer spending and the farm
economy.
Regional Economy
The majority of the Company's existing stores are located in the
Northeastern United States, the Midwestern United States and the Southeastern
United States. As a result, the Company's sales and profitability are largely
dependent on the general strength of the economy in these regions.
<PAGE>
Competition
The Company faces competition primarily from other chain and
single-store agricultural specialty retailers, and from mass merchandisers. Some
of these competitors have substantially greater financial and other resources
than the Company.
Currently, most of the Company's stores do not compete directly in the
markets of other agricultural specialty retail chains. However, the Company's
expansion plans will likely result in new stores being located in markets
currently serviced by one or more of these chains, and there can be no assurance
that these chains, certain of which have announced expansion plans, will not
expand into the Company's markets.
In addition, the Company competes in over half of its markets with mass
merchandisers. The Company believes that its merchandise mix and level of
customer service currently successfully differentiate it from mass
merchandisers, and that as a result the Company has to date not been
significantly impacted by competition from mass merchandisers. However, in the
past certain mass merchandisers have modified their product mix and marketing
strategies in an effort apparently intended to permit them to compete more
effectively in the Company's markets, and it is likely that these effort will
continue by these and other mass merchandisers.
