<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the quarterly period ended FOR THE 12 WEEKS ENDED JUNE 17, 1995
-------------------------------------
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: 0-15590
-------
QUALITY FOOD CENTERS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1330075
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10112 N.E. 10th Street, Bellevue, Washington 98004
- -------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(206) 455-3761
--------------
(Registrant's telephone number, including area code)
Not applicable.
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 .
----- -----
Number of shares of Registrant's common stock,
$.001 par value, outstanding at July 19, 1995: 14,421,845
<PAGE>
PART I. FINANCIAL INFORMATION
QUALITY FOOD CENTERS, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
12 Weeks Ended 24 Weeks Ended
June 17, June 11, June 17 June 11,
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $175,538,903 $127,181,571 $314,476,567 $248,167,947
Cost of sales and related
occupancy expenses 131,659,253 94,623,762 236,315,507 185,069,516
Marketing, general and
administrative expenses 32,809,482 22,931,180 59,379,822 45,327,532
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,070,168 9,626,629 18,781,238 17,770,899
Interest income 76,495 189,103 350,135 351,035
Interest expense (2,875,398) -- (2,947,417) --
Other expense -- -- (1,400,000) --
- -----------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 8,271,265 9,815,732 14,783,956 18,121,934
Taxes on income
Current 2,455,000 2,929,000 4,787,000 5,330,000
Deferred 540,000 443,000 940,000 897,000
- -----------------------------------------------------------------------------------------------------------
Total taxes on income 2,995,000 3,372,000 5,727,000 6,227,000
- -----------------------------------------------------------------------------------------------------------
NET EARNINGS $ 5,276,265 $ 6,443,732 $ 9,056,956 $ 11,894,934
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ .36 $ .33 $ .52 $ .61
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding 14,821,000 19,547,000 17,333,000 19,526,000
- -----------------------------------------------------------------------------------------------------------
Dividends per common share $ -- $ .05 $ .05 $ .10
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
QUALITY FOOD CENTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
June 17, December 31,
1995 1994
- -------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,448,482 $ 35,162,625
Accounts receivable 4,660,300 3,285,717
Inventories 32,933,409 23,615,073
Prepaid expenses 6,351,349 2,645,579
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 51,393,540 64,708,994
PROPERTIES
Land 9,022,521 9,721,225
Buildings, fixtures and equipment 121,283,691 96,096,154
Leasehold improvements 36,477,820 32,577,792
- -------------------------------------------------------------------------------
166,784,032 138,395,171
Accumulated depreciation and amortization (41,510,815) (36,095,273)
- -------------------------------------------------------------------------------
125,273,217 102,299,898
LEASEHOLD INTEREST, net of accumulated
amortization of $8,587,157 and $7,946,985 28,851,882 16,133,654
Real estate held for investment 19,222,976 19,166,054
GOODWILL, net of accumulated
amortization of $474,236 and $136,137 33,887,293 2,185,369
OTHER ASSETS 10,586,299 3,419,633
- -------------------------------------------------------------------------------
$269,215,207 $207,913,602
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,785,498 $ 24,043,452
Accrued payroll and related benefits 9,732,448 9,941,414
Accrued business and sales taxes 4,591,882 3,915,494
Other accrued expenses 3,151,324 2,692,404
Federal income taxes payable 1,252,000 340,000
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 49,513,152 40,932,764
DEFERRED INCOME TAXES 13,743,000 8,803,000
OTHER LIABILITIES 5,400,000 --
LONG-TERM DEBT 167,100,000 --
SHAREHOLDERS' EQUITY
Common stock, at stated value - authorized
60,000,000 shares, issued and outstanding
14,419,335 shares and 19,481,009 shares 28,182,790 26,644,616
Retained earnings 5,276,265 131,533,222
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 33,459,055 158,177,838
- -------------------------------------------------------------------------------
$269,215,207 $207,913,602
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
TWENTY FOUR WEEKS ENDED JUNE 17, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Common Stock
----------------------- Retained
Shares Amount Earnings Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 19,481,009 $26,644,616 $131,533,222 $158,177,838
NET EARNINGS 9,056,956 9,056,956
COMMON STOCK ISSUED 1,938,326 45,048,258 -- 45,048,258
COMMON STOCK
REPURCHASED (7,000,000) (43,510,084) (134,339,863) (177,849,947)
(NET OF OFFERING
FEES AND EXPENSES
AGGREGATING $2,849,947)
CASH DIVIDENDS -- -- (974,050) (974,050)
- -------------------------------------------------------------------------------
