-----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, RfBVeFhg1zQ2juwVrO0JQvRVYIC1nS4OweoGjqbiYnDDZKddvlcOJ83XSEGg1qH+ oL7RCuU8AqLNEpsHrbLE1w== 0001045969-99-000167.txt : 19990316 0001045969-99-000167.hdr.sgml : 19990316 ACCESSION NUMBER: 0001045969-99-000167 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990315 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: 99565024 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, 1998, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________ to ______________________ Commission file number 0-16125 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. [ X ] The aggregate market value of the Common Stock held by non-affiliates of the registrant as of March 1, 1999 was $1,098,083,534. For purposes of determining this number, all executive officers and directors of the registrant as of March 1, 1999 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 1, 1999, 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, 1998 are incorporated by reference in Part II. Portions of the registrant's Proxy Statement for the annual meeting of shareholders to be held April 20, 1999 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 new store and distribution center openings, markets for new stores, introduction of existing and new product lines, foreign operations, technology conversions and Year 2000 readiness, growth in manufacturing operations, leasing of new stores 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, 1998 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, Fastenal Canada Company, and Fastenal Mexico, S. de R.L. de C.V., collectively, "the Company") began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968. As of December 31, 1998, the Company had 766 store sites located in 48 states, Puerto Rico, and Canada and 3,025 people employed at these sites. Forty-nine of these sites were satellite stores of an existing site. The Company sells industrial supplies. These industrial supplies are grouped into eight product lines described further below. The Company operated eleven distribution centers as of December 31, 1998 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. 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 number of Company store sites during each of the last ten years and the related consolidated net sales for each year during that period:
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------------------------------- Number of store sites at year end 766 644 484 375 315 253 200 158 126 98 Net sales (in thousands) $ 503,100 397,992 287,691 222,555 161,886 110,307 81,263 62,305 52,290 41,190
As of December 31, 1998, the Company operated 766 store sites located in:
Alabama 15 Iowa 17 Nebraska 6 Rhode Island 3 Arizona 4 Kansas 13 Nevada 4 South Carolina 11 Arkansas 13 Kentucky 12 New Hampshire 7 South Dakota 6 California 26 Louisiana 12 New Jersey 7 Tennessee 18 Colorado 8 Maine 6 New Mexico 5 Texas 55 Connecticut 9 Maryland 9 New York 19 Utah 8 Delaware 3 Massachusetts 10 North Carolina 23 Vermont 3 Florida 19 Michigan 34 North Dakota 7 Virginia 19 Georgia 23 Minnesota 22 Ohio 41 Washington 18 Idaho 7 Mississippi 9 Oklahoma 13 West Virginia 10 Illinois 34 Missouri 13 Oregon 14 Wisconsin 36 Indiana 29 Montana 7 Pennsylvania 30 Wyoming 3 Puerto Rico 4 Canada 42
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 intends to continue opening new store sites; however, due to the slowdown in the market and general economic conditions experienced by certain of the Company's customers, the Company has decided to decrease the rate of store openings from the rate experienced over the last several years. The Company stocks all new stores with an inventory drawn from all of its product lines. Subsequent to a site's opening, the site personnel customize the inventory offering to that site's customer base. The Company has two types of stores: (1) the stand-alone store and (2) the satellite store. The stand-alone store is typically located in cities with a population in excess of 8,000. The Company believes that approximately 1,000 markets in the United States and Canada (including those in which existing stand-alone stores are already located) have sufficient potential to justify this type store. Most of the future potential markets for stand-alone stores are located in smaller communities. The second type, the satellite store, operates as a satellite of a stand-alone store. The satellite store is usually located within 30 miles of the stand-alone (mother) store and is typically managed by personnel at the mother store. The Company has satellite stores located in communities with a population as small as 2,000. 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. Of the 122 stores opened during 1998, 16 opened as satellite stores. 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. Some of these satellite stores are expected to eventually become stand-alone stores. The Company opened seven store sites in Canada in 1996, 20 in 1997, and nine in 1998, and plans to open additional store sites in Canada in the future. The Company opened one store site in Puerto Rico in 1997 and three in 1998, and plans to open additional store sites in Puerto Rico in the future. The stores in Canada and Puerto Rico contributed less than 5% of the Company's consolidated net sales in 1998. In 1998 the Company sold products into Mexico from its existing stores along the border between the United States and Mexico. The Company also established a Mexican subsidiary in 1998. This subsidiary is expected to employ sales personnel to sell directly into Mexico in the future. 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 46 stores opened in the first quarter of 1998, 16 were profitable in the fourth quarter of 1998. 5 For 1998, annual sales volumes of store sites operating at least five years ranged between approximately $300,000 and $4,400,000, with 75% of these store sites having annual sales volumes within the range of approximately $600,000 to $1,900,000. The data in the following table shows the growth in the average sales of the Company's store sites from 1997 to 1998 based on each site's age. The store sites opened in 1998 contributed approximately $17.6 million (or approximately 3.5%) of the Company's consolidated net sales in 1998, with the remainder coming from store sites opened prior to 1998. Number of store Age of store site as sites in group as of Average Average Percent of December 31, 1998 December 31, 1998 sales 1997 sales 1998 change - ------------------------------------------------------------------------------- 0-1 year old 122 $ -- $ 144,000(1) --% 1-2 years old 160 113,000(1) 348,000 -- 2-3 years old 109 361,000 500,000 38.5 3-4 years old 60 472,000 566,000 19.9 4-5 years old 62 534,000 596,000 11.6 5-6 years old 53 663,000 755,000 13.9 6-7 years old 42 843,000 887,000 5.2 7-8 years old 32 951,000 1,036,000 8.9 8-9 years old 28 1,119,000 1,218,000 8.9 9-10 years old 23 1,111,000 1,278,000 15.0 10-13 years old 40 1,353,000 1,529,000 13.0 13+ years old 35 1,918,000 1,981,000 3.3 (1) Average sales include sales of store sites open for less than the full fiscal year. As of December 31, 1998, the Company operated distribution centers in or near Winona, Minnesota; Indianapolis, Indiana; Dallas, Texas; Atlanta, Georgia; Scranton, Pennsylvania; Fresno, California; Lakewood, Washington; Akron, Ohio; Salt Lake City, Utah; Winston-Salem, North Carolina; and Kansas City, Missouri. Distribution centers are located so as to permit twice-a-week to five times-a-week deliveries 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 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 central 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. The Company plans to convert a portion of this central processing system in 1999 to a new computer software and operating system. At the store level, the Company currently has two point-of-sale systems. The first is a UNIX/terminal based computer system (legacy point-of-sale system) and the second is a Microsoft Windows NT system (NT Point-of-sale system). The development of the NT Point-of-sale system began in 1996. During 1997 and 1998 the Company tested its NT Point-of-sale system in a limited number of store locations. At the end of 1998, approximately 120 stores were using the NT Point-of-sale system. The Company plans to convert all but approximately 100 stores from the legacy point-of-sale system to the NT Point-of-sale system during 1999. 