SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 1998
OR
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-24902
CENTRAL TRACTOR FARM & COUNTRY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 42-1425562
(State of incorporation) (I.R.S. Employer I.D. No.)
3915 Delaware Avenue
Des Moines, Iowa 50316-0330
(515) 266-3101
(Address and telephone number
of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
All of the registrant's stock (100 shares as of January 29, 1999) is
held by CT Holding, Inc. and is not publicly traded.
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CENTRAL TRACTOR FARM & COUNTRY, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED OCTOBER 31, 1998
<S> <C> <C>
Page
PART I
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 8
Item 3. Legal Proceedings................................................................ 8
Item 4. Submission of Matters to a Vote of Security-Holders.............................. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 10
Item 6. Selected Financial Data......................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................15
Item 8. Financial Statements and Supplementary Data..................................... 16
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure......................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 17
Item 11. Executive Compensation.......................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 21
Item 13. Certain Relationships and Related Transactions.................................. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 22
</TABLE>
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References herein to "fiscal" years are references to Central Tractor Farm
& Country, Inc.'s 52- or 53-week fiscal year, which ends on the Saturday nearest
October 31 in that year.
ITEM 1. BUSINESS
Overview
Central Tractor Farm & Country, Inc., a Delaware corporation, along with
its subsidiary Country General, Inc., (collectively the "Company" or "CT"), is
an agricultural specialty retailer with 215 stores (as of December 31, 1998)
serving the agricultural, hardware and related needs of rural consumers,
especially part-time and full-time farmers, hobby gardeners, skilled trades
persons and do-it-yourself ("DIY") customers. CT was founded in 1935 and has
established itself as a market leader in the agricultural specialty market,
having strong name recognition and a loyal customer base. The Company's stores
offer a wide selection of agricultural products such as tractor parts and
accessories, feed, fencing materials and animal health supplies, specialty
hardware and paint, lawn and garden items, rural automotive parts and
accessories, workwear, pet supplies and general consumer merchandise. The
Company has also established national visibility for its products and services
through its catalog operation, which has an annual circulation of approximately
675,000.
Acquisition of the Company by J.W. Childs
On November 27, 1996, the Board of Directors of the Company approved, and
the Company entered into, a merger agreement (the "Merger Agreement") with J.W.
Childs Equity Partners, L.P. and two of its affiliates (collectively "Childs")
that provided for the acquisition of the Company by Childs in a two-stage
transaction (the "Acquisition"). The Merger Agreement provided that following
the acquisition by Childs of all of the Company shares held by affiliates of
Butler Capital Corporation (collectively, "BCC"), an affiliate of Childs would
merge with and into the Company (the "Merger") and Childs would acquire the
remaining shares of the Company held by public shareholders ("Merger
Consideration") for $14.25 per share in cash. The Merger was completed on March
27,1997.
Concurrent with the execution of the Merger Agreement, Childs entered into
agreements (the "Securities Purchase Agreements") with BCC and with certain
members of the Company's management (the "Management Shareholders") pursuant to
which Childs agreed to purchase at a price of $14.00 per share 100% of BCC's
shares and 36.4% of the Management Shareholders' shares representing
approximately 64.0% and 1.4% of the Company's outstanding common stock,
respectively (collectively the "Securities Purchases").
As of January 2, 1997, Childs had consummated the Securities Purchases and
paid related expenses utilizing (i) $65.4 million of cash equity and, (ii) $35.1
million of borrowings under an interim margin loan facility (the "Margin Loan
Facility"). In connection with the Securities Purchases, the Company entered
into a term loan and a revolving credit facility (the "Credit Facility") and
used a portion of such facilities to refinance existing debt of the Company,
including a $16.0 million convertible note held by BCC. The Credit Facility was
amended at the time of the Country General Acquisition discussed below. See
"Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
On March 27, 1997, the Company consummated a public offering of $105.0
million aggregate principal amount of Senior Notes. The net proceeds from the
offering were used to repay borrowings under the Margin Loan Facility, pay the
Merger Consideration, repay a portion of the outstanding borrowings under the
Credit Facility and pay fees and expenses of the Acquisition.
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The Acquisition was accounted for as a purchase. The total purchase price
has been allocated to the tangible and intangible assets and the liabilities of
the Company based upon their respective fair values. The cost of the Acquisition
over the allocated fair value of the underlying tangible net assets is as
follows (in thousands):
Cost of acquiring the outstanding common stock of the Company
from predecessor shareholders $159,393
Fair value of underlying tangible net assets 72,050
--------
Excess of cost of acquisition over the allocated fair value
of the underlying tangible net assets $ 87,343
========
As a result of the Acquisition, the Company is a wholly-owned subsidiary of
CT Holding, Inc. ("Holding"), an affiliate of Childs, and a new basis of
accounting has been reflected in the Company's financial statements reflecting
the fair values for the Company's assets and liabilities as of March 27, 1997.
The financial statements of the Company for periods prior to March 27, 1997, are
presented on the historical cost basis of accounting.
Acquisitions
Effective June 26, 1997, the Company acquired all of the outstanding
capital stock of Country General, Inc. ("Country General") for approximately
$138.6 million (including related costs and expenses) in cash (the "Country
General Acquisition"). Country General operated a chain of 114 agricultural
specialty retail stores. The Company funded the acquisition price in part from a
$49.75 million cash equity contribution from Holding, and the remainder from
funds drawn under the amended and restated Credit Facility (see "Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources").
The Country General Acquisition was accounted for as a purchase. The
purchase price was allocated to the tangible and intangible assets and the
liabilities based on fair values, as follows (in thousands):
Total purchase price $138,563
Fair value of underlying tangible net assets 86,788
--------
Excess of cost of acquisition over the allocated
fair value of the underlying tangible net assets $ 51,775
========
In May 1997, the Company acquired 4 retail stores and certain net operating
assets from Donald A. Walsh, Inc. ("Walsh"), a privately owned specialty
retailer for approximately $2.5 million. The transaction was accounted for as a
purchase.
The results of operations of Country General and Walsh are included in the
accompanying consolidated statements of income from the respective date of
purchase.
In addition, in January 1999, the Company acquired nine retail stores and
certain net operating assets from H.C. Shaw Co., a privately owned specialty
retailer for approximately $7.0 million, subject to post-closing adjustments.
The transaction will be accounted for as a purchase.
Expansion Plan
Since the beginning of fiscal 1996, the Company has increased the number of
its retail stores from 66 to 215. In fiscal 1996, the Company opened 14 new
stores and acquired 31 stores from Big Bear Farm Stores, Inc. ("Big Bear"). In
fiscal 1997, the Company opened 3 new stores and acquired 118 stores primarily
through the Country General
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Acquisition. Five stores were closed in 1997. In fiscal 1998, the Company opened
1 new store and closed 14 stores (including 12 stores acquired from Country
General, for which the closure was reserved in connection with the acquisition).
Currently in fiscal 1999, the Company has opened 2 new stores and closed 1
store.
The integration of the Big Bear stores and the Country General stores into
the Company's systems was completed during fiscal 1997 and fiscal 1998,
respectively. The Company plans to add an additional 25 stores in each of fiscal
1999 and fiscal 2000 through further penetration of the Northeastern and
Midwestern United States markets and through expansion into the Southeastern and
Western United States. Management intends to achieve this growth through new
store openings and selective acquisitions. On a preliminary basis, the Company
has identified potential new markets outside of its existing markets that
management believes are attractive candidates for one or more new CT stores. The
number of actual new CT store openings in the next two years may differ
materially from the projections outlined above if the Company makes a major
acquisition or is unable to find attractive store locations to rent at
reasonable prices, negotiate acceptable lease terms or acquire small regional
farm store chains at reasonable prices.
The Company seeks to locate stores in high traffic shopping districts
whenever possible in order to attract customers who prefer to do much of their
shopping at one time and place. As with the majority of its existing stores, the
Company intends to lease its new stores. The estimated cash required to open a
new, leased, large prototype store (approximately 22,000 square feet) is
$850,000 and the estimated cash required to open a new, leased, small prototype
store (approximately 11,000 square feet) averages $600,000 (in each case,
including inventory net of accounts payable and excluding an average of
approximately $100,000 in pre-opening expenses). Of these estimated cash
expenditures, approximately half is used for initial inventory (net of accounts
payable), and the balance is used for capital expenditures, principally
leasehold improvements, fixtures and equipment.
The Company also intends to continue to opportunistically relocate existing
stores. These relocations reflect, in most cases, the expiration of an existing
lease coupled with an opportunity to move to a more demographically and/or
physically attractive site.
Retail Stores
CT stores focus on agricultural and agricultural related products. The
Company segments its merchandising mix into seven key product categories:
agricultural products (including tractor parts and accessories), specialty
hardware, lawn and garden products, workwear products, rural automotive parts
and accessories, pet supplies and general consumer products. Sale of
agricultural and related products represent approximately 60% of CT's total net
sales. The growth and percentage of total store sales for each retail product
category for fiscal 1998, fiscal 1997, and fiscal 1996, and a description of
each product category, are set forth below:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Agricultural (including tractor parts 26.6% 26.8% 24.0%
and accessories)
Specialty Hardware 17.6% 17.7% 20.6%
Lawn & Garden and Seasonal 17.4% 18.4% 19.6%
Workwear 10.2% 9.3% 8.4%
Rural Automotive Parts & Accessories 14.3% 14.3% 14.8%
Pet Supplies 7.0% 6.6% 6.3%
General Consumer 6.9% 6.9% 6.3%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
Agricultural Products. CT stores' agricultural product line consists of
approximately 6,000 stock keeping units ("SKUs") supplying the needs of the
part-time and full-time farmer, including tractor parts, tillage and
harvesting parts, fencing materials and animal health supplies. This
product line consists largely of consumable products and
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other items requiring replacements on a regular basis. This product line
accounted for $156.3 million, $110.5 million and $67.3 million of the
Company's total revenue in fiscal years 1998, 1997 and 1996, respectively.
CT emphasizes consumable agricultural supplies that are purchased
frequently by its customers and does not sell heavy equipment such as
tractors or combines.
Specialty Hardware. CT's speciality hardware line consists of approximately
9,000 SKUs with an emphasis on products with agricultural applications.
These products accounted for $103.6 million, $72.7 million and $57.9
million of the Company's total revenue in fiscal years 1998, 1997 and 1996,
respectively. CT stores carry a broad range of high-quality hardware with
an emphasis on recognized branded professional products, including hand
tools, power tools, mechanical tools, electrical products, including
outdoor lighting, security lighting and motors, welders, air compressors,
generators, paints (as well as a competitively-priced private-label brand)
and plumbing supplies.
Lawn and Garden and Seasonal Products. CT's lawn and garden products
consist of approximately 2,000 SKUs, including lawn and garden tools,
nursery stock, fertilizers, lawn fencing and weed killers. These products
accounted for $102.1 million, $75.8 million and $54.8 million of the
Company's total revenue in fiscal years 1998, 1997 and 1996, respectively.
To differentiate itself from other retailers, CT also stocks a selection of
lawn mowers ranging from competitively priced items to full-featured riding
lawn mowers. CT assembles and tests the lawn mowers and sells a full
assortment of parts for follow-up service needs. CT stores offer seasonal
bedding plants, trees and shrubs in their garden centers. CT stores also
offer heating/energy equipment, including stoves, space heaters and fans.
Workwear. CT's workwear products, including products sold under the
Carhartt, Walls and Iron Age brand names, are targeted at the specialized
needs of its outdoor-oriented customers who require high quality functional
apparel. This product category consists of approximately 3,000 SKUs,
including premium quality insulated outerwear, overalls, flannel shirts and
work jeans. These products accounted for $59.8 million, $38.1 million and
$23.5 million of the Company's total revenue in fiscal years 1998, 1997,
and 1996, respectively. The Company has been expanding its workwear line in
its new stores to include quality non-insulated workwear, bib overalls,
twill pants and hunting clothing.
Rural Automotive Parts and Accessories. CT's rural automotive parts and
accessories consist of approximately 4,000 SKUs, including a core selection
of automotive parts, batteries and accessories for rural vehicles,
primarily for pick-up trucks and tractors. The products accounted for $83.9
million, $58.6 million and $41.4 million of the Company's total revenue in
fiscal years 1998, 1997 and 1996, respectively. CT also stocks a small
assortment of general automotive items as a convenience to its customers,
including oil and lubrication products and anti-freeze. In addition to
brand name products, certain of the Company's automotive products are
offered under CT's own private label.
Pet Supplies. CT's pet supplies consist of approximately 1,000 SKUs,
including dog and cat foods, wild bird feed, and rabbit supplies. These
products accounted for $40.9 million, $27.2 million and $17.7 million of
the Company's total revenue in fiscal years 1998, 1997, and 1996,
respectively. The pet supplies sold by CT include economically priced large
sizes, such as 50 pound bags of dog food. Certain of these items are sold
under CT's private label. CT has been expanding its pet supplies product
category.
General Consumer Products. CT's general consumer products line consists of
approximately 2,000 SKUs, including farm replicas and collectible toys and
sporting goods, including guns and ammunition, hunting accessories, camping
items and outdoor living needs. These products accounted for $40.6 million,
$28.3 million and $17.8 million of the Company's total revenue in fiscal
years 1998, 1997, and 1996, respectively. CT stores also offer seasonal
merchandise such as charcoal grills and coolers in the summer.