BALANCE AT
JUNE 17, 1995 14,419,335 $28,182,790 $ 5,276,265 $ 33,459,055
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Twenty-Four Weeks Ended
June 17, June 11,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 9,056,956 $11,894,934
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 5,567,773 4,439,031
Amortization of leasehold interest and other 1,125,880 629,091
Deferred tax asset 653,000 --
Deferred income taxes 940,000 897,000
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable 1,690,944 (1,023,720)
Inventories (777,336) (894,389)
Prepaid expenses (3,705,770) (1,878,648)
Accounts payable (5,049,954) (3,120,400)
Accrued payroll and related benefits (208,966) (900,368)
Accrued business and sales taxes 676,388 31,920
Other accrued expenses 458,920 (1,281,492)
Federal income taxes payable 912,000 2,290,000
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,339,835 11,082,959
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures, net (13,596,047) (7,654,792)
Cash portion of Olson's merger (17,814,527) --
Increase in real estate held for investment (56,922) --
Other (180,743) (175,819)
Proceeds from sale of real estate 1,340,000 --
- -------------------------------------------------------------------------------
Net Cash Used by Investing Activities (30,308,239) (7,830,611)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 26,978,258 1,825,879
Common stock repurchased (177,849,947) --
Net proceeds under revolving credit facility 3,100,000 --
Proceeds from long-term debt 140,000,000 --
Cash dividends paid (974,050) (1,940,786)
- -------------------------------------------------------------------------------
Cash Used by Financing Activities (8,745,739) (114,907)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (27,714,143) 3,137,441
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 35,162,625 31,256,492
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 7,448,482 $34,393,933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID DURING THE TWENTY-FOUR WEEKS FOR:
Income taxes $ 3,392,000 $ 3,040,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1995, the Company acquired all of the
outstanding shares of Olson's Food Stores, Inc. in a merger transaction for
$60,070,000. In connection with the merger, liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $71,862,000
Cash paid (18,000,000)
Long-term debt assumed (24,000,000)
Common Stock issued (18,070,000)
-----------
Liabilities assumed $11,792,000
-----------
-----------
</TABLE>
During the first quarter of 1995 the Company recorded $4 million as an
increase in goodwill and deferred income taxes payable to record deferred income
taxes arising from the Olson's merger. In addition a deferred tax asset and
corresponding liability of $5.4 million were recorded to reflect amounts due the
former shareholders of Olson's when tax loss and tax credit carryforwards are
utilized by the Company.
During the first quarter of 1995, a receivable was recorded and common
stock was issued totaling $484,859 relating to the exercise of stock options
that were tendered as part of the Recapitalization.
See accompanying notes to financial statements.
6
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
12 AND 24 WEEKS ENDED JUNE 17, 1995 AND JUNE 11, 1994
(UNAUDITED)
NOTE A - FINANCIAL STATEMENT PREPARATION
The financial statements as of June 17, 1995 and for the 12 and 24
weeks ended June 17, 1995 and June 11, 1994 are unaudited, but in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position and results of operations and
cash flows for the periods presented.
These statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. These financial statements
should be read in conjunction with the annual audited financial statements and
the accompanying notes included in the Company's Annual Report on Form 10-K
dated March 28, 1995 (File No. 0-15590) filed with the SEC on March 31, 1995.
Certain prior years' balances have been reclassified to conform to
classifications used in the current year.
NOTE B - FISCAL PERIODS
The Company's fiscal year ends on the last Saturday in December, and
its reporting quarters consist of three 12-week quarters and a 16-week fourth
quarter; however, 1994 was a 53-week fiscal year which resulted in a 17-week
fourth quarter.
NOTE C - OLSON'S MERGER
On March 2, 1995 the principal operations of Olson's Food Stores, Inc.
were merged into the Company, including assets and liabilities related to 12 of
its grocery stores and its interest in certain grocery stores in various stages
of development, and its rights to several other future sites. The merger was
effected through an acquisition of 100% of the outstanding voting securities of
Olson's for $18,000,000 cash, 752,941 shares of the Company's common stock,
which as of March 2, 1995 had a value of $18,070,000, and the assumption by the
Company of approximately $24,000,000 of indebtedness of Olson's. The merger has
been accounted for under the "purchase" method of accounting.
