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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 27, 2003
/ / 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 000-23314
---------
TRACTOR SUPPLY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3139732
- -------------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
320 PLUS PARK BOULEVARD, NASHVILLE, TENNESSEE 37217
(Address of Principal Executive Offices, including zip code)
(615) 366-4600
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.008 par value
- --------------------------------------------------------------------------------
(Title of Class)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES X NO
--- ---
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the closing price of the Common Stock on The Nasdaq
National Market on June 28, 2003, the last business day of the registrant's most
recently completed second fiscal quarter, was $722,623,749. For purposes of this
response, the registrant has assumed that its directors, executive officers, and
beneficial owners of 5% or more of its Common Stock are the affiliates of the
registrant.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding at January 31, 2004
- -------------------------------------- -------------------------------------
Common Stock, $.008 par value 37,879,955
1
TRACTOR SUPPLY COMPANY
INDEX
FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ----
Forward-Looking Statements ................................................................................ii
PART I
1. Business...............................................................................................1
2. Properties.............................................................................................7
3. Legal Proceedings......................................................................................7
4. Submission of Matters to a Vote of Security-Holders....................................................7
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Repurchases of
Equity Securities .....................................................................................9
6. Selected Financial Data...............................................................................10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................12
7A. Quantitative and Qualitative Disclosures About Market Risk............................................22
8. Financial Statements and Supplementary Data ..........................................................23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................42
9A. Controls and Procedures...............................................................................42
PART III
10. Directors and Executive Officers of the Registrant....................................................42
11. Executive Compensation................................................................................42
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...............................................................................................42
13. Certain Relationships and Related Transactions .......................................................43
14. Principal Accountant Fees and Services................................................................43
PART IV
15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K ....................................43
i
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 15, 2004 are incorporated by reference into
Part III of this Form 10-K.
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K and statements included or incorporated by reference in this Form
10-K include certain historical and forward-looking information. The
forward-looking statements included are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
All statements, other than statements of historical facts, which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future capital expenditures
(including their amount and nature), business strategy, expansion and growth of
the Company's business operations and other such matters are forward-looking
statements. To take advantage of the safe harbor provided by the Act, the
Company is identifying certain factors that could cause actual results to differ
materially from those expressed in any forward-looking statements, whether oral
or written, made by or on behalf of the Company.
All phases of the Company's operations are subject to influences outside its
control. Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include general economic
cycles affecting consumer spending, weather factors, operating factors affecting
customer satisfaction, consumer debt levels, pricing and other competitive
factors, the ability to attract, train and retain highly qualified employees,
the ability to identify suitable locations and negotiate favorable lease
agreements on new and relocated stores, the timing and acceptance of new
products in the stores, the mix of goods sold, the continued availability of
favorable credit sources, capital market conditions in general, and the
seasonality of the Company's business. Forward-looking statements made by or on
behalf of the Company are based on a knowledge of its business and the
environment in which it operates, but because of the factors listed above, as
well as other unanticipated factors, actual results could differ materially from
those reflected by any forward-looking statements. Consequently, the
forward-looking statements made herein are qualified by these cautionary
statements and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business and operations. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
ii
PART I
ITEM 1. BUSINESS
OVERVIEW
Tractor Supply Company, a Delaware corporation (the "Company"), was founded in
1938 as a catalog mail order tractor parts supplier. In 1982, the Company was
purchased by a group of investors, including a member of the Company's current
management team who is a significant stockholder. In 1994, the Company made its
initial public offering. Today, the Company is the largest operator of retail
farm and ranch stores in the United States. The Company is focused on supplying
the lifestyle needs of recreational farmers and ranchers and serving the
maintenance needs of those who enjoy the rural lifestyle, as well as tradesmen
and small businesses. Stores are located in towns outlying major metropolitan
markets and in rural communities. The Company offers the following comprehensive
selection of merchandise: (1) equine, pet and animal products, including items
necessary for their health, care, growth and containment; (2) maintenance
products for agricultural and rural use; (3) hardware and tool products; (4)
seasonal products, including lawn and garden power equipment; (5) truck, trailer
and towing products; and (6) work clothing for the entire family. The Company's
stores typically range in size from 12,500 to 18,000 square feet of inside
selling space and utilize outside selling space. The Company operated 463 retail
farm and ranch stores in 30 states as of December 27, 2003.
Tractor Supply Company has one reportable industry segment - the operation of
farm and ranch retail stores.
SEASONALITY AND WEATHER
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. The Company typically operates at a
net loss in the first fiscal quarter of each year. Unseasonable weather,
excessive rain, drought, and early or late frosts may also affect the Company's
sales. The Company believes, however, that the impact of adverse weather
conditions is somewhat mitigated by the geographic dispersion of its stores.
The Company experiences a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
BUSINESS STRATEGY
The Company believes its sales and earnings growth has resulted from the focused
execution of its business strategy, which includes the following key components:
MARKET NICHE
The Company has identified a specialized market niche: supplying the
lifestyle needs of recreational farmers and ranchers and serving the
maintenance needs of those who enjoy the rural lifestyle, as well as
tradesmen and small businesses. By focusing its product mix on these core
customers, the Company believes it has differentiated itself from general
merchandise, home center and other specialty retailers.
CUSTOMER SERVICE
The Company is committed to providing superior customer service and offers
its customers a high level of in-store service through motivated,
well-trained store employees. The Company believes the ability of its store
employees to provide friendly, responsive, technical assistance is valued
by its customers and helps to promote strong customer loyalty and repeat
shopping. As such, the Company seeks to provide store employees with
decision-making authority and training to enable them to meet customer
needs.
The Company endeavors to staff its stores with courteous, highly motivated
employees and devotes considerable resources to training its store
employees, often in cooperation with its vendors. The
1
Company's training programs include (i) a full management training program
which covers all aspects of the Company's operations, (ii) product
knowledge modules produced in conjunction with key vendors, (iii) frequent
management skills training classes, (iv) semi-annual store managers
meetings with vendor product presentations, (v) vendor sponsored in-store
training programs and (vi) ongoing product information updates from the
Company's management headquarters. The Company seeks to hire and train
store employees with farming and ranching backgrounds, with particular
emphasis on general maintenance, equine and welding.
The Company's refund policy permits full refund within 30 days of date of
purchase and accompanied by a receipt. However, the Company also has a
"satisfaction guaranteed" policy, such that if customers are not satisfied,
store employees are authorized, at their discretion, to offer to repair or
exchange the product, or to offer store credits or refunds, irrespective of
when the product was purchased. The Company believes that by providing
these services it improves customer satisfaction, builds customer loyalty
and generates repeat business.
The Company offers proprietary, third party credit cards for individual
retail and business customers. In addition, the Company accepts Visa,
MasterCard and Discover credit cards.
STORE ENVIRONMENT
The Company's stores are designed and managed to make shopping an enjoyable
experience and maximize sales and operating efficiencies. Stores utilize
several layouts, designed to provide an open environment, optimal product
placement, and visual display locations. In addition, these layouts allow
for departmental space to be easily reallocated and visual displays to be
easily changed for seasonal products and promotions. Display and product
placement information is sent to stores monthly to ensure quality and
uniformity among the stores. Informative signs are located throughout each
store to assist customers with purchasing decisions and merchandise
location. The uniformity of the store layouts and visual displays affords
the customer a feeling of familiarity and enhances the shopping experience.
To further enhance the shopping experience, all store employees wear highly
visible red smocks and nametags, and customer service desks and check out
counters are conveniently located.
MERCHANDISING
The Company seeks to offer a differentiated assortment of products for
farmers, ranchers and rural homeowners. Its broad product assortment is
tailored to meet the regional and geographic needs of each market, as well
as the physical store size. The Company's full line of product offerings is
supported by a strong in-stock inventory position with an average of 12,500
to 14,500 unique products per store.
Stores carry a wide selection of high quality, nationally recognized, name
brand merchandise. The Company also markets private-label merchandise under
the Tractor Supply Company brand, as well as control brands, including
Huskee (outdoor power equipment), Traveller (truck/automotive products),
Retriever and Paws `n Claws (pet foods), Dumor and Producers Pride
(livestock feed), C.E. Schmidt (apparel) and Royal Wing (bird foods). The
Company believes that the availability of top quality private label
products at great prices provides a superior value for its customers, a
strategic advantage for the Company, and positions the Company as a
destination store.
2
The following chart indicates the average percentages of sales represented
by each of the Company's major product categories during fiscal 2003, 2002
and 2001.
Percent of Total Sales
----------------------------------
Product Category 2003 2002 2001
---------------- ---- ---- ----
Equine, Pet and Animal.................... 32% 31% 30%
Seasonal Products......................... 22 22 22
Hardware and Tools........................ 18 18 17
Truck/Trailer/Tow/Lube.................... 12 12 13
Clothing and Footwear..................... 9 9 9
Agriculture Products...................... 7 8 9
---- ---- ----
100% 100% 100%
=== === ===
PURCHASING AND DISTRIBUTION
The Company offers an extensive selection of farm and ranch maintenance and
other specialty products. The Company's business is not dependent upon any
one vendor or particular group of vendors. The Company purchases its
products from approximately 890 vendor, and no one vendor accounted for
more than 10% of purchases during any single year. The Company has no
material long-term contractual commitments with any of its vendors, has not
experienced difficulty in obtaining satisfactory alternative sources of
supply for its products and believes that adequate sources of supply exist
at substantially similar costs for substantially all of its products.
The Company maintains a dedicated supply chain management team to focus
exclusively on all replenishment and forecasting functions. This
centralized direction permits the buying team to focus more strategic
attention toward vendor line reviews, assortment planning and testing of
more new products and programs. Through the combined efforts of these
teams, the Company expects to continually improve overall inventory
productivity and in-stock position.
Over 97% of the Company's purchase orders are transmitted through an
electronic data interchanges ("EDI") system, and approximately 79% of
merchandise vendor invoices are transmitted through EDI. The Company is
working to expand the number of vendors who transmit invoices to the
Company and increase the amount of sales history transmitted from the
Company, all through EDI. The Company's supply chain process is centrally
managed.
The Company operates a 500,000 square foot distribution center in
Pendleton, Indiana and a 320,000 square foot distribution center in Waco,
Texas, and leases a new 300,000 square foot distribution center in
Braselton, Georgia, and a 144,000 square foot distribution center in Omaha,
Nebraska. The new facility in Braselton, Georgia is strategically located
in the Southeast to optimize transportation efficiencies with surrounding
vendors and stores. This new location replaces the 57,000 square foot Rural
Hall, North Carolina facility. In fiscal 2003, the Company received
approximately 65% of its merchandise through these distribution facilities,
with the balance delivered directly to the stores. The Company's
transportation activity is managed by UPS Supply Chain Solutions ("UPS"),
which supports the distribution centers. Additionally, UPS provides inbound
transportation services for approximately 300 vendors. The Company is
continuously evaluating its long-term strategic plan with respect to its
distribution centers and transportation operations and currently plans to
add an additional distribution center in the Northeast and expand the
Pendleton facility by approximately 200,000 square feet to further
strengthen transportation efficiencies in 2004.
MARKETING
The Company utilizes an "everyday low prices" strategy to consistently
offer its products at competitive prices. The Company regularly monitors
prices at competing stores and adjusts its prices as necessary. The Company
believes that by avoiding a "sale" oriented marketing strategy, it is
attracting customers on a regular basis rather than only in response to
sales.
3
To generate store traffic and position itself as a destination store, the
Company promotes broad selections of merchandise, primarily advertised at
the regular everyday low price, with color circulars. The Company also runs
periodic special events promoted through local flyers, circulars and radio
advertising. The Company enhances its print marketing and advertising
programs through the expanded use of national and local cable network
television. Due to the geographic dispersion of the Company's stores, the
use of national cable network advertising is generally more cost-effective
and additionally serves to promote the Company in advance of entering a new
market.
The Company's vendors realize the value of the Company being a destination
store. Due to the relatively small size of its stores, increased traffic in
the store ensures increased exposure to most products. As such, the
Company's vendors are committed to helping the Company promote its brand
and position itself as a destination store. Vendors provide assistance with
product presentation and rack design, brochures, point of purchase
materials for customers' education and product education for employees.
COMPETITION
The Company operates in a highly competitive market. The principal
competitive factors include location of stores, price and quality of
merchandise, in-stock consistency, merchandise assortment and presentation,
and customer service. The Company believes it has successfully
differentiated itself from general merchandise, home center (i.e. "big
box") retailers and other specialty and discount retailers by focusing on
its specialized market niche (i.e. the rural lifestyle and maintenance
needs of recreational farmers and ranchers, as well as tradesmen and small
businesses). However, the Company does face select competition from these
entities, as well as competition from independently owned retail farm and
ranch stores, several privately-held regional farm store chains and farm
cooperatives. Some of these competitors are units of large national or
regional chains that have substantially greater financial and other
resources than the Company.
MANAGEMENT AND EMPLOYEES
As of December 27, 2003, the Company employed approximately 3,700 full-time
and approximately 2,700 part-time employees. The Company also employs
additional part-time employees during peak periods. As of such date,
approximately 40 employees of the Company's Omaha, Nebraska distribution
center were covered by a collective bargaining agreement which expires in
July 2005.
Management believes its district managers, store managers and other
distribution and support personnel have contributed significantly to the
Company's performance. The Company utilizes an internal advisory board
comprised of store managers. This group brings a grassroots perspective to
operational initiatives and generates chain-wide endorsement of proposed
"best-practice" solutions. The Company has implemented numerous best
practice teams (comprised of employees in operations and from the store
support center) to evaluate key operations of the Company and recommend
process changes that will both improve efficiency and strengthen controls.
Management encourages the participation of all employees in
decision-making, regularly solicits input and suggestions from employees
and responds to the suggestions expressed by employees.
All employees participate in one of various incentive programs, which
provide the opportunity to receive additional compensation based upon the
Company's success and profitability. The Company also provides employees
the opportunity to participate in an employee stock purchase plan and a
401(k) retirement plan (the Company participates in the 401(k) plan through
a cash match). Additionally, the Company shares in the cost of health
insurance provided to its employees, and employees receive a discount on
merchandise purchased at the Company's stores.
Management also encourages a "promote from within" environment when
internal resources permit. The Company maintains internal leadership
development programs designed to mentor high-track employees for continued
progress at a fast pace. Two of the five members of the Company's senior
management, most of the Company's district managers and a significant
portion of the Company's store managers were promoted to their positions
from within the Company. All executive officers have at least 17 years of
business experience and one executive officer has over 24 years of
4
experience with the Company. District managers and store managers have an
average length of service with the Company of approximately 4.5 years.
Management believes internal promotions coupled with the hiring of
individuals with previous retail experience will provide the management
structure necessary to support expected store growth. Management believes
it has satisfactory relationships with its employees.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
The Company has invested considerable resources in sophisticated management
information and control systems to ensure superior customer service,
support the purchase and distribution of merchandise and improve operating
efficiencies. The management information and control systems include a
point-of-sale system (with communications via a frame relay network to the
Company's primary systems), a supply chain management and replenishment
system, a vendor purchase order control system and a merchandise
presentation system. These systems are fully integrated and track
merchandise from order through sale. All data from these systems are fully
integrated with the Company's financial systems.
The Company utilizes a cross-functional committee comprised of members of
management from key departments within the Company. This diverse group of
Company leaders aligns the activities and deliverables of the Information
Technology team with the overall Company mission and goal of improving the
level of service provided to the Company's customers and creating
efficiencies within the Company's operations and supply chain. The
committee evaluates requests for information technology resources and
prioritizes projects to ensure greatest benefit to the Company.
The Company continues to evaluate and improve the functionality of its
systems to maximize their effectiveness. Such efforts will include an
ongoing evaluation of the optimal software configuration (including system
enhancements and upgrades) as well as the adequacy of the underlying
hardware components. These efforts are directed toward constantly improving
the overall business processes and achieving the most efficient and
effective use of the system to manage the Company's operations.
