PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPT. 25, DECEMBER 27,
2004 2003
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 23,488 $ 19,980
Inventories..................................................................... 435,007 324,518
Prepaid expenses and other current assets....................................... 36,771 27,725
Assets held for sale............................................................ 2,877 3,636
Deferred income taxes........................................................... 5,850 7,467
-------------- --------------
Total current assets..................................................... 503,993 383,326
-------------- --------------
Land.............................................................................. 15,757 14,307
Buildings and improvements........................................................ 150,302 124,968
Furniture, fixtures and equipment................................................. 105,409 89,633
Construction in progress.......................................................... 10,917 3,563
-------------- --------------
282,385 232,471
Accumulated depreciation and amortization......................................... (98,129) (83,880)
-------------- --------------
Property and equipment, net..................................................... 184,256 148,591
Other assets...................................................................... 5,945 4,292
-------------- --------------
Total assets............................................................. $ 694,194 $ 536,209
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 199,264 $ 131,564
Accrued employee compensation................................................... 6,221 12,716
Other accrued expenses.......................................................... 78,200 61,208
Current portion of capital lease obligations.................................... 532 339
-------------- --------------
Total current liabilities................................................ 284,217 205,827
-------------- --------------
Revolving credit loan............................................................. 44,153 19,403
Capital lease obligations......................................................... 1,852 1,807
Deferred income taxes............................................................. 2,916 8,879
Other long-term liabilities....................................................... 8,008 4,909
-------------- --------------
Total liabilities........................................................ 341,146 240,825
-------------- --------------
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; 38,268,885
and 37,390,469 shares issued and outstanding in 2004 and 2003, respectively.... 306 299
Additional paid-in capital........................................................ 76,591 62,083
Retained earnings................................................................. 276,151 233,002
-------------- --------------
Total stockholders' equity............................................... 353,048 295,384
-------------- --------------
Total liabilities and stockholders' equity............................... $ 694,194 $ 536,209
============== ==============
The accompanying notes are an integral part of this statement.
Page 3 of 21
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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL FOR THE FISCAL
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales ........................................ $ 426,384 $ 361,204 $ 1,282,857 $ 1,084,355
Cost of merchandise sold........................... 306,808 251,971 903,569 758,033
---------- ---------- ----------- -----------
Gross margin.................................. 119,576 109,233 379,288 326,322
Selling, general and administrative expenses....... 100,647 84,075 292,144 243,569
Depreciation and amortization...................... 6,269 5,165 18,186 14,369
---------- ---------- ----------- -----------
Income from operations........................ 12,660 19,993 68,958 68,384
Interest expense, net.............................. 171 805 742 2,756
---------- ---------- ----------- -----------
Income before income taxes and cumulative effect
of change in accounting principle................ 12,489 19,188 68,216 65,628
Income tax expense................................. 4,537 7,059 25,067 24,099
---------- ---------- ----------- -----------
Income before cumulative effect of change in
accounting principle............................. 7,952 12,129 43,149 41,529
Cumulative effect on prior years of retroactive
application of change in accounting principle,
net of income taxes of $1,165 ................... -- -- -- (1,888)
---------- ---------- ----------- -----------
Net income........................................ $ 7,952 $ 12,129 $ 43,149 $ 39,641
========== ========== =========== ===========
Net income per share - basic, before cumulative
effect of change in accounting principle......... $ 0.21 $ 0.33 $ 1.13 $ 1.12
Cumulative effect of accounting change, net of
income taxes..................................... -- -- -- (0.05)
---------- ---------- ----------- -----------
Net income per share - basic....................... $ 0.21 $ 0.33 $ 1.13 $ 1.07
========== ========== =========== ===========
Net income per share - assuming dilution before
cumulative effect of change in accounting
principle........................................ $ 0.19 $ 0.30 $ 1.03 $ 1.03
Cumulative effect of accounting change, net of
income taxes..................................... -- -- -- (0.04)
---------- ---------- ----------- -----------
Net income per share - assuming dilution........... $ 0.19 $ 0.30 $ 1.03 $ 0.99
========== ========== =========== ===========
The accompanying notes are an integral part of this statement.