7
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
12 AND 24 WEEKS ENDED JUNE 17, 1995 AND JUNE 11, 1994
(UNAUDITED)
(CONTINUED)
Goodwill of $31,067,000 is being amortized over a period of 35 years.
Because the merger was a statutory merger, the Company has a carryover tax basis
and amortization of the excess of the book value over the tax basis of the
assets included in the merger is not deductible for federal income tax purposes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company
has recorded $4,000,000 to goodwill and deferred income taxes payable to give
effect to the estimated deferred income taxes arising from the Olson's merger.
Further, as part of the merger agreement, the Company agreed to remit the
benefits, if any, of Olson's net operating loss carryforwards totaling
approximately $12,000,000 and certain other tax credit carryforwards totaling
approximately $1,200,000 to the former shareholders of Olson's when utilized. A
deferred tax asset and a corresponding liability of $5,400,000 related to these
carryforward items were recorded in other assets and other liabilities in the
Company's financial statements. During the quarter, the Company has utilized
$653,000 of the tax asset to reduce current taxes payable and other assets.
Following is a summary of the assets and liabilities recorded as a
result of the Olson's merger:
<TABLE>
<S> <C>
Cash $ 185,473
Inventories 8,541,000
Other Current Assets 3,065,527
------------
Total Current Assets 11,792,000
Property Plant and Equipment
(net) 18,087,000
Leasehold Interest 12,829,000
Goodwill 31,067,000
Other Assets 7,487,000
Current Liabilities (11,792,000)
Deferred Income Taxes (4,000,000)
Other Liabilities (5,400,000)
------------
$ 60,070,000
------------
------------
</TABLE>
The $24 million in long-term debt assumed in connection with the
Olson's merger was partially repaid with cash and partially refinanced with $15
million in borrowings under the Company's line of credit.
8
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
12 AND 24 WEEKS ENDED JUNE 17, 1995 AND JUNE 11, 1994
(UNAUDITED)
(CONTINUED)
NOTE D - RECAPITALIZATION
During the second quarter, the Company successfully completed its
recapitalization plan announced in December 1994. The Company's self-tender
offer that commenced on January 18, 1995, for up to 7,000,000 shares of its
common stock at a price of $25.00 per share payable in cash expired on March 17,
1995. On March 29, 1995, the Company purchased 7,000,000 of the 11,179,838
shares of its common stock that were tendered, resulting in a proration of
62.6127%; and entered into a new $220 million credit facility to finance the
tender offer, Olson's merger and provide additional capital. Initial borrowings
under the credit facility were $168 million which were used to refinance the
$15 million note outstanding at March 25, 1995 arising from the Olson's merger
and to finance the tender offer. Also, the Company sold 1,000,000 newly issued
shares of its common stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00
per share on March 29, 1995. Zell/Chilmark will acquire an additional 2,975,000
shares at $25.00 per share directly from the Company's chairman and chief
executive officer in a separate transaction that is expected to close on
January 15, 1996.
To reflect the net reduction in shareholders' equity resulting from
the recapitalization, the Company reduced retained earnings to zero at the
beginning of the second quarter of 1995 and allocated the remaining amount as
a reduction to common stock.
Fees payable in connection with the recapitalization aggregated
approximately $4.2 million. During the first quarter of 1995, $1.4 million of
these fees were recorded as a one-time expense, which is not deductible for
federal income tax purposes. The remaining costs of $2.8 million were recorded
as a direct reduction in shareholders' equity.