6 Trademarks The Company conducts its business in the United States and Canada under various trademarks and service marks, including Fastenal(R), FastTool(R), SharpCut(R), PowerFlow(TM), EquipRite(R), CleanChoice(R), PowerPhase(TM) and FastArc(TM). Although the Company does not believe its operations are substantially dependent upon any of its trademarks or service marks, the Company considers its "Fastenal" name and other trademarks and service marks to be valuable to its business. Products The Company's original product offering in 1967 was the Fastenal(R) product line. Today, this product line consists of approximately 59,000 different stock items. This product line 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 55%, 61%, and 64% of the Company's consolidated net sales in 1998, 1997 and 1996, 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. During the 1990's, the Company added seven additional product lines. These product lines are sold through the same distribution channel as the original Fastenal(R) product line and include the following: Approximate Year number of Product line introduced stock items Product line consists of: - ---------------- ---------- ------------- ------------------------------------- FastTool(R) 1993 30,000 Tools and safety supplies SharpCut(R) 1996 16,000 Metal cutting tool blades PowerFlow(TM) 1996 14,000 Fluid transfer components and accessories for hydraulic and pneumatic power EquipRite(R) 1996 6,000 Material handling and storage products CleanChoice(R) 1996 4,000 Janitorial and paper products PowerPhase(TM) 1997 4,000 Electrical supplies FastArc(TM) 1997 3,000 Welding supplies (excluding gas and welding machines) The Company plans to add other industrial product lines in the future. 7 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 stock item for the previous three years. Computers then convert this data to typical store maximum-minimum inventory levels for each stock 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 1998 approximately 95.9% of the Company's consolidated net sales were attributable to products manufactured by other companies to industry standards. The remaining amount of approximately 4.1% of the Company's consolidated net sales for 1998 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 136,000 standard stock items it distributes. Most items distributed by the Company can be purchased from several sources, although preferred sourcing is used for some stock items to facilitate quality control. No single supplier accounted for more than 5.0% of the Company's purchases in 1998. 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, 1998, the Company's total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 99,000. During each of the three years ended December 31, 1998, 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 is 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. In January 1999, the Company began rolling out its new 1500+ page catalog. This catalog includes standard product from all of the Company's product lines. It is the second comprehensive catalog published by the Company, the first being an 824 page catalog which was initially rolled out in late 1997. 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, 1998, the Company employed a total of 4,549 full- and part-time employees, 3,025 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. 9 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. 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. These facilities are as follows: Approximate Purpose Square Feet - -------------------------------------------------------------------- ----------- Distribution center and home office 213,000 Manufacturing facility 50,000 Winona store and regional training center 13,000 Rack and shelving storage 42,000 Multi-building complex which houses several support services including, among others, the SharpCut(R) regrind department, the FastTool(R) tool repair department and the fabrication department 30,000 The Company also owns the following facilities, excluding store locations, outside of Winona, Minnesota: Approximate Purpose Location Square Feet - ----------------------------- ---------------------------------- --------------- Distribution center Indianapolis, Indiana 76,000 Distribution center Atlanta, Georgia 54,000 Distribution center Dallas, Texas 50,000 (1) Distribution center Scranton, Pennsylvania 50,000 (2) Distribution center Akron, Ohio 102,000 (1) The Dallas, Texas facility is currently being expanded to approximately 95,000 square feet. (2) The Scranton, Pennsylvania facility is currently being expanded to approximately 80,000 square feet. 10 In addition, 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 owned by the Company. As of December 1998, the Company was in the process of purchasing store locations in Appleton, Wisconsin; Muskegon, Michigan; and Rochester, Minnesota. 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 also leases the following distribution centers and packaging facility:
Approximate Lease Lease Renewal Options Purpose Location Square Feet Expiration Date - --------------------- ------------------------------ ----------- ----------------- ----------------------- Distribution center Lakewood, Washington 40,000 February 2000 Two one-year periods(1) Distribution center Fresno, California(2) 52,500 February 2002 Three one-year periods(1) Distribution center Salt Lake City, Utah 12,100 March 2000 None Distribution center Winston-Salem, North Carolina 58,400 October 2000 Two one-year periods(1) Packaging facility Memphis, Tennessee 115,000 December 2000 One two-year period(1) Distribution center Kansas City, Missouri 40,000 April 2001 One two-year period(1)
(1) The lease renewals can be exercised at the Company's option. (2) The Company moved to a new facility in February 1999. As of December 31, 1998 the warehouse space was approximately 21,500 square feet. If economic conditions are suitable, the Company will, in the future, consider purchasing store sites to house its older stores. It is anticipated that 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. 11 ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Fastenal Company are: Name Age Position - ----------------------------------------------------------------------------- Robert A. Kierlin 59 Chairman of the Board, President, Chief Executive Officer and Director Willard D. Oberton 40 Vice President and Chief Operating Officer Stephen M. Slaggie 59 Secretary and Director Daniel L. Florness 35 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 senior manager from July 1992 through May 1996 with that firm. The executive officers are elected by the Board of Directors, generally for a term of one year, and serve until their successors are elected and qualified. None of the above executive officers is related to any other such executive officer or to any other director of Fastenal Company. 12 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, 1998, 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, 1998, Six-Year Selected Financial Data on page 4. 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, 1998, Management's Discussion & Analysis of Financial Condition & Results of Operations on pages 4-9. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Incorporated herein by reference is Fastenal Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998, Market Risk Management on page 8. 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, 1998, 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. 13 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", page 4, and "Section 16(a) Beneficial Ownership Reporting Requirements", page 11, in Fastenal Company's Proxy Statement dated March 16, 1999. 