Page 4 of 21
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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL
NINE MONTHS ENDED
-----------------------------
SEPT. 25, SEPT. 27,
2004 2003
----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................. $ 43,149 $ 39,641
Tax benefit of stock options exercised................................. 8,141 3,757
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle.............. -- 1,888
Depreciation and amortization...................................... 18,186 14,369
Gain on sale of property and equipment............................ (856) (666)
Asset impairment related to closed stores......................... 160 279
Deferred income taxes............................................. (4,346) 490
Change in assets and liabilities:
Inventories.................................................... (110,489) (88,649)
Prepaid expenses and other current assets...................... (9,046) (5,143)
Accounts payable............................................... 67,700 80,748
Accrued expenses............................................... 10,497 (6,084)
Income taxes currently payable................................. -- (1,814)
Other.......................................................... 2,018 1,359
----------- -----------
Net cash provided by operating activities.............................. 25,114 40,175
----------- -----------
Cash flows from investing activities:
Capital expenditures............................................... (55,194) (39,142)
Proceeds from sale of property and equipment....................... 2,784 3,174
----------- -----------
Net cash used in investing activities.................................. (52,410) (35,968)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit agreement........................ 233,524 391,593
Repayments under revolving credit agreement........................ (208,774) (381,926)
Repayment of long-term debt........................................ -- (1,607)
Principal payments under capital lease obligations................. (320) (267)
Net proceeds from issuance of common stock......................... 6,374 5,130
----------- -----------
Net cash provided by financing activities.............................. 30,804 12,923
----------- -----------
Net increase in cash and cash equivalents.............................. 3,508 17,130
Cash and cash equivalents at beginning of period....................... 19,980 13,773
----------- -----------
Cash and cash equivalents at end of period............................. $ 23,488 $ 30,903
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 400 $ 2,484
Income taxes......................................................... 26,443 21,953
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligation for equipment ................................ $ 558 $ --
The accompanying notes are an integral part of this statement.
Page 5 of 21
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TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These statements should be read in
conjunction with the Company's annual report on Form 10-K for the fiscal year
ended December 27, 2003. The results of operations for the fiscal three-month
and nine-month periods are not necessarily indicative of results for the full
fiscal year.
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.
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. 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.
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.
Page 6 of 21
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 as a reduction of 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 and related vendor funding is
based on management's current knowledge with respect to inventory
levels, sales trends and expected customer demand, as well as planned
new store openings. Although management believes it has the ability to
reasonably estimate its purchase volume and related vendor funding, 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 reports and 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
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.
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 to 48 hours and
are accordingly classified as cash and cash equivalents.
Page 7 of 21
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term receivables and payables and long-term debt instruments, including
capital leases. The carrying values of cash and cash equivalents, receivables,
and trade payables equal current fair value. The terms of the Company's senior
revolving credit agreement includes a variable interest rate which approximates
the current market rate.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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. The Company's interest rate swap expired in November 2003,
and there are presently no interest rate swap agreements outstanding.
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 $5.2 million higher than reported at
September 25, 2004. 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 and hardware 3 - 7 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)
Page 8 of 21
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. Expenses incurred are charged to operations
at the time the related advertising first takes place.