9
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
12 AND 24 WEEKS ENDED JUNE 17, 1995 COMPARED TO THE 12 AND 24 WEEKS ENDED JUNE
11, 1994
The following table sets forth the percentage relationship to sales
of items in the statements of earnings:
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
------------------- -------------------
June 17, June 11, June 17, June 11,
1995 1994 1995 1994
% % % %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales 100.0 100.0 100.0 100.0
Cost of sales & related
occupancy expenses 75.0 74.4 75.2 74.6
Marketing, general &
administrative expenses 18.7 18.0 18.9 18.3
------ ------ ------ ------
Operating income 6.3 7.6 5.9 7.1
Interest income .1 .2 .1 .2
Interest expense (1.7) - (.9) -
Other expense - - (.4) -
------ ------ ------ ------
Earnings before income taxes 4.7 7.8 4.7 7.3
Taxes on income 1.7 2.7 1.8 2.5
------ ------ ------ ------
Net earnings 3.0 5.1 2.9 4.8
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
SALES
Sales for the 12 weeks ended June 17, 1995 increased $48.3 million, or
38%, compared with the same period in 1994. This sales increase reflects the
seven stores that were new or acquired in 1994, increased sales in three store
remodels completed during the first half of 1995, sales from the 12 Olson's
stores merged on March 2, 1995 and the three stores acquired from Puget Sound
Marketing on March 26, 1995. These factors were offset in part by continued
food price deflation of approximately 1% and lower sales in certain existing
stores due to the opening and remodeling of competitive stores located near the
Company's stores. Comparable store sales decreased 0.3% for the quarter.
Sales for the 24 weeks ended June 17, 1995 increased 26.7% to $314.5
million, compared with $248.2 million for the same period in 1994, due to the
same factors described above. Comparable store sales decreased approximately
0.5% for the year-to-date period.
10
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Sales growth has also been affected by new stores and acquired stores,
which have lower sales volumes, becoming a more significant part of the
Company's sales, the maturing of older stores to a level where substantial sales
growth is more difficult, and the Company's strategy of opening stores in
certain locations that enhance the Company's competitive position and protect
its market share but reduce sales in nearby existing stores. Also, the
supermarket industry continues to be highly competitive.
OPERATING INCOME
The Company's cost of sales and related occupancy expenses increased
from 74.4% of sales for the second quarter of 1994 to 75.0% for the second
quarter of 1995 due to higher occupancy costs associated with the 61% increase
in store square footage over the second quarter a year ago and lower gross
margins in the newer and recently acquired stores. Marketing, general and
administrative expenses increased from 18.0% of sales during the second quarter
last year to 18.7% of sales for the second quarter of 1995, primarily due to
higher expenses in our newly acquired stores, start up and conversion costs
associated with acquired stores, as well as continued increases in labor costs
and other operating expenses coupled with the continued deflation in retail food
prices. Due to the above factors operating margins decreased from 7.6% of sales
for the second quarter of 1994 to 6.3% for the second quarter of 1995.
Operating income increased 15% for the quarter to $11.1 million compared with
$9.6 million last year.
For the 24 weeks ended June 17, 1995, operating income increased by
5.7% as the 26.7% increase in sales was offset by a decline in operating margins
from 7.1% in 1994 to 5.9% in 1995 due to the same factors described above.
INTEREST
Interest income increased $113,000 and $1,000 during the 12 and 24
weeks ended June 17, 1995, respectively, compared to the same periods in 1994
reflecting lower cash balances due to the recapitalization completed on March
29, 1995, offset by higher interest rates in 1995 than in 1994.
Interest expense reflects interest on the debt assumed (and
refinanced) in the Olson's merger and debt incurred in connection with the
recapitalization. Interest expense is net of
11
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
approximately $29,000 of interest capitalized in connection with store
construction and remodeling costs incurred during the second quarter.
NET EARNINGS
The Company's effective federal income tax rate increased to 36.2% in
the second quarter of 1995 from 34.4% in the second quarter of 1994 due to the
non-deductible amortization of goodwill and certain other assets that were
included in the Olson's merger. Net earnings for the second quarter of 1995
were $5.3 million, after incurring $2.9 million in interest expense associated
with the recently completed recapitalization. This compares with $6.4 million
in the corresponding 1994 quarter with no interest expense. As a result of the
recapitalization completed on March 29, 1995, weighted average shares declined
from 19.5 million in the second quarter of 1994 to 14.8 million in the second
quarter of 1995. Reflecting the new capital structure, earnings per share
improved to $0.36 from $0.33 in the second quarter a year ago.