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 16, 1999. 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 2-3, in Fastenal Company's Proxy Statement dated March 16, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 14 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, 1998 and 1997 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 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, 1998) 2. Financial Statement Schedules: Schedule II--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) 10.1 Description of bonus arrangement for Vice President (incorporated by reference to Exhibit 10 to Fastenal Company's Form 10-K for the year ended December 31, 1997) 10.2 Description of bonus arrangement for Treasurer 13 Annual Report to Shareholders for the fiscal year ended December 31, 1998 (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 Fastenal Company filed no report on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1998. 15 Independent Auditors' Report on Schedule The Board of Directors and Stockholders Fastenal Company: Under date of January 22, 1999, we reported on the consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the 1998 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 1998. 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 consolidated 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 22, 1999 16 FASTENAL COMPANY Schedule II--Valuation and Qualifying Accounts Years ended December 31, 1998, 1997, and 1996
"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, 1998 allowance for doubtful accounts $660,000 $3,493,000 $0 $3,413,000 $740,000 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
17 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 15, 1999 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 15, 1999 By /s/ Robert A. Kierlin --------------------------------- Robert A. Kierlin, President (Principal Executive Officer) and Director Date: March 15, 1999 By /s/ Daniel L. Florness --------------------------------- Daniel L. Florness, Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: March 15, 1999 By /s/ Stephen M. Slaggie --------------------------------- Stephen M. Slaggie, Director Date: March 15, 1999 By /s/ Michael M. Gostomski --------------------------------- Michael M. Gostomski, Director Date: March 15, 1999 By /s/ Henry K. McConnon --------------------------------- Henry K. McConnon, Director Date: March 15, 1999 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). 10.1 Description of bonus arrangement for Vice President (incorporated by reference to Exhibit 10 to Fastenal Company's Form 10-K for the year ended December 31, 1997) 10.2 Description of bonus arrangement for Treasurer .........................................Electronically Filed 13 Annual Report to Shareholders for the fiscal year ended December 31, 1998 (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 2 TREASURER'S BONUS ARRANGEMENT Exhibit 10.2 Treasurer's Bonus Arrangement Fastenal Company's Treasurer is paid a bonus under an individual oral bonus arrangement. Under this arrangement, the Treasurer's bonus for any year is calculated based on the amount by which the Company's consolidated net income for such year exceeds a percentage of such year's net sales. EX-13 3 ANNUAL REPORT TO SHAREHOLDERS [Fastenal Company Logo] 1998 Annual Report [Photo of Bins, Ladder [Photo of Man & Material Handling] with Hammer Drill] material handling [Photo of Fasteners] tools fasteners [Photo of Cutting Tools [Photo of Fuse Box, [Photo of and Endmills] Wire, and Electrical Regulators and cutting tools Supplies] Hose] electrical supplies [Photo of Bottles and hydraulics Man using Dispenser] and pneumatics janitorial supplies [Photo of Man Welding] welding supplies Profile of Fastenal Company----------------------------------------------------- - -------------------------------------------------------------------------------- Fastenal Company was founded in 1967. As of December 31, 1998, the Company operated 766 store sites located in 48 states, Puerto Rico and Canada and employed 3,025 people at these sites. In addition, there were 1,524 people employed in various support positions. The Company sells industrial and construction supplies in eight product lines. The traditional Fastenal(R) product line consists of approximately 59,000 different types of threaded fasteners and other industrial and construction supplies; the FastTool(R) product line consists of approximately 30,000 different types of tools and safety supplies; the SharpCut(R) product line consists of approximately 16,000 different types of metal cutting tool blades; the PowerFlow(TM) product line consists of approximately 14,000 different types of fluid transfer components and accessories for hydraulic and pneumatic power; the EquipRite(R) product line consists of approximately 6,000 different types of material handling and storage products; the CleanChoice(R) product line consists of approximately 4,000 different types of janitorial and paper products; the PowerPhase(TM) product line consists of approximately 4,000 different types of electrical supplies; and the FastArc(TM) product line consists of approximately 3,000 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, 1998, the Company also operated eleven distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina and Missouri, and a packaging facility in Tennessee. Approximately 95.9% of the Company's 1998 sales were attributable to products manufactured by others, and approximately 4.1% related to items manufactured or modified by the Company's Manufacturing Division or repaired by the Company's tool repair service. Since December 31, 1998, the Company has opened additional store sites. - -------------------------------------------------------------------------------- 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 market slowness, new store and distribution center openings, foreign operations, technology conversions and Year 2000 readiness, employee hiring, new product introduction, 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 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. - -------------------------------------------------------------------------------- [Product Logos] 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 2-3 President's Letter to Shareholders Page 4 Six-Year Selected Financial Data Page 4-9 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 and Comprehensive Income Page 13 Consolidated Statements of Cash Flows Page 14-19 Notes to Consolidated Financial Statements Page 20 Independent Auditors' Report Inside Back Cover Officers and Directors/Corporate Information [4 Photos of Fastenal Company Facilities] 1 1998 Annual Report President's Letter to Shareholders - -------------------------------------------------------------------------------- After 30 years of existence, Fastenal experienced some new circumstances in 1998. As the year started, we saw a slowing of business from our customers who export their products to the Far East. Then we started seeing deflation in the standard fastener market as the producers in the Far East lowered their prices to keep their plants busy. By the end of 1998 we also saw diminished sales to agricultural equipment manufacturers as low farm commodity prices curtailed the purchasing of new equipment. The result of these effects was progressively lower revenue growth rates compared to the previous year as the year went by. For the year, our net sales of $503,100,000 represent a 26.4% increase over the $397,992,000 of net sales in 1997. During 1998, the fastener product category made up 71.5% of net sales compared to 76.9% in 1997. Our seven other product categories continue to account for a larger percentage of total sales, as one would expect as we develop these new lines. As an indicator of the trend, the final quarter of 1998 showed the seven new product lines making up 30.1% of net sales. [PHOTO OF COMPANY PRESIDENT WITH FASTENAL COMPANY PRODUCTS] Our 1998 net earnings of $52,953,000 showed an increase of 29.7% over the 1997 net earnings of $40,834,000. Our net earnings grew at a faster rate than net sales in 1998 because of effective expense controls. About midway through 1998 we decided to slow down our new store openings until we see improvement in the manufacturing economy. Our stores generally operate at a loss in their first year. The elimination of some of these losses permitted us to achieve the 29.7% growth in earnings. We believe that the 1999 economy will show a continuation of slowness in our markets. Accordingly, our 1999 plans will be to continue to curtail store openings until we see improvement in our markets. We will, however, attempt to hire 25% more people for our branch stores. The new people will be placed in existing stores with the intention of continuing to grow sales in our seven new product lines. During economic downturns we believe it more efficacious to grow by selling additional products to current customers rather than by finding new customers for our fastener line. If we see improvement in our markets, however, we will be ready to open additional stores immediately. Our electronic commerce capability improved in 1998. Our electronic catalog became available on our Web Page. In 1999 we will implement the ability to place orders directly from our Web Page. We feel this will help our sales effort in two ways. First, it will allow all of our customers to electronically order from a store, as opposed to the relatively small cross section of customers that send orders to us electronically today. Most orders today are received using phone and facsimile technology; receiving orders electronically reduces the administrative workload at the store and allows them to focus more on sales and service, and less on typing in orders on their store point-of-sale system. Second, it will allow us to pull inventory directly from our distribution centers to fill some of the orders. Much of this is done today; however, we will be able to process the 2 1998 Annual Report President's Letter to Shareholders - -------------------------------------------------------------------------------- information quicker in this environment. In addition to the improvements in the electronic catalog, in 1998 we established an International Department to handle inquiries coming from outside of North America via our Web Page. We also entered into an alliance with Datastream Systems, Inc. to make our catalog content and product delivery services available to users of that company's maintenance management software. During 1998 we made significant strides in our marketing materials programs. At the start of the year we were distributing our first all-inclusive 824 page catalog. At the end of the year we had finished printing our second version, containing 1520 pages. In 1998 we also distributed our first target-market catalog of machine shop supplies, and we produced bulk mailings of featured items each quarter. In the data processing area we continued to roll out our new point-of-sale system during 1998. We finished 1998 with 123 stores on the new system. We expect to upgrade all but about 100 of our stores during 1999. In May of 1998 we began a project with PeopleSoft Company for a new operating system affecting our inventory, purchasing, manufacturing, accounting and quality control departments. Installation is expected in the third quarter of 1999. The new system will give us and our customers better information about our inventory and will help us plan more efficient use of our assets. Our goal is to grow through customer service. In 1998 we greatly expanded our service of repairing power tools. In January of 1998 we had three tool repair centers open. In January, 1999, we have 11 tool repair centers open. The net sales from tool repairs were approximately $2.7 million in 1998, more than double our 1997 tool repair sales. During 1998 we also expanded our capability to crimp hydraulic hoses and to make custom-length air hoses. In 1999 we expect to begin making welded-to-length band saw blades in three of our distribution centers. To improve our distribution system we added a new distribution center in Kansas City, Missouri in March, 1998. We also increased the size of our Indianapolis, Indiana, distribution center to 76,000 square feet. We began a 30,000 square foot addition to our Scranton, Pennsylvania, distribution center and a 50,000 square foot addition to our Dallas, Texas, distribution center, both of which will be completed in 1999. We are not planning any new distribution centers for 1999 under the current projections for our markets. At the end of 1998 we were 4,549 people strong. We are confident that we are well-positioned for whatever 1999 brings. Our attention will continue to be on growth through customer service. Thank you for believing in Fastenal. /s/ Robert A. Kierlin President and Chief Executive Officer January 22, 1999 [PHOTO OF FASTENAL COMPANY CATALOG] "growth through customer service" 3 1998 Annual Report Six-Year Selected Financial Data - -------------------------------------------------------------------------------- Amounts in thousands except per share information
Operating Results Percent Years Ended Dec. 31 1998 Change 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Net sales $503,100 +26.4 $397,992 287,691 222,555 161,886 110,307 ............................................................................................................. Gross profit 264,280 +26.5 208,929 152,880 118,944 85,927 58,552 ............................................................................................................. Earnings before income taxes 86,123 +27.9 67,336 54,432 46,206 31,391 20,075 ............................................................................................................. Net earnings 52,953 +29.7 40,834 32,539 27,411 18,666 11,910 ............................................................................................................. Basic and diluted earnings per share 1.40 +29.6 1.08 .86 .72 .49 .31 ............................................................................................................. Dividends per share .02 .02 .02 .02 .02 .015 ............................................................................................................. Weighted average shares outstanding 37,939 37,939 37,939 37,939 37,939 37,939 ............................................................................................................. Financial Position December 31 ............................................................................................................. Net working capital $142,459 +33.7 $106,555 78,417 66,100 45,341 33,319 ............................................................................................................. Total assets 251,234 +22.5 205,137 151,545 109,320 81,795 57,463 ............................................................................................................. Total stockholders' equity 217,646 +31.2 165,872 125,967 94,323 67,649 49,809 .............................................................................................................
All information contained in this Annual Report reflects the 2-for-1 stock split effected in the form of a 100% stock dividend in 1995. Management's Discussion & Analysis of Financial Condition & Results of Operations - -------------------------------------------------------------------------------- Results of Operations Net sales for 1998 exceeded net sales for 1997 by 26.4%. This compares with a 38.3% net sales growth rate experienced from 1996 to 1997. The increase in net sales in 1998 came primarily from new site openings, unit sales growth in existing sites and growth in the newer product lines. This growth was tempered by a slight deflationary impact to pricing. The increase in net sales in 1997 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 1998 1997 - ----------------------------------------------------------- FastTool(R)..............1993 12.2%/1/ 12.2% SharpCut(R)..............1996 4.9% 4.2% PowerFlow(TM)............1996 3.5% 2.4% EquipRite(R).............1996 5.2%/1/ 2.6% CleanChoice(R)...........1996 1.5% 1.1% PowerPhase(TM)...........1997 * * FastArc(TM)..............1997 * *