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Store Operations
The Company utilizes large and small store formats in order to enable
management to enhance CT's return on investment in light of varying population
density. The Company's small stores average 10,000 square feet of indoor selling
space and had average store sales of $1.6 million in fiscal 1998. The large
stores average 24,000 square feet of indoor selling space and had average store
sales of $3.9 million in fiscal 1998. Small stores generally carry a smaller
selection of workwear and seasonal and other general consumer products than
large stores. In addition, the Company looks for store sites that have 15,000 to
20,000 square feet of outdoor selling space. This outdoor selling space is
primarily used for displaying lawn and garden products, fencing, tractor
accessories and livestock watering and feeding equipment.
Both CT prototype stores are designed to provide customers with ease in
locating desired products and are clean and colorful in order to provide an
overall enjoyable shopping environment. The use of informative directional
signing adds to the ease of the customer's shopping experience. Plan-o-grams are
utilized to set merchandise assortments in the seven core product categories to
ensure uniformity of presentation, ease of shopping for the customer and to
facilitate inventory management, replenishment and restocking.
The agricultural products department is prominently featured in each store
and is identified by the parts desks. The parts desk is the focal point for CT's
new and used tractor parts program. In addition , the parts desk enables CT to
offer a high level of customer service, ranging from answering technical
questions regarding various products to the special ordering of hard to find
parts. Each parts desk is managed by the store's agricultural product specialist
who has access to the CT catalog and other inventory sources to quickly obtain
needed parts.
Each store is managed by a store manager who is responsible for all aspects
of the store operations, including the hiring and training of store associates,
work scheduling, inventory control, expense control, customer service and
associate morale. Typically, the store manager is supported by an assistant
manager and core department heads, along with an average of 15 sales associates.
Store operations are coordinated through sixteen district managers each of whom
is currently responsible for eleven to twenty retail stores. In addition, the
Company has developed and implemented consistent store standards, processes and
best practices for the chain.
The Company has established an internal store management training program
which focuses training on store operations, systems, financial matters, human
resources and sales. To support the Company's planned expansion and its
management training programs, the Company has implemented a long-range personnel
plan that provides for internal promotions, coupled with recruitment of college
graduates and hiring of individuals with previous retail experience. Store
associates receive training which emphasizes customer service, sales, product
knowledge and store procedures. All CT store operations' management, including
district managers, store managers and assistant managers are compensated based
on job performance, and participate in an incentive program, which is based on
the store/district exceeding a targeted level of profitability. The Company also
has established an incentive program for all store associates that focuses on
sales and profitability.
Other Operations
The CT catalog offers a broad assortment of new, used and rebuilt tractor
parts and agricultural componentry, including approximately 25,000 SKUs. In
fiscal 1998, catalog sales were $8.2 million. The catalog will be distributed
nationally to approximately 675,000 households in rural and agricultural
communities in fiscal 1999. The breadth of this distribution provides the
Company with name recognition among agricultural consumers in areas outside of
its core geographical markets. As a consequence, the Company anticipates some
customer familiarity with the Company when it expands into new areas.
The Company also sells tractor parts and other items, on a wholesale basis,
to other agricultural retailers and distributors. In recent years, the Company
has been reducing the number of products offered and the number of customers
served by this unit. In fiscal 1998, the Company's wholesale business generated
sales of $3.2 million.
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Purchasing and Distribution
The Company maintains a staff of ten merchandise buyers, each of whom is
responsible for specific product categories, at its headquarters in Des Moines,
Iowa. The purchasing and inventory control process is controlled centrally by
the Company's point of sale ("POS") and automatic replenishment systems. See "-
Corporate Offices and Management Information Systems." The Company purchases its
merchandise from approximately 1,500 vendors, none of which accounted for more
than 10% of the Company's purchases during fiscal 1998. The Company generally
maintains multiple sources of supply for its products in order to minimize the
risk of supply disruption and to improve its negotiating position. The Company
has no material long-term contractual commitments with any of its vendors.
The Company operates a 135,000 square-foot distribution center in Des
Moines, Iowa, a 175,000 square-foot distribution center in Youngstown, Ohio, and
a 300,000 square foot distribution center in Grand Island, Nebraska from which
it currently supplies the majority of its retail stores' inventory needs. The
Des Moines facility is used to handle the small part items and to receive
purchases sourced from vendors located in the Midwest. The Youngstown and Grand
Island facilities serve primarily as flow-through distribution stations.
Approximately 35% of total purchases, consisting mainly of high volume commodity
items, are shipped by vendors directly to individual store locations.
Merchandise from the distribution centers is shipped to each store through
supply orders generated by an automated replenishment system. The Company
transports most of its merchandise to each store once a week from the
distribution centers through a major contract carrier. The contract carrier's
truck fleet delivers all warehouse shipments and most of the truckloads of
merchandise which is shipped directly from vendors to store locations.
The Company expects that its current distribution facilities will be
sufficient to accommodate its planned expansion through fiscal 2000.
Corporate Offices and Management Information Systems
To facilitate the Company's expansion plan and to maintain consistent store
operations, CT has centralized specific functions of its operations, including
accounting, the development of policies and procedures, store layouts, visual
merchandise presentation, inventory management, merchandise procurement and
allocations, marketing and advertising, human resources and real estate. This
centralization effectively utilizes the experience and resources of the
Company's senior management and provides a high level of consistency throughout
the chain.
The Company has invested considerable resources in its management
information and control systems, which were developed beginning in 1981 and have
been expanded and improved yearly. These systems provide support for the
purchase and distribution of merchandise and help to improve the manner in which
CT stores, the corporate offices and distribution centers are operated. All CT
stores (including all of the acquired Country General Stores) use the Company's
POS system to capture sales information at the SKU level. Through the POS
system, the Company can monitor customer purchases and inventory levels with
respect to every item of merchandise in each store daily. The Company has
implemented scanning capabilities in the receiving process of its distribution
centers and currently plans to expand this to the picking and shipping process.
Electronic Data Interchange ("EDI") is used to send purchase orders to and
receive invoices from certain of its largest suppliers. CT intends to expand its
use of EDI to communicate invoicing, shipments and sales activity to and from
most major suppliers.
The Company also has an automated inventory replenishment system which uses
POS information, and facilitates the timely replenishment of both the stores and
the warehouses. The sales and inventory information used in this system is
updated on a daily basis. This system also provides for minimum stocking levels
for lower volume items enabling CT to carry a large number of SKUs at a minimum
of inventory carrying expense.
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Competition
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers, general merchandise retailers and home
centers. Some of these competitors have substantially greater financial and
other resources than the Company.
Currently, most of the Company's stores do not compete directly in the
markets of other agricultural specialty retail chains. However, the Company's
expansion plans will likely result in new stores being located in markets
currently served by one or more of these chains, and there can be no assurance
that these chains, certain of which have announced expansion plans, will not
expand into the Company's markets. Expansion by the Company into markets
currently served by its competitors or expansion by competitors into the
Company's markets could have a material adverse effect on the Company's
business, financial condition or results of operation.
In addition, the Company competes in over 90% of its markets (which the
Company defines as a 30 mile radius around a store) with general merchandise
retailers and/or home centers and expects these retailers to be in many of the
markets targeted for expansion. The Company believes that its merchandise mix
and level of customer service successfully differentiate it from general
merchandise retailers and home centers, and as a result the Company has to date
been able to operate profitably despite competition from general merchandise
retailers and home centers. However, in the past certain general merchandise
retailers and home centers have modified their product mix and marketing
strategies in an apparent effort to compete more effectively in the Company's
markets. There can be no assurances that these efforts will not continue or that
the Company will continue to be able to compete successfully against current and
future competition.
Advertising and Promotions
The Company's primary advertising occurs through the bi-weekly distribution
of approximately 5.8 million color circulars distributed as newspaper inserts,
at retail stores and by direct mail. In order to focus its marketing on the many
farmers in the Company's markets, the Company also advertises in geographically
zoned editions of leading farming industry magazines. In addition, the Company
runs periodic special events promoted through local flyers, circulars and radio
advertising.
Seasonality
Unlike many specialty retailers, the Company has historically generated
positive operating income in each of its four fiscal quarters. However, because
the Company is an agricultural specialty retailer, its sales necessarily
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
its use of part-time employees. Historically, the Company's sales and operating
income have been highest in the third quarter of each fiscal year due to the
farming industry's planting season and the sale of seasonal products. Working
capital needs are highest during the second quarter. The Company expects these
trends to continue for the foreseeable future.
Employees
As of October 31, 1998, CT had approximately 4,500 employees (approximately
2,200 in full-time and approximately 2,300 in part-time positions). The Company
believes its relations with its employees is good.
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ITEM 2. PROPERTIES
As of December 31, 1998, the Company had 215 retail stores located in 25
states as follows:
State Number of Stores
Nebraska 47
Iowa 27
New York 23
Pennsylvania 17
Colorado 15
Minnesota 12
South Dakota 11
Kansas 7
Virginia 7
Kentucky 6
Ohio 6
North Dakota 5
Wisconsin 5
Indiana 4
Maryland 4
Wyoming 4
New Jersey 3
Missouri 2
Montana 2
Oklahoma 2
Tennessee 2
Delaware 1
Illinois 1
Massachusetts 1
Vermont 1
---
Total 215
===
The Company owns 53 of the stores and leases the remaining 162 stores. In
addition the corporate headquarters and three distribution centers are leased.
The Company's corporate headquarters are located adjacent to its distribution
center in Des Moines, Iowa. The Company generally negotiates retail store leases
with an initial term between five and seven years, with two or three renewal
periods of five years each, exercisable at the Company's option. In fiscal 1998,
the Company paid an average of $5.02 per square foot in retail store occupancy
expenses, including rent, taxes, common area charges, repairs and maintenance.
Rent expenses generally do not vary based on sales, and generally increase 10-
15% at the beginning of each option period.
ITEM 3. LEGAL PROCEEDINGS
The Company has been notified by the U.S. Environmental Protection Agency
that it may have potential liability for cleanup costs associated with the
cleanup of a dumpsite near Owensburg, Kentucky. To date, the only articles of
waste identified as possibly once belonging to the Company are certain empty
battery acid containers. The Company believes that any liability it might have
as a result of this action would be as a de minimis contributor and will not
have a material effect on the Company's financial position, liquidity or results
of operations.
The Company is not a party to any other legal proceedings, other than
routine claims and lawsuits arising in the ordinary course of business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business.
Compliance with federal, state and local laws
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and regulations pertaining to the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had, and is
not anticipated to have, a material effect upon the capital expenditures,
earnings or competitive position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Central Tractor Farm & Country, Inc. Common Stock is held entirely by
Holding. See "Item 1. Business - Acquisition of the Company by J.W. Childs."
The Company has not paid any cash dividends on its common stock. Although
the Company may pay limited cash dividends on its common stock, the Company's
ability to pay cash dividends is restricted by the Credit Facility.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Successor | Predecessor
------------------------------ | --------------------------------------------------
Period of | Period of
seven | five
Fiscal year months | months Fiscal Year End
ended ended | ended --------------------------------------
October November 1, | March November October 28, October 29,
31, 1998 1997 | 26, 1997 2, 1996 1995 1994
----------- ------------ | --------- ---------- ----------- -----------
| (In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 587,195 $ 305,122 | $ 106,048 $ 293,020 $ 251,703 $ 231,064
Income (loss) from continuing |
operations 9,975 1,365 | (1,247) 8,744 8,185 5,181
Ratio (deficiency) of earnings to |
fixed charges (1) 1.8x 1.3x | (1,881) 5.3x 5.8x 2.5x
Number of stores at end of period (2) 214 227 | 112 111 66 55
Comparable store sales per square |
foot of indoor selling space (3) 180 191(6) | 222 224 240
Comparable store sales increases |
(decreases)(4) 4.6% (4.7%)(6) | 1.0% (1.6%) 10.0%
Balance Sheet Data (at end of period): |
Working capital $ 98,409 $ 85,639 | $ 63,803 $ 62,496 $ 50,442
Total assets 418,845 434,235 | 159,238 149,977 139,416
Long-term debt, less current portion (5) 150,011 153,171 | 17,341 16,862 16,959
Stockholders' equity 129,757 119,547 | 90,063 81,277 75,735
<FN>
(1) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist
of interest expense, amortization of deferred financing costs and 20.0% of the rent expense from operating leases which the
Company believes is a reasonable approximation of the interest factor included in the rent. For the five month period ended,
March 26, 1997 earnings were insufficient to cover fixed charges by $1,881.
(2) Net of three store closings in fiscal 1994, five store closings in fiscal 1997 and 14 store closings in fiscal 1998.
(3) Comparable sales per square foot of indoor selling space and calculated by dividing store sales by total indoor selling square
footage for stores open and operated by CT at least twelve months in each fiscal year.
(4) Percentage change in store sales as compared to sales for the same stores for the prior year for stores open and operated by CT
for at least twelve months in each year. The 1.0% increase in comparable store sales in 1996 has been adjusted to reflect a
comparable 52 week year. Comparable store sales grew 2.9% without such adjustment. The 4.7% decrease in comparable store sales
in 1997 has been adjusted to reflect that fiscal year 1996 was a 53 week year. Comparable store sales declined 6.5% without
such adjustment.
(5) Excluding, in fiscal 1995 and prior years, long-term debt from discontinued operations.
(6) Calculations are for the fiscal year ended November 1, 1997.