The Company's effective income tax rate was 38.7% for the 24 weeks
ended June 17, 1995 due to the non-deductible amortization discussed above and
the non-deductible $1.4 million charge relating to the Company's
recapitalization. This compares to an effective tax rate of 34.4% for the first
24 weeks of 1994. Accordingly, as a result of higher interest expense, a higher
effective tax rate and the charge resulting from the recapitalization, net
earnings for the 24 weeks ended June 17, 1995 decreased to $9.1 million, or 52
cents per share, compared with 1994 net earnings of $11.9 million, or 61 cents
per share. Excluding the $1.4 million charge, net earnings and earnings per
share for the 24 weeks would have been $10.5 million and 60 cents per share,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity has been cash generated
from operations. The Company's cash and cash equivalents decreased $27.7
million during the 24 weeks ended June 17, 1995 to $7.5 million due primarily to
cash utilized to complete the Olson's merger of $17.8 million and capital
expenditures of $13.6 million. The ratio of current assets to current
liabilities at June 17, 1995 was 1.04 to 1, compared with 1.58 to 1 at December
31, 1994.
12
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's expansion and remodeling and new store activities for
the period from 1986 through 1994 are summarized below:
<TABLE>
<CAPTION>
NEW OR SQUARE CAPITAL
MAJOR ACQUIRED FEET EXPENDITURES*
REMODELS RE-REMODELS STORES ADDED (IN THOUSANDS)
-------- ----------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
1986 3 - 1 58,000 $ 3,500
1987 2 - - 8,000 5,700
1988 5 - - 16,000 7,600
1989 2 - 2 85,000 9,900
1990 1 2 3 107,000 16,600
1991 2 1 3 127,000 25,900
1992 5 1 3 137,000 26,800
1993 3 - 5 173,000 43,000
1994 2 2 7 239,000 28,200
-- - - ------- --------
TOTAL 25 6 24 950,000 $167,200
-- - -- ------- --------
-- - -- ------- --------
<FN>
* Includes purchase of real estate held for investment.
</TABLE>
1994 was the Company's most active year prior to 1995 in terms of
square footage growth. New stores included one new construction, the
acquisition of a store in Sequim, the Company's first on the Olympic Peninsula,
and the acquisition of five other stores from two independent operators in the
Company's existing market.
1995 has been an even more aggressive year with an increase in square
footage since the end of 1994 of 40% from the 12 Olson's stores and the three
stores acquired from Puget Sound Marketing on March 26, 1995. The Company
acquired the Rainier Market store in Seattle in January 1995. The store was
closed for demolition and a replacement store is being constructed to be opened
in August 1995. The Puget Sound Marketing stores are located in Auburn,
Enumclaw and Gig Harbor, Washington. Additional stores are under construction
and the Company has secured a number of other sites that are still in the
entitlement process or subject to other contingencies and is actively pursuing
other new store locations and acquisition opportunities.
The Company owns the real estate at five of its 60 store facilities in
operation. As of June 17, 1995, the Company owned the strip shopping centers
where three of these stores are located; however, the real estate operations of
these centers are
13
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
currently insignificant to the Company's results of operations. Another
shopping center owned by the Company was sold during the first quarter of 1995
and the others are for sale, however, the Company plans to retain ownership of
its store buildings and pads. The remaining stores are leased under long-term
operating leases.
Capital expenditures, which include the purchase of land, fixtures,
equipment and leasehold improvements as well as the purchase of leasehold
interests, other property rights, goodwill and covenants not to compete, are
projected to remain substantial in 1995 and subsequent years as the Company
continues to expand and remodel existing stores and acquire and open new stores.
During 1994, the Company paid cash dividends of $.20 per share of the
Company's common stock totalling $3.9 million and a dividend of $.05 per share
was paid in February 1995. The payment of dividends has been discontinued
because the credit facility described below restricts payment of dividends prior
to 1997.