* Less than 1% of net sales /1/ Certain FastTool(R) products were reclassified to the EquipRite(R) product line late in 1997. Proforma percentages are not available. Threaded fasteners accounted for approximately 55%, 61% and 64% of the Company's consolidated sales in 1998, 1997 and 1996, respectively. Sites opened in 1998 contributed approximately $17,572,000 (or 3.5%) to 1998 net sales. Sites opened in 1997 contributed approximately $55,607,000 (or 11.1%) to 1998 4 1998 Annual Report Management's Discussion & Analysis of Financial Condition & Results of Operations - -------------------------------------------------------------------------------- net sales and approximately $18,175,000 (or 4.6%) 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. Gross profit as a percent of net sales was 52.5% in 1998, 52.5% in 1997 and 53.1% in 1996. The decrease from 1996 to 1997 resulted primarily from the mix of products being sold. Operating and administrative expenses were 35.2% of net sales in 1998 after having been 35.6% of net sales in 1997 and 34.6% of net sales in 1996. The fluctuations in operating and administrative costs were primarily due to changes in payroll and related costs and changes in occupancy costs. In 1998, payroll and related costs increased at a rate which was less than the rate of increase in net sales. In 1997, payroll and related costs increased at a rate which was greater than the rate of increase in net sales. The increases in payroll and related costs were due to the following rates of increases in personnel. 1998 1997 - ---------------------------------------- Sales Personnel........13.0%.......34.5% Support Personnel.......8.9%.......29.1% The increases in personnel were due to an 18.9% and a 33.0% increase in the number of sites in 1998 and 1997 respectively. In both 1998 and 1997 the rate of increase in occupancy costs exceeded the rate of increase in net sales. Occupancy costs increased in both years due to the aforementioned increase in the number of sites and due to the relocation of existing stores to larger sites to accommodate their growth in activity and the introduction of new product lines. Distribution costs benefited from productivity gains in both 1998 and 1997. Interest expense in 1998 increased $136,000 or 14.8% over 1997. Interest expense in 1997 increased $835,000 or 1,018% over 1996. Both increases were due to the increase in the weighted average amount of outstanding Company borrowings. The gains on disposal of property and equipment in 1998 came primarily from the disposal of used vehicles. 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 came primarily from the disposal of used vehicles. Net earnings grew 29.7% from 1997 to 1998 and 25.5% from 1996 to 1997. The growth in net earnings in both years resulted primarily from increased net sales. In 1998 the net earnings growth rate was higher than that of net sales because of the earlier mentioned impact of payroll and related costs. In 1997 the net earnings growth rate was lower than that of net sales because of the earlier mentioned increases in operating and administrative expenses. The Asian economic turmoil impacted the Company in several ways during 1998. The Company experienced lower prices on low-carbon and stainless steel fasteners imported from the Far East when compared to a year ago. To the extent the Company was able to retain the cost advantage, gross margins improved. However, some of these lower costs also affected net sales because some of the lower costs were passed on to customers in the competitive marketplace. The Company also experienced lower net sales of products to customers who export to the Far East. In addition, the second, third and fourth quarters of 1998 showed a continuing deterioration of sales in the industrial marketplace as manufacturing activity slowed in the United States and Canada. Effects of Inflation Price deflation related to certain products negatively impacted 1998. Inflation had little effect on the Company's operations in 1997 and 1996. Liquidity and Capital Resources Working capital increased from $78,417,000 at December 31, 1996, to $106,555,000 at December 31, 1997 and to $142,459,000 at December 31, 1998. These increases came primarily from higher trade accounts receivable and inventory levels, and from decreases during 1998 in notes payable. Net cash provided by operating activities increased from $12,478,000 in 1996, to $14,657,000 in 1997 and to $43,316,000 in 1998. The 1997 increase came primarily from the growth in net earnings, depreciation, accrued expenses and income tax payable charges exceeding the growth in accounts receivable and inventories. The 1998 increase 5 1998 Annual Report Management's Discussion & Analysis of Financial Condition & Results of Operations - -------------------------------------------------------------------------------- came primarily from the growth in net earnings, depreciation, and accounts payable exceeding the growth in accounts receivable and inventories. Net cash used in investing activities decreased from $26,498,000 in 1996 to $21,619,000 in 1997, and increased to $28,609,000 in 1998. The 1997 decrease in net cash used in investing activities resulted primarily from an increase in the disposal of vehicles. The 1998 increase came primarily from the Minnesota distribution center expansion, the purchase of software, and from the addition of and expansion to several other distribution centers. Additions to computer equipment are expected to be the largest part of cash used by investing activities in 1999. The Company had no long-term debt at December 31, 1998, 1997, or 1996. See note 8 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 1998, 1997 and 1996. The Company expects to make approximately $22,700,000 in total capital expenditures in 1999, consisting of approximately $12,800,000 for manufacturing, warehouse and packaging equipment and facilities, and approximately $9,900,000 for data processing equipment. The capital expenditures for vehicles, which represented a substantial portion of the total amount in prior years, will not recur in 1999 as the vehicles added in 1999 will be leased under an operating lease. 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. In addition to opening new sites in the United States, the Company plans to continue opening additional sites in Canada and Puerto Rico and to continue selling its products in Mexico from some of its existing sites along the border between the United States and Mexico. 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 State of Readiness The Company's information system can be broken down into four distinct components: (1) point-of-sale (POS) system, (2) enterprise-wide information system, (3) warehouse management system, and (4) other systems/equipment. The state of readiness of each of these is as follows: Beginning early in 1996, the Company began a rewrite of its point-of-sale system (POS) which was, for the most part, completed in 1997. Testing began in 1997 and has continued into 1998. As of December 31, 1998 the Company had 123 stores currently testing the new POS software. By the end of 1999 the Company expects to have all but approximately 100 stores converted to the new POS software. The Company has been modifying its legacy POS system throughout 1998 and plans to have it Year 2000 ready in the first half of 1999. Beginning early in 1997, the Company began to investigate new enterprise-wide information systems to replace its legacy enterprise-wide information system. In the second quarter of 1998 the Company finalized its selection of a Year 2000 ready enterprise-wide software package and hired an independent consulting firm to assist in the design and implementation of the new software package. Although the Company has significant depth within its own information system personnel, the outside firm was hired to provide additional resources related to the design and implementation of the new system