</FN>
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected consolidated
financial data and the consolidated financial statements of the Company and
related notes thereto.
Results of Operations
The following table sets forth, for the periods indicated, certain items in
the Company's Statements of Income expressed as a percentage of net sales. All
amounts and percentages for the fiscal year ended November 1, 1997 include the
activity for the periods of the seven-months ended November 1, 1997 and the
five-months ended March 26, 1997 on a combined basis.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
October 31, November 1, November 2,
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 30.1 29.1 29.3
Selling, general and
administrative expenses 22.9 24.6 23.3
Amortization of intangibles .6 .6 .3
----- ----- -----
Operating income 6.6 3.9 5.7
Interest expense 3.5 3.5 .6
----- ----- -----
Income before income taxes 3.1 .4 5.1
Income taxes 1.4 .4 2.1
----- ----- -----
Income from continuing
operations 1.7% 0.0% 3.0%
===== ===== =====
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Net sales for the fiscal year ended October 31, 1998 were $587.2
million, an increase of $176.0 million, or 42.8%, as compared to net sales for
the fiscal year ended November 1, 1997 of $411.2 million. The increase was due
principally to the fact that the Country General stores had a full year of sales
in fiscal 1998 compared to four months in fiscal 1997. Net sales includes $257.3
million and $99.4 million of Country General sales in fiscal 1998 and fiscal
1997, respectively. In addition, the Company had an increase in comparable store
sales of $13.2 million or 4.6% and had a full year of operations for the 4
stores acquired from Walsh and the 3 stores opened in 1997. The increase in
comparable store sales was due primarily to the fact that fiscal year 1998 had
warm early spring weather conditions while fiscal year 1997 had a mild winter
followed by a cool spring and dry summer in the Northeast where most of the
comparable stores are located.
Gross profit for fiscal 1998 was $177.0 million, an increase of $57.5
million, or 48.1%, as compared to $119.5 million for fiscal 1997, principally as
a result of the increase in net sales. Gross profit as a percentage of sales
increased to 30.1% for fiscal 1998, as compared to 29.1% for fiscal 1997. The
increase in gross profit percentage is a result of the increased purchasing
power obtained as a result of the Country General Acquisition.
Selling, general, and administrative expenses for fiscal 1998 were
$134.6 million, an increase of $33.4 million, or 33.0%, over fiscal 1997. This
increase was due primarily to costs related to the operation of the Country
General stores and new stores opened in fiscal 1997 for a full year in fiscal
1998. Selling, general, and administrative expenses
11
<PAGE>
as a percentage of sales decreased to 22.9% in fiscal 1998 as compared to 24.6%
in fiscal 1997. This decrease is attributable to completion of the integration
of the Country General stores and increased sales volume.
Amortization of intangibles was $3.6 million for fiscal 1998 and $2.2
million in fiscal 1997. The increase is due to a full year of amortization of
the additional goodwill incurred in the Acquisition and the Country General
Acquisition.
Operating income for fiscal 1998, was $38.8 million, an increase of
$22.6 million, or 139.9%, as compared to fiscal 1997. Operating income as a
percentage of sales increased to 6.6% in fiscal 1998 from 3.9% in fiscal 1997.
The increase resulted from the factors affecting net sales, gross profit,
selling, general and administrative expenses and amortization of intangibles
discussed above.
Interest expense for fiscal 1998 was $20.5 million, an increase of $5.8
million, as compared to $14.7 million for fiscal 1997. This increase was
primarily due to a full year of interest expense on the additional debt incurred
to fund the Acquisition and the Country General Acquisition.
Income tax expense for fiscal 1998, was $8.4 million, an increase of
$7.0 million, or 490.3% as compared to $1.4 million for fiscal 1997. Income
taxes as a percentage of pretax earnings were 45.7% in fiscal 1998 as compared
to 92.3% in fiscal 1997. The decrease is due primarily to amortization of
goodwill related to the Acquisition, which is not deductible for income tax
purposes, being spread over a larger income base in fiscal 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales for the fiscal year ended November 1, 1997 were $411.2 million,
an increase of $118.2 million, or 40.3%, as compared to net sales for the fiscal
year ended November 2, 1996 of $293.0 million. The increase was due principally
to the acquisition of 118 stores, primarily through the Country General
Acquisition. Net sales includes $99.4 million of Country General sales since the
date of the acquisition. In addition, the Company opened 3 new stores in 1997
and had a full year of operations for 45 stores opened or purchased in fiscal
1996. This increase was offset by a decrease in comparable store sales of $16.7
million or 6.5%. The decrease in comparable store sales was due primarily to the
fact that fiscal year 1997 consisted of 52 weeks while fiscal year 1996
consisted of 53 weeks and a mild winter followed by a cool spring and dry summer
in the Northeast where most of the comparable stores are located.
Gross profit for fiscal 1997 was $119.5 million, an increase of $33.7
million, or 39.3%, as compared to $85.8 million for fiscal 1996. Gross profit as
a percentage of sales remained relatively constant at 29.1% for fiscal 1997, as
compared to 29.3% for fiscal 1996.
Selling, general, and administrative expenses for fiscal 1997 were $101.2
million, an increase of $33.0 million, or 48.4%, over fiscal 1996. This increase
was due primarily to costs related to the acquisition and operation of the
Country General stores and costs related to new store openings. Selling,
general, and administrative expenses as a percentage of sales increased to 24.6%
in fiscal 1997 as compared to 23.3% in fiscal 1996. This increase is
attributable to higher selling, general and administrative expenses as a
percentage of sales at the Country General stores. CT stores percentage in 1997
was 23.9% versus 26.9% for Country General. The percentage for CT stores
increased over the prior year primarily due to decreased sales volume in
comparable stores.
Amortization of intangibles was $2.2 million for fiscal 1997 and $.9
million in fiscal 1996. The increase is due to the additional goodwill incurred
in the Acquisition and the Country General Acquisition.
Operating income for fiscal 1997, was $16.2 million, a decrease of $.5
million, or 3.0%, as compared to fiscal 1996. Operating income as a percentage
of sales decreased to 3.9% in fiscal 1997 from 5.7% in fiscal 1996. The decrease
resulted from the factors affecting net sales, gross profit, selling, general
and administrative expenses and amortization of intangibles discussed above.
12
<PAGE>
Interest expense for fiscal 1997 was $14.7 million, an increase of $13.0
million, as compared to $1.7 million for fiscal 1996. This increase was
primarily due to the additional debt incurred to fund the Acquisition and the
Country General Acquisition and the additional short term borrowing needs of the
consolidated entity.
Income tax expense related to continuing operations for fiscal 1997, was
$1.4 million, a decrease of $4.8 million, or 77.4% as compared to $6.2 million
for fiscal 1996. Income taxes as a percentage of pretax earnings were 92.3% in
fiscal 1997 as compared to 41.7% in fiscal 1996. The increase is due primarily
to amortization of goodwill related to the Acquisition, which is not deductible
for income tax purposes.
Liquidity and Capital Resources
In addition to cash to fund operations, CT's primary on-going cash
requirements are those necessary for the Company's expansion and relocation
programs, including inventory purchases and capital expenditures, and debt
service. The Company's primary sources of liquidity have been funds provided
from operations, borrowings pursuant to the Company's revolving and term credit
facilities, short term trade credit and additional equity investments.
On October 31, 1998, the Company had working capital of $98.4 million, an
increase of $12.8 million, as compared to working capital of $85.6 million on
November 1, 1997. This increase resulted primarily from a decrease in accrued
expenses, and borrowings under the Company's revolving credit facility partially
offset by an increase in accounts payable and decreases in accounts receivable,
inventory and deferred income taxes. On October 31, 1998, the Company's
inventories were $217.1 million, a decrease of $5.0 million, as compared to
$222.1 million at November 1, 1997. This decrease is primarily a result of the
store closings in fiscal 1998. On October 31, 1998, the Company's accounts
payable were $78.3 million, an increase of $10.3 million, as compared to $68.0
million at November 1, 1997. This increase is primarily a result of the Company
negotiating improved terms with its vendors.
Continuing operations of the Company generated $37.2 million of net cash in
fiscal 1998, used $0.5 million of net cash in fiscal 1997, and generated $5.0
million of net cash in fiscal 1996. The increase in net cash generated in fiscal
1998, as compared to fiscal 1997, resulted primarily from an increase in net
income from continuing operations, a larger increase in accounts payable, and a
net decrease in inventory compared to a net increase in 1997. The decrease in
net cash generated in fiscal 1997, as compared to fiscal 1996, resulted
primarily from a decrease in net income from continuing operations, a larger
increase in inventory, and an increase in recoverable income taxes, partially
offset by an increase in accounts payable and accrued expenses, as compared to a
decrease in fiscal 1996, an increase in depreciation and amortization and a
larger increase in deferred income taxes.
The Company's capital expenditures were $4.8 million and $6.2 million for
fiscal 1998 and 1997, respectively. The majority of capital expenditures were
for store fixtures, equipment and leasehold improvements for new and existing
stores. The Company presently expects its capital expenditures for new store
openings and for renewal and replacement costs at existing stores and
distribution centers in fiscal 1999 to be approximately $19.5 million.
During fiscal 1997, the Company was acquired by an affiliate of J.W. Childs
Equity Partners, L.P. and thereafter became a wholly owned subsidiary of
Holding. See "Item 1. Business - Acquisition of the Company by J.W. Childs" and
Notes to Consolidated Financial Statements. In connection with the Acquisition,
on March 27, 1997, the Company consummated a public offering of $105.0 million
aggregate principal amount of 10 5/8% Senior Notes (the "Senior Notes"). The net
proceeds of the offering were used to repay borrowings of $35.9 million under
the Margin Loan Facility, pay the Merger Consideration of $51.8 million, pay
fees and expenses of the Acquisition, and reduce outstanding short-term
borrowings. The Senior Notes mature on April 1, 2007 with interest payable
semiannually in arrears on April 1 and October 1. The Senior Notes may be
redeemed beginning April 1, 2002 at a price of 105.3125% of the principal amount
decreasing approximately 1.77% annually thereafter until April 1, 2005 at which
time they are redeemable at face value. Furthermore, notwithstanding the
foregoing the Company may redeem up to 35% of the original aggregate principal
amount of the Senior Notes at a price of 110% of the principal amount with the
net cash proceeds of a public equity offering within 60 days of closing such
offering.
13
<PAGE>
In addition, effective June 26, 1997, the Company acquired all of the
outstanding capital stock of Country General. The acquisition was accounted for
as a purchase and the Company has elected to treat the purchase as a purchase of
all of the assets of Country General for Federal income tax purposes. See "Item
1. Business - Acquisitions" and Notes to the Consolidated Financial Statements.
In connection with the Country General Acquisition, on July 3, 1997, the Company
entered into an amended and restated credit facility (the "Credit Facility")
which consists of a $50.0 million, six-year term loan facility, under which
$47.0 million of borrowings were outstanding as of October 31, 1998, and a
$100.0 million revolving credit facility under which borrowings of $32.1 million
and letters of credit totaling $6.7 million were outstanding as of October 31,
1998. The term loan must be repaid in semiannual installments plus annual
prepayments based on the Company's excess cash flow, as defined. The minimum
annual installments are as follows: fiscal years 1999 - $3.0 million; 2000 -
$6.0 million; 2001 - $8.0 million; 2002 - $12.0 million; and 2003 - $18.0
million. The Credit Facility will mature on June 30, 2003. Borrowings under the
Credit Facility will bear interest at rates based upon prime or the Eurodollar
Rate plus a margin. At October 31, 1998, the interest rate on the term loan was
8.1% and the interest rate on the revolving credit facility was 8.2%. The Credit
Facility agreement contains covenants which require the Company to maintain a
minimum consolidated net worth, a minimum earnings before interest, taxes,
depreciation and amortization (EBITDA), a minimum ratio of EBITDA to cash
interest payable, and a maximum ratio of debt to EBITDA. The covenants also
restrict, among other things, the payment of dividends, incurrence of debt, and
disposition of assets. The Credit Facility is secured by substantially all of
the assets of the Company.
In March of 1998, the Company entered into an interest rate swap agreement
(the "Swap Agreement") with a bank to reduce the impact of changes in interest
rates on its floating term loan facility. Accordingly, the Swap Agreement was
entered into for purposes other than trading. The Swap Agreement had an initial
notional amount of $48,500. The notional amount decreases in tandem with the
outstanding balance on the Company's term loan facility until the Swap
Agreement's maturity on March 30, 2001 and was $47,000 at October 31, 1998. The
Swap Agreement fixes the interest rate on the term loan facility at 5.8525%,
plus the applicable margin, resulting in an effective rate of 8.23% at October
31, 1998. The Company is exposed to interest rate risk in the event of
nonperformance by the counter party to the Swap Agreement. However, the Company
does not anticipate nonperformance by the bank.
The Company anticipates that its principal uses of cash in the foreseeable
future will be working capital requirements, debt service requirements and
capital expenditures, as well as expenditures relating to acquisitions. Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from operations, together with amounts available under the Credit
Facility, will be adequate to meet its anticipated requirements in the
foreseeable future for working capital, capital expenditures and interest
payments. The Company expects that if it were to pursue a significant
acquisition, it would arrange prior to the acquisition any additional debt or
equity financing required to fund the acquisition.