GROWTH STRATEGY
The Company's current and long-term growth strategy is built on a combination of
(1) expanded geographic market presence, achieved through the opening of new
retail stores and (2) enhanced financial performance through same-store sales
increases, achieved through aggressive merchandising programs with an "everyday
low prices" philosophy, supported by strong customer service.
The Company has experienced considerable growth in recent years, including the
addition of 18 stores in fiscal 2001, 113 in fiscal 2002 and 31 in fiscal 2003.
This recent growth has increased the Company's market presence in the Southwest,
primarily in Texas;, the Southeast, primarily in Florida; in the central
northern part of the United States, primarily in Ohio, Michigan and Indiana; and
in the Northeast, primarily in New York and Pennsylvania. The Company operated
463 stores in 30 states as of December 27, 2003 and has plans to open 52 stores
in fiscal 2004. The Company plans to open 60 to 65 new stores in fiscal 2005 and
additional stores thereafter. The Company believes it has developed a
sophisticated proven method for selecting store sites and has identified over
800 potential additional markets for new stores in the United States. In
addition, the Company continues to identify opportunities to relocate existing
stores.
The Company's strategy is generally to lease its new stores. At December 27,
2003, 393 of the Company's 463 stores are leased. Assuming that new stores are
leased, the estimated cash required to open a new store is approximately
$900,000 to $1,100,000, the majority of which is for initial acquisition of
inventory and capital expenditures (principally leasehold improvements and
fixtures and equipment), and the balance of which is for pre-opening expenses.
The Company plans to relocate a total of 18 to 20 stores in both fiscal 2004 and
2005 and an average of three or four additional stores each year over the next
several years. Store relocations are typically undertaken to move small, older
stores to full-size formats in prime retail areas. The Company has relocated 35
stores since 2001. We recognize certain properties have declined in physical
appearance and, in certain markets, the retail and traffic flows are shifting.
5
Through relocations, we are able to keep much of our existing loyal customer
base but expand the overall reach to new customers, thereby growing the
business. The cash required to complete a store relocation typically ranges from
$300,000 to $600,000, depending on whether the Company is responsible for any
renovation or remodeling costs.
ADDITIONAL INFORMATION
The Company files reports with the Securities and Exchange Commission ("SEC"),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and other
reports as required. The public may read and copy any materials the Company
files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer and the SEC maintains an Internet site at WWW.SEC.GOV that
contains the reports, proxy and information statements, and other information
filed electronically.
The Company makes available free of charge through its Internet website,
WWW.MYTSCSTORE.COM, its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on the website is not part of
this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this report.
The Company maintains a code of ethics that is applicable to all employees,
including the Company's Chief Executive Officer, Chief Financial Officer and
Controller. This code, which requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of the Company's business, is available for public access on the Company's
Internet website (WWW.MYTSCSTORE.COM).
6
ITEM 2. PROPERTIES
At December 27, 2003, the Company operated 463 stores in 30 states. The Company
leases more than 84% of its stores, four of its five distribution facilities and
its management headquarters. The store leases typically have initial terms of
between 10 and 15 years, with one to three renewal periods of five years each,
exercisable at the Company's option. None of the store leases is individually
material to the Company's operations.
In January 2004, the Company purchased the land and building related to its
distribution center in Pendleton, Indiana. The facility was originally built to
the Company's specifications and has been leased since 1999. Also in 2004, the
Company entered into a lease agreement that will relocate the three store
support center locations in Nashville, Tennessee to one new location. The
Company expects to incur incremental after tax costs of approximately $2.0
million primarily due to the abandonment of the current leases.
As of December 27, 2003, the Company operated 463 stores in 30 states as
follows:
Number Number
State of Stores State of Stores
----- --------- ----- ---------
Texas 67 Missouri 7
Ohio 60 North Dakota 7
Michigan 45 Nebraska 7
Tennessee 32 West Virginia 7
Indiana 31 Georgia 7
Florida 29 Arkansas 6
Pennsylvania 24 Oklahoma 6
North Carolina 19 Minnesota 5
New York 19 South Dakota 5
Kentucky 17 Alabama 4
Virginia 16 Maryland 3
Illinois 10 Delaware 1
Iowa 9 Mississippi 1
Kansas 9 Montana 1
South Carolina 8 Wisconsin 1
ITEM 3. LEGAL PROCEEDINGS
The company is involved in various litigation arising in the ordinary course of
business. After consultation with legal counsel, management expects these
matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss has
been adequately provided for in accrued liabilities to the extent probable and
reasonably estimable. It is possible, however, that future results of operations
for any particular quarterly or annual period could be materially affected by
changes in circumstances relating to these proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of the Company's security-holders during the
fourth quarter of the Company's fiscal year ended December 27, 2003.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 15, 2004.
The following is a list of the names and ages of all executive officers of the
registrant, indicating all positions and offices with the registrant held by
each such person and each person's principal occupations and employment during
at least the past five years:
Name Position Age
---- -------- ---
Joseph H. Scarlett, Jr.......... Chairman of the Board, Chief Executive Officer and Director 61
James F. Wright ................ President, Chief Operating Officer and Director 54
Gerald W. Brase ................ Senior Vice President-Merchandising 50
Calvin B. Massmann.............. Senior Vice President-Chief Financial Officer and Treasurer 60
Stanley L. Ruta................. Senior Vice President-Store Operations 52
- ----------------
Joseph H. Scarlett, Jr. has served as Chairman of the Board and Chief Executive
Officer of the Company since 1993, having previously served as President and
Chief Operating Officer of the Company from 1987 to 1993. Mr. Scarlett has
served as a director of the Company since 1982.
James F. Wright has served as President and Chief Operating Officer of the
Company since October 2000. Mr. Wright previously served as President and Chief
Executive Officer of Tire Kingdom, a tire and automotive services retailer, from
May 1997 to June 2000. Mr. Wright has served as a director of the Company since
2002.
Gerald W. Brase has served as Senior Vice President-Merchandising of the Company
since September 1997.
Calvin B. Massmann has served as Senior Vice President-Chief Financial Officer
and Treasurer since January 2000. Mr. Massmann previously served as an
independent business consultant during 1998 and 1999.
Stanley L. Ruta has served as Senior Vice President-Store Operations since June
2000, after having served as Vice President-Store Operations of the Company
since 1994.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock began trading on The Nasdaq National Market on
February 18, 1994 under the symbol "TSCO".
The table below sets forth the high and low sales prices of the Company's Common
Stock as reported by The Nasdaq National Market (as adjusted for 2:1 stock
splits effective August 21, 2003 and August 19, 2002) for each fiscal quarter of
the periods indicated:
PRICE RANGE
---------------------------------------------
2003 2002
-------------------- -------------------
HIGH LOW HIGH LOW
------- -------- ------- -------
First Quarter $ 22.03 $ 14.69 $ 11.65 $ 8.18
Second Quarter $ 26.60 $ 16.14 $ 18.31 $ 11.40
Third Quarter $ 38.10 $ 23.03 $ 18.05 $ 12.70
Fourth Quarter $ 44.87 $ 31.35 $ 22.75 $ 14.05
As of January 31, 2004, the approximate number of record holders of the
Company's Common Stock was 150 (excluding individual participants in nominee
security position listings), and the estimated number of beneficial holders of
the Company's Common Stock was 18,000.
The Company has not declared any cash dividends on its Common Stock during the
two most recent fiscal years. The Company currently intends to retain all
earnings for future operation and expansion of its business and, therefore, does
not anticipate that any dividends will be declared on the Common Stock in the
foreseeable future. Any future declaration of dividends will be subject to the
discretion of the Company's Board of Directors and subject to the Company's
results of operations, financial condition, cash requirements and other factors
deemed relevant by the Board of Directors. The Company is also restricted from
paying cash dividends by the terms of its credit agreement, which is described
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources.
There were no stock repurchases by the Company in the fourth quarter of fiscal
2003.
9
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
The Company's fiscal year includes 52 or 53 weeks and typically ends on the last
Saturday of the calendar year. References to fiscal year mean the year in which
that fiscal year began. Fiscal years ended December 27, 2003, December 28, 2002,
December 29, 2001 and December 30, 2000, contain 52 weeks, while the fiscal year
ended January 1, 2000 contains 53 weeks. The following table provides summary
historical financial information for the periods ended and as of the dates
indicated (in thousands, except per share and operating data):
2003 2002 2001 2000 1999*
----------- ----------- ---------- ---------- ----------
OPERATING RESULTS:
Net sales ......................................... $ 1,472,885 $ 1,209,990 $ 849,799 $ 759,037 $ 688,082
Gross margin ...................................... 448,900 342,187 228,344 200,407 181,251
Selling, general and administrative expenses ...... 332,215 260,290 178,243 156,535 139,725
Depreciation and amortization ..................... 19,758 16,457 11,254 9,889 7,311
----------- ----------- ---------- ---------- ----------
Income from operations ............................ 96,927 65,440 38,847 33,983 34,215
Interest expense, net ............................. 3,444 4,707 4,494 6,387 4,104
Unusual item: gain on life insurance .............. -- -- 2,173 -- --
----------- ----------- ---------- ---------- ----------
Income before income taxes and cumulative effect
of accounting change ............................ 93,483 60,733 36,526 27,596 30,111
Income tax provision .............................. 35,094 21,963 10,752 11,206 12,237
----------- ----------- ---------- ---------- ----------
Net income before cumulative effect of accounting
change .......................................... 58,389 38,770 25,774 16,390 17,874
Cumulative effect of accounting change, net of
income taxes (a) ................................ (1,888) -- -- -- --
----------- ----------- ---------- ---------- ----------
Net income ........................................ $ 56,501 $ 38,770 $ 25,774 $ 16,390 $ 17,874
=========== =========== ========== ========== ==========
Net income per share-basic, before cumulative
effect of change in accounting principle (b) .... $ 1.57 $ 1.07 $ 0.73 $ 0.47 $ 0.51
Cumulative effect of accounting change, net of
income taxes .................................... (0.05) -- -- -- --
----------- ----------- ---------- ---------- ----------
Net income per share-basic, after cumulative effect
of change in accounting principle ............... $ 1.52 $ 1.07 $ 0.73 $ 0.47 $ 0.51
=========== =========== ========== ========== ==========
Net income per share-assuming dilution before
cumulative effect of change in accounting
principle (b) ................................... $ 1.45 $ 0.99 $ 0.71 $ 0.47 $ 0.51
Cumulative effect of accounting change, net of
income taxes .................................... (0.05) -- -- -- --
----------- ----------- ---------- ---------- ----------
Net income per share-assuming dilution, after
cumulative effect of change in accounting
principle........................................ $ 1.40 $ 0.99 $ 0.71 $ 0.47 $ 0.51
=========== =========== ========== ========== ==========
Dividends per share ............................... -- -- -- -- --
OPERATING DATA (PERCENT TO SALES):
Gross margin ...................................... 30.5% 28.3% 26.9% 26.4% 26.3%
Selling, general and administrative expenses ...... 22.6% 21.5% 21.0% 20.6% 20.3%
Income from operations ............................ 6.6% 5.4% 4.6% 4.5% 5.0%
Net income before cumulative effect of change in
accounting principle ............................ 3.9% 3.2% 3.0% 2.2% 2.6%
10
2003 2002 2001 2000 1999*
--------- --------- --------- --------- ---------
PRO-FORMA AMOUNTS, ASSUMING THE CHANGE IN
ACCOUNTING PRINCIPLE IS APPLIED RETROACTIVELY (C):
Gross margin ....................................... $ 448,900 $ 373,895 $ 247,364 $ 216,282 $ 193,320
Selling, general and administrative expenses ....... 332,215 293,689 197,330 172,665 152,623
Income from operations ............................. 96,927 63,750 38,780 33,728 33,386
Net income ......................................... 58,389 37,690 25,732 16,239 17,382
Net income per share - basic ....................... $ 1.57 $ 1.04 $ 0.73 $ 0.46 $ 0.50
Net income per share - assuming dilution ........... $ 1.45 $ 0.96 $ 0.71 $ 0.46 $ 0.49
PRO-FORMA OPERATING DATA ASSUMING THE CHANGE IN
ACCOUNTING PRINCIPLE IS APPLIED RETROACTIVELY
(PERCENT TO SALES): (C):
Gross margin ....................................... 30.5% 30.9% 29.1% 28.5% 28.1%
Selling, general and administrative expenses ....... 22.6% 24.3% 23.2% 22.7% 22.2%
Income from operations ............................. 6.6% 5.3% 4.6% 4.4% 4.9%
Net income ......................................... 3.9% 3.1% 3.0% 2.1% 2.5%
NUMBER OF STORES:
Beginning of year .................................. 433 323 305 273 243
New stores opened .................................. 31 113 18 35 31
Closed stores ...................................... (1) (3) -- (3) (1)
--------- --------- --------- --------- ---------
End of year ........................................ 463 433 323 305 273
========= ========= ========= ========= =========
Number of relocated stores during year ............. 18 16 1 1 1
Number of remodeled stores (d) ..................... 3 8 4 -- --
Same-store sales increase (e) ...................... 7.0% 9.6% 3.8% 0.4% 4.4%
Average sales per store (000's) .................... $ 3,255 $ 3,045 $ 2,699 $ 2,603 $ 2,682
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital .................................... $ 177,499 $ 140,440 $ 122,309 $ 133,731 $ 117,306
Total assets ....................................... 536,209 458,919 338,482 332,296 302,630
Long-term debt, less current portion (g) ........... 21,210 35,705 23,157 62,950 54,683
Stockholders' equity ............................... 295,384 227,848 181,296 155,036 138,305
* 53-week fiscal year
- ------------------------
(a) The Company adopted Emerging Issues Task Force No. 02-16 ("EITF 02-16")
which changed its method of accounting for consideration received from
vendors whereby such consideration is considered a reduction of inventory
cost as opposed to a reduction of selling, general and administrative
costs. As a result, the Company recorded a non-cash charge of $1.9 million,
net of income tax, in the first quarter of fiscal 2003 for the cumulative
effect of the change on fiscal years prior to fiscal 2003.
(b) Basic net income per share is calculated based on the weighted average
number of common shares outstanding applied to net income. Diluted net
income per share is calculated using the treasury stock method for options
and warrants. All share and per share data have been adjusted for stock
splits.
(c) The pro-forma results provide a summary of gross margin, selling, general
and administrative expenses and net income as if the adoption of EITF 02-16
had occurred prior to January 1, 2000. See Note 2 to Consolidated Financial
Statements for further information.
(d) Reflects remodelings costing more than $150,000.
(e) Same-store sales increases are calculated on an annual basis, excluding
relocations, using all stores open at least one year.
(f) Average sales per store are calculated based on the weighted average number
of days open in the applicable period.
(g) Long-term debt includes borrowings under the Company's principal revolving
credit agreement, term loan agreement and amounts outstanding under its
capital lease obligations, excluding the current portions of each.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is the largest operator of retail farm and ranch stores in the
United States, focused on supplying the lifestyle needs of recreational farmers
and ranchers and serving the maintenance needs of those who enjoy the rural
lifestyle, as well as tradesmen and small businesses. Stores are located in
towns outlying major metropolitan markets and in rural communities. The Company
offers the following comprehensive selection of merchandise: (1) equine, pet and
animal products, including items necessary for their health, care, growth and
containment; (2) maintenance products for agricultural and rural use; (3)
hardware and tool products; (4) seasonal products, including lawn and garden
power equipment; (5) truck, trailer and towing products; and (6) work clothing
for the entire family. The Company's stores typically range in size from 12,500
to 18,000 square feet of inside selling space and utilize outside selling space.
The Company operated 463 retail farm and ranch stores in 30 states as of
December 27, 2003.