and, more specifically, to assist in the design, programming, and implementation of the key interfaces between the new enterprise system, the POS system and the warehouse management systems. The Company plans to implement this system in the third quarter of 1999 for its material planning, inventory management, and financial management. The general ledger system went on-line January 1, 1999. The Company's plan related to payroll processing, which is currently performed on an in-house developed system, is to implement this module of the new enterprise 6 1998 Annual Report Management's Discussion & Analysis of Financial Condition & Results of Operations------------------------------------- - -------------------------------------------------------------------------------- software in 2000. The Company has been modifying its current payroll system throughout 1998 and plans to have it Year 2000 ready in the first half of 1999. Beginning early in 1998, the Company began to investigate new warehouse management systems to replace its legacy warehouse management system. At the same time, the Company began identifying Year 2000 issues within its current warehouse management system. The warehouse management system has relatively little date sensitive information as most of the data is limited to warehouse locations, part numbers, quantities, and other warehouse related information. The Company does not plan to replace the warehouse management system by the year 2000. The Company has begun rewriting portions of the software and plans to have it Year 2000 ready in the first half of 1999. Beginning early in 1998, the Company began to investigate the Year 2000 readiness of other systems/equipment. These consist primarily of technology in the Company's buildings, the Company's distribution, manufacturing, and transportation equipment, and in the Company's other infrastructure. The Company's Year 2000 Project Team is currently conducting this investigation. The Company believes, due to the age of the equipment involved, that the remediation efforts will be limited and that they will be completed by the end of the second quarter of 1999. The Company's Year 2000 Project Team has also begun an ongoing process of evaluating suppliers regarding their plans to remediate Year 2000 issues. The Company has grouped its suppliers by the product they supply, as well as if they are a domestic or foreign supplier. The Company has chosen to mitigate its supplier risk by having multiple vendors available, when possible, for the various products supplied. No single supplier accounted for more than 5% of the Company's purchases in 1998. In addition to suppliers, the Company also relies upon governmental agencies, utility companies, telecommunication service companies, financial institutions and other service providers outside of the Company's control. There can be no assurance that such governmental agencies or other third parties will not suffer a Year 2000 business disruption that could have a material adverse effect on the Company's business, financial condition, or operating results. Costs to Address the Year 2000 Issue The total cost for hardware, software, and implementation related to the POS system is estimated at $8.0 million. The total cost for hardware, software, and implementation related to the enterprise-wide information system is estimated at $8.0 million. The Company has approximately $2.6 million yet to spend on its new POS system and approximately $5.1 million yet to spend on the new enterprise- wide information system. The Company does not separately track internal costs incurred for the Year 2000 issue. The internal costs primarily consist of payroll and related expenses. The costs included above represent the total estimated costs related to the new POS and enterprise-wide systems. The Company believes these costs are not, for the most part, directly related to Year 2000 issues; but rather, are new systems needed in the normal course due to the rapid growth the Company has experienced over the last several years. The Company does not have an estimate on Year 2000 remediation costs for its warehouse management system or its other systems/equipment, but the Company believes that such costs will not have a material adverse effect on the Company's business, financial condition or operating results. Management anticipates funding the costs to address the Year 2000 issue with cash generated from operations, from borrowing capacity and, to a lesser degree, from available cash, cash equivalents, and marketable securities. 7 1998 Annual Report Management's Discussion & Analysis of Financial Condition & Results of Operations------------------------------------- - -------------------------------------------------------------------------------- Risks Presented By the Year 2000 Issue There may be unanticipated delays in completing the Company's planned Year 2000 remediation and, as the process of inventorying the systems proceeds, the Company may identify additional systems that present a Year 2000 risk. In addition, if any third parties who provide goods or services essential to the Company's business activities fail to appropriately address their Year 2000 issues, such failure could have a material adverse effect on the Company's business, financial condition, or operating results. For example, a Year 2000 related disruption on the part of the financial institutions which process the Company's cash transactions could have a material adverse effect on the Company's business, financial condition or operating results. Contingency Plans The Company's Year 2000 Project Team's initiatives include the development of contingency plans in the event the Company has not completed all of its remediation plans in a timely manner. In addition, the Year 2000 Project Team is in the process of developing contingency plans in the event that any third parties who provide goods or services essential to the Company's business fail to appropriately address their Year 2000 issues. The Year 2000 Project Team expects to conclude the development of these contingency plans by the end of the second quarter of 1999. The Year 2000 Project Team consists of personnel from management, information systems/technology and legal areas. Market Risk Management The Company is exposed to certain market risks from changes in interest rates and foreign currency exchange rates. Changes in these factors cause fluctuations in the Company's earnings and cash flows. The Company evaluates and manages exposure to these market risks as follows: Interest Rates - The Company has a $25 million line of credit of which $55,000 was outstanding at December 31, 1998. The line bears interest at .9% over the LIBOR rate. In addition, the Company had $4 million advanced under an uncommitted line of credit at December 31, 1998. The interest rate on the uncommitted line is .5% over the LIBOR rate. Foreign Currency Exchange Rates - Foreign currency fluctuations can affect the Company's net investments and earnings denominated in foreign currencies. The Company's primary exchange rate exposure is with the Canadian dollar against the U.S. dollar. The Company's estimated net earnings exposure for foreign currency exchange rates was not material at December 31, 1998. 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, 1998, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made 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 8 1998 Annual Report Management's Discussion & Analysis of Financial Condition & Results of Operations - -------------------------------------------------------------------------------- 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 computers and other capital equipment. New Accounting Pronouncements During 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company will be required to adopt the new standard beginning with the first quarter of fiscal 2000; earlier application is permitted. The Company is currently in the process of evaluating the impact of this statement. Stock & 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 1998 and 1997.