There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt, and the Company may be required to refinance all or a portion
of its existing debt or to obtain additional financing or to reduce its capital
spending. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
Seasonality
Unlike many specialty retailers, the Company has historically generated
positive operating income in each of its four fiscal quarters. However, because
the Company is an agricultural specialty retailer, its sales necessarily
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
its use of part-time employees. Historically, the Company's sales and operating
income have been highest in the third quarter of each fiscal year due to the
farming industry's planting season and the sale of seasonal products. Working
capital needs are highest during the second quarter. The Company expects these
trends to continue for the foreseeable future.
14
<PAGE>
Inflation
Management does not believe its operations have been materially affected by
inflation.
Year 2000
The Year 2000 issue, common to most companies, concerns the inability of
information and noninformation systems to recognize and process date-sensitive
information after 1999 due to the use of only the last two digits to refer to a
year. This problem could affect both information systems (software and hardware)
and other equipment that relies on microprocessors. Management has completed a
company-wide evaluation of this impact on its computer systems, applications and
other date-sensitive equipment. Systems and equipment that are not Year 2000
compliant have been identified and remediation efforts are in process.
Management estimates that nearly 90 percent of remediation efforts were
completed as of December 31, 1998. All remediation efforts and testing of
product/equipment are expected to be completed by May 1, 1999.
The Company is also in the process of monitoring the progress of material
third parties (vendors and suppliers) in their efforts to become Year 2000
compliant. Those third parties include, but are not limited to: product
suppliers, third party benefit administrators, third party logistic providers,
insurance institutions, mainframe computer services suppliers, financial
institutions and utilities. The Company has requested confirmation from all
material third parties as to when they will be Year 2000 compliant. Through
December 31, 1998, the Company had received confirmations from approximately 50%
of the third parties that were sent these requests.
Through December 31, 1998, the Company has spent approximately $1.4 million
to address Year 2000 issues. Total costs to address Year 2000 issues are
currently estimated not to exceed $2.0 million and consist primarily of costs
for the remediation of internal systems, including internal programming time.
Funds for these costs are expected to be provided by the operating cash flows of
the Company. The majority of the internal system remediation efforts relate to
the staff costs of on-staff systems engineers and, therefore, are not
necessarily incremental costs.
The Company could be faced with severe consequences if Year 2000 issues are
not identified and resolved in a timely manner by the Company and material third
parties. A worst-case scenario would result in the short-term inability of the
Company to sell products in its stores due to unresolved Year 2000 issues. This
would result in lost revenues; however, the amount would be dependent on the
length and nature of the disruption, which cannot be predicted or estimated. In
light of the possible consequences, the Company is devoting the resources needed
to address Year 2000 issues in a timely manner. Management receives monthly
updates as to project status. While management expects a successful resolution
of these issues, there can be no guarantee that material third parties, on which
the Company relies, will address all Year 2000 issues on a timely basis or that
their failure to timely and successfully address all issues would not have an
adverse effect on the Company.
The Company is in the process of updating its business interruption
contingency plans to take into account potential Year 2000-related business
interruptions. Management expects these revisions to be completed by June 1,
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in the Company's financial instruments subject to
such risks, is the potential market value loss arising from adverse changes in
interest rates. The Company's financial instruments subject to market risk are
held for purposes other than trading.
15
<PAGE>
Interest Rate Swap Agreements
The Company uses interest rate swap agreements to reduce exposure to
interest rate fluctuations on its term debt. At October 31, 1998, the Company
had an interest rate swap agreement that effectively converted all its
outstanding bank term debt from floating interest rates to a fixed interest rate
of 5.8525 percent plus the applicable margin. This agreement covers $47.0
million notional amount of debt. At October 31, 1998, $47.0 million of term debt
was outstanding. Since interest rates on the debt are effectively fixed, changes
in interest rates would have no impact on future interest expense related to
this debt. Therefore, there is no earnings or liquidity risk associated with the
interest rate swap agreement. The fair market value of the interest rate swap is
the estimated amount, based on discounted cash flows, the Company would pay or
receive to terminate the swap agreement. At October 31, 1998, the fair market
value of the swap agreement was immaterial to the Company. Adverse changes in
interest rates, however, would result in an increased cost to terminate the swap
agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included at pages F-1 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
Company's directors, executive officers and other significant employees. All of
the Company's officers are elected annually and serve at the discretion of the
Board of Directors.
<TABLE>
<CAPTION>
Name Age Positions
<S> <C> <C>
James T. McKitrick 53 President, Chief Executive Officer, Director
Dean Longnecker 50 Executive Vice President, COO, Secretary, Director
John W. Childs 57 Director
Jerry D. Horn 60 Director
Steven G. Segal 38 Director
Adam L. Suttin 31 Director
Jeffrey B. Swartz 37 Director
William E. Watts 44 Director
Habib Y. Gorgi 42 Director
Peter Lamm 47 Director
Richard C. Dresdale 42 Director
John R. Pearson 50 Executive Vice President, Sales
Denny Starr 45 Senior Vice President, Finance, CFO
Jeffrey A. Stanton 48 Senior Vice President, Operations
David E. Enos 39 Senior Vice President, Information Systems/Logistics
</TABLE>
James T. McKitrick, President and Chief Executive Officer, joined the
Company in July 1992. He has over 30 years experience in retailing, including 20
years at Kmart Corporation. Prior to joining CT, Mr. McKitrick was President and
Chief Executive Officer of Builder's Emporium, a California-based home
improvement center chain. Previously, he was with Ames Department Stores from
1987 through 1990, were he held the positions of Executive Vice President,
Chairman of Zayre Discount Store Division, and President and Chief Executive
Officer of G.C. Murphy Division, a $900 million variety store chain. Mr.
McKitrick also served as President and Chief Executive Officer of Warehouse
Club, Inc. from 1986 through 1987 and Executive Vice President of Merchandising
for T.G.&Y. Stores Company from 1984 through 1986. From 1963 through 1984, Mr.
McKitrick was with the Kmart Corporation.
Dean Longnecker, Executive Vice President, Chief Operating Officer, has
held his current position since 1997. He joined CT in 1980 as Controller and was
promoted to Executive Vice President of Finance in 1985. Mr. Longnecker was
employed at Payless Cashways from 1973 until 1980, most recently as Treasurer.
He received a B.S. from Iowa State University in 1970 and C.P.A. in 1972.
John W. Childs has been President of J.W. Childs Associates since July
1995. Prior to that time, he was an executive at Thomas H. Lee Company from May
1987, most recently holding the position of Senior Managing Director. He is a
director of Big V Supermarkets, Inc., The Edison Project, Inc., Chevys, Inc.,
DESA International, Inc., Pan Am International Flight Academy, Inc. and Beltone
Electronics, Inc.
Jerry D. Horn has been Chairman of the Board of General Nutrition
Companies, Inc., a 3,000 store vitamin and nutritional supplement retail chain
operating under the GNC name, since October 1991 and, prior to that was
President and Chief Executive Officer since 1985. Mr. Horn is Chairman of the
Board of Cinnabon, Inc. and has been a Managing Director of J.W. Childs
Associates since July 1995.
Steven G. Segal is Senior Managing Director of J.W. Childs Associates and
has been an executive of J.W. Childs Associates since July 1995. Prior to that
time, he was an executive at Thomas H. Lee Company from August 1987, most
17
<PAGE>
recently holding the position of Managing Director. He is a director of
Universal Hospital Services, Inc., National Nephrology Associates, Inc.,
International DiverseFoods, Inc., Big V Supermarkets, Inc., Jillian's
Entertainment Holdings, Inc., Fitz and Floyd, Inc. and is Chairman of the Board
of Empire Kosher Poultry Inc.
Adam L. Suttin is a Managing Director of J.W. Childs Associates and has
been an executive of J.W. Childs Associates since July 1995. Prior to that time,
he was an executive at Thomas H. Lee Company from August 1989, most recently
holding the position of Associate. He is a director of Empire Kosher Poultry,
Inc. and DESA International, Inc.
Jeffrey B. Swartz has been Chief Executive Officer of Timberland Co., a
manufacturer and marketer of branded footwear and apparel, since 1998, and has
worked for that company in various positions since June 1986.
William E. Watts has been President, Chief Executive Officer and a Director
of General Nutrition Companies, Inc. since October 1991 and, prior to that, held
various positions with its predecessor since 1984.
Habib Y. Gorgi is President of the general partners of Fleet Equity
Partners VII, L.P. and the general partner of Silverado III, L.P., which is the
general partner of Chisholm Partners and has worked at Fleet Equity Partners
since 1986. He is a director of Skyline Chili, Roadrunner Freight Systems, Dines
Industrial Group, Rosina Food Products, Savage Sports Corporation, Simonds
Industries and FTD Corporation. Mr. Gorgi received a bachelor's degree from
Brown University and a master's degree from Columbia University.
Peter Lamm, is President of Fenway Partners, a New York-based private
investment firm with $527 million under management. Mr. Lamm was previously
Managing Director of Butler Capital Corporation (BCC) and a general partner of
each of the BCC funds. Mr. Lamm currently serves as a director on Van de Kamp's,
Aurora Foods, Iron Age Corporation, Delimex, Blue Capital and Beckley-Cardy.
Richard C. Dresdale, is a founding partner of Fenway Partners, a New
York-based private investment firm with $527 million under management. Mr.
Dresdale was previously a principal at Clayton, Dubilier & Rice, Inc. (CD&R).
Mr. Dresdale is a director of Aurora Foods, Delimex, Blue Capital, MW Windows
and Bear Archery.
John R. Pearson, Executive Vice President, Sales, joined Central Tractor in
October 1997. Previously he was with Tractor Supply Center for 27 years, with
the last 10 years in senior management and the most recent position being held
as Senior Vice President, Merchandising.
Denny Starr, Senior Vice President, Finance, Chief Financial Officer,
joined the Company in October 1989 as Assistant Controller. He previously served
as Assistant Controller of The Witten Group, a holding company with operations
in manufacturing, real estate and finance, from 1986 through 1989. He was an
Audit Manager with McGladrey & Pullen from 1982 until 1986. Mr. Starr received
his B.A. from the University of Iowa in 1982 and C.P.A.
in 1982.
Jeffery A. Stanton, Senior Vice President, Operations, joined the Company
in June 1992. Previously, he was employed by R.R. Donnelly & Sons and
Meredith/Burda Corporation from 1985 through 1992, as well as Reichardt's Inc.,
a specialty retailer, from 1972 through 1985. Mr. Stanton received a B.B.A.
degree from the University of Iowa in 1972.
David E. Enos, Senior Vice President, Information Systems/Logistics, has
held his current position since 1990. Mr. Enos joined CT in 1981. Previously, he
was employed at Meredith/Burda Corporation from 1979 through 1981. He received
an A.A.S. degree in Data Processing from DMACC in 1979.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation earned for all services
rendered to the Company during fiscal 1998, fiscal 1997, and fiscal 1996, as
applicable, by the Company's chief executive officer and five other executive
officers who were employed by the Company as such during fiscal 1998
(collectively, the "Named Executives").
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
All Other
Name and Principal Fiscal Salary(1) Bonus Compensation
Position During 1998 Year ($) ($) ($)
- -------------------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
James T. McKitrick 1998 435,000 224,743 5,000 (2)
President, Chief 1997 399,423 -- 9,586 (2)
Executive Officer 1996 365,000 91,250 9,863 (2)
Dean Longnecker 1998 265,000 136,912 4,587 (2)
Executive Vice 1997 254,327 -- 2,043 (2)
President, Chief Operating Officer 1996 234,000 58,500 5,131 (2)
John R. Pearson (3) 1998 207,000 106,947 --
Executive Vice President, Sales 1997 15,923 -- 158,856 (4)
1996 -- -- --
Denny Starr 1998 148,077 62,954 5,000 (2)
Senior Vice President, Finance, 1997 123,558 -- 6,438 (2)
Chief Financial Officer 1996 89,167 23,000 5,942 (2)
Jeffrey A. Stanton 1998 145,385 61,998 5,000 (2)
Senior Vice President, Operations 1997 108,692 -- 9,465 (2)
1996 100,860 20,300 9,507 (2)
David E. Enos 1998 147,692 61,998 5,000 (2)
Senior Vice President, Information 1997 106,731 -- 8,276 (2)
Systems/Logistics 1996 87,115 17,500 8,942 (2)
<FN>
(1) Includes compensation deferred at the Named Executive's election under the Company's Profit Sharing Plan.
(2) Represents amounts contributed by the Company during each fiscal year, as applicable, to the Named Executive's
Profit Sharing Plan account.
(3) Mr. Pearson joined the Company effective October 6, 1997.
(4) Represents payments associated with the hiring of Mr. Pearson.
</FN>
</TABLE>
Employment Arrangements with Executive Officers
As part of the Acquisition, on January 2, 1997, James T. McKitrick and G.
Dean Longnecker sold to Childs for $14.00 per share, 81,810 and 64,489 shares,
respectively, of the Company's outstanding common stock, in accordance with the
terms of the Securities Purchase Agreements entered into at the same time as the
Merger Agreement. Additionally, the Securities Purchase Agreements provided that
at the closing of the Merger, Mr. McKitrick would exchange outstanding options
to purchase 183,935 shares of Company common stock having an aggregate exercise
price of $0.6 million for options to acquire shares of Holding common stock
valued at $2.6 million and that Mr. Longnecker would exchange 71,429 shares of
Company common stock for shares of Holding common stock valued at $1.0 million.