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 the
fiscal three and nine months ended September 25, 2004 and September 27, 2003,
would have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income - as reported $ 7,952 $ 12,129 $ 43,149 $ 39,641
Pro forma compensation expense, net
of income taxes (1,135) (1,539) (3,255) (3,038)
----------- ----------- ----------- -----------
Net income - pro forma $ 6,817 $ 10,590 $ 39,894 $ 36,603
=========== =========== =========== ===========
Net income per share - basic:
As reported $ 0.21 $ 0.33 $ 1.13 $ 1.07
Pro forma $ 0.18 $ 0.29 $ 1.05 $ 0.99
Net income per share - diluted:
As reported $ 0.19 $ 0.30 $ 1.03 $ 0.99
Pro forma $ 0.16 $ 0.27 $ 0.96 $ 0.92
NET INCOME PER SHARE
The Company presents both basic and diluted earning per share ("EPS") on the
face of the statements of income. 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.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE:
Beginning in 2003, the Company adopted the provisions of Emerging Issues Task
Force Issue No. 02-16 ("EITF 02-16"). EITF 02-16 provides guidance for the
accounting and financial statement classifications for consideration
Page 9 of 21
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, 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 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 Accounting Principles Board Opinion ("APB") No.
20, "Accounting Changes" and Financial Accounting Standards Board ("FASB")
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements"
and as permitted by EITF 02-16. In the first quarter of 2003, the Company
recognized a net income reduction of $3.1 million ($1.9 million 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 related store properties
that the Company intends to sell. The Company applies the provisions of SFAS
144, "Accounting for the Impairment or 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 $0.1 million
and $0.2 million in the third quarter of fiscal 2004 and 2003, respectively, to
adjust the carrying value of certain property to fair value, less costs to sell.
Impairment charges of $0.2 million and $0.3 million were required during the
first nine months of fiscal 2004 and 2003, respectively. These charges are
included in selling, general and administrative expenses.
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 August 2002, the Company entered into a replacement unsecured senior
revolving credit agreement (the "Credit Agreement") with Bank of America, N.A.,
as agent for a lender group, expanding the maximum available borrowings from
$125 million to $155 million and extending the maturity to February 2006. The
Credit Agreement bears interest at either the bank's prime rate (4.75% at
September 25, 2004) or the London Inter-Bank Offer Rate (1.84% at September 25,
2004) plus an additional amount ranging from 0.75% to 1.5% per annum, adjusted
quarterly based on the Company's performance (0.75% at September 25, 2004).
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.
On September 30, 2004, the Credit Agreement was amended to extend the maturity
date to February 27, 2008. Additionally, the Amendment included changes to
certain financial covenants, primarily to provide flexibility for capital
expenditures.
NOTE 5 - 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
Page 10 of 21
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 6 - COMPREHENSIVE INCOME:
Comprehensive income includes the change in the fair value of the Company's
interest rate swap agreement (which expired in November 2003), which qualified
for hedge accounting. Comprehensive income for each period is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
---------- ----------- ----------- -----------
Net income -- as reported $ 7,952 $ 12,129 $ 43,149 $ 39,641
Change in fair value of effective portion of
interest rate swap agreement, net of income
taxes -- 285 -- 849
---------- ----------- ----------- -----------
Comprehensive income $ 7,952 $ 12,414 $ 43,149 $ 40,490
========== =========== =========== ===========
NOTE 7 - NET INCOME PER SHARE:
Basic net income per share is based on the weighted average outstanding common
shares. Diluted net income per share is based on the weighted average
outstanding common shares and reflects basic net income per share reduced by the
dilutive effect of stock options.
