-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JXecH8/Vl8flkdKOpdq/4uDYW5ejE9NbE7FSUggq/e30FftzdB/51I0wArr3M3uS 0oVMk+UyRHXCa+HvDxXeyA== 0001045969-98-000274.txt : 19980317 0001045969-98-000274.hdr.sgml : 19980317 ACCESSION NUMBER: 0001045969-98-000274 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FASTENAL COMPANY CENTRAL INDEX KEY: 0000815556 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY [5200] IRS NUMBER: 410948415 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16125 FILM NUMBER: 98566130 BUSINESS ADDRESS: STREET 1: 2001 THEURER BLVD CITY: WINONA STATE: MN ZIP: 55987 BUSINESS PHONE: 5074545374 10-K 1 FORM 10-K 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 31, 1997, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________ to ______________________ Commission file number 0-16125 FASTENAL COMPANY ---------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0948415 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Theurer Boulevard Winona, Minnesota 55987-1500 - -------------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) (507) 454-5374 -------------------------------------------------------------------------- (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, $.01 par value 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 the 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. [ ] The aggregate market value of the Common Stock held by non-affiliates of the registrant as of March 2, 1998 was $1,222,262,811. For purposes of determining this number, all executive officers and directors of the registrant as of March 2, 1998 are considered to be affiliates of the registrant. This number is provided only for the purposes of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person. As of March 2, 1998, the registrant had 37,938,688 shares of Common Stock issued and outstanding. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated by reference in Part II. Portions of the registrant's Proxy Statement for the annual meeting of shareholders to be held April 21, 1998 are incorporated by reference in Part III. FORWARD LOOKING STATEMENTS This Form 10-K, including the sections in Part I hereof captioned "Item 1. Business - Development of the Business", "Item 1. Business - Products", "Item 1. Business - Manufacturing Operations", and "Item 2. Properties", and the section in Part II hereof captioned "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, including statements regarding expected results of operations, new store and distribution center openings, markets for new stores, introduction of existing and new product lines, technology conversions, growth in manufacturing operations, occupancy of new facilities and capital expenditures. A discussion of certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements is included in the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 in the section thereof captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations", which section has been incorporated in this Form 10-K by reference. The registrant assumes no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties. PART I ITEM 1. BUSINESS Fastenal Company ("Fastenal Company" and, together with its wholly owned subsidiaries, Fastenal Company Services, Fastenal Company Purchasing, Fastenal Company Leasing and Fastenal Canada Company, collectively, "the Company") began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968. As of December 31, 1997, the Company had 644 store sites located in 48 states and Canada and 2,676 people employed at these sites. Forty-six of these sites were satellite stores of an existing site. The Company has eight product lines. The traditional Fastenal(R) product line(1) consists of approximately 51,000 different types of threaded fasteners and other industrial and construction supplies. The FastTool(R) product line(1), which was introduced in 1993, consists of approximately 21,000 different types of tools and safety supplies. The SharpCut(R), PowerFlow(TM), EquipRite(R) and CleanChoice(R) product lines(1), which were introduced in 1996, consist of approximately 14,000 different types of metal cutting tool blades, approximately 11,000 different types of fluid transfer components and accessories for hydraulic and pneumatic power, approximately 4,000 different types of material handling and storage products, and approximately 3,000 different types of janitorial and paper products, respectively. The FastArc(TM) and PowerPhase(TM) product lines, which were introduced in 1997, consist of approximately 1,000 different types of welding supplies (excluding gas and welding machines) and approximately 1,000 different types of electrical supplies, respectively. The Company operated nine distribution centers as of December 31, 1997 from which the Company distributes products to its store sites, and operates a facility in Memphis, Tennessee to receive and package goods coming from suppliers outside of the United States. - ---------------- (1) Fastenal(R), FastTool(R), SharpCut(R), PowerFlow(TM), EquipRite(R), CleanChoice(R), FastArc(TM) and PowerPhase(TM) are trademarks and/or service marks of the Company. 3 DEVELOPMENT OF THE BUSINESS Fastenal Company began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small- to medium-sized cities. The Company believes its success can be attributed to its ability to offer such customers a full line of products at convenient locations, and to the high quality of the Company's employees. The Company opened its first store site in Winona, Minnesota, a city with a population of approximately 25,000. The following table shows the growth in the number of Company store sites during the last ten years, and the related increases in the Company's consolidated net sales during that period:
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------ Number of store sites at year end 75 98 126 158 200 253 315 375 484 644 Net sales (in thousands) $30,441 41,190 52,290 62,305 81,263 110,307 161,886 222,555 287,691 397,992
As of December 31, 1997, the Company operated 644 store sites located in: Alabama (12 sites) Nebraska (6 sites) Arizona (4 sites) Nevada (3 sites) Arkansas (11 sites) New Hampshire (6 sites) California (17 sites) New Jersey (6 sites) Colorado (8 sites) New Mexico (5 sites) Connecticut (8 sites) New York (17 sites) Delaware (2 sites) North Carolina (20 sites) Florida (17 sites) North Dakota (6 sites) Georgia (19 sites) Ohio (38 sites) Idaho (6 sites) Oklahoma (10 sites) Illinois (26 sites) Oregon (11 sites) Indiana (23 sites) Pennsylvania (25 sites) Iowa (15 sites) Rhode Island (2 sites) Kansas (9 sites) South Carolina (11 sites) Kentucky (11 sites) South Dakota (4 sites) Louisiana (9 sites) Tennessee (14 sites) Maine (4 sites) Texas (50 sites) Maryland (9 sites) Utah (7 sites) Massachusetts (10 sites) Vermont (2 sites) Michigan (28 sites) Virginia (17 sites) Minnesota (19 sites) Washington (16 sites) Mississippi (7 sites) West Virginia (8 sites) Missouri (13 sites) Wisconsin (31 sites) Montana (6 sites) Wyoming (2 sites) Puerto Rico (1 site) Canada (33 sites) The Company has closed only three store sites in its history. 4 The Company selects new locations for its stores based on their proximity to the Company's distribution network, population statistics, and employment data for manufacturing and construction. The Company currently intends to continue opening new store sites at or above the rate experienced over the last several years, subject to market and general economic conditions. In 1995 the Company opened nine experimental multi-product line `combination' stores in communities which were smaller (populations of approximately 8,000 to 25,000) than those in which traditional stores selling one product line were located. These stores, each of which started operations with two full-time employees, combined the Fastenal(R) and FastTool(R) product lines in a single store. The Company opened 71 of these combination stores in 1996, most of which were located in smaller communities. In 1997, the Company began to stock all new stores with an inventory drawn from all of its product lines. This included sites in smaller communities as well as larger communities. Subsequent to a site's opening, the site personnel customize the inventory offering to that site's customer base. In addition, the Company began to introduce selected product from all of the Company's product lines into existing stores. Therefore, beginning in 1997 the Company ceased making a distinction between a traditional Fastenal(R) store and a `combination' store. The Company believes that approximately 1,000 markets in the United States and Canada (including those in which Fastenal stores are already located) have sufficient potential to justify this type of multi-product line store. Most of the future potential markets are located in smaller communities. In 1996, the Company opened eight experimental stores that operated as satellites of existing stores. These satellites are located in communities as small as 2,000 population and are usually located within a 30 mile radius of the mother store. In most cases, the Company was already doing business in this community from the mother store, but the addition of a physical presence in the community provided sales increases from that community. The Company opened additional satellite stores in 1997. Although the Company cannot be sure of the success of these stores, the Company believes that their success could lead to approximately 500 satellite store sites in the United States and Canada. In 1997 the Company sold products into Mexico from its existing Brownsville, El Paso and McAllen, Texas stores. The Company opened six store sites in Canada in 1995, seven in 1996, 20 in 1997, and plans to open additional store sites in Canada in 1998. The Company opened one store site in Puerto Rico in 1997 and plans to open additional store sites in Puerto Rico in 1998. The stores in Canada and Puerto Rico contributed less than 5% of the Company's consolidated net sales in 1997. No assurance can be given that any of the expansion plans described above will be achieved, or that new stores, once opened, will be profitable. It has been the Company's experience that near-term profitability has been adversely affected by the opening of new store sites, due to the related start-up costs and the time necessary to generate a customer base. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. As a result of this process, sales volume builds slowly and it typically requires nine to 12 months for a new store to achieve its first profitable month. Of the 44 stores opened in the first quarter of 1997, 18 were profitable in the fourth quarter of 1997. 5 For 1997, annual sales volumes of store sites operating at least five years ranged between approximately $300,000 and $5,200,000, with 75% of these store sites having annual sales volumes within the range of approximately $700,000 to $1,800,000. The data in the following table shows the growth in the average sales of the Company's store sites from 1996 to 1997 based on each site's age. The store sites opened in 1997 contributed approximately $18.1 million (or approximately 4.5%) of the Company's consolidated net sales in 1997, with the remainder coming from existing store sites. Age of store site as of Number of store December sites in group as of Average Average Percent 31, 1997 December 31, 1997 sales 1996 sales 1997 change - -------------------------------------------------------------------------------- 0-1 year old 160 $ -- $ 113,000(1) -- % 1-2 years old 109 88,000(1) 361,000 -- 2-3 years old 60 299,000 472,000 57.9 3-4 years old 62 405,000 534,000 32.1 4-5 years old 53 509,000 663,000 30.3 5-6 years old 42 724,000 843,000 16.4 6-7 years old 32 821,000 951,000 15.8 7-8 years old 28 959,000 1,119,000 16.7 8-9 years old 23 947,000 1,111,000 17.3 9-10 years old 17 992,000 1,087,000 9.6 10-13 years old 30 1,244,000 1,477,000 18.7 13+ years old 28 1,734,000 2,088,000 20.4 (1) Average sales includes sales of store sites open for less than the full fiscal year. As of December 31, 1997, the Company operated distribution centers in or near Winona, Minnesota; Indianapolis, Indiana; Dallas, Texas; Atlanta, Georgia; Scranton, Pennsylvania; Fresno, California; Lakewood, Washington; Akron, Ohio; and Salt Lake City, Utah. Distribution centers are located so as to permit twice-a-week to five times-a-week delivery to Company stores using Company trucks and overnight delivery by surface common carrier. As the number of stores increases, the Company intends to add new distribution centers. The Company opened a distribution center in Winston-Salem, North Carolina in January 1998 and plans to open two to four other distribution centers during 1998. The Company also operates a packaging facility in Memphis, Tennessee. This facility receives freight containers from foreign suppliers and repackages the items in standard packages using high speed equipment. The Company operates a UNIX/terminal-based computer system allowing automatic data exchange between the stores and the distribution centers during regular business hours. The use of client/server technology allows the Company's network of UNIX-based machines to serve networked personal computers and workstations. During 1997 the Company began testing its Microsoft Windows NT, client/server, graphical user environment in a limited number of store locations (NT Point-of-sale system). The Company plans to convert to the NT Point-of-sale system during 1998. 6 PRODUCTS Traditional Fastenal(R) Product Line The Company's Fastenal(R) product line consists of approximately 51,000 different items, which may be divided into two broad categories: threaded fasteners, such as bolts, nuts, screws, studs, and related washers; and other industrial and construction supplies, such as paints, various pins and machinery keys, concrete anchors, batteries, sealants, metal framing systems, wire rope, stainless strut, private label stud anchors, rivets, and related accessories. Threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures. Although some aspects of the threaded fastener market are common to all cities, the Company feels that each city's market is to some extent unique. Therefore, the Company opens each store with minimal base stocks of inventory, and then tailors the growing inventory to the local market demand as it develops. Threaded fasteners accounted for approximately 61%, 64%, and 65% of the Company's consolidated net sales in 1997, 1996 and 1995, respectively. Concrete anchors make up the largest portion of the other supply items included in the Fastenal(R) product line. Most concrete anchors use threaded fasteners as part of the completed anchor assembly. FastTool(R) Product Line In 1993 the Company began selling a new FastTool(R) product line. This product line consists of power and hand tools, safety supplies and a tool repair service. The inventory of tools and safety supplies is comprised of approximately 21,000 different items. The Company uses its current distribution system for the FastTool(R) product line. SharpCut(R) Product Line Late in 1995 the Company developed a new SharpCut(R) product line which it began selling in 1996. This product line consists of metal cutting tool blades and a resharpening service. The inventory related to the SharpCut(R) product line is comprised of approximately 14,000 different items. The Company uses its current distribution system for the SharpCut(R) product line. PowerFlow(TM) Product Line In 1996 the Company began selling a new PowerFlow(TM) product line. This product line consists of fluid transfer components and accessories for hydraulic and pneumatic power and a hose crimping service. The inventory related to the PowerFlow(TM) product line is comprised of approximately 11,000 different items. The Company uses its current distribution system for the PowerFlow(TM) product line. EquipRite(R) Product Line In 1996 the Company began selling a new EquipRite(R) product line. This product line consists of material handling and related storage products and a storeroom layout design service. The inventory related to the EquipRite(R) product line is comprised of approximately 4,000 different items. The Company uses its current distribution system for the EquipRite(R) product line. 7 CleanChoice(R) Product Line In 1996 the Company began selling a new CleanChoice(R) product line. This product line consists of janitorial and paper products. The inventory related to the CleanChoice(R) product line is comprised of approximately 3,000 different items. The Company uses its current distribution system for the CleanChoice(R) product line. FastArc(TM) Product Line In 1997 the Company began selling a new FastArc(TM) product line. This product line consists of welding supplies (excluding gas and welding machines). The inventory related to the FastArc(TM) product line is comprised of approximately 1,000 different items. The Company uses its current distribution system for the FastArc(TM) product line. PowerPhase(TM) Product Line In 1997 the Company began selling a new PowerPhase(TM) product line. This product line consists of electrical supplies. The inventory related to the PowerPhase(TM) product line is comprised of approximately 1,000 different items. The Company uses its current distribution system for the PowerPhase(TM) product line. Additional Product Lines The Company plans to add other industrial product lines in the future. INVENTORY CONTROL The Company controls inventory by using computer systems to preset desired stock levels. The data used for this purpose is derived from reports showing sales activity by item for the previous three years. Computers then convert this data to typical store maximum-minimum inventory levels for each item. Stores can deviate from preset inventory levels as deemed appropriate by their district managers. Inventories in distribution centers are established from computerized sales data for the stores served by the respective centers. MANUFACTURING OPERATIONS In 1997 approximately 95.5% of the Company's consolidated net sales were attributable to products manufactured by other companies to industry standards. The remaining amount of approximately 4.5% of the Company's consolidated net sales for 1997 related to products manufactured by, or modified in, the Company's machining shop or repaired in a tool repair center. These manufactured products consist primarily of non-standard sizes of threaded fasteners made to customers' specifications. The Company engages in manufacturing activity primarily as a service to its customers and does not expect any significant growth in the foreseeable future in the proportion of the Company's consolidated net sales attributable to manufacturing. SOURCES OF SUPPLY The Company uses a large number of suppliers for the approximately 106,000 standard items it distributes. Most items distributed by the Company can be purchased from several sources, although preferred sourcing is used for some items to facilitate quality control. No single supplier accounted for more than 5.0% of the Company's purchases in 1997. 8 CUSTOMERS AND MARKETING The Company believes its success can be attributed to its ability to offer customers in small- to medium-sized cities a full line of products at convenient locations, and to the high quality of the Company's employees. Most of the Company's customers are in the construction and manufacturing markets. The construction market includes general, electrical, plumbing, sheet metal, and road contractors. The manufacturing market includes both original equipment manufacturers and maintenance and repair operations. Other users of the Company's products include farmers, truckers, railroads, mining companies, municipalities, schools, and certain retail trades. As of December 31, 1997, the Company's total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 84,000. During each of the three years ended December 31, 1997, no one customer accounted for a significant portion of the Company's sales. The Company believes that the large number of its customers together with the varied markets that they represent provide some protection to the Company from economic downturns in a particular market. A significant portion of the Company's sales are generated through direct calls on customers by store personnel. Because of the nature of the Company's business, the Company does not use the more expensive forms of mass media advertising such as television, radio, and newspapers. Forms of advertising used by the Company include signs and catalogs. Late in December 1997 the Company began rolling out its new 824 page catalog. This catalog includes standard product from all of the Company's product lines. COMPETITION The Company's business is highly