1998: High Low First quarter........ $ 48-3/4.......34-1/4 Second quarter....... 56-7/8.......39-5/8 Third quarter........ 51-1/4.......24-1/16 Fourth quarter....... 46-7/16......20-1/2 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
As of February 11, 1999, there were approximately 2,672 record holders of the Company's Common Stock. A $.02 annual dividend per share was paid during both 1997 and 1998. On January 21, 1999, the Company announced a $.04 annual dividend per share to be paid on March 12, 1999 to shareholders of record at the close of business on February 26, 1999. The Company expects that it will continue to pay comparable cash dividends in the foreseeable future, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the board of directors. Selected Quarterly Financial Data (Unaudited)
1998: Net sales Gross profit Net earnings Earnings per share First quarter.............$ 116,707,000.... 61,595,000.... 12,386,000.......... .33 Second quarter............ 126,427,000.... 66,938,000.... 14,016,000.......... .37 Third quarter............. 131,349,000.... 69,515,000.... 14,033,000.......... .37 Fourth quarter............ 128,617,000.... 66,232,000.... 12,518,000.......... .33 - ------------------------------------------------------------------------------------------- $ 503,100,000 264,280,000 52,953,000 1.40 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
9 1998 Annual Report Consolidated Balance Sheets----------------------------------------------------- - --------------------------------------------------------------------------------
December 31, 1998 and 1997 1998 1997 Assets Current assets: Cash and cash equivalents $ 2,086,000 386,000 Trade accounts receivable, net of allowance for doubtful accounts of $740,000 and $660,000 respectively 68,498,000 57,542,000 Inventories 93,734,000 79,415,000 Deferred income tax asset 2,312,000 1,591,000 Other current assets 6,637,000 5,237,000 --------------------------- Total current assets 173,267,000 144,171,000 Marketable securities 265,000 265,000 Property and equipment, less accumulated depreciation 74,212,000 57,084,000 Other assets, net 3,490,000 3,617,000 --------------------------- Total assets $251,234,000 205,137,000 --------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 17,411,000 12,950,000 Notes payable 4,055,000 16,303,000 Accrued expenses 8,999,000 7,314,000 Income tax payable 343,000 1,049,000 --------------------------- Total current liabilities 30,808,000 37,616,000 --------------------------- Deferred income tax liability 2,780,000 1,649,000 --------------------------- Stockholders' equity: Preferred stock Common stock, 50,000,000 shares authorized - - 37,938,688 shares issued 379,000 379,000 Additional paid-in capital 4,424,000 4,424,000 Retained earnings 213,615,000 161,421,000 Accumulated other comprehensive loss (772,000) (352,000) --------------------------- Total stockholders' equity 217,646,000 165,872,000 --------------------------- Total liabilities and stockholders' equity $251,234,000 205,137,000 ---------------------------
The accompanying notes are an integral part of the financial statements. 10 1998 Annual Report Consolidated Statements of Earnings--------------------------------------------- - --------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 Net sales $503,100,000 397,992,000 287,691,000 Cost of sales 238,820,000 189,063,000 134,811,000 ---------------------------------------- Gross profit 264,280,000 208,929,000 152,880,000 Operating and administrative expenses 177,180,000 141,725,000 99,473,000 ---------------------------------------- Operating income 87,100,000 67,204,000 53,407,000 Other income (expense): Interest income 4,000 40,000 118,000 Interest expense (1,053,000) (917,000) (82,000) Gain on disposal of property and equipment 72,000 1,009,000 989,000 ---------------------------------------- Total other income (expense) (977,000) 132,000 1,025,000 ---------------------------------------- Earnings before income taxes 86,123,000 67,336,000 54,432,000 Income tax expense 33,170,000 26,502,000 21,893,000 ---------------------------------------- Net earnings $ 52,953,000 40,834,000 32,539,000 ---------------------------------------- Basic and diluted earnings per share $ 1.40 1.08 .86 ---------------------------------------- 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 1998 Annual Report Consolidated Statements of Stockholders' Equity & Comprehensive Income - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996
Accumulated Common stock Additional other Total ---------------------- paid-in Retained comprehensive stockholders' Shares Amount capital earnings income (loss) equity - ------------------------------------------------------------------------------------------------------------------------- Balances as of December 31, 1995 37,938,688 $379,000 4,424,000 89,566,000 (46,000) 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) ----------- Total comprehensive income 32,403,000 - ------------------------------------------------------------------------------------------------------------------------ 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) ----------- Total comprehensive income 40,664,000 - ------------------------------------------------------------------------------------------------------------------------ Balances as of December 31, 1997 37,938,688 $379,000 4,424,000 161,421,000 (352,000) 165,872,000 Dividends paid in cash -- -- -- (759,000) -- (759,000) Net earnings for the year -- -- -- 52,953,000 -- 52,953,000 Translation adjustment -- -- -- -- (420,000) (420,000) ----------- Total comprehensive income 52,533,000 - ------------------------------------------------------------------------------------------------------------------------ Balances as of December 31, 1998 37,938,688 $379,000 4,424,000 213,615,000 (772,000) 217,646,000 - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 12 1998 Annual Report Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 52,953,000 40,834,000 32,539,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 11,040,000 9,362,000 7,349,000 Gain on disposal of property and equipment (72,000) (1,009,000) (989,000) Deferred income taxes 410,000 737,000 268,000 Amortization of goodwill and non-compete agreement 220,000 220,000 129,000 Amortization of premium on marketable securities - - 6,000 Changes in operating assets and liabilities: Trade accounts receivable (10,956,000) (15,989,000) (9,687,000) Inventories (14,319,000) (22,889,000) (16,348,000) Other current assets (1,400,000) (1,506,000) (2,208,000) Accounts payable 4,461,000 2,940,000 2,128,000 Accrued expenses 1,685,000 1,703,000 637,000 Income taxes payable (706,000) 254,000 (1,346,000) ------------------------------------------- Net cash provided by operating activities 43,316,000 14,657,000 12,478,000 ------------------------------------------- Cash flows from investing activities: Sales of marketable securities - 250,000 257,000 Additions of property and equipment (37,232,000) (28,658,000) (26,243,000) Proceeds from sale of property and equipment 9,136,000 7,151,000 3,043,000 Translation adjustment (420,000) (170,000) (130,000) Increase in other assets (93,000) (192,000) (3,425,000) ------------------------------------------- Net cash used in investing activities (28,609,000) (21,619,000) (26,498,000) ------------------------------------------- Cash flows from financing activities: Net (decrease) increase in line of credit (12,030,000) 7,463,000 8,622,000 (Payment) proceeds of note payable (218,000) 218,000 - Payment of dividends (759,000) (759,000) (759,000) ------------------------------------------- Net cash provided by (used in) financing activities (13,007,000) 6,922,000 7,863,000 ------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,700,000 (40,000) (6,157,000) Cash and cash equivalents at beginning of year 386,000 426,000 6,583,000 ------------------------------------------- Cash and cash equivalents at end of year $ 2,086,000 386,000 426,000 ------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during each year for: Income taxes $ 34,100,000 25,511,000 22,971,000 Interest $ 1,073,000 867,000 82,000