The fiscal year of the Company includes 52 or 53 weeks and ends on the last
Saturday of the calendar year. References to fiscal year mean the year in which
that fiscal year began. Each of the fiscal years ended December 27, 2003,
December 28, 2002 and December 29, 2001 contain 52 weeks.
The Company's current and long-term growth strategy is to (1) expand geographic
market presence, achieved by opening new retail stores and (2) enhance financial
performance through same-store sales increases, achieved through aggressive
merchandising programs with an "everyday low prices" philosophy, supported by
strong customer service.
The Company has experienced considerable growth in recent years, including the
addition of 18 stores in fiscal 2001, 113 in fiscal 2002, and 31 in fiscal 2003.
The significant growth in 2002 is due primarily to the acquisition of real
property and lease rights from Quality Stores, Inc. (See Note 16 of Notes to the
Consolidated Financial Statements contained in this report for further
discussion regarding this purchase.) This growth has increased the Company's
market presence in the Southeast, primarily in Florida; in the central northern
part of the United States, primarily in Ohio and Michigan; and in the Northeast,
primarily in New York and Pennsylvania. The Company operated 463 stores in 30
states as of December 27, 2003, and plans to open 52 stores in fiscal 2004. The
Company plans to open 60 to 65 new stores in fiscal 2005 and additional stores
thereafter. The Company has identified over 800 potential additional locations
for new stores in the United States. In addition, the Company continues to
identify opportunities to relocate existing stores.
Additionally, the Company has placed significant emphasis on its merchandising
programs, evaluating the sales and profitability of its products through
detailed line reviews, review of vendor performance measures and modification of
the overall product offerings. These efforts, coupled with a strong marketing
program and in-depth product knowledge training of store employees, have
enhanced sales, improved gross margins and generated improved overall financial
performance.
SEASONALITY AND WEATHER
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. The Company typically operates at a
net loss in the first fiscal quarter of each year. Unseasonable weather,
excessive rain, drought, and early or late frosts may also affect the Company's
sales. The Company believes, however, that the impact of adverse weather
conditions is somewhat mitigated by the geographic dispersion of its stores.
The Company experiences a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
12
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial position and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make informed estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The Company's
significant accounting policies, including areas of critical management
judgments and estimates, have primary impact on the following financial
statement areas:
- Inventory valuation - Self insurance
- Sales returns
The Company's critical accounting policies are subject to judgments and
uncertainties, which affect the application of such policies. (See Note 1 to the
Notes to the Consolidated Financial Statements contained in this report for a
discussion of the Company's critical accounting policies.) The Company's
financial position and/or results of operations may be materially different when
reported under different conditions or when using different assumptions in the
application of such policies. In the event estimates or assumptions prove to be
different from actual amounts, adjustments are made in subsequent periods to
reflect more current information.
CHANGE IN ACCOUNTING PRINCIPLE
Emerging Issue Task Force Issue No. 02-16 ("EITF 02-16"), "Accounting by a
Customer (including a Reseller) for Certain Consideration Received from a
Vendor" provides guidance for the accounting treatment and income statement
classification for consideration given by a vendor to a retailer in connection
with the sale of the vendor's products or for the promotion of sales of the
vendor's products. The EITF concluded that such consideration received from
vendors should be reflected as a decrease in prices paid for inventory and
recognized in cost of sales as the related inventory is sold. Prior to adopting
this pronouncement, the Company classified all vendor-provided marketing support
funds as a reduction in selling, general and administrative expenses.
The effect of applying EITF 02-16 on prior-period financial statements would
have resulted in a change to previously reported net income, thus, the Company
has reported the adoption of EITF 02-16 as a cumulative effect adjustment.
Accordingly, in the first quarter of fiscal 2003, the Company recorded a
cumulative effect of accounting change of $3.1 million ($1.9 million net of
income taxes) for the impact of this adoption on prior fiscal years.
The following pro forma financial information for the fiscal year ended December
28, 2002 reflects the impact of EITF 02-16 as if it had been adopted prior to
fiscal 2002 (in thousands, except per share amounts):
AS REPORTED PRO-FORMA
------------------------- -------------------------
% OF % OF
SALES SALES
----- -----
Net sales $ 1,209,990 100.0% $ 1,209,990 100.0%
Cost of merchandise sold 867,803 71.7 836,095 69.1
------------ ------ ------------ ------
Gross margin 342,187 28.3 373,895 30.9
Selling, general and administrative expense 260,290 21.5 293,689 24.2
Depreciation and amortization 16,457 1.4 16,457 1.4
------------ ------ ------------ ------
Income from operations 65,440 5.4 63,749 5.3
Interest expense, net 4,707 0.4 4,707 0.4
------------ ------ ------------ ------
Income before income taxes 60,733 5.0 59,042 4.9
Income tax provision 21,963 1.8 21,352 1.8
------------ ------ ------------ ------
Net income $ 38,770 3.2% $ 37,690 3.1%
============ ====== ============ ======
Net income per share:
Basic $ 1.07 $ 1.04
Diluted $ 0.99 $ 0.96
Weighted average shares outstanding:
Basic 36,111 36,111
Diluted 39,277 39,277
13
QUARTERLY FINANCIAL DATA
The Company's unaudited quarterly operating results for each fiscal quarter of
2003 and 2002 are shown below (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER TOTAL
- ---- --------- --------- --------- --------- -----------
Net sales $ 273,760 $ 449,391 $ 361,204 $ 388,530 $ 1,472,885
Gross margin 80,797 136,292 109,233 122,578 448,900
Income from operations 4,205 44,186 19,993 28,543 96,927
Net income before cumulative effect of accounting
change 2,013 27,387 12,129 16,860 58,389
Net income including cumulative effect of accounting
change $ 125 $ 27,387 $ 12,129 $ 16,860 $ 56,501
Net income per share, before cumulative effect
of accounting change:
Basic $ 0.06 $ 0.74 $ 0.33 $ 0.45 $ 1.57
Diluted $ 0.05 $ 0.69 $ 0.30 $ 0.41 $ 1.45
Net income per share, including cumulative effect
of accounting change:
Basic $ 0.01 $ 0.74 $ 0.33 $ 0.45 $ 1.52
Diluted $ 0.01 $ 0.69 $ 0.30 $ 0.41 $ 1.40
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER TOTAL
- ---- --------- --------- --------- --------- -----------
Net sales $ 193,810 $ 392,048 $ 296,215 $ 327,917 $ 1,209,990
Gross margin 51,979 108,391 84,019 97,798 342,187
Income (loss) from operations (5,401) 29,125 13,312 28,404 65,440
Net income (loss) $ (4,010) $ 17,346 $ 7,801 $ 17,633 $ 38,770
Net income (loss) per share-basic $ (0.11) $ 0.48 $ 0.22 $ 0.49 $ 1.07
Net income (loss) per share-diluted $ (0.11) $ 0.44 $ 0.20 $ 0.44 $ 0.99
The following quarterly pro forma financial information for the fiscal year
ended December 28, 2002 reflects the impact of EITF 02-16 as if it had been
adopted prior to fiscal 2002 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER TOTAL
- ---- --------- --------- --------- --------- -----------
Net sales $ 193,810 $ 392,048 $ 296,215 $ 327,917 $ 1,209,990
Gross margin 56,464 119,566 94,885 102,980 373,895
Income (loss) from operations (5,382) 30,499 17,946 20,686 63,749
Net income (loss) $ (3,998) $ 18,223 $ 10,759 $ 12,706 $ 37,690
Net income (loss) per share-basic $ (0.11) $ 0.51 $ 0.30 $ 0.35 $ 1.04
Net income (loss) per share-diluted $ (0.11) $ 0.47 $ 0.27 $ 0.32 $ 0.96
As a result of two two-for-one stock splits, stockholders of record as of August
4, 2003 and August 2, 2002 received one additional share of stock. The par value
of the Company's common stock remained $0.008. All share and per share data
included in the consolidated financial statements and notes thereto has been
restated to give effect to the stock splits.
14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Consolidated Statements of Income expressed as a percentage of net
sales. The table reflects actual and pro-forma information. The pro-forma
information reflects the impact of EITF 02-16 as if it had been adopted prior to
fiscal 2001:
(PRO-FORMA)
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 69.5 71.7 73.1 69.5 69.1 70.9
------ ------ ------ ------ ------ ------
Gross margin 30.5 28.3 26.9 30.5 30.9 29.1
Selling, general and administrative expenses 22.6 21.5 21.0 22.6 24.2 23.2
Depreciation and amortization 1.3 1.4 1.3 1.3 1.4 1.3
------ ------ ------ ------ ------ ------
Income from operations 6.6 5.4 4.6 6.6 5.3 4.6
Interest expense, net 0.2 0.4 0.5 0.2 0.4 0.5
Unusual item - gain on life insurance -- -- 0.2 -- -- 0.2
------ ------ ------ ------ ------ ------
Income before income taxes 6.4 5.0 4.3 6.4 4.9 4.3
Income tax provision 2.4 1.8 1.3 2.4 1.8 1.3
------ ------ ------ ------ ------ ------
Net income before cumulative effect of
accounting change 4.0 3.2 3.0 4.0 3.1 3.0
Cumulative effect of accounting change 0.1 -- -- -- -- --
------ ------ ------ ------ ------ ------
Net income 3.9% 3.2% 3.0% 4.0% 3.1% 3.0%
====== ====== ====== ====== ====== ======
FISCAL 2003 COMPARED TO FISCAL 2002
Net sales increased 21.7% to $1,472.9 million in fiscal 2003 from $1,210.0
million in fiscal 2002. This increase resulted from the opening of new stores as
well as a same-store sales improvement of 7.0%. The Company's favorable
performance versus prior year was driven primarily by market share gains in
certain markets, continued improvement in merchandising programs and improved
in-store execution. In fiscal 2003, the Company opened 31 new stores (compared
to 113 in the prior year), closed one store (compared to three in the prior
year) and relocated 18 stores (compared to 16 in the prior year). The Company
substantially expanded its store base during 2002 due to its purchase of
property and lease rights from Quality Stores, Inc. (See Note 16 of Notes to the
Consolidated Financial Statements contained in this report for further
discussion regarding this purchase.)
As a percent of sales, gross margin increased 220 basis points from 28.3% for
fiscal 2002 to 30.5% for fiscal 2003. Assuming the provisions of EITF 02-16 had
been applied prior to 2002, fiscal 2003 gross margin would have decreased 40
basis points from 30.9% in fiscal 2002. The majority of this decline is
attributable to a return to a more normal level of vendor funding in fiscal
2003. Specifically, vendors provided additional funds in fiscal 2002 in
connection with the opening of 87 new stores as a result of the purchase of
certain properties and lease rights from Quality Stores, Inc.
As a percent of sales, selling, general and administrative ("SG&A") expenses
were 22.6% and 21.5% for fiscal 2003 and 2002, respectively. Assuming the
provisions of EITF 02-16 had been applied prior to fiscal 2002 and exclusive of
non-recurring expansion costs of $10.7 million experienced in fiscal 2002 (these
costs include pre-opening transition and training costs related to the 87 new
stores, costs for store relocations and three store closings as a result of the
purchase of the aforementioned properties and lease rights from Quality Stores,
Inc.) fiscal 2003 SG&A expenses as a percent of sales decreased 80 basis points
from 23.4% for fiscal 2002. This decrease is primarily a result of controlled
spending and greater leverage from increased sales.
Depreciation and amortization expense increased 20.1% in fiscal 2003 over the
prior year due mainly to costs associated with new and relocated stores, as well
as remodeled existing stores.
Net interest expense decreased 26.8% in fiscal 2003 over the prior year. This
decrease reflects stronger cash flow and less cash requirements for store
openings, which resulted in reduced average long-term borrowings under the
Company's revolving credit agreement.
15
The Company's effective tax rate increased to 37.5% for fiscal 2003 compared
with 36.2% for fiscal 2002. This increase is due to increased income in states
with higher tax rates.
As a result of the foregoing factors, net income for fiscal 2003 increased to
$56.5 million, or $1.40 per diluted share, compared to net income of $37.7
million, or $0.99 per diluted share, in the prior year. Exclusive of the
cumulative effect of the accounting change, net income for fiscal 2003 was $58.4
million or $1.45 per diluted share. This increase is primarily a result of
increased leverage from increased sales at both new and existing stores.
Additionally, certain store expansion costs incurred in the Company's
significant expansion in 2002, which was primarily the result of the purchase of
property and lease rights from Quality Stores, Inc. in the first quarter of
2002, were non-recurring. The expansion increased the size of the Company by
over 25% and was completed in a very compressed timeframe. As such, the Company
incurred significant incremental costs to achieve the state of readiness
required to enable all stores to open within the desired time frame and such
costs are not considered by management to be indicative of normal pre-opening or
recurring expenses. Management believes that disclosing the effect of the
significant 2002 store expansion improves the investor's ability to reasonably
evaluate the Company's longer-term business trends.
The following pro-forma information isolates the effect of adoption of EITF
02-16 and the expansion costs related to the 2002 store expansion (in thousands,
except per share amounts):
2003 2002
-------------------- ---------------------
% of % of
Sales Sales
----- -----
Net income - as reported $ 56,501 3.9% $ 38,770 3.2%
Change in accounting for vendor funding
had EITF 02-16 been adopted prior to
2002, net of income taxes 1,888 0.1 (1,080) (0.1)
Non-recurring store expansion costs,
net of income taxes -- -- 6,666 0.6
-------- ----- -------- -----
Pro-forma net income assuming the change in
accounting for vendor funding occurred
prior to 2002 and exclusive of
non-recurring store expansion costs $ 58,389 4.0% $ 44,356 3.7%
======== ===== ======== =====
2003 2002
------------------------------ ------------------------------
(PRO-FORMA) (PRO-FORMA)
INCOME SHARES (DILUTED) INCOME SHARES (DILUTED)
-------- ------ --------- ------- ------ ---------
Net income - as reported $ 56,501 40,271 $ 1.40 $ 38,770 39,277 $ 0.99
Change in accounting for vendor funding had
EITF 02-16 been adopted prior to fiscal 2002,
net of income taxes 1,888 40,271 0.05 (1,080) 39,277 (0.03)
Non-recurring store expansion costs, net of
income taxes -- 40,271 -- 6,666 39,277 0.17
-------- ------- -------- --------
Pro-forma net income assuming the change in
accounting for vendor funding had occurred
prior to 2002 and exclusive of non-recurring
store expansion costs $ 58,389 40,271 $ 1.45 $ 44,356 39,277 $ 1.13
======== ======= ======== ========
16
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales increased 42.4% to $1,210.0 million in fiscal 2002 from $849.8 million
in fiscal 2001. This increase resulted from the opening of new stores as well as
a same-store sales improvement of 9.6%. The significant improvement in
same-store sales in fiscal 2002 is due primarily to new merchandising programs,
special promotions, market share gains in certain markets and improved in-store
execution. In fiscal 2002, the Company opened 113 new stores (compared to 18 in
the prior year), closed three stores (compared to none in the prior year) and
relocated 16 stores (compared to one in the prior year).
As a percent of sales, gross margin increased to 28.3% in fiscal 2002 from 26.9%
in fiscal 2001. This gross margin improvement was primarily due to improved
product costs (including a $1.4 million favorable LIFO experience), changes in
the sales mix, increased volume rebates and improved leveraging of freight
costs.
As a percent of sales, selling, general and administrative (SG&A) expenses
increased to 21.5% for fiscal 2002 from 21.0% for fiscal 2001. The increase
includes incremental pre-tax costs of $10.7 million for pre-opening transition
and training costs related to the Company's significant store expansion, costs
for store relocations and three store closings. Exclusive of the incremental
expansion costs, SG&A expense, as a percent of sales, decreased 0.4 percentage
point to 20.6% for fiscal 2002. On an absolute basis, SG&A expenses increased
46.0% to $260.3 million. These increases primarily reflect the incremental
expansion costs and the remaining incremental costs associated with the new
stores opened in fiscal 2002, as well as higher variable store operating costs
associated with the same-store sales increase and higher incentive compensation
accruals.