competitive. Competitors include both large distributors located primarily in large cities and smaller distributors located in many of the same cities in which the Company has stores. The Company believes that the principal competitive factors affecting the markets for the Company's products are customer service and convenience. Some competitors use vans to sell their products in communities away from their main warehouses, while others rely on mail order or telemarketing sales. The Company, however, believes that the convenience provided to customers by actually operating a number of stores in smaller markets, each offering a full line of products, is a competitive selling advantage and that the large number of stores in a given area, taken together with the Company's ability to provide frequent deliveries to such stores from centrally located distribution centers, makes possible the prompt and efficient distribution of products. Having trained personnel at each store also enhances the Company's ability to compete (see "Employees" below). EMPLOYEES As of December 31, 1997, the Company employed a total of 4,075 full- and part-time employees, 2,676 being store managers and store employees, and the balance being employed in the Company's distribution centers, packaging facility, manufacturing operations, service operations and home office. The Company believes that the quality of its employees is critical to its ability to compete successfully in the markets it currently serves and to its ability to open new stores in new markets. The Company fosters the growth and education of skilled employees throughout the organization by operating training programs and by decentralizing decision making. Wherever possible, promotions are from within the Company. For example, most new store managers are promoted from an assistant manager's position at another store and district managers (who supervise a number of stores) are usually former store managers. 9 The Company's sales personnel participate in incentive bonus arrangements that place emphasis on achieving increased sales on a store and regional basis, while still attaining targeted levels of gross profit. As a result, a significant portion of the Company's total employment cost varies with sales volume. The Company also pays incentive bonuses to other personnel for achieving pre-determined cost containment goals. None of the Company's employees is subject to a collective bargaining agreement and the Company has experienced no work stoppages. The Company believes its employee relations are excellent. ITEM 2. PROPERTIES The Company owns five facilities in Winona, Minnesota: a 173,000 square foot distribution center and home office building, a 50,000 square foot manufacturing facility, a 13,000 square foot building that houses the Company's Winona store and regional training center, a 42,000 square foot building that houses rack and shelving storage and a multi-building complex purchased in 1997 with approximately 30,000 total square feet which houses several support services including, among others, the SharpCut(R) regrind department and the fabrication department. The Company also owns a 60,000 square foot distribution center in Indianapolis, Indiana, a 54,000 square foot distribution center in Atlanta, Georgia, a 50,000 square foot distribution center in Dallas, Texas, a 50,000 square foot distribution center near Scranton, Pennsylvania and a 102,000 square foot distribution center in Akron, Ohio. The buildings that house the Company's stores in Waterloo and Mason City, Iowa; St. Joseph, Missouri; Wichita Falls and Texarkana, Texas; Topeka, Kansas; and Kokomo, Indiana are also owned by the Company. All other buildings occupied by the Company are leased. Leased stores range from approximately 1,200 to 8,000 square feet, with lease terms of up to 48 months. The Company's leases certain distribution centers as well as its packaging facility in Tennessee. These leases are as follows:
Location Square Feet Lease Expiration Date Lease Renewal Options - ------------------------------------------------------------------------------------------------------ Lakewood, Washington 40,000 February 2000 Two one-year periods* Fresno, California 21,500 February 1999 One one-year period* Salt Lake City, Utah 12,100 March 2000 None Winston-Salem, North Carolina 58,400 October 2000 Two one-year periods* Memphis, Tennessee** 115,000 December 2000 One two-year period*
* The lease renewals can be exercised at the Company's option. ** As of December 31, 1997, the Memphis packaging center was housed in a 37,500 square foot facility. The Company expects to move into a 115,000 square foot facility in February 1998. If economic conditions are suitable, the Company will, in the future, consider purchasing store sites to house its older stores. All sites for new stores will continue to be leased. It is the Company's policy to negotiate relatively short lease terms to facilitate relocation of particular store operations if deemed desirable by management. It has been the Company's experience that space suitable for its needs and available for leasing is more than sufficient. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 10 ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Fastenal Company are: Name Age Position - ---------------------------------------------------------------------------- Robert A. Kierlin 58 Chairman of the Board, President, Chief Executive Officer and Director Willard D. Oberton 39 Vice President and Chief Operating Officer Stephen M. Slaggie 58 Secretary and Director Daniel L. Florness 34 Treasurer, Chief Financial Officer and Chief Accounting Officer Mr. Kierlin has been the Chairman of the Board, President and Chief Executive Officer of Fastenal Company and has served as a director since Fastenal Company's incorporation in 1968. Mr. Oberton has been the Vice President and Chief Operating Officer of Fastenal Company since March 1997. From June 1986 through March 1997, Mr. Oberton held the position of general operations manager of Fastenal Company. Mr. Slaggie has been the Secretary of Fastenal Company and has served as a director since 1970. He became a full-time employee of Fastenal Company in December 1987, at which time he assumed the additional duties of Shareholder Relations Director and Insurance Risk Manager. From 1970 through June 1996, Mr. Slaggie also served as the Treasurer of Fastenal Company. Mr. Florness has been the Treasurer, Chief Financial Officer and Chief Accounting Officer of Fastenal Company since June 1996. From January 1987 through May 1996, Mr. Florness was employed by KPMG Peat Marwick LLP, a public accounting firm. Mr. Florness served in the capacity of manager or senior manager from July 1992 through May 1996 with that firm. None of the above executive officers is related to any other such executive officer or to any other director of Fastenal Company. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference is Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, Common Stock Data on page 9. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference is Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, page 2. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference is Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, pages 5-8. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference is Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, Selected Quarterly Financial Data (Unaudited) on page 9, and Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Independent Auditors' Report on pages 10-20. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference is the information appearing under the headings "Election of Directors--Nominees and Required Vote", pages 4-5, and "Section 16(a) Beneficial Ownership Reporting Requirements", page 10, in Fastenal Company's Proxy Statement dated March 17, 1998. See also Part I hereof under the heading "Item X. Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information appearing under the headings "Election of Directors--Board and Committee Meetings", page 5, "Executive Compensation--Summary of Compensation", page 6, and "Executive Compensation--Compensation Committee Interlocks and Insider Participation", page 6, in Fastenal Company's Proxy Statement dated March 17, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information appearing under the heading "Security Ownership of Principal Shareholders and Management", pages 2-4, in Fastenal Company's Proxy Statement dated March 17, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is the information appearing under the heading "Interests of Management in Certain Transactions", page 10, in Fastenal Company's Proxy Statement dated March 17, 1998. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) 1. Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report (Incorporated by reference to pages 10-20 of Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997) 2. Financial Statement Schedules: Schedule VIII--Valuation and Qualifying Accounts 3. Exhibits: 3.1 Restated Articles of Incorporation of Fastenal Company, as amended (incorporated by reference to Exhibit 3.1 to Fastenal Company's Form 10-Q for the quarter ended September 30, 1993) 3.2 Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-14923) 10 Description of bonus arrangement for Vice President 13 Annual Report to Shareholders for the fiscal year ended December 31, 1997 (only those portions specifically incorporated by reference herein shall be deemed filed with the Commission) 21 List of Subsidiaries 27 Financial Data Schedule Copies of Exhibits will be furnished upon request and payment of the Company's reasonable expenses in furnishing the Exhibits. b) Reports on Form 8-K No report on Form 8-K was filed by Fastenal Company during the fourth quarter of the fiscal year ended December 31, 1997. 