The Securities Purchase Agreements also contain provisions regarding the
continued employment of Messrs. McKitrick and Longnecker in their current
capacities after the Merger (the "Employment Agreements").
Mr. McKitrick's Employment Agreement provides for a base salary of
$435,000, and Mr. Longnecker's provides for a base salary of $265,000, subject
in each case to annual increases as determined by the Board of Directors (which
19
<PAGE>
increases must at least equal increases in the consumer price index).
Additionally, Messrs. McKitrick and Longnecker are eligible for annual cash
bonuses if the Company achieves certain operation cash flow targets, which
bonuses are not subject to any ceilings contained in the Employment Agreements.
Mr. McKitrick's Employment Agreement provides for severance payments equal
to his base salary for 18 months if his employment is terminated (other than in
the case of death, disability or for cause) or if he is not reelected as
President and Chief Executive Officer, reduced by any compensation he should
earn during such 18-month period from other businesses. Mr. Longnecker's
Employment Agreement provides for severance payments equal to his base salary
for 12 months if his employment is terminated (other than in the case of death,
disability or for cause) or if he is not reelected as Executive Vice President,
Chief Operating Officer, not subject however, to reduction for any compensation
earned from other businesses.
The Employment Agreements also contemplated that Messrs. McKitrick and
Longnecker will participate along with other management personnel in two stock
option plans of Holding involving 4.5% and 3.2% of Holding's outstanding common
stock and common stock equivalents on a fully diluted basis, respectively.
Allocations of options among the management group are to be made in the first
instance by the Chief Executive Officer of the Company, subject to ratification
by Holding's Board of Directors. A portion of such allocations were made during
fiscal year 1998. The management stock options are subject to accelerated
vesting based on the Company's achievement of certain operating cash flow
targets. The following table provides certain information concerning options to
purchase Holding common stock during fiscal 1998 to each Named Executive Officer
of the Company.
<TABLE>
<CAPTION>
Options Granted in Last Fiscal Year
Individual Grants
---------------------------------------------------------------- Potential Realizable Value At
Number of Assumed Annual Rates Of
Shares Percent Of Stock Price Appreciation For
Underlying Total Options Option Term
Options Granted to Exercise or ------------------------------
Granted Employees In Base Price
Name (#) Fiscal Year ($/share) Expiration Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James T. McKitrick 25,550 24.5% $60.00 June 1, 2008 $964,000 $2,443,000
Dean Longnecker 15,400 14.7% $60.00 June 1, 2008 $581,000 $1,473,000
John R. Pearson 15,400 14.7% $60.00 June 1, 2008 $581,000 $1,473,000
Denny Starr 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000
Jeffrey A. Stanton 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000
David E. Enos 3,900 3.7% $60.00 June 1, 2008 $147,000 $ 373,000
</TABLE>
Additionally, the Employment Agreements contemplate that Messrs. McKitrick
and Longnecker will receive additional stock options which vest if the Company
is sold within six years after the effective time of the Merger and the realized
value of the common equity of the original investment group in Holding should
equal or exceed ten times the value thereof at the time of the Merger. Mr.
McKitrick's and Mr. Longnecker's options under this program are to acquire an
aggregate number of shares of common stock of Holding equal to 1.25% and 0.75%,
respectively, of the total outstanding common stock and common stock equivalents
of Holding on a fully diluted basis.
In addition various other executives of the Company have employment
agreements that contain, among other items, one year severance provisions under
certain circumstances as well as various bonus provisions.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of October 31, 1998, Holding holds 100% of the outstanding stock of the
Company. All outstanding options were repurchased in connection with the
Acquisition or exchanged for options to acquire shares of Holding common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two of the Company's suppliers, Iron Age Corporation ("Iron Age") and DESA
International, Inc. ("DESA"), are controlled by certain stockholders of Holding.
Iron Age is a manufacturer and distributor of work boots and protective
footwear. DESA is a manufacturer and marketer of zone heating/home comfort
products and specialty tools. The Company believes that the terms of its
purchases from Iron Age and DESA are at least as favorable to the Company as
could be obtained from other suppliers. In fiscal 1998, the Company's purchases
from Iron Age and DESA totaled $5.0 million.
For fiscal 1998 and the period of seven months ended November 1, 1997,
Childs was paid a management and consulting services fee of approximately
$240,000 and $140,000 respectively, under a five-year agreement, annually
renewable thereafter, requiring annual payments of $240,000, subject to
limitations of the Company's debt agreements. In addition, during fiscal 1998
Fenway Partners, a stockholder of Holding, was paid a management fee of
$120,000.
In connection with the consummation of the Acquisition and subsequent
employee stock purchases, Holding loaned amounts to certain employees of the
Company to partially fund their investment in Holding common stock. The loans,
which totaled $748,000 at October 31, 1998, are due in ten years and bear
interest at an interest rate of 8.5%.
Additionally, Messrs. McKitrick and Longnecker are parties to a
Stockholders Agreement dated as of December 23, 1996 applicable to all shares of
Holding common stock or vested options to acquire such common stock held now or
hereafter acquired by them. The Stockholders Agreement, among other terms,
permits Holding to "call" their shares and vested options on their termination
of employment for any reason. Additionally, if either Mr. McKitrick of Mr.
Longnecker is terminated for any reason other than for cause or without good
reason (as those terms are defined in the Stockholders Agreement), he has the
right to "put" his shares or vested options to Holding. Depending on the
circumstances, the price for shares of Holding common stock purchased in
connection with a call or put under the Stockholders Agreement will range from
cost to seven times EBITDA. The put and call features of the Stockholders
Agreement terminate on completion of a public offering of Holding common stock
with aggregate net proceeds of $50.0 million or more.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. See the Index to Financial Statements
appearing at page F-1.
2. Financial Statement Schedules. The following Consolidated Financial
Statement Schedule is included at page F-25:
Schedule II - Valuation and Qualifying Accounts
No other Financial Statement Schedules have been presented since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
3. Exhibits.
The following exhibits are filed with this Annual Report on Form 10-K or
incorporated herein by reference.
Exhibit
No. Description
3(i).1 -- Restated Certificate of Incorporation, filed as exhibit 3(i).1
to the Company's Registration Statement on Form S-1 (File
#33-82620) originally filed on August 9, 1994 and incorporated
herein by reference.
3(i).2 -- Certificate of Merger dated October 5, 1994, filed as exhibit
3(i).2 to the Company's Registration Statement on Form S-1 (File
#33-82620) originally filed on August 9, 1994 and incorporated
herein by reference.
3(ii) -- By-Laws of the Company, filed as exhibit 3(ii) to the Company's
Registration Statement on Form S-1 (File #33-82620) originally
filed on August 9, 1994 and incorporated herein by reference.
4.1 -- Form of Common Stock Certificate of the Company, filed as exhibit
4.1 to the Company's Registration Statement on Form S-1 (File
#33-82620) originally filed on August 9, 1994 and incorporated
herein by reference.
4.2 -- Indenture relating to the Senior Notes, the form of which was
filed as exhibit 4.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-19613)
originally filed on March 19, 1997 and incorporated herein by
reference.
10.1 -- Employment Agreement between the Company and James T. McKitrick
dated as of September 16, 1994, filed as exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File #33-82620)
originally filed on August 9, 1994 and incorporated herein by
reference.
10.2 -- Employment Agreement between the Company and Dean Longnecker
dated as of September 16, 1994, filed as exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File #33-82620)
originally filed on August 9, 1994 and incorporated herein by
reference.
22
<PAGE>
10.3 -- Asset Purchase Agreement By and Between Central Tractor Farm &
Country, Inc., (the "Buyer") and Big Bear Farm Stores, Inc. (the
"Seller") dated May 22, 1996, filed as exhibit 10.15 to the
Company's 10-Q originally filed on September 9, 1996 and
incorporated herein by reference.
10.4 -- Agreement Plan of Merger dated November 27, 1996 by and among
Central Tractor Farm & Country, Inc., J.W. Childs Equity
Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition I,
Inc., filed as an exhibit to the Company's 8-K originally filed
on December 3, 1996 and incorporated herein by reference.
10.5 -- Securities Purchase Agreement dated as of November 27, 1996 by
and among Central Tractor Farm & Country, Inc., J.W. Childs
Equity Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition
I, Inc., filed as an exhibit to the Company's 8-K originally
filed on December 3, 1996 and incorporated herein by reference.
10.6 -- Securities Purchase Agreement, dated as of November 6, 1996, by
and among Mezzanine Lending Associates I, L.P., Mezzanine Lending
Associates II, L.P., Mezzanine Lending Associates III, L.P.,
Senior Lending Associates I, L.P., BCC Industrial Services, JWC
Acquisition I, Inc., J.W. Childs Equity Partners, L.P., Central
Tractor Farm & Country, Inc. filed as an exhibit to JWCAC's
Schedule 13D originally filed on December 9, 1996 and
incorporated herein by reference.
10.7 -- Letter Agreement, dated as of November 27, 1996 between JWC
Acquisition I, Inc. and Mr. James T. McKitrick, filed as an
exhibit to JWCAC's Schedule 13D originally filed on December 9,
1996 and incorporated herein by reference.
10.8 -- Letter Agreement, dated as of November 27, 1996 between JWC
Acquisition I, Inc. and Mr. G. Dean Longnecker, filed as an
exhibit to JWCAC's Schedule 13D originally filed on December 9,
1996 and incorporated herein by reference.
10.9 -- Credit Agreement dated as of December 23, 1996 among the Company,
Holding, JWCAC, certain banks, financial institutions and other
institutional lenders listed therein, Fleet, as administrative
agent, and NationsBank, as co-agent, filed as exhibit 10.22 to
the Company's 10-K originally filed on January 31, 1997 and
incorporated herein by reference.
10.10 -- Stock Purchase Agreement, dated June 26, 1997 by and between the
Company and ConAgra, Inc. and the Amended and Restated Credit
Agreement, dated as of July 3, 1997, filed as exhibits to the
Company's 8-K filed on July 3, 1997 and incorporated herein by
reference.
10.11 -- Letter Amendment, dated as of February 18, 1998, to Amended and
Restated Credit Agreement, filed as exhibit 10.1 to the Company's
10-Q originally filed on September 15, 1998 and incorporated
herein by reference.
12 -- Statement Regarding Computation of Ratio of Earnings to Fixed
Charges
21 -- Subsidiaries of the Company
27 -- Financial Data Schedule
99 -- Important Factors Regarding Forward-Looking Statements
23
<PAGE>
(b) Reports on Form 8-K Filed During the Last Quarter of Fiscal 1998
None
(c) See Item 14(a)(3) of this report.
(d) See Item 14(a)(2) of this report.
24
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
FINANCIAL STATEMENTS
Year ended October 31, 1998 and periods of seven-
months ended November 1, 1997 and five-months
ended March 26, 1997, and year ended November 2, 1996
<TABLE>
<CAPTION>
Index to Financial Statements
<S> <C>
Report of Ernst & Young LLP.............................................................F-2
Consolidated Balance Sheets as of October 31, 1998 and November 1, 1997.................F-3
Consolidated Statements of Income for year ended October 31, 1998
and periods of seven-months ended November 1, 1997 and
five-months ended March 26, 1997, and year ended November 2, 1996....................F-5
Consolidated Statements of Changes in Stockholders' Equity for year
ended October 31, 1998 and periods of seven-months ended
November 1, 1997 and five-months ended March 26, 1997, and
year ended November 2, 1996..........................................................F-6
Consolidated Statements of Cash Flows for year ended October 31, 1998 and
periods of seven-months ended November 1, 1997 and
five-months ended March 26, 1997, and year ended November 2, 1996....................F-7
Notes to Consolidated Financial Statements..............................................F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Central Tractor Farm & Country, Inc.