Depreciation and amortization expense increased 46.2% over the prior year due
mainly to costs associated with new and relocated stores, as well as remodeled
existing stores.
Net interest expense increased 4.7% in fiscal 2002 from fiscal 2001 resulting
from increased borrowings under the Company's revolving credit agreement to fund
significant new store expansion.
The Company's effective tax rate decreased to 36.2% for fiscal 2002 compared
with 38.6% for fiscal 2001 (exclusive of a non-taxable $2.2 million gain from
the proceeds of life insurance and a $2.5 million reduction of previously
accrued income taxes, both of which occurred during 2001). The Company
reevaluated its tax exposure during the quarter ended December 29, 2001, and, as
a result of the favorable resolution of certain tax issues, along with the
closing of open tax years, the Company reduced previously accrued income tax
liabilities by $2.5 million. The effective tax rate decreased primarily due to
reductions in state income taxes.
Net income increased 50.4% to $38.8 million in fiscal 2002 from $25.8 million in
fiscal 2001 and net income per share (assuming dilution) for fiscal 2002
increased 39.4% to $0.99 per share from $0.71 per share for fiscal 2001. As a
percentage of sales, net income increased 0.2 percentage point to 3.2% of sales
for fiscal 2002 from 3.0% of sales for fiscal 2001.
17
The following chart presents earnings per share, reflecting the effect of
certain significant matters:
2002 2001
-------------------------------- ---------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- --------
BASIC EARNINGS PER SHARE:
- -------------------------
Net income-as reported $ 38,770 36,112 $ 1.07 $ 25,774 35,296 $ 0.73
Non-recurring store expansion costs, net of
income taxes 6,666 36,112 0.19 -- -- --
Unusual item: insurance proceeds -- -- -- (2,173) 35,296 (0.06)
Adjustment of deferred taxes -- -- -- (2,500) 35,296 (0.07)
-------- -------- -------- -------
$ 45,436 36,112 $ 1.26 $ 21,101 35,296 $ 0.60
======== ======== ======== =======
DILUTED EARNINGS PER SHARE:
- ---------------------------
Net income-as reported $ 38,770 39,277 $ 0.99 $ 25,774 36,162 $ 0.71
Non-recurring store expansion costs, net of
income taxes 6,666 39,277 0.17 -- -- --
Unusual item: insurance proceeds -- -- -- (2,173) 36,162 (0.06)
Adjustment of deferred taxes -- -- -- (2,500) 36,162 (0.07)
-------- -------- -------- -------
$ 45,436 39,277 $ 1.16 $ 21,101 36,162 $ 0.58
======== ======== ======== =======
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company's primary ongoing cash
requirements are for expansion, remodeling and relocation programs, including
inventory purchases and capital expenditures. The Company's primary ongoing
sources of liquidity are funds provided from operations, commitments available
under its revolving credit agreement and normal trade credit. The Company's
inventory and accounts payable levels typically build in the first and third
fiscal quarters in anticipation of the spring and winter selling seasons,
respectively.
At December 27, 2003, the Company had working capital of $177.5 million, a $37.0
million increase from December 28, 2002. This increase is primarily attributable
to the changes in the following components of current assets and current
liabilities (in millions):
2003 2002 VARIANCE
-------- ------- --------
Current assets
Cash and cash equivalents $ 20.0 $ 13.8 $ 6.2
Inventories 324.5 289.3 35.2
Prepaid expenses and other current assets 27.7 17.6 10.1
Other, net 11.1 11.6 (0.5)
-------- ------- --------
383.3 332.3 51.0
-------- ------- --------
Current liabilities
Accounts payable $ 131.6 $ 114.9 $ 16.7
Accrued expenses 73.9 66.3 7.6
Current maturities of long term debt -- 5.5 (5.5)
Other, net 0.3 5.1 (4.8)
-------- ------- --------
205.8 191.8 14.0
-------- ------- --------
Working capital $ 177.5 $ 140.5 $ 37.0
======== ======= ========
The increases in cash and cash equivalents, prepaid expenses, and accrued
expenses is generally due to the increase in the number of stores in operation
and resulting increases in sales, growth in operations, and timing of payments.
The increase in inventories and related increase in trade credit resulted
primarily from additional inventory for new stores and a slight increase in
average inventory per store due to increased sales expectations. Trade credit
arises from the Company's vendors granting extended payment terms for inventory
purchases. Payment terms vary from 30 days to 180 days depending on the
inventory product.
18
The decrease in current maturities of long term debt is due to the maturity of
the Company's Loan Agreement and Term Note in November 2003. (See Note 5 of
Notes to the Consolidated Financial Statements contained in this report for
further discussion regarding this maturity.)
In August 2002, the Company entered into a replacement unsecured senior
revolving credit facility (the "Credit Agreement") with Bank of America, N.A.,
as agent for a lender group, expanding the maximum available borrowings to $155
million and extending the maturity to February 2006. The balance of funds
available under the Credit Agreement may be utilized for borrowings, including
up to $50 million for letters of credit. The Credit Agreement bears interest at
either the bank's base rate (4.0% at December 27, 2003) or the London Inter-Bank
Offer Rate ("LIBOR") (1.14% at December 27, 2003) plus an additional amount
ranging from 0.75% to 1.5% per annum, adjusted quarterly based on Company
performance (0.75% at December 27, 2003). The Company is also required to pay,
quarterly in arrears, a commitment fee ranging from 0.20% to 0.35% (0.20% at
December 27, 2003) per annum, adjusted quarterly based on Company performance,
on the average daily unused portion of the Credit Agreement. There are no
compensating balance requirements associated with the Credit Agreement. The
Company expects to continue borrowing amounts under the Credit Agreement from
time to time to fund its growth and expansion programs and as a source of
seasonal working capital.
The Credit Agreement contains certain restrictions regarding additional
indebtedness; capital expenditures; business operations; guarantees;
investments; mergers; consolidations and sales of assets; transactions with
subsidiaries or affiliates; and liens. In addition, the Company must comply with
certain quarterly restrictions (based on a rolling four-quarters basis)
regarding net worth, leverage ratio, fixed charge coverage and current ratio
requirements. The Company was in compliance with all covenants at December 27,
2003.
On January 28, 2004, the Credit Agreement was amended to extend the maturity
date to February 28, 2007. Additionally, the amendment included changes to
certain financial covenants, primarily to permit greater flexibility for capital
expenditures in accordance with the Company's growth plans.
Operations provided net cash of $62.1 million in fiscal 2003, $46.7 million in
fiscal 2002, and $47.1 million in fiscal 2001. The $15.4 million increase in
fiscal 2003 over fiscal 2002 is primarily due to changes in the following
operating activities (in millions):
2003 2002 VARIANCE
-------- -------- --------
Net income $ 56.5 $ 38.8 $ 17.7
Depreciation and amortization 19.8 16.5 3.3
Deferred income taxes 7.6 (3.9) 11.5
Inventories and accounts payable (21.6) (33.4) 11.8
Prepaid expenses and other current assets (10.9) -- (10.9)
Accrued expenses 7.6 23.4 (15.8)
Other, net 3.1 5.3 (2.2)
-------- -------- --------
Net cash provided by operations $ 62.1 $ 46.7 $ 15.4
======== ======== ========
The increase in net cash provided by operations in fiscal 2003 compared with
fiscal 2002 is primarily due to the increase in the number of stores in
operation. In addition to the 31 stores opened in 2003, it was also the first
full year of operations for the 113 stores opened in 2002. As a result of this
aggressive expansion, the Company experienced a dramatic increase in all working
capital components. Strong sales performance generated increased cash flows and
inventory requirements thereby driving proportionate increases in operating
expenses.
19
The $0.4 million decrease in net cash provided by operations in fiscal 2002 from
fiscal 2001 is primarily due to changes in the following operating activities
(in millions):
2002 2001 VARIANCE
-------- -------- --------
Net income $ 38.8 $ 25.8 $ 13.0
Depreciation and amortization 16.5 11.3 5.2
Inventories and accounts payable (33.4) 11.2 (44.6)
Prepaid expenses and other current assets 0.3 (6.1) 6.4
Accrued expenses 23.4 9.0 14.4
Other, net 1.1 (4.1) 5.2
-------- -------- --------
Net cash provided by operations $ 46.7 $ 47.1 $ (0.4)
======== ======== ========
The decrease in net cash provided by operations in fiscal 2002 compared with
fiscal 2001 is primarily due to the addition of 113 new stores during fiscal
2002 compared with 18 new stores in fiscal 2001. The significant expansion,
coupled with strong sales performance, increased the need for inventories beyond
typical vendor leveraging, and increased related operating expenses in support
of the growing operations.
Investing activities used $41.6 million, $62.6 million, and $10.7 million in
fiscal 2003, 2002 and 2001, respectively. The majority of this cash requirement
relates to the Company's capital expenditures.
The Company's significant store expansion, coupled with required investment in
infrastructure costs, required the following capital expenditures (in
thousands):
2003 2002 2001
-------- -------- --------
New and relocated stores and stores not yet opened $ 17,130 $ 60,728 $ 4,578
Existing stores 9,829 4,193 6,069
Distribution center capacity 17,217 417 103
Information technology 3,320 1,055 2,607
Corporate and other 626 151 212
-------- -------- --------
$ 48,122 $ 66,544 $ 13,569
======== ======== ========
The Company's long-term growth strategy anticipates continued geographic market
expansion and further concentration within existing markets. These additional
stores will require continuing investment in distribution capacity, information
technology and people. The Company currently estimates that capital expenditures
will be approximately $86.0 million in fiscal 2004, as follows (in thousands):
New and relocated stores and stores not yet opened $ 25,000
Existing stores 11,000
Distribution center capacity 38,000
Information technology 8,000
Corporate and other 4,000
--------
$ 86,000
========
Financing activities used $14.3 million, provided $20.8 million, and used $36.6
million in fiscal 2003, 2002 and 2001, respectively, largely as a result of
borrowing requirements created by operations, partially offset by proceeds
received from the exercise of stock options.
The Company believes that its cash flow from operations, borrowings available
under the Credit Agreement, and normal trade credit will be sufficient to fund
the Company's operations and its capital expenditure needs, including store
openings and renovations, over the next several years.
20
The following table reflects the Company's future obligations and commitments as
of December 27, 2003 (in thousands):
PAYMENT DUE BY PERIOD
-------------------------------------------------------------------
TOTAL
CONTRACTUAL LESS THAN 1 MORE THAN 5
OBLIGATIONS YEAR 1-3 YEARS 4-5 YEARS YEARS
----------- ----------- ----------- ----------- -----------
Long term debt (1) $ 19,403 $ -- $ 19,403 $ -- $ --
Operating leases 405,322 52,341 91,417 76,389 185,175
Capital leases (2) 5,100 496 660 394 3,550
----------- ----------- ----------- ----------- -----------
$ 429,825 $ 52,837 $ 111,480 $ 76,783 $ 188,725
=========== =========== =========== =========== ===========
(1) Long term debt balances represent principal maturities, excluding interest.
At December 27, 2003, this entire amount relates to the Company's Credit
Agreement.
(2) Capital lease obligations include related interest.
The Company has outstanding standby letters of credit of $8.1 million as of
December 27, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
The extent of the Company's off-balance sheet arrangements are operating leases
and outstanding letters of credit. The balances for these arrangements are
discussed above. Leasing buildings and equipment for retail stores and offices
rather than acquiring these significant assets allows the Company to utilize
financial capital to operate the business rather than maintain assets. Letters
of credit allow the Company to purchase inventory in a timely manner.
SUBSEQUENT EVENTS
In January 2004, the Company purchased the land and building related to its
distribution center in Pendleton, Indiana for $15.3 million. The facility was
originally built to the Company's specifications and had been leased since 1999.
In January 2004, the Company entered into an eight-year lease agreement that
will consolidate multiple headquarter facilities within one location. The
Company expects to incur incremental after-tax costs of approximately $2.0
million primarily due to the abandonment of the current leases.
The Credit Agreement was amended in January 2004 to extend the maturity date to
February 28, 2007. Additionally, the amendment included changes to certain
financial covenants, primarily to provide flexibility for capital expenditures.
The Company is in compliance with all covenants at December 27, 2003.
RELATED PARTY TRANSACTIONS
Related party transactions consist of the sale of property in 2003. (See Note 12
of the Notes to the Consolidated Financial Statements contained in this report
for a description of this transaction.)
LITIGATION
The Company is involved in various litigation arising in the ordinary course of
business. After consultation with legal counsel, management expects these
matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in circumstances relating
to these proceedings.
ENVIRONMENTAL MATTERS
In connection with a contaminated leased store property vacated by the Company
upon relocation in 2002, the Company has agreed to indemnify the property owner
with respect to an environmental liability associated with the use of the
property, as defined in the related lease agreement. During fiscal 2003, the
Company has not paid or accrued material amounts related to this property. The
Company does not expect the expense of these activities to
21
exceed $0.1 million; however, because of the uncertainties associated with
environmental assessment and remediation activities, the Company's future
expenses to remediate the currently identified site could be higher than amounts
accrued. Future expenditures for environmental remediation may be affected in
the near-term by identification of additional contaminated sites, the level and
type of contamination found, and the extent and nature of cleanup activities
required.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE"), an
Interpretation of Accounting Research Bulletin No. 51" ("FIN 46"). The
Interpretation provides guidance for determining whether an entity is a variable
interest entity and evaluation for consolidation based on a company's variable
interests. The Interpretation is effective (1) immediately for VIEs created
after January 31, 2003 and (2) in the first interim period ending after March
15, 2004 for VIEs created prior to February 1, 2003. The Company has no variable
interest entities and the adoption of FIN 46 is expected to have no impact on
the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company entered into an interest rate swap agreement as a means of managing
its interest rate exposure. This agreement, which matured in November 2003, had
the effect of converting certain of the Company's variable rate obligations to
fixed rate obligations. Net amounts paid or received are reflected as an
adjustment to interest expense.
The Company complies with SFAS Nos. 133, 137, and 138 (collectively "SFAS 133")
pertaining to the accounting for derivatives and hedging activities. SFAS 133
requires the Company to recognize all derivative instruments in the balance
sheet at fair value. SFAS 133 impacted the accounting for the Company's interest
rate swap agreement, which was designated as a cash flow hedge.
The Company is exposed to changes in interest rates primarily from its
variable-rate unsecured senior revolving credit agreement. The agreement bears
interest at either the bank's base rate (4.00% and 4.25% at December 27, 2003
and December 28, 2002, respectively) or LIBOR (1.14% and 1.42% at December 27,
2003 and December 28, 2002, respectively) plus an additional amount ranging from
0.75% to 1.50% per annum, adjusted quarterly, based on Company performance
(0.75% and 1.00% at December 27, 2003 and December 28, 2002, respectively). The
Company is also required to pay, quarterly in arrears, a commitment fee ranging
from 0.20% to 0.35% based on the daily average unused portion of the credit
line. (See Note 4 of Notes to the Consolidated Financial Statements contained in
this report for further discussion regarding this credit agreement.) A
hypothetical 100 basis point adverse move (increase) in interest rates along the
entire interest rate yield curve would result in approximately $330,000 of
additional annual interest expense and would not impact the fair market value of
the long-term debt.