Net income per share is calculated as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 25, 2004 SEPTEMBER 27, 2003
------------------------------------- ------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE:
Net income $ 7,952 38,259 $ 0.21 $ 12,129 37,262 $ 0.33
DILUTED NET INCOME PER SHARE:
Net income $ 7,952 41,731 $ 0.19 $ 12,129 40,553 $ 0.30
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 25, 2004 SEPTEMBER 27, 2003
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE:
Net income, before cumulative
effect of accounting change $ 43,149 38,100 $ 1.13 $ 41,529 36,986 $ 1.12
Cumulative effect of
accounting change -- 38,100 -- (1,888) 36,986 (0.05)
---------- ------ --------- ------
Net income $ 43,149 38,100 $ 1.13 $ 39,641 36,986 $ 1.07
========== ====== ========= ======
DILUTED NET INCOME PER SHARE:
Net income, before cumulative
effect of accounting change $ 43,149 41,757 $ 1.03 $ 41,529 40,190 $ 1.03
Cumulative effect of
accounting change -- 41,757 -- (1,888) 40,190 (0.04)
---------- ------ --------- ------
Net income $ 43,149 41,757 $ 1.03 $ 39,641 40,190 $ 0.99
========== ====== ========= ======
Page 11 of 21
Weighted average shares outstanding are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ---------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
------------- -------------- ------------ ------------
Shares outstanding 38,259 37,262 38,100 36,986
Dilutive stock options outstanding 3,472 3,291 3,657 3,204
------------- -------------- ------------ ------------
Diluted shares outstanding 41,731 40,553 41,757 40,190
============= ============== ============ ============
On July 17, 2003, the Company's Board of Directors approved a two-for-one split
of the Company's common stock. As a result, stockholders received one additional
share on August 21, 2003 for each share held as of the record date of August 4,
2003. The par value of the Company's common stock remains $0.008. All share and
per share data included in the fiscal 2003 consolidated financial statements and
notes thereto have been restated to give effect to the stock split.
NOTE 8 - CONTINGENCIES:
LITIGATION
A purported shareholder derivative lawsuit has been filed in the Chancery Court
for Davidson County, Tennessee by the Hawaii Laborers Pension Plan against each
of the Company's directors, certain of its officers and one former director. The
Company is named as a nominal defendant. On August 4, 2004, the Company moved to
dismiss the original complaint for failure to make a pre-suit demand on the
Board of Directors. On September 17, 2004, the plaintiff filed an amended
complaint which alleges breaches of fiduciary duty, acts of bad faith, abuse of
control, mismanagement, waste of corporate assets, unjust enrichment and other
violations of Tennessee law relating to the preparation of the Company's
financial statements. The amended complaint seeks, on behalf of the Company,
unspecified damages, a constructive trust on certain of the defendants' proceeds
from selling Company stock, injunctive relief, restitution, the plaintiff's
costs and disbursements and such other relief as the Court deems proper. The
Audit Committee of the Board of Directors, with the assistance of independent
legal counsel, is conducting an investigation of the claims set forth in the
complaint. On October 8, 2004, the Company moved to dismiss the amended
complaint for failure to make a pre-suit demand on the Board of Directors.
The Company is also 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.
SELF INSURANCE
During the third fiscal quarter of 2004, the Company determined, through
assistance with insurance industry analysts, that one of its former insurance
carriers appears insolvent. The carrier insures the Company for both workers'
compensation and general liability claims for policy years 1999 through 2001.
The Company's exposure to related claims are at risk of not being limited to
previously established stop-loss aggregates. A charge of $0.5 million was
recognized in the current period for the estimated additional cost to the
Company due to the expected loss of stop-loss coverage. This additional
estimated liability was determined using a third party actuary service. There
can be no assurance that the Company will not incur additional claims in excess
of the estimated amounts.
NOTE 9 - 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") as amended by
FIN 46-R. The Interpretation provides guidance for determining whether an entity
is a variable interest
Page 12 of 21
entity and evaluation for consolidation based on a company's variable interests.
The Interpretation was 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 adoption of FIN 46-R had no impact
on the Company's financial position or results of operations.
NOTE 10 - MOVE OF CORPORATE FACILITY:
In July 2004, the Company relocated its existing headquarters to consolidate
multiple headquarter facilities within one facility. The Company recognized
incremental after-tax costs of approximately $2.0 million primarily related to
remaining facility and technology lease obligations and other moving costs.
NOTE 11 - RECOGNITION OF ADDITIONAL FREIGHT COSTS:
During the third quarter of fiscal 2004, the Company identified certain
unrecorded freight costs totaling approximately $2.5 million which relate to
prior periods. Due to the immaterial impact of this cost on the Company's
financial position and results of operations, this cost has been recognized in
the current period as additional cost of merchandise sold.
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