The accompanying notes are an integral part of the financial statements. 13 1998 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 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, Fastenal Canada Company and Fastenal Mexico, S. de R.L. de C.V. (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. Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. 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, 1998 and 1997 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, but are included in comprehensive income, 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. The amortized cost approximated the fair value of available-for-sale debt securities as of December 31, 1998 and 1997. 14 1998 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 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 on transportation equipment is provided by the straight-line method over lives mandated by IRS Regulations. 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 unamortized 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's long-lived assets are accounted for under the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. 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. 1998 Annual Report 15 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 1 Summary of Significant Accounting Policies continued 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. Comprehensive Income During 1998 the Company implemented Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and displaying the components of comprehensive income. The financial statements have been restated to show the impact of this statement. The impact to the financial statements is limited primarily to the impact of foreign currency fluctuations. 2 Property and Equipment Property and equipment as of December 31 consists of the following:
Depreciable life in years 1998 1997 ------------------------------------------------------------------------------------- Land -- $ 2,524,000 2,266,000 Buildings and improvements 31 to 39 18,955,000 16,513,000 Equipment and shelving 3 to 10 46,721,000 33,726,000 Transportation equipment 3 to 5 33,569,000 28,475,000 Construction in progress -- 9,245,000 4,317,000 ---------------------------------- 111,014,000 85,297,000 Less accumulated depreciation (36,802,000) (28,213,000) ---------------------------------- Net property and equipment $ 74,212,000 57,084,000 ==================================
16 1998 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 3 Accrued Expenses Accrued expenses as of December 31 consist of the following:
1998 1997 ------------------------------------------------------------------------ Payroll and related taxes $4,359,000 $4,232,000 Bonuses and commissions 2,286,000 2,041,000 Insurance 1,257,000 54,000 Sales and real estate taxes 801,000 734,000 Other 296,000 253,000 -------------------------- $8,999,000 $7,314,000 ==========================
4 Stockholders' Equity Preferred stock has a par value of $.01 per share. There were 5,000,000 shares authorized and no shares issued as of December 31, 1998 and 1997. Common Stock has a par value of $.01 per share. There were 50,000,000 shares authorized and 37,938,688 shares issued and outstanding as of December 31, 1998 and 1997. Dividends On January 21, 1999, the Company's board of directors declared a dividend of $.04 per share of Common Stock to be paid in cash on March 12, 1999 to shareholders of record at the close of business on February 26, 1999. 5 Retirement Plan In 1998 the Company established the Fastenal Company and Subsidiaries 401(k) Plan. This plan covers all employees of the Company in the United States. The Company made no contributions to the plan in 1998. 17 1998 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 6 Income Taxes Components of income tax expense are as follows:
1998: Current Deferred Total - -------------------------------------------------------------------------------- Federal $28,199,000 353,000 28,552,000 State 4,561,000 57,000 4,618,000 -------------------------------------- $32,760,000 410,000 33,170,000 ====================================== 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 ======================================
Income tax expense in the accompanying consolidated financial statements differs from the "expected" tax expense as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------- Federal income tax expense at the "expected" rate of 35% $30,143,000 23,568,000 19,051,000 Increase (reduction) attributed to: State income taxes, net of federal benefit 3,002,000 2,937,000 2,829,000 Tax exempt interest -- (16,000) (16,000) Other, net 25,000 13,000 29,000 --------------------------------------- Total income tax expense $33,170,000 26,502,000 21,893,000 =======================================
The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31 are as follows:
1998 1997 --------------------------------------------------------------------------------------- Deferred taxes: Inventory costing and valuation methods $ 1,571,000 1,343,000 Allowance for doubtful accounts receivable 285,000 254,000 Insurance claims payable 484,000 21,000 Fixed assets (2,780,000) (1,649,000) Other, net (28,000) (27,000) -------------------------------- Net deferred tax asset (liability) $ (468,000) (58,000) ================================
No valuation allowance for deferred tax assets was necessary as of December 31, 1998 and 1997. The character of the deferred tax assets is such that they can be realized through carry-back to prior tax periods or offset against future taxable income. 18 1998 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 7 Operating Leases The Company leases space under non-cancelable operating leases for its California, Missouri, North Carolina, Utah and Washington distribution centers, its Tennessee packaging center, and certain store sites with initial terms of one to 48 months. Future minimum annual rentals, exclusive of taxes, insurance, etc., for the leased facilities, are as follows:
Distribution centers, packaging center and store sites - ---------------------------------------------------------------------------- 1999 $10,522,000 2000 6,623,000 2001 2,249,000 2002 479,000 2003 and thereafter 54,000
Rent expense under all operating leases was as follows:
Distribution centers, packaging center and store sites - ---------------------------------------------------------------------------- 1998 $13,040,000 1997 9,460,000 1996 5,865,000
8 Lines of Credit and Commitments The Company has a line of credit arrangement with a bank which expires June 30, 1999. The line allows for borrowings of up to $25,000,000 at .9% over the LIBOR rate. On December 31, 1998 there was $55,000 outstanding on the line and the interest rate was 6.2%. The Company also had $4,000,000 advanced under an uncommitted line of credit as of December 31, 1998. The interest rate on such date was 5.7%. This instrument will be repriced on February 3, 1999 at 0.5% over the LIBOR rate. The Company had a note payable related to a 1997 purchase of property. The $218,000 outstanding under this note on December 31, 1997 was paid off in 1998. The Company currently has letters of credit issued on its behalf to suppliers for large overseas purchases. As of December 31, 1998 and 1997, the total undrawn balance of outstanding letters of credit was $0 and $209,000, respectively. The Company currently has a letter of credit issued on its behalf to its insurance carrier. As of December 31, 1998, the total undrawn balance of this letter of credit was $2,600,000. 19 1998 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, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota January 22, 1999 20 1998 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 and Chief Executive Officer 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 20, 1999, 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 Legal Counsel Faegre & Benson LLP Minneapolis, Minnesota Streater & Murphy, PA Winona, Minnesota Form 10-K A copy of the Company's 1998 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 Auditors KPMG Peat Marwick LLP Minneapolis, Minnesota Transfer Agent Norwest Bank Minnesota, N.A. Minneapolis, Minnesota [Photo of Corporate Headquarters] [Photo of Winona, Minnesota] Corporate Headquarters: 2001 Theurer Boulevard Winona, Minnesota 55987 Phone: 507-454-5374 Fax: 507-453-8049 For more information e-mail us at: www.fastenal.com [Globe] Serving the world from branches in the U.S., Canada and Puerto Rico [Photo of Man [Photo of Man in [Photo of man fixing Power Tool] Storeroom] doing Bin Stocking] tool repair CAD storeroom design inventory management [Photo of Man at hose crimping [Photo of Overhead Sharpening Machine View of Shop] Computer] cutting tool [Photo of man manufacturing resharpening Operating Hose division Crimper] EX-21 4 SUBSIDIARIES OF FASTENAL COMPANY Exhibit 21 Subsidiaries of Fastenal Company. Jurisdiction 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 Fastenal Mexico S. de R.L. de C.V. Same Mexico 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,086,000 0 69,238,000 740,000 93,734,000 173,267,000 111,014,000 36,802,000 251,234,000 30,808,000 0 0 0 379,000 217,267,000 251,234,000 503,100,000 503,100,000 238,820,000 238,820,000 0 3,493,000 1,053,000 86,123,000 33,170,000 52,953,000 0 0 0 52,953,000 1.40 1.40 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, 1998.
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