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it does not believe its sales or results of operations have
been materially affected by inflation. The Company has been successful, in many
cases, in reducing or mitigating the effects of inflation principally by taking
advantage of vendor incentive programs, economies of scale from increased volume
of purchases and selective buying from the most competitive vendors without
sacrificing quality.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
PAGE
Report of Independent Auditors............................................... 24
Consolidated Statements of Income for the years ended December 27, 2003,
December 28, 2002 and December 29, 2001................................ 25
Consolidated Balance Sheets as of December 27, 2003 and December 28, 2002.... 26
Consolidated Statements of Stockholders' Equity for the years ended
December 27, 2003, December 28, 2002 and December 29, 2001............. 27
Consolidated Statements of Cash Flows for the years ended December 27, 2003,
December 28, 2002 and December 29, 2001................................ 28
Notes to Consolidated Financial Statements................................... 29
23
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
TRACTOR SUPPLY COMPANY
We have audited the accompanying consolidated balance sheets of Tractor Supply
Company as of December 27, 2003 and December 28, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 27, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 Tractor Supply
Company at December 27, 2003 and December 28, 2002, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 27, 2003, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 2 to the financial statements, in fiscal 2003 the Company
changed its method of accounting for certain consideration received from
vendors.
/s/ Ernst & Young LLP
Nashville, Tennessee
January 19, 2004, except for
Note 19, as to which the date
is January 28, 2004
24
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
2003 2002 2001
----------- ----------- -----------
Net sales ................................................. $ 1,472,885 $ 1,209,990 $ 849,799
Cost of merchandise sold .................................. 1,023,985 867,803 621,455
----------- ----------- -----------
Gross margin ............................................ 448,900 342,187 228,344
Selling, general and administrative expenses .............. 332,215 260,290 178,243
Depreciation and amortization ............................. 19,758 16,457 11,254
----------- ----------- -----------
Income from operations .................................. 96,927 65,440 38,847
Interest expense, net ..................................... 3,444 4,707 4,494
Unusual item: gain on life insurance ................... -- -- 2,173
----------- ----------- -----------
Income before income taxes and cumulative effect of
change in accounting principle ........................ 93,483 60,733 36,526
Income tax expense ........................................ 35,094 21,963 10,752
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle .................................. 58,389 38,770 25,774
Cumulative effect on prior years of change in
accounting principle, net of income taxes (Note 2) ...... (1,888) -- --
----------- ----------- -----------
Net income ................................................ $ 56,501 $ 38,770 $ 25,774
=========== =========== ===========
Net income per share - basic, before cumulative effect of
change in accounting principle .......................... $ 1.57 $ 1.07 $ 0.73
Cumulative effect of accounting change, net of income taxes (0.05) -- --
----------- ----------- -----------
Net income per share - basic .............................. $ 1.52 $ 1.07 $ 0.73
=========== =========== ===========
Net income per share - assuming dilution before cumulative
effect of change in accounting principle ................ $ 1.45 $ 0.99 $ 0.71
Cumulative effect of accounting change, net of income taxes (0.05) -- --
----------- ----------- -----------
Net income per share - assuming dilution .................. $ 1.40 $ 0.99 $ 0.71
=========== =========== ===========
Pro-forma amounts assuming the change in accounting
principle is applied retroactively:
Net income .............................................. $ 58,389 $ 37,690 $ 25,732
=========== =========== ===========
Net income per share - basic ............................ $ 1.57 $ 1.04 $ 0.73
=========== =========== ===========
Net income per share - assuming dilution ................ $ 1.45 $ 0.96 $ 0.71
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
25
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DEC. 27, DEC. 28,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 19,980 $ 13,773
Accounts receivable, net ................................................... -- 102
Inventories ................................................................ 324,518 289,253
Prepaid expenses and other current assets .................................. 27,725 17,579
Assets held for sale ....................................................... 3,636 3,779
Deferred income taxes ...................................................... 7,467 7,784
--------- ---------
Total current assets ................................................... 383,326 332,270
--------- ---------
Property and Equipment:
Land ....................................................................... 14,307 12,569
Buildings and improvements ................................................. 124,968 100,843
Furniture, fixtures and equipment .......................................... 89,633 75,815
Construction in progress ................................................... 3,563 4,271
232,471 193,498
Accumulated depreciation and amortization .................................. (83,880) (69,953)
Property and equipment, net ................................................ 148,591 123,545
Other assets ................................................................. 4,292 3,104
--------- ---------
Total assets ........................................................... $ 536,209 $ 458,919
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 131,564 $ 114,851
Accrued employee compensation .............................................. 12,716 14,892
Other accrued expenses ..................................................... 61,208 51,410
Current maturities of long-term debt ....................................... -- 5,537
Current portion of capital lease obligations ............................... 339 340
Income taxes currently payable ............................................. -- 3,101
Other current liabilities .................................................. -- 1,699
--------- ---------
Total current liabilities .............................................. 205,827 191,830
--------- ---------
Revolving credit loan ........................................................ 19,403 33,542
Capital lease obligations, less current maturities ........................... 1,807 2,163
Deferred income taxes ........................................................ 8,879 1,584
Other long-term liabilities .................................................. 4,909 1,952
--------- ---------
Total liabilities ...................................................... 240,825 231,071
--------- ---------
Stockholders' equity:
Preferred Stock, 40,000 shares authorized; $1.00 par value; no shares issued -- --
Common stock, 100,000,000 shares authorized; $.008 par value; 37,390,469 and
36,465,908 shares issued and outstanding in 2003 and 2002, respectively .. 299 292
Additional paid-in capital ................................................. 62,083 52,028
Retained earnings .......................................................... 233,002 176,501
Accumulated other comprehensive loss, net .................................. -- (973)
--------- ---------
Total stockholders' equity ............................................. 295,384 227,848
--------- ---------
Total liabilities and stockholders' equity ............................. $ 536,209 $ 458,919
========= =========
The accompanying notes are in integral part of these financial statements.
26
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
---------- ----------- ---------- ------------- ------------
Stockholders' equity at December 30, 2000 . $ 282 $ 42,797 $ 111,957 $ -- $ 155,036
Issuance of common stock under employee
stock purchase plan (138,860 shares) ... 380 380
Exercise of stock options (265,756 shares) 2 1,234 1,236
Tax benefit on disqualifying disposition of
stock options .......................... 292 292
Unrealized loss on interest rate swap
agreement, net of income tax benefit of
$902.................................... (1,422) (1,422)
Net income ................................ 25,774 25,774
---------- ----------- ---------- ------------- ------------
Stockholders' equity at December 29, 2001 . 284 44,703 137,731 (1,422) 181,296
Issuance of common stock under employee
stock purchase plan (71,374 shares) .... 639 639
Exercise of stock options (819,810 shares) 8 4,188 4,196
Tax benefit on disqualifying disposition of
stock options .......................... 2,498 2,498
Unrealized gain on interest rate swap
agreement, net of income tax expense of
$299.................................... 449 449
Net income ................................ 38,770 38,770
Stockholders' equity at December 28, 2002 . 292 52,028 176,501 (973) 227,848
---------- ----------- ---------- ------------- ------------
Issuance of common stock under employee
stock purchase plan (52,900 shares) .... 935 935
Exercise of stock options (871,661 shares) 7 4,832 4,839
Tax benefit on disqualifying disposition of
stock options .......................... 4,288 4,288
Unrealized gain on interest rate swap
agreement, net of income tax expense of
$603.................................... 973 973
Net income ................................ 56,501 56,501
---------- ----------- ---------- ------------- ------------
Stockholders' equity at December 27, 2003 . $ 299 $ 62,083 $ 233,002 $ -- $ 295,384
========== =========== ========== ============= ============
The accompanying notes are in integral part of these financial statements.
27
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income ............................................... $ 56,501 $ 38,770 $ 25,774
Tax benefit of stock options exercised ................... 4,288 2,498 292
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle ..... 1,888 -- --
Depreciation and amortization ........................... 19,758 16,457 11,254
Gain on disposition of property and equipment ........... (2,847) (1,081) (60)
Asset impairment related to closed stores and relocations 423 558 --
Gain on proceeds from life insurance .................... -- -- (2,173)
Deferred income taxes ................................... 7,122 (3,932) (4,765)
Change in assets and liabilities:
Accounts receivable .................................. 102 2,109 592
Inventories .......................................... (38,318) (67,274) 556
Prepaid expenses and other current assets ............ (10,945) 343 (6,095)
Accounts payable ..................................... 16,713 33,877 10,680
Accrued expenses ..................................... 7,622 23,359 9,014
Income taxes currently payable ....................... (1,446) (10) 1,468
Other ................................................ 1,187 983 560
--------- --------- ---------
Net cash provided by operating activities ............ 62,048 46,657 47,097
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................... (48,122) (66,544) (13,569)
Proceeds from sale of property and equipment ............ 6,539 3,924 1,376
Liquidation of life insurance policies .................. -- -- 1,499
--------- --------- ---------
Net cash used in investing activities ................ (41,583) (62,620) (10,694)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit agreement ............. 536,285 539,915 274,674
Repayments under revolving credit agreement ............. (550,424) (521,490) (309,564)
Repayment of long term debt ............................. (5,537) (2,142) (5,597)
Principal payments under capital lease obligations ...... (356) (309) (279)
Net proceeds from life insurance death benefit .......... -- -- 2,529
Net proceeds from issuance of common stock .............. 5,774 4,835 1,616
--------- --------- ---------
Net cash provided by (used in) financing activities .. (14,258) 20,809 (36,621)
--------- --------- ---------
Net increase (decrease) in cash ........................... 6,207 4,846 (218)
Cash and cash equivalents at beginning of year ............ 13,773 8,927 9,145
--------- --------- ---------
Cash and cash equivalents at end of year .................. $ 19,980 $ 13,773 $ 8,927
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................ $ 3,043 $ 3,789 $ 4,338
Income taxes ............................................ 31,840 23,774 13,770
The accompanying notes are an integral part of these financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Company is the largest operator of retail farm and ranch stores in the
United States. The Company is focused on supplying the lifestyle needs of
recreational farmers and ranchers and serving the maintenance needs of those who
enjoy the rural lifestyle, as well as tradesmen and small businesses. Stores are
located in towns outlying major metropolitan markets and in rural communities.
The Company operated 463 retail farm and ranch stores in 30 states as of
December 27, 2003.
FISCAL YEAR
The Company's fiscal year includes 52 or 53 weeks and ends on the last Saturday
of the calendar year. References to fiscal year mean the year in which that
fiscal year began. Each of the fiscal years ended December 27, 2003, December
28, 2002 and December 29, 2001 contain 52 weeks.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States inherently
requires estimates and assumptions by management that affect the reported
amounts of assets and liabilities, revenues and expenses and related
disclosures. Actual results could differ from those estimates.
Significant estimates and assumptions by management primarily impact the
following key financial statement areas:
INVENTORY VALUATION
The Company identifies potentially excess and slow-moving inventory by
evaluating turn rates and overall inventory levels. Excess quantities are
identified through the application of benchmark turn targets and historical
sales experience. Further, exposure to inadequate realization of carrying
value is identified through analysis of gross margin achievement and
markdown experience, in combination with all merchandising initiatives. The
estimated reserve is based on management's current knowledge with respect
to inventory levels, sales trends and historical experience relating to the
sale of the excess and/or slow-moving inventory. Management does not
believe the Company's merchandise inventories are subject to significant
risk of obsolescence in the near-term, and management has the ability to
adjust purchasing practices based on anticipated sales trends and general
economic conditions. However, changes in consumer purchasing patterns could
result in the need for additional reserves.
The Company estimates its expected shrinkage of inventory between physical
inventory counts by assessing the chain-wide average shrinkage experience
rate, applied to the related periods' sales volumes. Such assessments are
updated on a regular basis for the most recent individual store
experiences.
The Company receives funding from its vendors for promotion of the
Company's brand as well as the sale of their products. Vendor funding is
accounted for as a discount on the purchase price of inventories and is
recognized in cost of sales as inventory is sold. The amount of expected
funding is estimated based upon initial guaranteed commitments, as well as
anticipated purchase levels with applicable vendors. The estimated purchase
volume is based on management's current knowledge with respect to inventory
levels, sales trends and expected customer demand, as well as
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
planned new store openings. Although management believes it has the ability
to reasonably estimate its purchase volume, it is possible that actual
results could significantly differ from the estimated amounts.
SALES RETURNS
The Company generally honors customer refunds within 30 days of the
original purchase, with the supporting receipt. The Company estimates its
reserve for likely customer returns based on the average refund experience
in relation to sales for the related period. Due to the seasonality of the
Company's sales, the refund experience can vary, depending on the fiscal
quarter of measurement.
SELF-INSURANCE
The Company is self-insured for certain losses relating to workers'
compensation, medical and general liability claims. However, the Company
has stop-loss limits and umbrella insurance coverage for certain risk
exposures subject to specified limits. Self-insurance claims filed and
claims incurred but not reported are accrued based upon management's
estimates of the aggregate liability for uninsured claims incurred using
actuarial assumptions followed in the insurance industry and historical
experience. Although management believes it has the ability to adequately
record estimated losses related to claims, it is possible that actual
results could significantly differ from recorded self-insurance
liabilities.
REVENUE RECOGNITION
The Company recognizes revenue when sales transactions occur and customers take
possession of the merchandise. A provision for anticipated merchandise returns
is provided in the period during which the related sales are recorded.
STORE PRE-OPENING COSTS
Non-capital expenditures incurred in connection with start-up activities are
expensed as incurred.
STORE CLOSING COSTS
Beginning in fiscal 2003, the Company recognizes store closing costs in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Prior to the
adoption of SFAS 146, the Company recognized store-closing costs (primarily
remaining lease obligations and disposals of property and equipment) at the time
the plan for the related store closing or relocation was finalized. The adoption
of SFAS 146 did not materially impact the Company's financial position, cash
flows, or results of operations.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments, with a maturity of three
months or less when purchased, to be cash equivalents. The majority of payments
due from banks for customer credit card transactions process within 24-48 hours
and are accordingly classified as cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables and long-term debt instruments,
including capital leases. The carrying values of cash and cash equivalents,
trade receivables and trade payables equal current fair value. The terms of the
Company's revolving credit agreement (the "Credit Agreement") and term loan
agreement include variable interest rates, which approximate current market
rates.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company complies with Statement of Financial Accounting Standard ("SFAS")
Nos. 133, 137, and 138 (collectively "SFAS 133") pertaining to the accounting
for derivatives and hedging activities. SFAS 133 requires the Company to
recognize all derivative instruments in the balance sheet at fair value. SFAS
133 impacted the accounting for the Company's interest rate swap agreement,
which was designated as a cash flow hedge.
INVENTORIES
The value of the Company's inventories was determined using the lower of
last-in, first-out (LIFO) cost or market. Inventories are not in excess of
market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year,
sales for the year and the rate of inflation/deflation for the year. If the
first-in, first-out (FIFO) method of accounting for inventory had been used,
inventories would have been approximately $5,267,000 higher than reported at
December 28, 2002. At December 27, 2003 LIFO and FIFO inventory values were the
same.
FREIGHT COSTS
The Company incurs various types of transportation and delivery costs in
connection with inventory purchases and distribution. Such costs are included as
a component of the overall cost of merchandise.
WAREHOUSING AND DISTRIBUTION COSTS
Costs incurred at the Company's distribution centers for receiving, warehousing
and preparing product for delivery are expensed as incurred. These costs are
included in selling, general and administrative expenses in the accompanying
statements of income.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets. Improvements
to leased premises are amortized using the straight-line method over the life of
the lease or the useful life of the improvement, whichever is shorter. The
following estimated useful lives are generally applied:
Life
--------------
Buildings 30 - 35 years
Leasehold improvements 5 - 15 years
Furniture, fixtures and equipment 5 - 10 years
Computer software 3 - 5 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of the asset may not be recoverable. Impairment is
recognized on assets classified as held and used when the sum of undiscounted
estimated future cash flows expected to result from the use of the asset is less
than the carrying value. Impairment on long-lived assets to be disposed of is
recognized by writing down the related assets to their fair value (less costs to
sell, as appropriate), when the criteria have been met for the asset to be
classified as held for sale or disposal (Note 3).
ADVERTISING COSTS
Advertising costs consist of expenses incurred in connection with newspaper
circulars, television and radio, as well as direct mail, newspaper
advertisements and other promotions. Gross advertising expenses for fiscal 2003,
2002 and 2001 were approximately $38,235,000, $33,761,000 and $24,539,000,
respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to be recovered or settled.