14 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders Fastenal Company: Under date of January 23, 1998, we reported on the consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Minneapolis, Minnesota January 23, 1998 15 FASTENAL COMPANY Schedule VIII--Valuation and Qualifying Accounts Years ended December 31, 1997, 1996, and 1995 "Additions" "Additions" Balance at charged to charged Balance beginning costs and to other "Less" at end Description of year expenses accounts deductions of year - -------------------------------------------------------------------------------- Year ended December 31, 1997 allowance for doubtful accounts $540,000 $1,614,000 $0 $1,494,000 $660,000 Year ended December 31, 1996 allowance for doubtful accounts 460,000 917,000 0 837,000 540,000 Year ended December 31, 1995 allowance for doubtful accounts 300,000 519,513 0 359,513 460,000 16 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. Date: March 16, 1998 FASTENAL COMPANY By /s/ Robert A. Kierlin --------------------------------- Robert A. Kierlin, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 16, 1998 By /s/ Robert A. Kierlin ------------------------------------- Robert A. Kierlin, President (Principal Executive Officer) and Director Date: March 16, 1998 By /s/ Daniel L. Florness ------------------------------------- Daniel L. Florness, Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: March 16, 1998 By /s/ Stephen M. Slaggie ------------------------------------- Stephen M. Slaggie, Director Date: March 16, 1998 By /s/ Michael M. Gostomski ------------------------------------- Michael M. Gostomski, Director Date: March 16, 1998 By /s/ Henry K. McConnon ------------------------------------- Henry K. McConnon, Director Date: March 16, 1998 By /s/ John D. Remick ------------------------------------- John D. Remick, Director INDEX TO EXHIBITS 3.1 Restated Articles of Incorporation of Fastenal Company, as amended (incorporated by reference to Exhibit 3.1 to Fastenal Company's Form 10-Q for the quarter ended September 30, 1993). 3.2 Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-14923). 10 Description of bonus arrangement for Vice President .................................Electronically Filed 13 Annual Report to Shareholders for the fiscal year ended December 31, 1997 (only those portions specifically incorporated by reference herein shall be deemed filed with the Commission)................Electronically Filed 21 List of Subsidiaries ...............................Electronically Filed 27 Financial Data Schedule.............................Electronically Filed EX-10 2 VICE PRESIDENT'S BONUS ARRANGEMENT Exhibit 10 Vice President's Bonus Arrangement Fastenal Company's Vice President is paid a bonus under an individual oral bonus arrangement. Under this arrangement, the Vice President's bonus for any year is calculated based on the amount by which the Company's consolidated pre-tax income for such year exceeds the Company's consolidated pre-tax income for the prior year. EX-13 3 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 FASTENAL COMPANY --------------------------------- FIRST IN INDUSTRIAL SUPPLIES - -------------------------------------------------------------------------------- Annual Report [9 PHOTOS OF COMPANY PRODUCTS AND COMPANY HEADQUARTERS] Annual Report - -------------------------------------------------------------------------------- Fastenal Company Annual Report 1997 -------------------------------------- 10 Year Average Compound Annual Net Sales Growth Rate in Excess of 30% -------------------------------------- Profile of Fastenal Company Fastenal Company was founded in 1967. As of December 31, 1997, the Company operated 644 store sites located in 48 states, Puerto Rico and Canada and employed 2,676 people at these sites. The Company sells industrial and construction supplies in eight product lines. The traditional Fastenal(R) product line consists of approximately 51,000 different types of threaded fasteners and other industrial and construction supplies; the FastTool(R) product line consists of approximately 21,000 different types of tools and safety supplies; the SharpCut(R) product line consists of approximately 14,000 different types of metal cutting tool blades; the PowerFlow(TM) product line consists of approximately 11,000 different types of fluid transfer components and accessories for hydraulic and pneumatic power; the EquipRite(R) product line consists of approximately 4,000 different types of material handling and storage products; the CleanChoice(R) product line consists of approximately 3,000 different types of janitorial and paper products; the PowerPhase(TM) product line consists of approximately 1,000 different types of electrical supplies; and the FastArc(TM) product line consists of approximately 1,000 different types of welding supplies (excluding gas and welding machines). The SharpCut(R), PowerFlow(TM), EquipRite(R) and CleanChoice(R) product lines were introduced in 1996. The PowerPhase(TM) and FastArc(TM) product lines were introduced in 1997. As of December 31, 1997, the Company also operated nine distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California and Utah, and a packaging facility in Tennessee. A tenth distribution center located in North Carolina began operating in January 1998. Approximately 95.5% of the Company's 1997 sales were attributable to products manufactured by others, and approximately 4.5% related to items manufactured or modified by the Company's Manufacturing Division or repaired by the Company's tool repair service. Since December 31, 1997, the Company has opened additional store sites in the United States and Canada. - -------------------------------------------------------------------------------- This Annual Report, including the sections captioned "President's Letter to Shareholders", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Stock and Financial Data", contains statements that are not historical in nature and that are intended to be, and are hereby identified as, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), including statements regarding expected results of operations, new store openings, value to be derived from planned expansion, technology conversions, employee hiring, capital expenditures and dividends. A discussion of certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements is included in of the section of this Annual Report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company assumes no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties. - -------------------------------------------------------------------------------- [FASTENAL LOGO] [FASTTOOL LOGO] [SHARPCUT LOGO] [POWERFLOW LOGO] [EQUIPRITE LOGO] [CLEANCHOICE LOGO] [POWERPHASE LOGO] [FASTARC LOGO] Fastenal(R), FastTool(R), SharpCut(R), PowerFlow (TM), EquipRite(R), CleanChoice(R), PowerPhase(TM) and FastArc(TM) are trademarks and/or service marks of the Company. Fastenal Company & Subsidiaries Table of Contents Page 2 Six-Year Selected Financial Data Page 3 - 4 President's Letter to Shareholders [PHOTO OF COMPANY HEADQUARTERS] Page 5 - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 9 Stock and Financial Data Page 10 Consolidated Balance Sheets Page 11 Consolidated Statements of Earnings Page 12 Consolidated Statements of Stockholders' Equity Page 13 Consolidated Statements of Cash Flows [PHOTO OF COMPANY EMPLOYEE] Page 14 - 19 Notes to Consolidated Financial Statements Page 20 Independent Auditors' Report Inside Back Cover Officers and Directors/Corporate Information Fastenal Company and Subsidiaries 6 Six-Year Selected Financial Data
Operating Results Percent Years Ended Dec. 31 1997 Change 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- Net sales $397,992,000 +38.3 $287,691,000 222,555,000 161,886,000 110,307,000 81,263,000 - --------------------------------------------------------------------------------------------------------------------------- Gross profit 208,929,000 +36.7 152,880,000 118,944,000 85,927,000 58,552,000 43,683,000 - --------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 67,336,000 +23.7 54,432,000 46,206,000 31,391,000 20,075,000 14,735,000 - --------------------------------------------------------------------------------------------------------------------------- Net earnings 40,834,000 +25.5 32,539,000 27,411,000 18,666,000 11,910,000 8,833,000 - --------------------------------------------------------------------------------------------------------------------------- Basic and diluted earnings per share 1.08 +25.6 0.86 .72 .49 .31 .23 - --------------------------------------------------------------------------------------------------------------------------- Dividends per share 0.02 0.02 .02 .02 .015 .015 - --------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 37,938,688 37,938,688 37,938,688 37,938,688 37,938,688 37,938,688 - --------------------------------------------------------------------------------------------------------------------------- Financial Position December 31 - --------------------------------------------------------------------------------------------------------------------------- Net working capital $106,555,000 +35.9 $ 78,417,000 66,100,000 45,341,000 33,319,000 22,569,000 - --------------------------------------------------------------------------------------------------------------------------- Total assets 205,137,000 +35.4 151,545,000 109,320,000 81,795,000 57,463,000 43,937,000 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 165,872,000 +31.7 125,967,000 94,323,000 67,649,000 49,809,000 38,468,000