We have audited the accompanying consolidated balance sheets of Central Tractor
Farm & Country, Inc. ("Successor"), a wholly-owned subsidiary of CT Holding,
Inc., as of October 31, 1998 and November 1, 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows of the
Successor for the year ended October 31, 1998 and the seven-month period ended
November 1, 1997 and its "Predecessor" for the five-month period ended March 26,
1997 and for the year ended November 2, 1996. Our audits also included the
financial statement schedule listed in Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Central Tractor
Farm & Country, Inc. at October 31, 1998 and November 1, 1997, and the
consolidated results of operations and cash flows of the Successor for the year
ended October 31, 1998 and the seven-month period ended November 1, 1997 and the
Predecessor for the five-month period ended March 26, 1997 and for the year
ended November 2, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
December 7, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
October 31 November 1
1998 1997
---------------------------
<S> <C> <C>
Assets (Note 4)
Current assets:
Cash and cash equivalents $ 6,971 $ 7,378
Recoverable income taxes 3,134 2,513
Trade and other receivables, less allowances of $386 in 1998
and 1997 4,648 7,264
Inventory 217,064 222,117
Deferred income taxes (Note 7) -- 4,000
Other 3,010 3,136
-------------------------
Total current assets 234,827 246,408
Property, improvements and equipment:
Land 1,821 1,963
Buildings and improvements 5,210 4,934
Leasehold improvements 13,384 12,788
Furniture and fixtures 27,590 24,731
Capitalized property rights (Note 5) 867 867
Automobiles and trucks 703 628
-------------------------
49,575 45,911
Less allowances for depreciation and amortization 7,948 2,716
-------------------------
41,627 43,195
Goodwill, net of amortization of $5,080 in 1998 and $1,753 in 1997 134,037 135,612
Other assets, principally deferred financing costs 8,354 9,020
-------------------------
Total assets $418,845 $434,235
=========================
F-3
<PAGE>
<CAPTION>
October 31 November 1
1998 1997
--------------------------
<S> <C> <C>
Liabilities and stockholder's equity
Current liabilities:
Bank line of credit (Note 4) $ 32,075 $ 60,750
Accounts payable 78,322 68,015
Accrued payroll and bonuses 8,272 5,847
Accrued income taxes -- 508
Other accrued expenses 14,084 22,479
Deferred income taxes (Note 7) 506 --
Current portion of long-term debt and capital lease obligations 3,159 3,170
-------------------------
Total current liabilities 136,418 160,769
Long-term debt, less current portion (Note 4) 149,000 152,000
Capital lease obligations, less current portion (Note 5) 1,011 1,171
Deferred income taxes (Note 7) 2,659 748
-------------------------
Total liabilities 289,088 314,688
Stockholder's equity (Notes 3 and 6):
Common stock, $.01 par value: 3,000 authorized shares; 100 shares
issued and outstanding (wholly-owned by CT Holding, Inc.) -- --
Additional paid-in capital 119,155 118,920
Retained earnings 10,602 627
-------------------------
Total stockholder's equity 129,757 119,547
Commitments (Notes 5 and 8) -- --
-------------------------
Total liabilities and stockholder's equity $418,845 $434,235
=========================
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Successor | Predecessor
------------------------------- | ------------------------------
Fiscal year Period of seven | Period of five Fiscal year
ended months ended | months ended ended
October 31 November 1 | March 26 November 2
1998 1997 | 1997 1996
------------ ------------- | ----------- -----------
|
<S> <C> <C> <C> <C>
Net sales $ 587,195 $ 305,122 | $ 106,048 $ 293,020
Cost of sales 410,179 216,342 | 75,281 207,228
--------- --------- --------- ---------
Gross profit 177,016 88,780 | 30,767 85,792
|
Selling, general and administrative expenses, |
including amounts with related parties (Note |
10) 134,623 72,142 | 29,045 68,197
Amortization of intangibles 3,552 1,753 | 415 938
--------- --------- | --------- ---------
Operating income 38,841 14,885 | 1,307 16,657
|
Interest expense, including amounts with |
related parties (Note 10) 20,466 11,463 | 3,188 1,663
--------- --------- | --------- ---------
Income (loss) before income taxes 18,375 3,422 | (1,881) 14,994
|
Income taxes (credits) (Note 7) 8,400 2,057 | (634) 6,250
--------- --------- | --------- ---------
Net income (loss) $ 9,975 $ 1,365 | $ (1,247) $ 8,744
========= ========= | ========= =========
|
Ratio (deficiency) of earnings to fixed charges 1.8x 1.3x | $ (1,881) 5.3x
========= ========= | ========= =========
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Fiscal year ended October 31, 1998, and periods
of seven-months ended November 1, 1997
and five-months ended March 26, 1997, and
year ended November 2, 1996
Stock Additional Retained Total
Common Warrant Paid-In Earnings Stockholders'
Stock Outstanding Capital (Deficit) Equity
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Predecessor
Stockholders' equity at October 28, 1995 $ 106 $ 665 $ 69,667 $ 10,839 $ 81,277
Exercise of common stock options -- -- 42 -- 42
Net income -- -- -- 8,744 8,744
-----------------------------------------------------------------------------
Stockholders' equity at November 2, 1996 106 665 69,709 19,583 90,063
Exercise of common stock options -- -- 252 -- 252
Net loss -- -- -- (1,247) (1,247)
-----------------------------------------------------------------------------
Stockholders' equity at March 26, 1997 $ 106 $ 665 $ 69,961 $ 18,336 $ 89,068
=============================================================================
Successor
Initial capitalization of the Company after
merger of JWC Acquisition I on
March 27, 1997 $ -- $ 69,170 $ (738) $ 68,432
Capital contribution from parent
(Note 3) -- 49,750 -- 49,750
Net income -- -- 1,365 1,365
--------- -------------------------------------------
Stockholder's equity at November 1, 1997 -- 118,920 627 119,547
Net income -- -- 9,975 9,975
Capital contribution from parent -- 235 -- 235
--------- -------------------------------------------
Stockholder's equity at October 31, 1998 $ -- $ 119,155 $ 10,602 $ 129,757
========= ===========================================
See accompanying notes.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor | Predecessor
---------------------------------- | --------------------------------
Fiscal year Period of seven | Period of five Fiscal year
ended months ended | months ended ended
October 31 November 1 | March 26 November 2
1998 1997 | 1997 1996
----------- --------------- | -------------- -------------
<S> <C> <C> <C> <C>
Operating activities |
Net income (loss) from continuing operations $ 9,975 $ 1,365 | $ (1,247) $ 8,744
Adjustments to reconcile net income (loss) from |
continuing operations to net cash provided by
(used in) continuing operations: |
Depreciation and amortization of property, |
improvements and equipment 5,221 2,716 | 1,490 3,056
Amortization of intangibles and other deferred |
assets 4,604 2,253 | 414 998
Loss on sale of assets -- -- | -- 20
Deferred income taxes 6,417 1,871 | 1,328 1,100
Changes in operating assets and liabilities: |
Recoverable income taxes (621) (1,119) | (1,885) --
Trade and other receivables 2,616 (871) | 144 83
Inventory 5,053 1,957 | (11,894) (4,549)
Other current assets 126 946 | (924) (972)
Accounts payable 10,307 1,895 | 1,468 (3,806)
Accrued expenses (6,478) 1,139 | (1,524) 287
--------- --------- | --------- ---------
37,220 12,152 | (12,630) 4,961
|
Adjustments for net cash provided by |
discontinued operations: |
Deferred income taxes -- -- | -- (367)
Changes in operating assets and liabilities -- -- | -- 13,520
--------- --------- | --------- ---------
-- -- | -- 13,153
--------- --------- | --------- ---------
Net cash provided by (used in) operating |
activities 37,220 12,152 | (12,630) 18,114
|
Investing activities |
Purchases of property, improvements and |
equipment (4,842) (3,816) | (2,419) (8,789)
Acquisition of Central Tractor Farm & Country, |
Inc. (Predecessor) -- (155,963) | -- --
Acquisition of Big Bear Farm Stores, Inc. in 1996
and Country General, Inc. in 1997 (Note 11) (1,568) (136,995) | -- (5,650)
Other 394 206 | (1,348) 255
--------- --------- | --------- ---------
Net cash used in investing activities (6,016) (296,568) | (3,767) (14,184)
F-7
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Successor | Predecessor
---------------------------------- | --------------------------------
Fiscal year Period of seven | Period of five Fiscal year
ended months ended | months ended ended
October 31 November 1 | March 26 November 2
1998 1997 | 1997 1996
----------- --------------- | -------------- -------------
<S> <C> <C> <C> <C>
Financing activities |
Borrowings under line of credit $ 273,645 $ 206,106 | $ 113,119 $ 86,782
Repayments on line of credit (302,320) (170,650) | (91,494) (89,902)
Proceeds from issuance of long-term debt -- 155,000 | 8,000 --
Payments on long-term debt (3,000) (8,000) | (16,000) (17)
Payments on capitalized lease obligations (171) (101) | (69) (120)
Proceeds from issuance of common stock and |
capital contributions 235 115,489 | 252 42
Cash of Central Tractor at date of acquisition -- 1,220 | -- --
Financing costs relating to new line of credit, |
term loan and Senior Notes -- (8,764) | -- --
Other -- 1,494 | -- --
--------- --------- | --------- ---------
Net cash (used in) provided by financing |
activities (31,611) 291,794 | 13,808 (3,215)
--------- --------- | --------- ---------
Net (decrease) increase in cash and cash |
equivalents (407) 7,378 | (2,589) 715
|
Cash and cash equivalents at beginning of period 7,378 -- | 3,809 3,094
--------- --------- | --------- ---------
Cash and cash equivalents at end of period $ 6,971 $ 7,378 | $ 1,220 $ 3,809
========= ========= | ========= =========
|
Supplemental disclosures of cash flow |
information |
Cash paid during the period for interest $ 19,838 $ 10,294 | $ 1,746 $ 1,991
Cash paid during the period for income taxes 355 327 | 412 5,675
See accompanying notes.
</TABLE>
F-8
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended October 31, 1998, and periods
of seven-months ended November 1, 1997
and five-months ended March 26, 1997,
and year ended November 2, 1996
(In thousands of dollars, except where indicated)
1. Basis of Presentation and Acquisition of the Company
Central Tractor Farm & Country, Inc. ("the Company") is a wholly-owned
subsidiary of CT Holding, Inc. ("CT Holding"), an affiliate of J. W. Childs
Equity Partners, L.P. ("Childs").
As a result of the acquisition of the Company discussed below, effective March
27, 1997, a new basis of accounting has been reflected in the Company's
financial statements reflecting the fair values for the Company's assets and
liabilities at that date ("Successor"). The financial statements of the Company
for periods prior to March 27, 1997 are presented on the historical cost basis
of accounting ("Predecessor"). A line has been placed in the financial
statements to distinguish between Predecessor and Successor activity.
On November 27, 1996, the Board of Directors of the Company approved, and the
Company entered into, a merger agreement (the "Merger Agreement") with Childs,
CT Holding and its subsidiary, JWC Acquisition I, Inc., that provided for the
acquisition of the Company by CT Holding in a two-stage transaction. The Merger
Agreement provided that following the acquisition of all of the Company's common
stock held by affiliates of Butler Capital Corporation (collectively "BCC"), CT
Holding's subsidiary would merge with and into the Company (the "Merger") and CT
Holding would acquire the remaining shares of common stock of the Company held
by public shareholders. The Merger was completed on March 27, 1997.
On March 27, 1997, the Company consummated a public offering of $105.0 million
aggregate principal amount of Senior Notes. The net proceeds from the offering
were used to pay the Merger consideration, repay certain outstanding borrowings,
and pay fees and expenses of the acquisition.
The acquisition of the Company was accounted for as a purchase. The purchase
price for the common stock was approximately $159.4 million, including related
costs and expenses, of which $156.0 million was paid in cash and $3.4 million in
common stock and stock options of CT Holding. The cash portion was funded from
the proceeds of capital stock issued by CT Holding, and the Senior Note
borrowings by the Company. The final purchase price was allocated to the
tangible and intangible assets and the liabilities of the Company based on fair
values, as follows:
F-9
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
1. Basis of Presentation and Acquisition of the Company (continued)
Inventory $124,284
Property, improvements and equipment 25,387
Accounts receivable and other assets 9,990
Goodwill 87,343
Bank line of credit (23,554)
Accounts payable and accrued expenses (51,809)
Long-term debt and capitalized lease obligations (9,442)
Deferred income taxes (2,806)
--------
$159,393
========
2. Summary of Accounting Policies and Other Matters
Business and Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned
subsidiary, Country General, Inc. (hereinafter collectively "the Company").
The Company operates agricultural specialty retail stores located in the
Midwest, Northeast, and Southeast United States. The Company also sells
merchandise on a wholesale basis under various distributor agreements throughout
the United States. During fiscal 1996, the Company completed the sale of its
wholly-owned subsidiary, Herschel Corporation (Herschel), a manufacturer and
wholesale distributor of equipment parts for use in the farming industry. With
this sale, continuing operations of the Company constitute one business segment
for financial reporting purposes.
The Company operates on a 52-53 week fiscal year ending on the Saturday nearest
to October 31.
All significant intercompany transactions have been eliminated from the
consolidated financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Investments, including repurchase agreements and commercial
paper, are carried at cost, which approximates market.
F-10
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
2. Summary of Accounting Policies and Other Matters (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Trade Receivables
Most of the Company's retail sales are cash or credit card sales, while
wholesale sales and some retail sales are on account. The Company generally does
not require collateral for sales on account. Concentrations of credit risk with
respect to trade receivables are limited due to the number of customers of the
Company and their geographic dispersion. The allowance for doubtful accounts is
based on a current analysis of receivable delinquencies and historical loss
experience.
Inventory
Inventory is recorded at cost, including warehousing and freight costs,
determined principally by the last-in, first-out (LIFO) method, which is not in
excess of market. The Company reviews its inventory for slow-moving, obsolete or
otherwise unsalable items on a regular basis throughout the year, including at
the time of physical inventory counts. Write downs are made for any estimated
losses to be incurred with respect to slow-moving, obsolete or otherwise
unsalable inventory as such inventory is identified. Inventories valued using
the LIFO method were approximately $0 and $134 at October 31, 1998 and November
1, 1997, respectively, less than the amounts of such inventories valued at
current cost.
Property, Improvements and Equipment
Property, improvements and equipment are carried at cost less allowances for
depreciation and amortization. Depreciation and amortization expense is computed
primarily on a basis of the straight-line method over the estimated useful lives
of the assets as follows:
Buildings and improvements 10 to 39 years
Leasehold improvements (not in excess of underlying lease terms) 5 to 20 years
Furniture and fixtures 5 to 15 years
Automobiles and trucks 3 to 10 years
F-11
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
2. Summary of Accounting Policies and Other Matters (continued)
Certain long-term lease transactions have been accounted for as capital leases.
The property rights recorded under direct financing leases are amortized on a
straight-line basis over the lesser of the useful life or the respective terms
of the leases.