STOCK-BASED COMPENSATION PLANS
As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the Company
has elected to account for its stock-based compensation plans under the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
Under APB No. 25, compensation expense would be recorded if the current market
price of the underlying stock on the date of grant exceeded the exercise price.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date (derived through use of Black-Scholes
methodology) for awards under the plans consistent with the method prescribed by
SFAS 123, the Company's pro forma net income and net income per share for fiscal
2003, 2002 and 2001 would have been as follows (in thousands, except per share
amounts):
2003 2002 2001
-------- -------- --------
Net income - as reported $ 56,501 $ 38,770 $ 25,774
Pro forma compensation expense, net of
income taxes (3,742) (1,836) (922)
-------- -------- --------
Net income - pro-forma $ 52,759 $ 36,934 $ 24,852
======== ======== ========
Net income per share - basic:
As reported $ 1.52 $ 1.07 $ 0.73
Pro forma $ 1.42 $ 1.02 $ 0.70
Net income per share - diluted:
As reported $ 1.40 $ 0.99 $ 0.71
Pro forma $ 1.31 $ 0.94 $ 0.69
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2003 2002 2001
-------- -------- --------
Expected volatility 44.2% 43.8% 43.8%
Risk-free interest rate 3.7% 5.0% 5.1%
Average expected life (years) 7.0 6.9 7.5
Dividend yield 0.0% 0.0% 0.0%
Weighted average fair value $ 10.13 $ 4.87 $ 0.93
NET INCOME PER SHARE
The Company presents both basic and diluted earning per share ("EPS") on the
face of the income statement. As provided by SFAS 128, "Earnings per Share",
basic EPS is calculated as income available to common stockholders divided by
the weighted average number of shares outstanding during the period. Diluted EPS
is calculated using the treasury stock method for options and warrants. All
earnings per share data included in the consolidated financial
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements and notes thereto have been restated to give effect to the August 21,
2003 and the August 19, 2002 two-for-one stock splits (Note 9).
RECLASSIFICATIONS
Certain amounts in previously issued financial statements were reclassified to
conform to the fiscal 2003 presentation.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE:
Emerging Issues Task Force Issue No. 02-16 ("EITF 02-16") provides guidance for
the accounting treatment and income statement classification for consideration
given by a vendor to a retailer in connection with the sale of the vendor's
products or for the promotion of sales of the vendor's products. The EITF
concluded that such consideration received from vendors should be reflected as a
decrease in prices paid for inventory and recognized in cost of sales as the
related inventories are sold, unless specific criteria are met qualifying the
consideration for treatment as reimbursement of specific, identifiable
incremental costs. Prior to adopting this pronouncement, the Company classified
all vendor-provided marketing support funds as a reduction in selling, general
and administrative expenses.
The effect of applying the consensus of EITF 02-16 on prior-period financial
statements would have resulted in a change to previously reported net income.
Thus, the Company has reported the adoption of EITF 02-16 as a cumulative effect
adjustment in accordance with APB Opinion No. 20, "Accounting Changes" and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements" and as
permitted by EITF 02-16. During the first quarter of fiscal 2003, the Company
recognized a charge against net income of $3,053,000 ($1,888,000 net of income
taxes), that resulted from the cumulative effect on prior years.
NOTE 3 - ASSETS HELD FOR SALE:
Assets held for sale consists of certain buildings and properties that the
Company either acquired through the significant asset purchase as described in
Note 16 or that the Company vacated upon relocation of a store.
The Company applies the provisions of SFAS 144, "Accounting for the Impairment
of Disposal of Long Lived Assets," to assets held for sale. SFAS 144 requires
assets held for sale to be valued on an asset-by-asset basis at the lower of
carrying amount or fair value less costs to sell. In applying these provisions,
recent appraisals, valuations, offers and bids are considered. The Company
recorded an impairment charge of $423,000 and $558,000 in 2003 and 2002,
respectively, to adjust the carrying value of certain property and equipment
related to vacated stores to fair value, less costs to sell. This charge is
included in selling, general and administrative expenses. In addition, in
December 2002, the Company decided to retain an asset previously classified as
an asset held for sale as the Company believes the geographic location of the
property is favorable. The asset (approximately $1.7 million) was reclassified
from assets held for sale to property and equipment.
The buildings and properties held for sale are separately presented as assets
held for sale in the accompanying consolidated balance sheets. The assets are
classified as current, as the Company believes they will be sold within the next
twelve months and have met all the criteria for classification as held for sale
pursuant to SFAS 144.
NOTE 4 - CREDIT AGREEMENT:
In November 2000, the Company entered into a three-year unsecured senior
revolving credit agreement with Bank of America, N.A., as agent for a lender
group, whereby the Company was permitted to borrow up to $125 million. In
October 2001, the Company extended this credit agreement by one year, thus
extending the maturity to November 2004.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2002, the Company entered into a replacement credit agreement with
Bank of America, N.A. as agent for a lender group (the "Credit Agreement"),
expanding the maximum available borrowing from $125 million to $155 million,
extending the maturity to February 2006 and increasing the number of
participating banks from seven to ten. Of the total $155 million commitment at
December 27, 2003, $8.1 million has been utilized for the issuance of letters of
credit relating to insurance policies and import merchandise. The outstanding
borrowings under the Credit Agreement totaled $19.4 million at December 27, 2003
and $33.5 million at December 28, 2002. The balance of funds available under the
Credit Agreement may be utilized for borrowings and up to $41.9 million for
additional letters of credit. The Credit Agreement bears interest at either the
bank's base rate (4.0% at December 27, 2003) or the London Inter-Bank Offer Rate
("LIBOR") (1.14% at December 27, 2003) plus an additional amount ranging from
0.75% to 1.5% per annum, adjusted quarterly based on Company performance (0.75%
at December 27, 2003). The Company is also required to pay, quarterly in
arrears, a commitment fee ranging from 0.20% to 0.35% per annum (0.20% at
December 27, 2003), adjusted quarterly based on Company performance, on the
average daily unused portion of the credit line. There are no compensating
balance requirements associated with the Credit Agreement.
The Credit Agreement contains certain restrictions regarding additional
indebtedness; capital expenditures; business operations; guarantees;
investments; mergers; consolidations and sales of assets; transactions with
subsidiaries or affiliates; and liens. In addition, the Company must comply with
certain quarterly restrictions (based on a rolling four-quarters basis)
regarding net worth, leverage ratio, fixed charge coverage and current ratio
requirements. The Company was in compliance with all covenants at December 27,
2003. (See Note 19).
The Company had letters of credit outstanding totaling $8.1 and $3.9 million at
December 27, 2003 and December 28, 2002, respectively. These letters of credit
were issued primarily for the purchase of inventory.
NOTE 5 - OTHER LONG-TERM DEBT:
In June 1998, the Company entered into a new loan agreement (the "Loan
Agreement") and term note (the "Term Note") pursuant to which the Company
borrowed $15 million. There are no compensating balance requirements associated
with the Loan Agreement. The Loan Agreement is unsecured.
In August 2002, in connection with the replacement of the Credit Agreement, the
Company amended the Loan Agreement and Term Note. The terms of the Loan
Agreement and Term Note were amended to provide that the existing indebtedness
would bear interest under the same provisions as that in the Credit Agreement
and the restrictive covenants would be modified to be the same as those in the
Credit Agreement (Note 4). The maturity dates of the Loan Agreement and Term
Note were not amended and the Loan Agreement and the Term note matured in
November 2003.
Under the Loan Agreement and Term Note, the Company had $5.5 million outstanding
at December 28, 2002.
NOTE 6 - LEASES:
The Company leases the majority of its office space and most of its retail store
locations, transportation equipment and other equipment under various
noncancelable operating leases. The leases have varying terms and expire at
various dates through 2029 and 2018 for capital leases and operating leases,
respectively. The store leases typically have initial terms of between 10 and 15
years, with one to three renewal periods of five years each, exercisable at the
Company's option. Generally, most of the leases require the Company to pay
taxes, insurance and maintenance costs.
Total rent expense for fiscal 2003, 2002, and 2001 was approximately
$60,129,000, $51,952,000, and $36,733,000, respectively.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum payments, by year and in the aggregate, under leases with initial
or remaining terms of one year or more consist of the following (in thousands):
CAPITAL OPERATING
LEASES LEASES
-------- ---------
2004............................................ $ 496 $ 52,341
2005............................................ 463 47,974
2006............................................ 197 43,443
2007............................................ 197 39,546
2008............................................ 197 36,843
Thereafter ..................................... 3,550 185,175
-------- --------
Total minimum lease payments ................... 5,100 $405,322
Amount representing interest ................... (2,954) ========
--------
Present values of net minimum lease payments ... 2,146
Less: current portion .......................... (339)
--------
Long-term capital lease obligations ............ $ 1,807
========
Assets under capital leases were as follows in thousands:
2003 2002
-------- --------
Building and improvements........................... $ 3,756 $ 3,756
Less: accumulated depreciation...................... (2,212) (2,051)
-------- --------
$ 1,544 $ 1,705
======== ========
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS:
During fiscal 2000, the Company entered into an interest rate swap agreement as
a means of managing its interest rate exposure. This agreement, which matured in
November 2003, had the effect of converting certain of the Company's variable
rate obligations to fixed rate obligations.
The Company complies with SFAS 133 and recognized the fair value of the interest
rate swap in its consolidated balance sheet. The Company regularly adjusted the
carrying value of the interest rate swap to reflect its current fair value. The
related gain or loss on the swap was deferred in stockholders' equity (as a
component of comprehensive income) to the extent that the swap was an effective
hedge. The deferred gain or loss was recognized in income in the period in which
the related interest rate payments being hedged were recognized as an expense.
However, to the extent that the change in value of an interest rate swap
contract did not perfectly offset the change in the interest rate payments being
hedged, the ineffective portion was immediately recognized as an expense. Net
amounts paid or received were reflected as adjustments to interest expense.
NOTE 8 - INCOME TAXES:
The provision for income taxes before cumulative effect of change in accounting
principle consists of the following (in thousands):
2003 2002 2001
-------- -------- --------
Current tax expense:
Federal $ 25,548 $ 23,536 $ 13,159
State 2,424 2,359 2,358
-------- -------- --------
Total current 27,972 25,895 15,517
-------- -------- --------
Deferred tax expense (benefit):
Federal 6,675 (3,188) (4,154)
State 447 (744) (611)
-------- -------- --------
Total deferred 7,122 (3,932) (4,765)
-------- -------- --------
Total provision $ 35,094 $ 21,963 $ 10,752
======== ======== ========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
2003 2002
-------- --------
Current tax assets:
Inventory valuation ............................. $ 2,161 $ 4,174
Interest rate swap .............................. -- 603
Accrued employee benefit costs .................. 3,445 3,051
Other ........................................... 1,957 3,538
-------- --------
7,563 11,366
-------- --------
Current tax liabilities:
Inventory basis difference ...................... -- (3,504)
Other ........................................... (96) (78)
-------- --------
(96) (3,582)
-------- --------
Net current tax asset ............................ $ 7,467 $ 7,784
======== ========
Non-current tax assets:
Capital lease obligation basis difference ....... $ 1,013 $ 1,181
Rent expenses in excess of cash payments required 3,367 2,824
Other ........................................... 68 606
-------- --------
4,448 4,611
-------- --------
Non-current tax liabilities:
Depreciation .................................... (12,591) (5,330)
Capital lease assets basis difference ........... (656) (731)
Other ........................................... (80) (134)
-------- --------
(13,327) (6,195)
-------- --------
Net non-current tax liability..................... $ (8,879) $ (1,584)
======== ========
Management has evaluated the need for a valuation allowance for all or a portion
of the deferred tax assets and believes that all of the deferred tax assets will
more likely than not be realized through the future earnings of the Company.
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows (in thousands):
2003 2002 2001
-------- -------- --------
Tax provision at statutory rate .................. $ 32,719 $ 21,257 $ 12,784
Tax effect of:
State income taxes, net of federal tax benefit .. 1,867 634 1,369
Permanent differences ........................... 359 56 274
Life insurance proceeds ......................... -- -- (926)
Previously accrued income taxes ................. -- -- (2,500)
Amortization of negative goodwill ............... -- (61) (63)
Other ........................................... 149 77 (186)
-------- -------- --------
$ 35,094 $ 21,963 $ 10,752
======== ======== ========
The Company reevaluated its tax exposure during the quarter ended December 29,
2001 and, as a result of the favorable resolution of certain tax issues, along
with the closing of open tax years, the Company reduced previously accrued
income tax liabilities by $2.5 million.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CAPITAL STOCK:
The authorized capital stock of the Company consists of common stock and
preferred stock. The Company is authorized to issue 100,000,000 shares of Common
Stock. The Company is also authorized to issue 40,000 shares of Preferred Stock,
with such designations, rights and preferences as may be determined from time to
time by the Board of Directors.
As a result of two two-for-one stock splits, stockholders of record as of August
4, 2003 and August 2, 2002 received one additional share of stock. The par value
of the Company's common stock remains $0.008. All share and per share data
included in the consolidated financial statements and notes thereto has been
restated to give effect to the stock splits.
NOTE 10 - COMPREHENSIVE INCOME:
Comprehensive income includes the change in the fair value of the Company's
interest rate swap agreement (which expired in November 2003), that qualifies
for hedge accounting. Comprehensive income for each fiscal year is as follows
(in thousands):
2003 2002 2001
-------- -------- --------
Net income - as reported $ 56,501 $ 38,770 $ 25,774
Unrealized gain on interest rate swap agreement,
net of income taxes 973 449 (1,422)*
-------- -------- --------
Comprehensive income $ 57,474 $ 39,219 $ 24,352
======== ======== ========
* reflects cumulative effect upon initial adoption
NOTE 11 - NET INCOME PER SHARE:
Net income per share is calculated as follows (in thousands, except per share
amounts):
2003
---------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ------- --------
BASIC NET INCOME PER SHARE:
Net income, before cumulative effect of accounting change $ 58,389 37,076 $ 1.57
Cumulative effect of accounting change, net of income taxes (1,888) 37,076 (0.05)
--------- --------
Net income $ 56,501 37,076 $ 1.52
========= ========
DILUTED NET INCOME PER SHARE:
Net income, before cumulative effect of accounting change $ 53,389 40,271 $ 1.45
Cumulative effect of accounting change, net of income taxes (1,888) 40,271 (0.05)
--------- --------
Net income $ 56,501 40,271 $ 1.40
========= ========
2002
---------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ------- --------
BASIC NET INCOME PER SHARE:
Net income, before cumulative effect of accounting change $ 38,770 36,112 $ 1.07
Dilutive stock options outstanding 3,165 ========
--------- -------
DILUTED NET INCOME PER SHARE: $ 38,770 39,277 $ 0.99
========= ======= ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001
---------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ------- --------
BASIC NET INCOME PER SHARE:
Net income, before cumulative effect of accounting change $ 25,774 35,296 $ 0.73
Dilutive stock options outstanding -- 866 ========
--------- -------
DILUTED NET INCOME PER SHARE: $ 25,774 36,162 $ 0.71
========= ======= ========
Anti-dilutive stock options excluded from the above calculations totaled
1,218,656 in 2001. There were no anti-dilutive stock options excluded from the
calculations for fiscal 2002 or 2003.
NOTE 12 - RELATED PARTY TRANSACTIONS:
In 2003, the Company sold certain recreational property acquired in 1982 to the
Company's Chief Executive Officer. The Company obtained independent appraisals
of the property and utilized an independent agent and bidding process. The
property was sold for $2,650,000 and the related gain of $2,100,000 was
recognized in 2003 and included in selling, general and administrative expenses
in the accompanying statement of income.