- -------------------------------------------------------------------------------- All information contained in this Annual Report reflects the 2-for-1 stock splits effected in the form of a 100% stock dividend in 1992 and 1995. - -------------------------------------------------------------------------------- 2 ------------------------------------------------------------------------------ 1997 Annual Report President's Letter to Shareholders Our Company experienced growing pains in 1997. We worked hard to add and assimilate more people, products, and procedures throughout the year. Although we experienced an occasional stumble, we begin 1998 by noticing light at the end of the tunnel, and it doesn't appear to be from an oncoming train. Our 1997 net sales of $397,992,000 represent a 38.3% increase over the $287,691,000 of net sales in 1996. We started the year with six product groups and added two more during the year - PowerPhase(TM), which includes electrical supplies (cable, conduit, connectors, etc.), and FastArc(TM), which includes welding supplies except for gas and welding machines. Approximately 23.1% of our 1997 sales came from the seven product lines added since 1993. All six of our product lines introduced prior to 1997 showed sales increases during 1997. Our 1997 net earnings were $40,834,000, a 25.5% increase over the 1996 net earnings of $32,539,000. Those of you who have been shareholders since Fastenal became a public company in 1987 may note that our 1997 earnings were double our net sales of ten years ago. The percentage increase in net earnings trailed the ----- percentage increase in net sales during 1997 because our operating and administrative expenses increased at a rate greater than our net sales. Expense categories that grew faster than the 38.3% rate of increase in net sales included payroll, rents, utilities, training and vehicular expense. The increased expenses are part of our planned expansion and should return their value in the future. During 1997 we opened an additional 160 store sites, bringing the total number of store sites at the end of the year to 644. If the US and Canadian economies stay strong and if we maintain our sales plan, we hope to open about 200 more store sites in 1998. To do so we need more good people joining our Company. We began 1997 with 3,073 employees and finished the year with 4,075. Of the added 1,002 people, 687 were employed in our store sites and the remainder in our distribution, manufacturing, packaging, home office, or service operations. Development of our personnel continues to receive high priority. At the start of the year we had 15 people involved in training functions. We doubled this to 30 by the end of 1997. In addition to our own training staff, we continue to receive training help from our vendors. In 1997 we also began using customized training programs from vocational schools. Development of our people provides for our growth. Despite the realization that our people are our most important asset, we still haven't convinced the GAAP folks to allow such an entry on our balance sheet. During 1997 we employed significant resources to publish an all-encompassing catalog for our eight product lines. This 824-page color-coded catalog rolled off the presses in mid December. The first printing of 200,000 copies was distributed to all of our stores by mid January, 1998. Our customers have given us good reviews (and some nice orders) after looking through the catalog. We added to our distribution and service facilities in 1997. We opened a new distribution center in Salt Lake City, Utah, and set up an additional distribution center in Winston-Salem, North Carolina, that opened in January, 1998. We also started planning work for a distribution center in Valparaiso, Indiana. In a new concept, we set up a small satellite - ----------------------------------- More Product Line Expansion in 1998 - ----------------------------------- - ------------------------------------------------------------------------------ 3 1997 Annual Report President's Letter to Shareholders continued distribution center in Billerica, Massachusetts. The Lowell facility opened in January, 1998, and is supported out of our Scranton, Pennsylvania, distribution center. In Winona we disposed of two properties in 1997 and purchased another 9- acre property that included 4 buildings. Our SharpCut(R) regrind service, Winona tool repair center, fabrication department and printing department are located in the 4 buildings. We also began a 42,000 square foot addition to our Winona distribution center in late 1997, with completion expected in the middle of 1998. We leased a larger building in Memphis, Tennessee, for our packaging facility, and will move to that location in February, 1998. In 1997 our Manufacturing Division purchased a CNC combined turning and milling machine. This machine is our first step in pursuing medium quantity special orders. Previously our equipment focused on small order quantities. Our FastTool(R) service centers repair electric and air powered tools. We started the first center with one employee in 1993 when we began selling tools. The three centers operating in 1997 repaired 15,500 tools and contributed more than $1 million of our net sales. Our information systems people completed the coding for our new point-of-sale system in 1997. The system is running in a few of our stores as we "debug" it. We await a final version of the vendor-supplied software that will allow us to use low-cost terminals with the system. Our largest stores will be the last to convert to the new system, probably in the third quarter of 1998. If overall economic conditions stay good during 1998, we expect to have a good year at Fastenal. We have a lot of work to do, but we have and will hire more people willing to do what work needs to be done. All of us at Fastenal work together. Our goal in 1998 will be the same as it has been in the past: "To Grow Our Company through Customer Service". Thank you for believing in Fastenal. /s/ Robert A. Kierlin President and Chief Executive Officer January 23, 1998 "growth through customer service" [REPRESENTATION OF COMPANY CATALOG] - -------------------------------- Over 640 Fastenal Company Stores - -------------------------------- 4 ------------------------------------------------------------------------------ 1997 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales for 1997 exceeded net sales for 1996 by 38.3%. This compares with a 29.3% net sales growth rate experienced from 1995 to 1996. The increase in net sales in 1997 and 1996 came primarily from new site openings, unit sales growth in existing sites, and, to a lesser extent, the introduction of new products and services, rather than from price increases. The following table indicates product lines added to the original Fastenal(R) product line, the year of introduction, and the approximate percentage of total net sales related to each product line: Percentage of Net Sales Name Introduced 1997 1996 - ------------------------------------------ FastTool(R) 1993 12.2% 12.0% SharpCut(R) 1996 4.2% 3.0% PowerFlow(TM) 1996 2.4% 1.0% EquipRite(R) 1996 2.6% * CleanChoice(R) 1996 1.1% * PowerPhase(TM) 1997 * - FastArc(TM) 1997 * - * Less than 1% of net sales. Sites opened in 1997 contributed approximately $18,175,000 (or 4.6%) to 1997 net sales. Sites opened in 1996 contributed approximately $9,544,000 (or 3.0%) to 1996 net sales and approximately $39,694,000 (or 10.0%) to 1997 net sales. The rate of growth in sales of sites generally levels off after sites have been open for five years, and the sales of older sites typically vary more with the economy than the sales of younger sites. Threaded fasteners accounted for approximately 61%, 64% and 65% of the Company's consolidated sales in 1997, 1996 and 1995, respectively. Gross profit as a percent of net sales was 52.5% in 1997, 53.1% in 1996 and 53.4% in 1995. The decrease from 1996 to 1997 and from 1995 to 1996 resulted primarily from the mix of products being sold. Operating and administrative expenses were 35.6% of net sales in 1997 after having been 34.6% of net sales in 1996 and 33.0% of net sales in 1995. The 1997 and 1996 increases in operating and administrative costs were primarily due to an increase in payroll and related costs and an increase in occupancy costs, the rate of increase of both of which exceeded the growth rate of net sales. Payroll costs increased due to a 1997 increase of 34.5% and 29.1% in sales and support personnel, respectively, and a 1996 increase of 52.0% and 47.0% in sales and support personnel, respectively. This increase was due to a 33.0% and 29.5% increase in the number of sites in 1997 and 1996, respectively, and an introduction of two and four new product lines in 1997 and 1996, respectively. Occupancy costs increased in both years due to the aforementioned increase in the number of sites and due to the relocation of existing sites to larger sites to accommodate their growth in activity and the introduction of new product lines. Distribution costs benefited from productivity gains in both 1997 and 1996. Interest expense in 1997 increased $835,000 or 1,018% over 1996 due to the increase in the weighted average amount of outstanding Company borrowings. Interest income minus interest expense decreased 68.1% between 1995 and 1996 primarily because of less investable cash and the use of short-term borrowings. The gains on disposal of property and equipment in 1997 came primarily from the disposal of two buildings and, to a lesser extent, the disposal of used vehicles. The gains on disposal of property and equipment in 1996 and 1995 came primarily from the disposal of used vehicles owned by the Company. The 1996 gain was significantly higher than the 1995 gain due to the increase in the number of pickup trucks sold. - ------------------------------------------------------------------------------ 5 1997 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Continued Results of Operations continued Net earnings grew 25.5% from 1996 to 1997, and 18.7% from 1995 to 1996. The growth in net earnings in all years resulted primarily from increased net sales. In 1997 and 1996 the net earnings growth rate was lower than that of net sales because of the earlier mentioned increases in operating and administrative expenses. Effects of Inflation Inflation had little effect on the Company's operations in 1997, 1996 and 1995. Liquidity and Capital Resources Working capital increased from $66,100,000 at December 31, 1995, to $78,417,000 at December 31, 1996 and to $106,555,000 at December 31, 1997. These increases came primarily from higher trade accounts receivable and inventory levels without comparable increases in current liabilities. Net cash provided by operating activities decreased from $14,945,000 in 1995 to $12,478,000 in 1996 and increased to 14,657,000 in 1997. The 1996 decrease came primarily because the growth in inventories exceeded the growth in net earnings and depreciation charges for such year. The 1997 increase came primarily because the growth in net earnings, depreciation, accrued expenses and income tax payable charges for such year exceeded the growth in accounts receivable and inventories. Net cash used in investing activities increased from $10,736,000 in 1995 to $26,498,000 in 1996 and decreased to $21,619,000 in 1997. The 1996 increase in net cash used in investing activities resulted primarily from an increase in purchases of property and equipment and by an increase in other assets. The increase in other assets was primarily due to the acquisition of a business in 1996. The 1997 decrease in net cash used in investing activities resulted primarily from an increase in the disposal of vehicles. Additions to vehicles and computer equipment are expected to be the largest part of cash used by investing activities in 1998. The Company had no long-term debt at December 31, 1997, 1996, or 1995. See note 9 of the Notes to Consolidated Financial Statements for a description of the Company's current lines of credit and note payable arrangements. The Company paid an annual dividend of $.02 per share in 1997, 1996 and 1995. At December 31, 1997, the Company had two outstanding commitments for capital expenditures. The Company's commitments consisted of a $1,700,000 expansion of the Winona, Minnesota warehouse and a $1,300,000 purchase of property for a future distribution center. The Company expects to make approximately $36,000,000 in total capital expenditures in 1998 (including the $3,000,000 described above), this consists of approximately $15,000,000 for pickup trucks, approximately $3,000,000 for semi-tractors and trailers, approximately $8,500,000 for manufacturing, warehouse and packaging equipment and facilities, approximately $8,000,000 for data processing equipment and approximately $1,500,000 for land. Management anticipates funding its commitments for capital expenditures and its current expansion plans with cash generated from operations, from its borrowing capacity and, to a lesser degree, from available cash, cash equivalents and marketable securities. 