Goodwill
Goodwill is being amortized utilizing the straight-line method over periods of
40 years. The carrying value of goodwill is reviewed continually to determine
whether any impairment has occurred. This review takes into consideration the
recoverability of the unamortized amounts based on the estimated undiscounted
cash flows of the related businesses to the respective carrying value of the
goodwill. To the extent that the estimated undiscounted future cash flows are
less than the carrying value of the assets, an impairment loss can be measured
based upon various methods, including undiscounted cash flows, discounted cash
flows and fair value. Based upon undiscounted cash flows, no impairment of
goodwill was determined to exist and, accordingly, no measurement was required.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt.
Deferred Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on the
difference between financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expenses
or credits are based on the changes in the asset or liability from period to
period.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash equivalents and accounts receivable and payable: Carrying amounts
reported in the Company's consolidated balance sheets based on historical
cost approximate estimated fair value for these instruments, due to their
short-term nature.
The fair value of the bank line of credit, bank term loan, and Senior Notes
is estimated to approximate their carrying value as of October 31, 1998.
F-12
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
2. Summary of Accounting Policies and Other Matters (continued)
Interest Rate Swap Agreements
The differential to be paid or received in connection with interest rate swap
agreements is accrued as interest rates change and is recognized over the life
of the agreements.
Returns and Warranties
Costs relating to merchandise returns from sales at retail stores and through
distributors are not significant and generally are accounted for as they occur.
Catalogs, Sale Flyers and Advertising Costs
The direct cost of printing and mailing the Company's annual mail order catalog
is deferred and amortized against mail order revenues over the year the catalog
is in use. The direct cost of printing and distributing sale flyers is deferred
and amortized over the life of the flyer which is generally two weeks or less.
Other advertising costs are expensed as incurred. Unamortized amounts relating
to the costs of the annual catalog and periodic sale flyers amounted to $394,
$923 and $950 at October 31, 1998, November 1, 1997 and March 26, 1997,
respectively. Advertising expenses were approximately $15,127, $7,755, $3,286
and $8,841 for fiscal 1998, the seven-month and five-month periods of 1997 and
for fiscal 1996, respectively.
Store Pre-Opening Costs
Prior to fiscal 1998, direct costs, which consisted principally of rent,
employee compensation and travel costs for merchandise set-up and supplies,
incurred in setting up new stores for opening were deferred and amortized over
the first twenty-six weeks of store operations. Beginning in fiscal 1998, all
such costs are currently expensed. The effect of this change in accounting on
fiscal 1998 results of operations was immaterial. The amount of unamortized
store pre-opening costs at October 31, 1998, November 1, 1997, and March 26,
1997 amounted to $0, $104 and $1,203, respectively.
Emerging Accounting Issues
The Company is not aware of any accounting standards which have been issued and
which will require the Company to change its current accounting policies or
adopt new policies, the effect of which would be material to the Company's
financial statements.
F-13
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
3. Acquisitions
Effective June 26, 1997, the Company acquired all of the outstanding capital
stock of Country General, Inc. (Country General) for approximately $138.6
million (including related costs and expenses) in cash, including $1.6 million
related to post closing adjustments finalized during fiscal 1998. Country
General operated a chain of 114 agricultural specialty retail stores. The
Company funded the acquisition price in part from a $49,750 cash equity
contribution from its parent, CT Holding, and the remainder from funds drawn
under the Company's amended and restated Credit Facility.
The acquisition was accounted for as a purchase. The final purchase price was
allocated to the tangible and intangible assets and the liabilities based on
fair values, as follows:
Inventory $ 99,790
Accounts receivables and other assets 5,824
Property, improvements and equipment 17,174
Goodwill 51,775
Deferred income taxes 9,229
Accounts payable and accrued expenses (45,229)
--------
$138,563
========
In initially allocating the purchase price to the assets and liabilities based
on fair values, a $3,358 reserve was recorded in 1997 for the estimated cost,
principally lease liabilities, to close nine acquired stores; and a $2,866
reserve was recorded in 1997 for the cost of severance payments to identified
employees in connection with the closing of Country General's corporate
headquarters. During March of 1998, the decision was made to actually close
twelve of the acquired stores. As of October 31, 1998, the inventory liquidation
and store closing process and the termination of employees at Country General's
closed corporate headquarters has been completed. During fiscal 1998, in
connection with the final purchase price adjustments, the reserve for store
closings was increased by $1,522 as a result of the additional closed stores,
and the reserve for severance payments was decreased by $704; these adjustments
resulted in a net increase in goodwill of $818. As of October 31, 1998 and
November 1, 1997, the reserve for closed stores was $3,435 and $3,358,
respectively, consisting primarily of remaining lease costs for the closed
stores. As of October 31, 1998 and November 1, 1997, the reserve for severance
had been reduced to $224 and $2,722, respectively, as a result of payments to
terminated employees and the final purchase price adjustments.
On May 31, 1996, the Predecessor acquired 31 retail stores and related net
operating assets from Big Bear Farm Stores, Inc. (Big Bear), an agricultural
specialty retailer, for approximately $5,650 in cash. The acquisition was
accounted for as a purchase. The purchase price was allocated to the tangible
and intangible assets and the liabilities based on fair values as follows:
F-14
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
3. Acquisitions (continued)
Inventory $8,780
Accounts receivable and other assets 206
Leaseholds and equipment 517
Deferred income taxes 135
Goodwill 2,666
Accounts payable and accrued expenses (6,654)
------
$5,650
======
The results of operations of Country General and Big Bear are included in the
accompanying consolidated statements of income from the respective date of
purchase.
Pro Forma Results of Operations
Pro forma results of operations (in thousands) presented below are based on the
historical results of operations of the Company, as Successor, and its
Predecessor, adjusted to give effect to: (i) the acquisition of the Company
described in Note 1; (ii) the acquisitions of Country General and Big Bear
described above; and (iii) the debt financing arrangements relating to the
acquisitions, as though these transactions had occurred at the beginning of
fiscal 1996. Pro forma results of operations for 1997 and 1996 have not been
adjusted for the effect of the twelve acquired Country General stores which were
closed during fiscal 1998.
Year ended
November 1 November 2
1997 1996
-----------------------------
Net sales $600,157 $613,538
Operating income 28,828 28,897
Net income 3,418 4,147
4. Line of Credit and Long-Term Debt
On July 3, 1997, the Company entered into an amended and restated Credit
Facility with a bank which consists of a $50.0 million, six-year term loan
facility, which was fully funded, and a $100.0 million revolving credit facility
under which borrowings of $32,075 and letters of credit totaling $6,710 were
outstanding as of October 31, 1998. The Credit Facility will mature on June 30,
2003. Borrowings under the Credit Facility will bear interest at rates based
upon prime or the Eurodollar Rate plus a margin. At October 31, 1998, the
interest rate on the Term Loan was 8.1% and the interest rate on the Revolving
Credit Facility was 8.2%.
F-15
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
4. Line of Credit and Long-Term Debt (continued)
The Credit Facility agreement contains covenants which require the Company to
maintain a minimum: consolidated net worth; earnings before taxes, interest,
depreciation and amortization (EBITDA); ratio of EBITDA to cash interest
payable; and ratio of debt to EBITDA. The covenants also restrict, among other
things, the payment of dividends, incurrence of debt, and disposition of assets.
The Credit Facility is secured by substantially all of the assets of the
Company.
Long-term debt consisted of the following:
October 31 November 1
1998 1997
---------------------------
10-5/8% Senior Notes due 2007 $105,000 $105,000
Bank term loan 47,000 50,000
--------------------------
152,000 155,000
Less current portion 3,000 3,000
--------------------------
$149,000 $152,000
==========================
The Senior Notes mature on April 1, 2007 with interest payable semiannually in
arrears on April 1 and October 1. The Senior Notes may be redeemed beginning
April 1, 2002 at a price of 105.3125% of the principal amount decreasing
approximately 1.77% annually thereafter until April 1, 2005 at which time they
are redeemable at face value. Furthermore, notwithstanding the foregoing the
Company may redeem up to 35% of the original aggregate principal amount of the
Senior Notes at a price of 110% of the principal amount with the net cash
proceeds of a public equity offering within 60 days of closing such offering.
In March of 1998, the Company entered into an interest rate swap agreement (the
"Swap Agreement") with a bank to reduce the impact of changes in interest rates
on its floating term loan facility. Accordingly, the Swap Agreement was entered
into for purposes other than trading. The Swap Agreement has an initial notional
amount of $48,500. The notional amount decreases in tandem with the outstanding
balance on the Company's term loan facility until the Swap Agreement's maturity
on March 30, 2001 and was $47,000 at October 31, 1998. The Swap Agreement fixes
the interest rate on the term loan facility at 5.8525%, plus the applicable
margin, resulting in an effective rate of 8.23% at October 31, 1998. The Company
is exposed to interest rate risk in the event of nonperformance by the counter
party to the Swap Agreement. However, the Company does not anticipate
nonperformance by the bank.
F-16
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
4. Line of Credit and Long-Term Debt (continued)
The bank term loan must be repaid in semiannual installments, plus annual
prepayments based on the Company's excess cash flow, as defined. The minimum
annual installments are as follows: fiscal years 1999 - $3,000; 2000 - $6,000;
2001 - $8,000; 2002 - $12,000; and 2003 - $18,000.
5. Lease Obligations
The Company has entered into certain long-term lease agreements for the use of
warehouses, certain retail store facilities and computer equipment. These leases
have been accounted for as purchases of property rights and designated as
capitalized leases.
Amortization expense relating to such property rights recorded under capitalized
leases was $145, $86, $59 and $125 for fiscal 1998, the seven-month and
five-month periods of 1997 and for fiscal 1996, respectively. The net book value
of property rights recorded under capital leases was $636 and $781 at October
31, 1998 and November 1, 1997, respectively.
As of October 31, 1998, the debt associated with the capitalized property rights
is represented by the present value of the minimum lease payments as follows:
Fiscal year ended in:
1999 $ 293
2000 293
2001 293
2002 293
2003 257
After 2003 185
-------
Total minimum lease payments 1,614
Less amount representing interest 444
-------
Present value of minimum lease payments 1,170
Less current installments 159
-------
$1,011
=======
The Company also has entered into certain noncancelable operating leases for the
use of real estate, automobiles and trucks, and office equipment. Aggregate
rental expense for operating leases was approximately $14,602, $9,299, $4,069
and $9,294 for fiscal 1998 and the seven-month and five-month periods of 1997
and for fiscal 1996, respectively.
F-17
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
5. Lease Obligations (continued)
The following is a summary of minimum rental commitments as of October 31, 1998,
for operating leases:
<TABLE>
<CAPTION>
Automobile Office
Fiscal Year-End Real Estate and Trucks Equipment Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $14,637 $457 $46 $15,140
2000 11,691 - 17 11,708
2001 8,553 - 2 8,555
2002 6,440 - - 6,440
2003 4,369 - - 4,369
After 2003 6,022 - - 6,022
----------------------------------------------------------------------
$51,712 $457 $65 $52,234
======================================================================
</TABLE>
6. Stock Options
CT Holding has stock option arrangements with various officers and other members
of management of the Company which it accounts for under the provisions of APB
Opinion No. 25 and related interpretations. No compensation expense has been
recognized by CT Holding or the Company in connection with such stock option
arrangements.
Under FASB Statement No. 123, certain pro forma information is required as if CT
Holding had accounted for stock options under the alternative fair value method
of Statement 123 with the resultant compensation expense "pushed-down" to the
Company. CT Holding used a Minimum Valuation model to determine the per unit
fair value of the options at the grant date. The following assumptions were used
in the valuation:
Risk-free interest rate 5.65%
Expected dividend yield None
Expected volatility None
Expected life of option 7 years
F-18
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
6. Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
at the grant date is amortized to expense over the vesting period of the
options. Pro forma stock option compensation expense for the year ended October
31, 1998 is not indicative of what annual pro forma expense may be in the
future. Pro forma net income of the Company for fiscal 1998 is approximately
$9,729. Pro forma results for the period of seven months ended November 1, 1997
would not differ from amounts as reported since no stock option compensation
expense would be recognized during that period.
The Company had no capital shares reserved for issuance under any outstanding
stock option or other agreements at October 31, 1998.
7. Income Taxes
The Company's consolidated results of operations are included in the
consolidated tax returns of its parent, CT Holding. The entities in the
consolidated tax returns have adopted a policy of allocating income tax expense
or benefit based on a separate return concept. This generally results in
profitable companies recognizing income tax expense as if the individual company
filed a separate return and loss companies recognizing an income tax benefit to
the extent their losses contribute to reduce consolidated income taxes currently
or in the future.
Deferred income taxes reflect the net tax effect of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
October 31 November 1
1998 1997
---------------------------
<S> <C> <C>
Deferred tax liabilities:
Differences in depreciation and cost basis of property,
improvements and equipment $ 3,392 $ 2,428
Differences in cost basis of inventories due to LIFO and
uniform capitalization 5,623 5,423
Prepaid advertising 158 369
Store pre-opening costs -- 42
Differences in amortization and cost basis of intangibles 584 --
---------------------------
Total deferred tax liabilities 9,757 8,262
</TABLE>
F-19
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
<TABLE>
<CAPTION>
7. Income Taxes (continued)
October 31 November 1
1998 1997
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,105 $ 1,369
Capital loss carryforward 920 920
Allowance for doubtful accounts 154 214
Excess and obsolete inventory reserves 2,120 5,355
Compensation and employee benefit accruals 1,319 2,509
Operating leases 308 368
Accrued store closing costs 1,374 1,362
Capitalized property rights and lease obligations treated as
operating leases for income tax purposes 212 223
Other -- 114
------------------------
7,512 12,434
Less valuation allowance for capital loss carryforward (920) (920)
------------------------
Total deferred tax assets 6,592 11,514
------------------------
Net deferred tax (liabilities) assets $ (3,165) $ 3,252
========================
</TABLE>
The Company has a net operating loss carryforward of approximately $2.8 million
which will expire in the year 2012. A capital loss carryforward of approximately
$2.3 million which relates to the sale of Herschel will expire in the year 2001.