NOTE 13 - RETIREMENT BENEFIT PLANS:
The Company has a defined contribution benefit plan, the Tractor Supply Company
401(k) Retirement Savings Plan (the "Plan"), which provides retirement and other
benefits for the Company's employees. Employees become eligible for
participation at age 21 and upon completion of 12 consecutive months of
employment and 1,000 or more hours of service. The Company matches (in cash)
100% of the employee's elective contributions up to 3% of the employee's
compensation plus 50% of the employee's elective contributions from 3% to 6% of
the employee's compensation. In no event shall the total Company match made on
behalf of the employee exceed 4.5% of the employee's compensation. All current
employer contributions are immediately 100% vested. Company contributions to the
Plan during fiscal 2003, 2002 and 2001, were approximately $1,724,000 (net of
applied forfeitures of $54,000), $1,397,000 (net of applied forfeitures of
$48,000), and $1,022,000 (net of applied forfeitures of $98,000), respectively.
In fiscal 2002, the Company began offering, through a deferred compensation
program, the opportunity for certain qualifying employees to elect a deferral of
up to 40% of their annual base salary and up to 100% of their annual incentive
under their respective incentive programs. To be eligible for the salary
deferral, each participant must contribute the maximum amount of salary to the
Plan subject to the Company's match. Under the deferred compensation program,
the participants' salary deferral is matched by the Company, 100% on the first
3% of base salary contributed and 50% on the next 3% of base salary contributed.
Each participant's account earns simple annual interest at the prime rate as in
effect on January 1 each year. Each participant is fully vested in all amounts
credited to their deferred compensation account. Payments under the program,
which are made in cash and paid in ten annual installments or in a single lump
sum payment at the election of the participant, are made within 30 days
following the earlier of the participant's (i) death, (ii) retirement, (iii)
total and permanent disability, (iv) termination of employment with the Company
or (v) some other date designated by the participant at the time of the initial
deferral. The Company's contributions, including accrued interest, were $104,000
and $93,000 for fiscal 2003 and 2002, respectively.
NOTE 14 - STOCK-BASED COMPENSATION PLANS:
FIXED STOCK OPTION PLANS
The Company has stock option plans for officers, directors (including
non-employee directors) and key employees which reserve 8,000,000 shares of
common stock for future issuance. According to the terms of the plans, the per
share exercise price of options granted shall not be less than the fair market
value of the stock on the date of grant
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and such options will expire no later than ten years from the date of grant. In
the case of a stockholder owning more than 10% of the outstanding voting stock
of the Company, the exercise price of an incentive stock option may not be less
than 110% of the fair market value of the stock on the date of grant and such
options will expire no later than five years from the date of grant. Also, the
aggregate fair market value of the stock with respect to which incentive stock
options are exercisable on a tax deferred basis for the first time by an
individual in any calendar year may not exceed $100,000. Options granted prior
to fiscal 2002 generally vest one-third each year beginning on the third
anniversary date of the grant and expire after ten years, provided, however,
that options granted to non-employee directors vest one-third each year
beginning on the first anniversary of the grant. All options granted after
fiscal 2001 vest one-third each year beginning on the first anniversary of the
grant.
Plan activity is summarized as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
Outstanding at December 30, 2000 3,347,332 $ 4.59
Exercised (265,756) $ 4.65
Granted 1,584,000 $ 3.35
Canceled (478,732) $ 4.51
---------
Outstanding at December 29, 2001 4,186,844 $ 4.13
Exercised (819,810) $ 5.12
Granted 1,245,600 $ 9.11
Canceled (72,000) $ 5.76
---------
Outstanding at December 28, 2002 4,540,634 $ 5.29
Exercised (871,661) $ 5.59
Granted 724,600 $ 20.26
Canceled (336,788) $ 6.72
---------
Outstanding at December 27, 2003 4,056,785 $ 7.80
=========
The following table summarizes information concerning currently outstanding and
exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
YEAR EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---- --------------- ----------- ----------- --------- ----------- ----------
1995 $ 5.53 500 1.09 $ 5.53 500 $ 5.53
1996 $ 5.34 14,332 2.08 $ 5.34 14,332 $ 5.34
1997 $ 4.44 - $ 5.00 27,056 3.46 $ 4.60 27,056 $ 4.60
1998 $ 3.61 670 4.07 $ 3.61 670 $ 3.61
1999 $ 6.45 - $ 6.69 232,080 5.07 $ 6.46 157,887 $ 6.47
2000 $ 3.73 - $ 3.79 685,100 6.09 $ 3.74 247,033 $ 3.74
2000 $ 2.24 155,330 6.85 $ 2.24 51,777 $ 2.24
2001 $ 3.36 1,298,000 7.08 $ 3.36 17,333 $ 3.36
2002 $ 8.91 - $ 9.80 946,417 7.02 $ 9.10 315,472 $ 9.10
2002 $ 14.22 14,000 8.56 $14.22 4,667 $14.22
2003 $ 19.14 - $ 25.11 673,300 9.08 $20.02 -- --
2003 $ 38.98 10,000 9.80 $38.98 -- --
--------- --------
4,056,785 7.07 $ 7.80 836,727 $ 6.29
========= ========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSOCIATE STOCK PURCHASE PLAN
The Company provides an Associate Stock Purchase Plan (the "ASPP") whereby
eligible employees of the Company have the opportunity to purchase, through
payroll deductions, shares of common stock of the Company at a 15% discount.
Pursuant to the terms of the ASPP, the Company issued 52,900, 71,374 and 138,860
shares of common stock in fiscal 2003, 2002 and 2001, respectively.
NOTE 15 - GAIN ON PROCEEDS FROM LIFE INSURANCE:
In April 2001, a former executive of the Company, on whom the Company carried a
life insurance policy, passed away. As a result of the related coverage, the
Company realized a $2.2 million gain on the life insurance proceeds.
NOTE 16 - SIGNIFICANT ASSET PURCHASE:
On December 31, 2001, the Company, through a joint venture with Great American
Group, Gordon Brothers Retail Partners, LLC and DJM Asset Management LLC, was
the successful bidder at a liquidation bankruptcy auction for the buildings,
improvements, fixtures and lease rights of certain retail stores formerly
operated by Quality Stores, Inc., a debtor and debtor in possession under
Chapter 11 of the United States Bankruptcy Code. The Company's share of the bid
totaled $34.0 million and was funded entirely through the Credit Agreement. The
Company acquired the buildings for 24 retail stores, assumed the building lease
rights for 76 additional retail stores and acquired the related equipment,
furniture and fixtures in the transaction.
The Company intends to sell three excess buildings acquired in the purchase and
is actively marketing these locations. The assigned value for these three
locations is included as assets held for sale in the accompanying consolidated
balance sheet at December 27, 2003 (Note 3).
NOTE 17 - CONTINGENCIES:
LITIGATION
The Company is involved in various litigation arising in the ordinary course of
business. After consultation with legal counsel, management expects these
matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss has
been adequately provided in accrued liabilities to the extent probable and
reasonably estimable. It is possible, however, that future results of operations
for any particular quarterly or annual period could be materially affected by
changes in circumstances relating to these proceedings.
ENVIRONMENTAL MATTERS
In connection with a contaminated leased store property vacated by the Company
upon relocation in 2002, the Company has agreed to indemnify the property owner
with respect to an environmental liability associated with the use of the
property, as defined in the related lease agreement. During fiscal 2003, the
Company has not paid or accrued material amounts related to this property. The
Company does not expect the expense of these activities to exceed $0.1 million;
however, because of the uncertainties associated with environmental assessment
and remediation activities, the Company's future expenses to remediate the
currently identified site could be higher than amounts accrued. Future
expenditures for environmental remediation may be affected in the near-term by
identification of additional contaminated sites, the level and type of
contamination found, and the extent and nature of cleanup activities required.
NOTE 18 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE"), an
Interpretation of Accounting Research Bulletin No. 51" ("FIN 46"). The
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interpretation provides guidance for determining whether an entity is a variable
interest entity and evaluation for consolidation based on a company's variable
interests. The Interpretation is effective (1) immediately for VIEs created
after January 31, 2003 and (2) in the first interim period ending after March
15, 2004 for VIEs created prior to February 1, 2003. The Company has no variable
interest entities and the adoption of FIN 46 had no impact on the Company's
financial position or results of operations.
NOTE 19 - SUBSEQUENT EVENTS:
In January 2004, the Company purchased the land and building related to its
distribution center in Pendleton, Indiana for $15.3 million. The facility was
originally built to the Company's specifications and has been leased since 1999.
On January 28, 2004, the Credit Agreement was amended to extend the maturity
date to February 28, 2007. Additionally, the amendment included changes to
certain financial covenants, primarily to provide flexibility for capital
expenditures. The Company is in compliance with its debt covenants at December
27, 2003.
In January 2004, the Company entered into a lease agreement that will
consolidate multiple headquarter facilities within one new location. The Company
expects to incur incremental after tax costs of approximately $2.0 million
(unaudited) primarily due to abandonment of the current leases.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of the filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 10a-14 and 15d-14 under the
Securities Exchange Act of 1934) are effective for gathering, analyzing and
disclosing the information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934, as of December 27, 2003, and
that such information is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROLS
There were no material changes in the Company's internal control over financial
reporting during the fourth quarter of 2003. There have been no significant
changes in the Company's internal controls over financial reporting or in other
factors that could significantly affect internal controls over financial
reporting subsequent to the date of the evaluation referred to above.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Item 1: Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages
4 through 8 and 20, respectively, of the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on April 15, 2004 is incorporated
herein by reference.
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Form 10-K is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Board of Directors and Committees
of the Board - Compensation of Directors", "Compensation Committee Interlocks
and Insider Participation", "Executive Compensation", "Compensation Committee's
Report on Executive Compensation", "Summary Compensation", "Option Grants in
Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values", and "Stock Performance Chart" on pages 8 through 19 of
the Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on April 15, 2004 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on pages 20 and 21 of the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on April 15, 2004 is
incorporated herein by reference.
42
Following is a summary of the Company's equity compensation plans as of December
27, 2003, under which equity securities are authorized for issuance, aggregated
as follows:
Number of Securities Weighted Average
to Be Issued Upon Exercise Price of Number of Securities
Exercise of Outstanding Outstanding Options, Remaining Available for
Plan Category Options, Warrants, and Rights Warrants and Rights Future Issuance
------------- ----------------------------- ------------------- ---------------
Equity compensation plans
-------------------------
approved by security holders:
-----------------------------
2000 Stock Incentive Plan 2,161,912 $10.41 1,729,600
Employee Stock Purchase Plan1 3,467,758
Equity compensation plans
-------------------------
not approved by security
------------------------
holders:
--------
1994 Stock Option Plan2 1,894,873 $ 4.84 227,390
Total 4,056,785 $ 7.80 5,424,748
- ------------
1 Represents shares available as of January 1, 2004.
2 The 1994 Stock Option Plan was adopted by the Company prior to its initial
public offering and expired in February 2004.
The information set forth under the caption "Stock-Based Compensation Plans" in
the "Notes to Consolidated Financial Statements" contained in this Report,
provides further information with respect to the material features of each plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Related-Party Transactions with
Tractor Supply Company" on page 9 of the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on April 15, 2004 is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Item 2 - Ratification of
Reappointment of Independent Auditors" on page 22 of the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on April 15, 2004,
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See Consolidated Financial Statements under Item 8 on page 23 through
41 of this Report.
43
(a) (2) FINANCIAL STATEMENT SCHEDULES
None
Financial statement schedules have been omitted because they are not
applicable or because the required information is otherwise furnished.
(a) (3) EXHIBITS
The exhibits listed in the Index to Exhibits, which appears on pages 46
through 52 of this Form 10-K, are incorporated herein by reference or
filed as part of this Form 10-K.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K, dated October 2, 2003, issuing
a press release announcing its sales for the third quarter and nine
months ended September 27, 2003. Notwithstanding the foregoing,
information furnished under items 9 and 12 of our Current Reports on
Form 8-K, including the related exhibits, is not incorporated by
reference in this annual report.
The Company filed a report on Form 8-K, dated October 16, 2003, issuing
a press release announcing its financial results for the third quarter
and nine months ended September 27, 2003. Notwithstanding the
foregoing, information furnished under items 9 and 12 of our Current
Reports on Form 8-K, including the related exhibits, is not
incorporated by reference in this annual report.
The Company filed a report on Form 8-K, dated October 22, 2003, issuing
a press release to provide presentation materials furnished to a group
of investors. Notwithstanding the foregoing, information furnished
under items 9 and 12 of our Current Reports on Form 8-K, including the
related exhibits, is not incorporated by reference in this annual
report.
44
SIGNATURES
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.
TRACTOR SUPPLY COMPANY
Date: March 8, 2004 By: /s/ Calvin B. Massmann
----------------------
Calvin B. Massmann
Senior Vice President - Chief
Financial Officer and Treasurer
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 in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph H. Scarlett, Jr. Chairman of the Board, March 8, 2004
------------------------ Chief Executive Officer and Director
Joseph H. Scarlett, Jr. (Principal Executive Officer)
/s/ Calvin B. Massmann Senior Vice President - Chief Financial March 8, 2004
------------------------ Officer and Treasurer
Calvin B. Massmann (Principal Financial Officer)
/s/ James F. Wright President, Chief Operating Officer March 8, 2004
------------------------ and Director
James F. Wright
/s/ S.P. Braud Director March 8, 2004
------------------------
S.P. Braud
/s/ Cynthia T. Jamison Director March 8, 2004
------------------------
Cynthia T. Jamison
/s/Gerard E. Jones Director March 8, 2004
------------------------
Gerard E. Jones
/s/ Thomas O. Flood Director March 8, 2004
------------------------
Thomas O. Flood
/s/ Joseph D. Maxwell Director March 8, 2004
------------------------
Joseph D. Maxwell
/s/ Edna K. Morris Director March 8, 2004
------------------------
Edna K. Morris
/s/ Sam K. Reed Director March 8, 2004
------------------------
Sam K. Reed
/s/ Joseph M. Rodgers Director March 8, 2004
------------------------
Joseph M. Rodgers
48
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Certificate of Incorporation, as amended, of the Company,
filed with the Delaware Secretary of State on February 14, 1994 (filed
as Exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Registration No. 333-102768, filed with the Commission on January 28,
2003. and incorporated herein by reference).
3.2 Certificate of Amendment of the Restated Certificate of Incorporation,
as amended, of the Company, filed with the Delaware Secretary of State
on April 28, 1995 1994 (filed as Exhibit 4.2 to Registrant's
Registration Statement on Form S-8, Registration No. 333-102768, filed
with the Commission on January 28, 2003. and incorporated herein by
reference).
3.3 Certificate of Amendment of the Restated Certificate of Incorporation,
as amended, of the Company, filed with the Delaware Secretary of State
on May 13, 1994 (filed as Exhibit 4.3 to Registrant's Registration
Statement on Form S-8, Registration No. 333-102768, filed with the
Commission on January 28, 2003. and incorporated herein by reference).
3.4 Amended and Restated By-laws of the Company as currently in effect
(filed as Exhibit 3.7 to Registrant's Registration Statement on Form
S-1, Registration No. 33-73028, filed with the Commission on December
17, 1993, and incorporated herein by reference).
4.1 Form of Specimen Certificate representing the Company's Common Stock,
par value $.008 per share (filed as Exhibit 4.2 to Amendment No. 1 to
Registrant's Registration Statement on Form S-1, Registration No.
33-73028, filed with the Commission on January 31, 1994, and
incorporated herein by reference).
10.1 Indenture of Lease, dated as of January 1, 1986, between the Company
and Joseph H. Scarlett, Jr. and Dorothy F. Scarlett (relating to
Omaha, Nebraska store) (filed as Exhibit 10.14 to Registrant's
Registration Statement on Form S-1, Registration No. 33-73028, filed
with the Commission on December 17, 1993, and incorporated herein by
reference).