6 ------------------------------------------------------------------------------ 1997 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Continued Liquidity and Capital Resources continued In addition to opening new sites in the United States, in 1998 the Company plans to open additional sites in Canada and Puerto Rico and to continue selling its products in Mexico from some of its existing sites in Texas. No assurance can be given that any of the Company's expansion plans will be achieved or that new sites, once opened, will be profitable. Year 2000 Discussion Like any other company, advances and changes in available technology can significantly impact the business and operations of the Company. For example, a challenging problem exists as many computer systems worldwide do not have the capability of recognizing the year 2000 or years thereafter. No easy technological "quick fix" has yet been developed for this problem. The Company is expending resources to assure that its computer systems are reprogrammed or replaced in time to effectively deal with transactions in the year 2000 and beyond. The Company is constantly upgrading its computer systems in the normal course to accommodate the rapid sales growth experienced over the last several decades. The most recent upgrade has occurred in the Company's point-of-sale system. The Company began to rewrite the software for this system in 1996. This rewrite, which was completed and tested in 1997, addressed "Year 2000" issues and is expected to be implemented in 1998. The software supporting the non- branch operations is also being upgraded in the normal course. These upgrades are expected to be completed in time to effectively deal with the "Year 2000" issue. The "Year 2000 Computer Problem" creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions worldwide. "Year 2000" failures of the Company and/or third party computer systems could have a material impact on the Company's ability to conduct its business, and especially to process and account for the transfer of funds electronically. Certain Risks and Uncertainties Certain statements in this Annual Report, in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements make by or with approval of the Company's executive officers constitute or will constitute "forward-looking statements" under the Reform Act. The following factors are among those that could cause the Company's actual results to differ materially from those predicted in such forward-looking statements: (i) a downturn in the economy could impact sales at existing stores, (ii) a change, from that projected, in the number of smaller communities able to support future store sites could impact the rate of new store openings, (iii) the ability of the Company to develop product expertise at the store level, to identify future product lines that complement existing product lines, to transport and store certain hazardous products and to otherwise integrate new product lines into the Company's existing stores and distribution network could impact sales and margins, (iv) the ability of the Company to successfully attract and retain qualified personnel to staff the Company's smaller community stores could impact sales at existing stores and the rate of new store openings, (v) changes in governmental regulations related to product quality or product source traceability could impact the cost to the Company of regulatory compliance, (vi) inclement weather could impact the Company's distribution network, (vii) foreign currency. - ------------------------------------------------------------------------------ 7 1997 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations continued Certain Risks and Uncertainties continued fluctuations or changes in trade relations could impact the ability of the Company to procure products overseas at competitive prices and the Company's foreign sales, (viii) disruptions caused by the implementation of the Company's new management information systems infrastructure could impact sales, (ix) unforeseen disruptions associated with "Year 2000 Computer Problems" could impact sales and the Company's ability to order and pay for product, and (x) changes in the rate of new store openings could impact expenditures for vehicles, computers and other capital equipment. New Accounting Pronouncements During 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 129, SFAS No. 130 and SFAS No. 131. SFAS No. 129, Disclosure of Information about Capital Structure, consolidates existing disclosure requirements and had no impact on the Company's financial statements. SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying the components of comprehensive income and will be adopted by the Company in 1998. The statement requires additional disclosures, but has no impact on consolidated net earnings. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for determining operating segments and reporting operating segment information. SFAS No. 131 is required to be adopted beginning with Company's 1998 year-end annual report. The Company has not yet evaluated the effects of this pronouncement to determine what changes, if any, to its current reporting format will be required. 8 ------------------------------------------------------------------------------ 1997 Annual Report Stock and Financial Data $ Common Stock Data The Company's shares are traded on The Nasdaq Stock Market under the symbol "FAST". The following table sets forth, by quarter, the high and low closing sale price of the Company's shares on The Nasdaq Stock Market for 1997 and 1996. 1997: High Low First quarter $49-7/8 31-3/4 Second quarter 53 30-3/4 Third quarter 60-1/2 49 Fourth quarter 56 36 1996: High Low First quarter $42-1/2 28-3/4 Second quarter 47 34-1/4 Third quarter 50 35 Fourth quarter 49-3/4 42-3/8 As of February 13, 1998, there were approximately 2,933 record holders of the Company's Common Stock. A $.02 annual dividend per share was paid during both 1996 and 1997. On January 20, 1998, the Company announced a $.02 annual dividend per share to be paid on March 13, 1998 to shareholders of record at the close of business on February 27, 1998. The Company expects that it will continue to pay comparable cash dividends in the foreseeable future, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the board of directors. $ Selected Quarterly Financial Data (Unaudited) 1997: Net sales Gross profit Net earnings Earnings per share First quarter $ 87,095,000 45,836,000 8,765,000 .23 Second quarter 98,232,000 51,165,000 10,479,000 .28 Third quarter 105,551,000 55,652,000 11,334,000 .30 Fourth quarter 107,114,000 56,276,000 10,256,000 .27 --------------------------------------------------------------- $397,992,000 208,929,000 40,834,000 1.08 --------------------------------------------------------------- 1996: Net sales Gross profit Net earnings Earnings per share First quarter $ 63,061,000 33,425,000 7,433,000 .20 Second quarter 70,850,000 38,036,000 8,445,000 .22 Third quarter 76,212,000 40,687,000 8,692,000 .23 Fourth quarter 77,568,000 40,732,000 7,969,000 .21 --------------------------------------------------------------- $287,691,000 152,880,000 32,539,000 .86 --------------------------------------------------------------- - ------------------------------------------------------------------------------ 9 Annual Report Consolidated Balance Sheets December 31, 1997 and 1996
1997 1996 Assets Current assets: Cash and cash equivalents $ 386,000 426,000 Trade accounts receivable, net of allowance for doubtful accounts of $660,000 and $540,000 as of December 31, 1997 and 1996, respectively 57,542,000 41,553,000 Inventories 79,415,000 56,526,000 Deferred income tax asset 1,591,000 1,219,000 Other current assets 5,237,000 3,731,000 ------------------------------- Total current assets 144,171,000 103,455,000 Marketable securities 265,000 515,000 Property and equipment, less accumulated depreciation 57,084,000 43,930,000 Other assets, net 3,617,000 3,645,000 ------------------------------- Total assets $ 205,137,000 151,545,000 ------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 12,950,000 10,010,000 Notes payable 16,303,000 8,622,000 Accrued expenses 7,314,000 5,611,000 Income tax payable 1,049,000 795,000 ------------------------------- Total current liabilities 37,616,000 25,038,000 ------------------------------- Deferred income tax liability 1,649,000 540,000 ------------------------------- Stockholders' equity: Preferred stock of $.01 par value per share. Authorized 5,000,000 shares; none issued - - Common stock of $.01 par value per share. Authorized 50,000,000 shares; issued and outstanding 37,938,688 shares 379,000 379,000 Additional paid-in capital 4,424,000 4,424,000 Retained earnings 161,421,000 121,346,000 Translation adjustment (352,000) (182,000) ------------------------------- Total stockholders' equity 165,872,000 125,967,000 ------------------------------- Total liabilities and stockholders' equity $ 205,137,000 151,545,000 -------------------------------