<TABLE>
<CAPTION>
Components of income tax expense (benefit) are as follows:
Successor | Predecessor
------------------------------------ | ---------------------------------
|
Fiscal year Period of seven | Period of five Fiscal year
ended months ended | months ended ended
October 31 November 1 | March 26 November 2
1998 1997 | 1997 1996
------------------------------------ | ---------------------------------
<S> <C> <C> <C> <C>
Continuing operations: |
Current: |
Federal $ -- $ 148 | $(1,541) $3,951
State 200 38 | (421) 1,199
------------------------------ | -----------------------------
200 186 | (1,962) 5,150
Deferred 8,200 1,871 | 1,328 1,100
------------------------------ | -----------------------------
8,400 2,057 | (634) 6,250
Discontinued operations: |
Current -- -- | -- 367
Deferred -- -- | -- (367)
------------------------------ | -----------------------------
-- -- | -- --
------------------------------ | -----------------------------
Total $8,400 $2,057 | $ (634) $6,250
============================== | =============================
</TABLE>
F-20
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
7. Income Taxes (continued)
Total reported income tax expense differs from the tax that would have resulted
by applying the statutory expected federal income tax rate to income before
taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
Successor | Predecessor
------------------------------------ | ---------------------------------
|
Fiscal year Period of seven | Period of five Fiscal year
ended months ended | months ended ended
October 31 November 1 | March 26 November 2
1998 1997 | 1997 1996
------------------------------------ | ---------------------------------
<S> <C> <C> <C> <C>
Income tax at federal statutory |
rate $6,248 $1,163 | $(639) $5,098
Increases in taxes resulting from: |
State income taxes, net of |
federal income tax effect 1,214 306 | (79) 833
Goodwill amortization 766 391 | 72 178
Other, net 172 197 | 12 141
---------------------------------- | -----------------------------
$8,400 $2,057 | $(634) $6,250
================================== | =============================
</TABLE>
8. Employment Commitments
The Company has employment agreements with two officers of the Company which
provide for annual salaries amounting to approximately $700. Upon termination of
employment without cause or for certain other circumstances, compensation may be
continued for a period not to exceed eighteen months.
9. Profit Sharing Plan
The Company has a profit sharing plan covering all employees who meet certain
eligibility requirements. The plan provides for discretionary employer
contributions and allows voluntary participant contributions. Company
contributions are determined by its Board of Directors. The Company accrued
expense in connection with the profit sharing plan of $0, $729, $85 and $881 for
fiscal 1998 and the seven-month and five-month periods of 1997 and for fiscal
1996, respectively.
F-21
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
10. Transactions with Related Parties
Certain investment funds managed by Butler Capital Corporation ("BCC") owned a
majority of the outstanding common stock of the Company (see Note 1 regarding
acquisition by Childs and CT Holding). The BCC Funds also held the 7%
convertible notes which were retired in connection with the purchase of the BCC
common stock. Interest paid on such notes was approximately $171 and $1,425 for
the period of five months ended March 26, 1997 and for fiscal 1996,
respectively.
Included in costs associated with acquiring the Company and related deferred
financing costs is an advisory and financing fee of $1.7 million paid to Childs
in consideration of services regarding the planning, structuring and negotiating
of the acquisition and related financings.
For fiscal 1998 and the period of seven months ended November 1, 1997, Childs
was paid a management and consulting services fee of approximately $240 and
$140, respectively, under a five-year agreement, annually renewable thereafter,
requiring annual payments of $240. In addition, during fiscal 1998 Fenway
Partners, a stockholder of CT Holding, was paid a management fee of $120.
The Company purchases inventory from two suppliers who are controlled by
stockholders of CT Holding. Purchases from these suppliers aggregated
approximately $4,999 and $6,092 for fiscal 1998 and fiscal 1997, respectively.
The Company purchased inventory from two suppliers who were controlled by the
BCC Funds. Purchases from these suppliers aggregated approximately $1,605 and
$6,228 for the period of five months ended March 26, 1997 and for fiscal 1996,
respectively.
11. Guarantee of Senior Notes
The Senior Notes described in Note 4 are guaranteed jointly and severally, fully
and unconditionally by Country General, the Company's wholly-owned subsidiary.
As a result of the acquisition of Country General by the Company as discussed in
Note 3, a new basis of accounting has been reflected in Country General's
financial statements reflecting the fair values for Country General's assets and
liabilities at that date.
F-22
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
11. Guarantee of Senior Notes (continued)
<TABLE>
<CAPTION>
Summarized financial information for Country General is as follows:
October 31 November 1
1998 1997
------------- -----------
<S> <C> <C>
Balance sheet data
Current assets:
Accounts receivable $ 3,437 $ 6,049
Inventory 104,777 102,571
Other 3,569 7,702
-----------------------------
111,783 116,322
Property and equipment, net of allowances for depreciation 15,598 16,673
Other noncurrent assets, principally goodwill and deferred
financing costs 52,170 53,109
-----------------------------
$ 179,551 $ 186,104
=============================
Current liabilities, principally accounts payable and accrued
expenses $ 28,159 $ 38,696
Noncurrent liabilities, principally amounts due to related 5,262 11,434
parties
Stockholder's equity 146,130 135,974
-----------------------------
$ 179,551 $ 186,104
=============================
<CAPTION>
Period of four
Fiscal year months ended
ended November 1 1997
October 31 (from date of
1998 acquisition)
-------------------------------
<S> <C> <C>
Income statement data
Net sales $ 257,342 $ 99,381
Cost of sales 178,918 71,095
-----------------------------
Gross profit 78,424 28,286
Selling, general and administrative and other expenses 53,151 26,719
-----------------------------
Operating income 25,273 1,567
Interest expense to related party 9,167 3,201
-----------------------------
Income (loss) before income taxes 16,106 (1,634)
Income taxes (credits) 6,488 (613)
-----------------------------
Net income (loss) $ 9,618 $ (1,021)
=============================
F-23
<PAGE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except where indicated)
11. Guarantee of Senior Notes (continued)
Period of four
Fiscal year months ended
ended November 1 1997
October 31 (from date of
1998 acquisition)
-------------------------------
<S> <C> <C>
Cash flow data
Net cash flows provided by (used in):
Operating activities $ 2,586 $ (1,736)
Investing activities, principally capital expenditures (3,575) (415)
Financing activities, principally change in amounts due to related
parties, less payment of deferred financing costs
of $2,340 in 1997 (5,192) 5,548
</TABLE>
12. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
The following is a tabulation of the unaudited quarterly results of operations
for the years ended October 31, 1998 and November 1, 1997:
Successor
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended October 31, 1998:
Net sales $144,393 $143,717 $167,859 $131,226
Gross profit 41,619 42,501 51,146 41,750
Operating income 6,659 8,168 15,696 8,318
Net income 590 1,375 6,597 1,413
Ratio of earnings to fixed charges 1.2x 1.4x 3.1x 1.6x
<CAPTION>
Predecessor | Successor
---------------------------- | ----------------------------------------
|
February 2, | March 27,
1997 to | 1997 to
First March 26, | May 3, Third Fourth
Quarter 1997 | 1997 Quarter Quarter
---------------------------- | -----------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended November 1, 1997: |
Net sales $71,479 $34,569 | $35,168 $129,216 $140,738
Gross profit 20,409 10,358 | 10,634 36,649 41,497
Operating income (loss) 2,538 (1,231) | 2,832 9,519 2,534
Net income (loss) 601 (1,848) | 732 2,709 (2,076)
Ratio (deficiency) of earnings |
to fixed charges 1.6x (910) | 1.8x 1.9x (2,871)
|
</TABLE>
F-24
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Valuation and Qualifying Accounts
Schedule II
Allowance for
Trade Receivables
-----------------
Balance at October 28, 1995 $ (72,000)
Credited to expense 20,500
Write-off of uncollectible accounts 1,500
---------
Balance at November 2, 1996 (50,000)
Credited to expense 4,700
---------
Balance at March 26, 1997 (45,300)
Debited to expense (54,436)
Write-off of uncollectible accounts 49,736
Acquired from Country General, Inc. (336,000)
---------
Balance at November 1, 1997 (386,000)
Debited to expense (174,279)
Write-off of uncollectible accounts 174,279
---------
Balance at October 31, 1998 $(386,000)
=========
F-25
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTRAL TRACTOR FARM & COUNTRY, INC.
DATED: January 29, 1999 By: /s/ James T. McKitrick
James T. McKitrick, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
DATED: January 29, 1999
/s/ James T. McKitrick President and Chief Executive Officer, Director
James T. McKitrick (Principal Executive Officer)
/s/ Dean Longnecker Executive Vice President and Chief Operating
Dean Longnecker Officer, Director
/s/ Denny L. Starr Senior Vice President, Finance and Chief
Denny L. Starr Financial Officer (Principal Financial and
Accounting Officer)
____________________ Director
John W. Childs
/s/ Jerry D. Horn Director
Jerry D. Horn
/s/ Steven G. Segal Director
Steven G. Segal
/s/ Adam L. Suttin Director
Adam L. Suttin
/s/ Jeffrey B. Swartz Director
Jeffrey B. Swartz
/s/ William E. Watts Director
William E. Watts
/s/ Habib Y. Gorgi Director
Habib Y. Gorgi
/s/ Peter Lamm Director
Peter Lamm
/s/ Richard C. Dresdale Director
Richard C. Dresdale
<TABLE>
<CAPTION>
EXHIBIT 12
CENTRAL TRACTOR FARM & COUNTRY, INC.
SCHEDULE REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
Fiscal 1997
----------------------------------
7 months ended 5 months ended Fiscal
Fiscal 1998 November 1, 1997 March 26, 1997 1996
----------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
Income before income taxes $18,375 3,422 (1,881) 14,994
======= ======= ======= =======
Fixed charges:
Interest expense $20,466 11,463 3,188 1,663
Portion of rent expense
representing interest 2,920 1,860 814 1,859
------- ------- ------- -------
Total fixed charges $23,386 13,323 4,002 3,522
======= ======= ======= =======
Earnings before income
taxes and fixed charges $41,761 16,745 2,121 18,516
======= ======= ======= =======
Ratio (deficiency) of
earnings to fixed charges 1.8x 1.3x $(1,881) 5.3x
======= ======= ======= =======
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is the Company's significant subsidiary:
Country General, Inc., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of Central Tractor Farm & Country, Inc. at and for
the period ended October 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> OCT-31-1998
<CASH> 6,971
<SECURITIES> 0
<RECEIVABLES> 5,034
<ALLOWANCES> 386
<INVENTORY> 217,064
<CURRENT-ASSETS> 234,827
<PP&E> 49,575
<DEPRECIATION> 7,948
<TOTAL-ASSETS> 418,845
<CURRENT-LIABILITIES> 136,418
<BONDS> 150,011
0
0
<COMMON> 0
<OTHER-SE> 129,757
<TOTAL-LIABILITY-AND-EQUITY> 418,845
<SALES> 587,195
<TOTAL-REVENUES> 587,195
<CGS> 410,179
<TOTAL-COSTS> 410,179
<OTHER-EXPENSES> 138,175
<LOSS-PROVISION> 174
<INTEREST-EXPENSE> 20,466
<INCOME-PRETAX> 18,375
<INCOME-TAX> 8,400
<INCOME-CONTINUING> 9,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,975
<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 third quarter of each fiscal year
due to the farming industry's planting season and the sale of seasonal products.
Weather, Business Conditions and Government Policy
Unseasonable weather and excessive rain, drought, or early or late frosts may
affect the Company's sales and operating income. In addition, the Company's
sales volume and income from operations depend significantly upon expectations
and economic conditions relevant to consumer spending and the farm economy.
Regional Economy
The majority of the Company's existing stores are located in the Northeastern
United States, the Midwestern United States and the Southeastern United States.
As a result, the Company's sales and profitability are largely dependent on the
general strength of the economy in these regions.
Competition
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers, and from mass merchandisers. Some of these
competitors have substantially greater financial and other resources than the
Company.
Currently, most of the Company's stores do not compete directly in the markets
of other agricultural specialty retail chains. However, the Company's expansion
plans will likely result in new stores being located in markets currently
serviced by one or more of these chains, and there can be no assurance that
these chains, certain of which have announced expansion plans, will not expand
into the Company's markets.
In addition, the Company competes in over half of its markets with mass
merchandisers. The Company believes that its merchandise mix and level of
customer service currently successfully differentiate it from mass
merchandisers, and that as a result the Company has to date not been
significantly impacted by competition from mass merchandisers. However, in the
past certain mass merchandisers have modified their product mix and marketing
strategies in an effort apparently intended to permit them to compete more
effectively in the Company's markets, and it is likely that these effort will
continue by these and other mass merchandisers.