10.2 Indenture of Lease, dated as of January 1, 1986, between the Company
and Joseph D. Maxwell and Juliann K. Maxwell (relating to Nashville,
Tennessee store) (filed as Exhibit 10.18 to Registrant's Registration
Statement on Form S-1, Registration No. 33-73028, filed with the
Commission on December 17, 1993, and incorporated herein by
reference).
10.3 Tractor Supply Company 1994 Stock Option Plan (filed as Exhibit 10.28
to Registrant's Registration Statement on Form S-1, Registration No.
33-73028, filed with the Commission on December 17, 1993, and
incorporated herein by reference).
10.4 Amendment to the Tractor Supply Company 1994 Stock Option Plan (filed
as Exhibit 4.6 to Registrant's Registration Statement on Form S-8,
Registration No. 333-10699, filed with the Commission on June 14,
1999, and incorporated herein by reference).
10.5 Second Amendment to the Tractor Supply Company 1994 Stock Option Plan
(filed as Exhibit 10.44 to Registrant's Annual Report on Form 10-K,
filed with the Commission on March 24, 2000, Commission File No.
000-23314, and incorporated herein by reference).
46
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6 Certificate of Insurance relating to the Medical Expense Reimbursement
Plan of the Company (filed as Exhibit 10.33 to Registrant's
Registration Statement on Form S-1, Registration No. 33-73028, filed
with the Commission on December 17, 1993, and incorporated herein by
reference).
10.7 Summary Plan Description of the Executive Life Insurance Plan of the
Company (filed as Exhibit 10.34 to Registrant's Registration Statement
on Form S-1, Registration No. 33-73028, filed with the Commission on
December 17, 1993, and incorporated herein by reference).
10.8 Tractor Supply Company 1996 Associate Stock Purchase Plan (filed as
Exhibit 4.4 to Registrant's Registration Statement on Form S-8,
Registration No. 333-10699, filed with the Commission on August 23,
1996, and incorporated herein by reference).
10.9 Indemnification Agreement, dated January 27, 1994, between the Company
and Thomas O. Flood (filed as Exhibit 10.38 to Amendment No. 1 to
Registrant's Registration Statement on Form S-1, Registration No.
33-73028, filed with the Commission on January 31, 1994, and
incorporated herein by reference).
10.10 Tractor Supply Company Restated 401(k) Retirement Plan (filed as
Exhibit 4.1 to Registrant's Registration Statement on Form S-3,
Registration No. 333-35317, filed with the Commission on September 10,
1997, and incorporated herein by reference).
10.11 Second Amendment to Tractor Supply Company Restated 401(k) Retirement
Plan (filed as Exhibit 10.57 to Registrant's Annual Report on Form
10-K, filed with the Commission on March 23, 2001, Commission File No.
000-23314, and incorporated herein by reference).
10.12 Trust Agreement (filed as Exhibit 4.2 to Registrant's Registration
Statement on Form S-3, Registration No. 333-35317, filed with the
Commission on September 10, 1997, and incorporated herein by
reference).
10.13 Split-Dollar Agreement, dated January 27, 1998, between the Company
and Joseph H. Scarlett, Jr., Tara Anne Scarlett and Andrew Sinclair
Scarlett (filed as Exhibit 10.45 to Registrant's Annual Report on Form
10-K, filed with the Commission on March 17, 1999, Commission File No.
000-23314, and incorporated herein by reference).
10.14 Split-Dollar Agreement, dated January 2, 1998, between the Company and
Thomas O. Flood and Terry Mainiero, as Trustee of the Flood 1997
Irrevocable Trust under Agreement dated November 10, 1997 (filed as
Exhibit 10.46 to Registrant's Annual Report on Form 10-K, filed with
the Commission on March 17, 1999, Commission File No. 000-23314, and
incorporated herein by reference).
10.15 Noncompetition Agreement, dated as of August 31, 1999, between the
Company and Thomas O. Flood (filed as Exhibit 10.48 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on October
29, 1999, Commission File No. 000-23314, and incorporated herein by
reference).
10.16 Agreement, effective August 1, 1999 between the Company and General
Drivers & Helpers Union, Local #554 (filed as Exhibit 10.45 to
Registrant's Annual Report on
47
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Form 10-K, filed with the Commission on March 24, 2000, Commission No.
000-23314, and incorporated herein by reference).
10.17 Tractor Supply Company 2000 Stock Incentive Plan (filed as Exhibit 4.5
to Registrant's Registration Statement on Form S-8, Registration No.
333-102768, filed with the Commission on January 28, 2003 and
incorporated herein by reference).
10.18 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and Bank of America, N.A (filed as Exhibit 10.47 to
Registrant's Annual Report on Form 10-K, filed with the Commission on
March 23, 2001, Commission File No. 000-23314, and incorporated herein
by reference).
10.19 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and Firstar Bank, N. A. (filed as Exhibit 10.48 to
Registrant's Annual Report on Form 10-K, filed with the Commission on
March 23, 2001, Commission File No. 000-23314, and incorporated herein
by reference).
10.20 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and SouthTrust Bank (filed as Exhibit 10.49 to Registrant's
Annual Report on Form 10-K, filed with the Commission on March 23,
2001, Commission File No. 000-23314, and incorporated herein by
reference).
10.21 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and AmSouth Bank (filed as Exhibit 10.50 to Registrant's
Annual Report on Form 10-K, filed with the Commission on March 23,
2001, Commission File No. 000-23314, and incorporated herein by
reference).
10.22 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and SunTrust Bank, Nashville, N.A. (filed as Exhibit 10.51 to
Registrant's Annual Report on Form 10-K, filed with the Commission on
March 23, 2001, Commission File No. 000-23314, and incorporated herein
by reference).
10.23 Revolving Note, dated as of November 3, 2000 between Tractor Supply
Company and Compass Bank (filed as Exhibit 10.52 to Registrant's
Annual Report on Form 10-K, filed with the Commission on March 23,
2001, Commission File No. 000-23314, and incorporated herein by
reference).
10.24 Revolving Note, dated as of December 30, 2000 between Tractor Supply
Company and Fifth Third Bank (filed as Exhibit 10.53 to Registrant's
Annual Report on Form 10-K, filed with the Commission on March 23,
2001, Commission File No. 000-23314, and incorporated herein by
reference).
10.25 Amended and Restated Loan Agreement, dated as of November 3, 2000,
between the Company and SunTrust Bank, Nashville, N.A. (filed as
Exhibit 10.54 to Registrant's Annual Report on Form 10-K, filed with
the Commission on March 23, 2001, Commission File No. 000-23314, and
incorporated herein by reference).
10.26 Amended and Restated Term Note, dated as of November 3, 2000, issued
by the Company to SunTrust Bank, Nashville, N.A. in the aggregate
amount of $9,999,945 (filed as Exhibit 10.55 to Registrant's Annual
Report on Form 10-K, filed with the
48
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Commission on March 23, 2001, Commission File No. 000-23314, and
incorporated herein by reference).
10.27 First Amendment to Lease Agreement, dated as of December 18, 2000,
between Tractor Supply Company and GOF Partners (filed as Exhibit
10.56 to Registrant's Annual Report on Form 10-K, filed with the
Commission on March 23, 2001, Commission File No. 000-23314, and
incorporated herein by reference).
10.28 Transportation Management Services Agreement between UPS Logistics
Group, Inc. and Tractor Supply Company dated May 10, 2001 (filed as
Exhibit 10.58 to Registrant's Quarterly Report on Form 10-Q, filed
with the Commission on August 14, 2001 Commission File No. 000-23314,
and incorporated herein by reference).
10.29 Tractor Supply Company Executive Deferred Compensation Plan, dated
November 11, 2001 (filed as Exhibit 10.58 to Registrant's Quarterly
Report on Form 10-Q, filed with the Commission on May 13, 2002,
Commission File No. 000-23314, and incorporated herein by reference).
10.30 Letter Agreement between Tractor Supply Company and the Joint Venture
formed by Great American Group, Gordon Brothers Retail Partners, LLC
and DJM Asset Management, dated December 14, 2001 (filed as Exhibit
10.59 to Registrant's Quarterly Report on Form 10-Q, filed with the
Commission on May 13, 2002, Commission File No. 000-23314, and
incorporated herein by reference).
10.31 Amended Letter Agreement between the members of the joint venture
comprised of Tractor Supply Company, Great American Group, Gordon
Brothers Retail Partners, LLC and DJM Asset Management, dated January
8, 2002 (filed as Exhibit 10.60 to Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 13, 2002, Commission File
No. 000-23314, and incorporated herein by reference).
10.32 Agency Agreement between Quality Stores, Inc. and Tractor Supply
Company et al., dated December 31, 2001 (filed as Exhibit 10.61 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on May 13, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.33 Amendment No. 1 to the Agency Agreement between Quality Stores, Inc.
and Tractor Supply Company et al., dated January 4, 2002 (filed as
Exhibit 10.62 to Registrant's Quarterly Report on Form 10-Q, filed
with the Commission on May 13, 2002, Commission File No. 000-23314,
and incorporated herein by reference).
10.34 Amendment No. 2 to the Agency Agreement between Quality Stores, Inc.
and Tractor Supply Company et al., dated January 30, 2002 (filed as
Exhibit 10.63 to Registrant's Quarterly Report on Form 10-Q, filed
with the Commission on May 13, 2002, Commission File No. 000-23314,
and incorporated herein by reference).
10.35 Amendment No. 3 to the Agency Agreement between Quality Stores, Inc.
and Tractor Supply company et al., dated January 31, 2002 (filed as
Exhibit 10.64 to Registrant's Quarterly Report on Form 10-Q, filed
with the Commission on May 13, 2002, Commission File No. 000-23314,
and incorporated herein by reference).
49
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.36 Revolving Credit Agreement, dated as of August 15, 2002 by and among
Tractor Supply Company, the banks party thereto and Bank of America,
N.A., as Administrative Agent (filed as Exhibit 10.65 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.37 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and Bank of America, N.A. (filed as Exhibit 10.66 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.38 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and U.S. Bank, N. A. (filed as Exhibit 10.67 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.39 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and SouthTrust Bank (filed as Exhibit 10.68 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.40 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and AmSouth Bank (filed as Exhibit 10.69 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.41 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and SunTrust Bank, Nashville, N.A. (filed as Exhibit 10.70 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.42 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and Compass Bank (filed as Exhibit 10.71 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.43 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and Fifth Third Bank (filed as Exhibit 10.72 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.44 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and Branch Banking & Trust Company (filed as Exhibit 10.73 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.45 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and Regions Bank (filed as Exhibit 10.74 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
50
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.46 Revolving Note, dated as of August 15, 2002 between Tractor Supply
Company and National City Bank (filed as Exhibit 10.75 to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on November
12, 2002, Commission File No. 000-23314, and incorporated herein by
reference).
10.47 Change in Control Agreement, dated August 1, 2002, between Tractor
Supply Company and Joseph H. Scarlett, Jr. (filed as Exhibit 10.76 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.48 Change in Control Agreement, dated August 1, 2002, between Tractor
Supply Company and James F. Wright (filed as Exhibit 10.77 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.49 Change in Control Agreement, dated August 1, 2002, between Tractor
Supply Company and Gerald W. Brase (filed as Exhibit 10.78 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.50 Change in Control Agreement, dated August 1, 2002, between Tractor
Supply Company and Calvin B. Massmann (filed as Exhibit 10.79 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.51 Change in Control Agreement, dated August 1, 2002, between Tractor
Supply Company and Stanley L. Ruta (filed as Exhibit 10.80 to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on November 12, 2002, Commission File No. 000-23314, and incorporated
herein by reference).
10.52* Lease Agreement dated September 26, 2003 between Tractor Supply
Company and Duke Realty Limited.
10.53* First Amendment, dated December 22, 2003 to the Tractor Supply Company
401(k) Retirement Savings Plan.
10.54* Lease Agreement dated January 22, 2004 between Tractor Supply Company
and The Prudential Insurance Company of America.
10.55* First Amendment to Revolving Credit Agreement, dated as of January 28,
2004 by and among Tractor Supply Company, the banks party thereto, and
Bank of America, N.A., as Administrative Agent.
23.1* Consent of Ernst & Young LLP.
31.1* Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
51
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
32.1* Certification of Chief Executive Officer and Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------
* Filed herewith
52
- ---------------------------------------------------------------------------------------------------------------------
DIRECTORS
JOSEPH H. SCARLETT, JR. S.P. BRAUD (1)* (3) EDNA K. MORRIS (2) (4)
CHAIRMAN OF THE BOARD RETIRED CHIEF FINANCIAL OFFICER MEMBER, BOARD OF TRUSTEES
AND CHIEF EXECUTIVE OFFICER SERVICE MERCHANDISE CULINARY INSTITUTE OF AMERICA, AND
TRACTOR SUPPLY COMPANY COMPANY, INC., AND FORMER PRESIDENT
VICE-PRESIDENT AND DIRECTOR BRAUD RED LOBSTER
JAMES F. WRIGHT DESIGN/BUILD, INC.
PRESIDENT AND SAM K. REED (3) (4)*
CHIEF OPERATING OFFICER CYNTHIA T. JAMISON (1) (2)* RETIRED VICE CHAIRMAN
TRACTOR SUPPLY COMPANY PARTNER AND DIRECTOR
TATUM CFO PARTNERS, LLP KELLOGG COMPANY
THOMAS O. FLOOD
RETIRED SENIOR VICE PRESIDENT GERARD E. JONES (3)* (4) JOSEPH M. RODGERS (1) (2)
TRACTOR SUPPLY COMPANY PARTNER CHAIRMAN OF THE BOARD
CORPORATE GOVERNANCE ADVISORS, LLC THE JMR GROUP, AND
JOSEPH D. MAXWELL FORMER U.S AMBASSADOR
RETIRED VICE PRESIDENT TO FRANCE
TRACTOR SUPPLY COMPANY (1) AUDIT COMMITTEE
(2) COMPENSATION COMMITTEE (4) CORPORATE GOVERNANCE COMMITTEE
(3) NOMINATING COMMITTEE * COMMITTEE CHAIRPERSON
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EXECUTIVE OFFICERS
JOSEPH H. SCARLETT, JR. JAMES F. WRIGHT CALVIN B. MASSMANN
CHAIRMAN OF THE BOARD AND PRESIDENT AND SENIOR VICE PRESIDENT-
CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER CHIEF FINANCIAL OFFICER
AND TREASURER
GERALD W. BRASE STANLEY L. RUTA
SENIOR VICE PRESIDENT - SENIOR VICE PRESIDENT - STORE
MERCHANDISING OPERATIONS
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SHAREHOLER INFORMATION
CORPORATE ADDRESS INDEPENDENT AUDITORS NUMBER OF STOCKHOLDERS
TRACTOR SUPPLY COMPANY ERNST & YOUNG LLP AS OF JANUARY 31, 2004, THERE WERE
320 PLUS PARK BLVD. SUNTRUST FINANCIAL CENTER APPROXIMATELY 150 STOCKHOLDERS OF
NASHVILLE, TN SUITE 1100 RECORD. THIS NUMBER EXCLUDES AN
37217 615.366.4600 424 CHURCH ST. ESTIMATED 18,000 INDIVIDUAL
NASHVILLE, TN 37219-3302 STOCKHOLDERS HOLDING STOCK UNDER
INTERNET ADDRESS NOMINEE SECURITY POSITION LISTINGS.
WWW.MYTSCSTORE.COM
STOCK EXCHANGE LISTING ANNUAL MEETING
TRANSFER AGENT & REGISTRAR THE NASDAQ NATIONAL MARKET APRIL 15, 2004 AT 10:00 A.M.
EQUISERVE TRUST COMPANY, N.A. TICKER SYMBOL: TSCO TRACTOR SUPPLY COMPANY
POST OFFICE BOX 219045 STORE SUPPORT CENTER
KANSAS CITY, MO 64121-4299 320 PLUS PARK BLVD.
NASHVILLE, TN 37217
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