The accompanying notes are an integral part of the financial statements. 10 ----------------------------------------------------------------------------- 1997 Annual Report Consolidated Statements of Earnings Years ended December 31, 1997, 1996 and 1995 - --------------------------------------------------------------------------------
1997 1996 1995 Net sales $ 397,992,000 287,691,000 222,555,000 Cost of sales 189,063,000 134,811,000 103,611,000 -------------- ----------- ----------- Gross profit 208,929,000 152,880,000 118,944,000 Operating and administrative expenses 141,725,000 99,473,000 73,448,000 -------------- ----------- ----------- Operating income 67,204,000 53,407,000 45,496,000 Other income (expense): Interest income 40,000 118,000 181,000 Interest expense (917,000) (82,000) (68,000) Gain on disposal of property and equipment 1,009,000 989,000 597,000 -------------- ----------- ----------- Total other income 132,000 1,025,000 710,000 -------------- ----------- ----------- Earnings before income taxes 67,336,000 54,432,000 46,206,000 Income tax expense 26,502,000 21,893,000 18,795,000 -------------- ----------- ----------- Net earnings $ 40,834,000 32,539,000 27,411,000 -------------- ----------- ----------- Basic and diluted earnings per share $ 1.08 .86 .72 -------------- ----------- ----------- Weighted average shares outstanding 37,938,688 37,938,688 37,938,688 -------------- ----------- -----------
The accompanying notes are an integral part of the financial statements. - ----------------------------------------------------------------------------- 11 1997 Annual Report Consolidated Statements of Stockholders' Equity Years ended December 31, 1997, 1996 and 1995 - --------------------------------------------------------------------------------
Unrealized holding gains Additional (losses) on Total Common stock paid-in Retained Translation marketable stockholders' Shares Amount capital earnings adjustment securities equity - ---------------------------------------------------------------------------------------------------------------------- Balances as of December 31, 1994 37,938,688 $ 379,000 4,424,000 62,914,000 (11,000) (57,000) 67,649,000 Dividends paid in cash - - - (759,000) - - (759,000) Net earnings for the year - - - 27,411,000 - - 27,411,000 Translation adjustment - - - - (41,000) - (41,000) Unrealized holding gains on marketable securities - - - - - 63,000 63,000 - ---------------------------------------------------------------------------------------------------------------------- Balances as of December 31, 1995 37,938,688 $ 379,000 4,424,000 89,566,000 (52,000) 6,000 94,323,000 Dividends paid in cash - - - (759,000) - - (759,000) Net earnings for the year - - - 32,539,000 - - 32,539,000 Translation adjustment - - - - (130,000) - (130,000) Unrealized holding losses on marketable securities - - - - - (6,000) (6,000) - ---------------------------------------------------------------------------------------------------------------------- Balances as of December 31, 1996 37,938,688 $ 379,000 4,424,000 121,346,000 (182,000) - 125,967,000 Dividends paid in cash - - - (759,000) - - (759,000) Net earnings for the year - - - 40,834,000 - - 40,834,000 Translation adjustment - - - - (170,000) - (170,000) - ---------------------------------------------------------------------------------------------------------------------- Balances as of December 31, 1997 37,938,688 $ 379,000 4,424,000 161,421,000 (352,000) - 165,872,000 - ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 12 ----------------------------------------------------------------------------- 1997 Annual Report Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 - --------------------------------------------------------------------------------
1997 1996 1995 Cash flows from operating activities: Net earnings $40,834,000 32,539,000 27,411,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 9,362,000 7,349,000 5,404,000 Gain on disposal of property and equipment (1,009,000) (989,000) (597,000) Deferred income taxes 737,000 268,000 (218,000) Amortization of goodwill and non-compete agreement 220,000 129,000 - Amortization of premium on marketable securities - 6,000 36,000 Changes in operating assets and liabilities: Trade accounts receivable (15,989,000) (9,687,000) (8,260,000) Inventories (22,889,000) (16,348,000) (9,267,000) Other current assets (1,506,000) (2,208,000) (415,000) Accounts payable 2,940,000 2,128,000 68,000 Accrued expenses 1,703,000 637,000 828,000 Income taxes payable 254,000 (1,346,000) (45,000) ----------- ----------- ----------- Net cash provided by operating activities 14,657,000 12,478,000 14,945,000 ----------- ----------- ----------- Cash flows from investing activities: Sales of marketable securities 250,000 257,000 4,269,000 Additions of property and equipment (28,658,000) (26,243,000) (16,664,000) Proceeds from sale of property and equipment 7,151,000 3,043,000 1,755,000 Translation adjustment (170,000) (130,000) (41,000) Increase in other assets (192,000) (3,425,000) (55,000) ----------- ----------- ----------- Net cash used in investing activities (21,619,000) (26,498,000) (10,736,000) ----------- ----------- ----------- Cash flows from financing activities: Net increase in line of credit 7,463,000 8,622,000 - Proceeds of note payable 218,000 - - Payment of dividends (759,000) (759,000) (759,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities 6,922,000 7,863,000 (759,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (40,000) (6,157,000) 3,450,000 Cash and cash equivalents at beginning of year 426,000 6,583,000 3,133,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 386,000 426,000 6,583,000 ----------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid during each year for: Income taxes $25,511,000 22,971,000 19,057,000 Interest $ 867,000 82,000 68,000 Supplemental disclosures on non-cash investing activities: Unrealized holding gains (losses) on marketable securities $ - (6,000) 63,000
The accompanying notes are an integral part of the financial statements. - ----------------------------------------------------------------------------- 13 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 1 Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Fastenal Company and its wholly-owned subsidiaries, Fastenal Company Services, Fastenal Company Purchasing, Fastenal Company Leasing, and Fastenal Canada Company (collectively referred to as the Company). All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes sales and the related cost of sales on the accrual basis of accounting at the time products are shipped to or picked up by customers. Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly-liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories, consisting of merchandise held for resale, are stated at the lower of cost (first in, first out method) or market. Marketable Securities Marketable securities as of December 31, 1997 and 1996 consist of debt securities. The Company classifies its debt securities as available-for-sale. Available-for-sale securities are recorded at fair value based on current market value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized, provided that a decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. (continued) 14 - ------------------------------------------------------------------------------ 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 1 Summary of Significant Accounting Policies continued Property and Equipment Property and equipment are stated at cost. Except as provided below, depreciation on buildings and equipment is provided for financial statement reporting purposes by the methods and over the lives mandated by Internal Revenue Service Regulations (IRS Regulations). These lives approximate the anticipated economic useful lives of the related property. Depreciation in 1997 and 1996 on transportation equipment is provided by the straight-line method over lives mandated by IRS Regulations which represents a change from 1995 when the accelerated method was used. The 1996 change reflected a change in the estimate of the salvage value of the transportation equipment. This change was made to lessen the effect of increasing gains from the planned disposal of transportation equipment. The impact of the change was immaterial in 1996 and 1997. Other Assets Other assets consists of prepaid security deposits, goodwill and a non-compete agreement. Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized on a straight-line basis over 15 years. The non-compete agreement is amortized on a straight-line basis over 15 years. Goodwill and other long-term asset balances are reviewed periodically to determine that the unamortized balances are recoverable. In evaluating the recoverability of these assets, the following factors, among others, are considered: a significant change in the factors used to determine the amortization period, an adverse change in legal factors or in the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the unamortized balance is believed to be unrecoverable, the Company recognizes an impairment charge necessary to reduce the unamortized balance to the amount of undiscounted cash flows expected to be generated over the remaining life. If the acquired entity has been integrated into other operations and cash flows cannot be separately measured, the Company recognizes an impairment charge necessary to reduce the unamorttized balance to its estimated fair value. The amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Long-Lived Assets The Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of, in 1996. Adoption of this statement did not have a material impact on the Company's financial position or results of operations. (continued) - ----------------------------------------------------------------------------- 15 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 1 Summary of Significant Accounting Policies continued Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Stock-Based Compensation The Company does not have any stock options or any other types of stock-based compensation. Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding. Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, establishes a new standard for computing and presenting earnings per share information. The Company, as required, adopted SFAS No. 128 in the interim and annual period ended December 31, 1997. Due to the fact that the Company has a simple capital structure, there has been no impact to the financial statements due to the adoption of this standard. 2 Marketable Securities The amortized cost, unrealized holding gains (losses), and fair value of available-for-sale debt securities as of December 31 were as follows: Amortized Unrealized holding Fair cost gains (losses) value ---------------------------------------------------------- 1997 $265,000 - 265,000 1996 $515,000 - 515,000 16 ----------------------------------------------------------------------------- 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 3 Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of all financial instruments to which the Company is a party. All financial instruments are carried at amounts that approximate estimated fair value. 4 Property and Equipment Property and equipment as of December 31 consists of the following: Depreciable life in years 1997 1996 - --------------------------------------------------------------------------- Land - $ 2,266,000 1,934,000 Buildings and improvements 31 to 39 16,513,000 17,370,000 Equipment and shelving 3 to 10 33,726,000 25,765,000 Transportation equipment 3 to 5 28,475,000 17,464,000 Construction in progress - 4,317,000 2,078,000 -------------------------- 85,297,000 64,611,000 Less accumulated depreciation 28,213,000 20,681,000 -------------------------- Net property and equipment $57,084,000 43,930,000 -------------------------- 5 Accrued Expenses Accrued expenses as of December 31 consist of the following: 1997 1996 -------------------------------------------------------------- Payroll and related taxes $ 4,232,000 2,766,000 Bonuses 852,000 1,108,000 Commissions 1,189,000 867,000 Sales and real estate taxes 734,000 570,000 Other 307,000 300,000 ----------------------------- $ 7,314,000 5,611,000 ----------------------------- 6 Stockholders' Equity Stock Splits Dollar, share and per share amounts herein and in the accompanying consolidated financial statements have been adjusted retroactively, where appropriate, to reflect the 2-for-1 Common Stock split effected in the form of a 100% stock dividend in 1995. Dividends On January 20, 1998, the Company's board of directors declared a dividend of $.02 per share of Common Stock to be paid in cash on March 13, 1998 to shareholders of record at the close of business on February 27, 1998. - ----------------------------------------------------------------------------- 17 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 7 Income Taxes Components of income tax expense are as follows: 1997: Current Deferred Total --------------------------------------------------------- Federal $ 21,385,000 599,000 21,984,000 State 4,380,000 138,000 4,518,000 -------------------------------------------- $ 25,765,000 737,000 26,502,000 -------------------------------------------- 1996: Current Deferred Total --------------------------------------------------------- Federal $ 17,324,000 216,000 17,540,000 State 4,301,000 52,000 4,353,000 -------------------------------------------- $ 21,625,000 268,000 21,893,000 -------------------------------------------- 1995: Current Deferred Total --------------------------------------------------------- Federal $ 15,192,000 (175,000) 15,017,000 State 3,821,000 (43,000) 3,778,000 -------------------------------------------- $ 19,013,000 (218,000) 18,795,000 -------------------------------------------- Income tax expense in the accompanying consolidated financial statements differs from the "expected" tax expense as follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------- Federal income tax expense at the "expected" rate of 35% $ 23,568,000 19,051,000 16,172,000 Increase (reduction) attributed to: State income taxes, net of federal benefit 2,937,000 2,829,000 2,371,000 Tax exempt interest (16,000) (16,000) (46,000) Other, net 13,000 29,000 298,000 -------------------------------------------------- Total income tax expense $ 26,502,000 21,893,000 18,795,000 --------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31 are as follows:
1997 1996 - ------------------------------------------------------------------------- Deferred taxes: Inventory costing and valuation methods $ 1,343,000 1,007,000 Allowance for doubtful accounts receivable 254,000 218,000 Health claims payable 21,000 21,000 Fixed assets (1,649,000) (540,000) Other, net (27,000) (27,000) --------------------------- Net deferred tax asset (liability) $ (58,000) 679,000 ---------------------------
No valuation allowance for deferred tax assets was necessary as of December 31, 1997 and 1996. The character of the federal tax assets is such that they can be realized through carry-back to prior tax periods or offset against future taxable income. 18 ----------------------------------------------------------------------------- 1997 Annual Report Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 8 Operating Leases The Company leases space under non-cancelable operating leases for its California, North Carolina, Utah and Washington distribution centers, its Tennessee packaging center, and certain store sites with initial terms of one to 48 months. Minimum annual rentals, exclusive of taxes, insurance, etc., for the leased facilities, are as follows: Year ending Distribution centers, December 31 packaging center and store sites -------------------------------------------------- 1998 $ 8,295,391 1999 6,436,067 2000 2,529,672 2001 and thereafter 615,602 Rent expense under all operating leases was as follows: Year ended Distribution centers, December 31 packaging center and store sites -------------------------------------------------- 1997 $ 9,460,000 1996 5,865,000 1995 4,003,000 9 Lines of Credit and Commitments The Company has a line of credit arrangement with a bank which expires June 30, 1998. The line allows for borrowings of up to $20,000,000 at .9% over the LIBOR rate. On December 31, 1997 there was $11,085,000 outstanding on the line and the interest rate was 6.8%. The Company also had $5,000,000 advanced under an uncommitted line of credit as of December 31, 1997. The interest rate on such date was 6.25%. This instrument will be repriced on March 3, 1998 at 0.5% over the LIBOR rate. The Company has a note payable related to a 1997 purchase of property. The note is due, with interest, on April 1, 1998. On December 31, 1997 there was $218,000 outstanding on the note and the interest rate was 5.6%. The Company currently has letters of credit issued on its behalf to suppliers for large overseas purchases. As of December 31, 1997 and 1996, the total undrawn balance of outstanding letters of credit was $209,000 and $101,000, respectively. At December 31, 1997, the Company had two outstanding commitments for capital expenditures. These commitments consisted of a $1.7 million expansion of the Winona, Minnesota warehouse and a $1.3 million purchase of property for a future distribution center. - ----------------------------------------------------------------------------- 19 Annual Report Independent Auditors' Report The Board of Directors and Stockholders Fastenal Company: We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota January 23, 1998 20 ----------------------------------------------------------------------------- 1997 Annual Report Officers Robert A. Kierlin Chairman of the Board, Chief Executive Officer and President Willard D. Oberton Chief Operating Officer and Vice-President Stephen M. Slaggie Secretary Daniel L. Florness Chief Financial Officer and Treasurer Directors Michael M. Gostomski President and Chief Executive Officer Winona Heating & Ventilating Co. (sheet metal and roofing contractor) Robert A. Kierlin Henry K. McConnon President Wise Eyes, Inc. (eyeglass retailer and wholesaler) John D. Remick President, Rochester Athletic Club, Inc. (health club) Stephen M. Slaggie Corporate Information Annual Meeting The annual meeting of shareholders will be held at 10:00 a.m., Tuesday, April 21, 1998, at Corporate Headquarters, 2001 Theurer Boulevard, Winona, Minnesota Corporate Headquarters Fastenal Company 2001 Theurer Boulevard Winona, Minnesota 55987-1500 Phone: (507) 454-5374 Fax: (507) 453-8049 Transfer Agent Norwest Bank Minnesota, N.A. Minneapolis, Minnesota FORM 10-K A COPY OF THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY AT THE ADDRESS LISTED ON THIS PAGE FOR THE COMPANY'S CORPORATE HEADQUARTERS. Copies of our latest press release and unaudited supplemental Company information are available at the Fastenal Company world wide web site at www.fastenal.com Legal Counsel Faegre & Benson LLP Minneapolis, Minnesota Streater & Murphy, PA Winona, Minnesota Auditors KPMG Peat Marwick LLP Minneapolis, Minnesota First in Industrial Supplies [8 PHOTOS OF COMPANY PRODUCTS] Welding Electrical Janitorial Material Hydraulics Cutting Tools Fasteners Handling Our Approach At Fastenal Company, we operate in an uncomplicated, straightforward way that makes it easy for our customers to gain confidence and satisfaction based on our performance. This concept, present when we opened our first Fastenal store in 1967, will remain unchanged. Corporate Headquarters: 2001 Theurer Boulevard. Winona, MN 55987 Phone: 507-454-5374. Fax: 507-453-8049 For more information, e-mail us at: fastinfo@fastenal.com EX-21 4 LIST OF SUBSIDIARIES Exhibit 21 Subsidiaries of Fastenal Company. State of Subsidiary name Doing business as incorporation - --------------- ----------------- ------------- Fastenal Canada Company Same Minnesota Fastenal Company Services Same Minnesota Fastenal Company Purchasing Same Minnesota Fastenal Company Leasing Same Minnesota EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and Consolidated Statement of Earnings of Fastenal Company and Subsidiaries as of, and for the year ended, December 31, 1997 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 386,000 0 58,202,000 660,000 79,415,000 144,171,000 85,297,000 28,213,000 205,137,000 37,616,000 0 0 0 379,000 165,493,000 205,137,000 397,992,000 397,992,000 189,063,000 189,063,000 0 1,614,000 917,000 67,336,000 26,502,000 40,834,000 0 0 0 40,834,000 1.08 1.08 Marketable securities in the amount of 265,000 have been classified as non-current assets on the Consolidated Balance Sheet of Fastenal Company and Subsidiaries as of December 31, 1997.
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