The $220 million Credit Facility entered into in connection with the
recapitalization consists of a term loan of $140 million (the "Term Loan") and
revolving credit loans of up to $80 million (the "Revolving Loans"). Principal
repayments of the Term Loan are due in quarterly installments from March 1997
through September 2001. The Revolving Loans are available on a revolving credit
basis for general corporate purposes and any outstanding amounts would become
due in September 2001. At the Company's option, the interest rate per annum
applicable to the Credit Facility is either (1) the greater of the bank agent's
reference rate and .5% above the federal funds rate or (2) LIBOR plus a margin
of 1.25% initially, with margin reductions if the Company meets specified
financial ratios. The Credit Facility contains a number of significant
covenants that, among other things, restrict the ability of the Company to incur
additional indebtedness or incur liens on its assets, in each case subject to
specified exceptions, impose specified financial tests as a precondition to the
Company's acquisition of other businesses, prohibit the Company from making
certain restricted payments (including dividends) and restrict the Company from
making share repurchases above certain amounts before January 1, 1997 and,
subject to specified financial tests, restrict its ability to make such payments
and repurchases thereafter. In addition, the Company is required to comply with
specified financial ratios and tests, including a maximum debt to cash flow
ratio, minimum ratios of cash flow to fixed charges, a minimum accounts payable
to inventory ratio and a minimum net worth test. The Credit Facility is secured
by a lien on all of the Company's receivables
14
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
and intangible assets. The Company has borrowed $167 million under the facility
and the current interest rate, which is 125 basis points over LIBOR, is 7.3125%.
The amount of the Credit Facility is significantly higher than the
Company's planned current financing needs, which will help to accommodate other
future growth opportunities. While the Company believes the Credit Facility and
existing cash and cash generated from operations will be adequate to fund
planned expansion, the Company believes it can readily obtain additional
capital, if needed, through other institutional financing or further issuance of
debt or equity securities.
INFLATION
During the 24 weeks ended June 17, 1995, the Company's sales reflect
food price deflation of approximately 1%, compared with more than 1.5% for the
same period in 1994.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 31, 1995, a class action lawsuit was filed against the Company
and three of its officers in the United States District Court for the District
of Washington. The complaint alleges violations of federal securities laws and
a breach of fiduciary duties in connection with the Company's recent
recapitalization. The amount of relief sought is unspecified. However, the
action seeks to compel the Company to reopen its self-tender offer to provide
the public shareholders the opportunity to sell all of their QFC shares that
they desire to tender at $25 per share. The Company believes the suit is
without merit and intends to defend it vigorously.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of Quality Food Centers, Inc. was held
on April 25, 1995.
(b) Joel S. Friedland was elected as a Class III director to serve a term of
one year. Samuel Zell was elected as a Class I director to serve a term of two
years. Stuart M. Sloan and Maurice F. Olson were elected as Class II directors
to serve terms of three years. The board is comprised of those elected this
year and the following directors completing their terms: Dan Kourkoumelis and
Ronald A. Weinstein, Class III directors whose terms expire in one year and
John W. Creighton, Jr. and Fred B. McLaren, Class I directors whose terms expire
in two years.
(c) The following matters were voted upon at the meeting:
1. For the election of directors:
FOR WITHHELD
--- --------
Class I Director
Samuel Zell 12,139,467 116,907
Class II Directors
Maurice F. Olson 12,194,311 62,063
Stuart M. Sloan 11,027,752 1,228,622
Class III Director
Joel S. Friedland 12,197,495 58,879
16
<PAGE>
PART II. OTHER INFORMATION
(CONTINUED)
2. Ratification of selection of Deloitte & Touche LLP as independent
auditors of the Company.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
12,235,781 3,364 17,228 -0-
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Exhibit 11.0 - Statement regarding computation of per share earnings
Exhibit 27.0 - Financial data schedule
(b) On May 1, 1995, the Company filed a report on Form 8-K and a report on Form
8-K/A under Item 2 with respect to the merger of Olson's Food Stores, Inc. with
and into the Company and under Item 5 with respect to the filing of the
Company's independent auditors' consent to the incorporation by reference in
Registration Statement No. 33-84202 of the Company on Form S-8 of such auditor's
report dated March 15, 1995. The following financial statements were filed with
these reports under Item 7: statements of assets and liabilities associated with
the business to be acquired of Olson's Food Stores, Inc. and related statements
of revenues and expenses for the years ended October 29, 1994 and October 30,
1993; pro forma condensed balance sheet as of December 31, 1994; and pro forma
condensed statement of earnings for the fiscal year ended December 31, 1994.
17
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
QUALITY FOOD CENTERS, INC.
(Registrant)
Date: July 19, 1995 /s/ Stuart M. Sloan
--------------------------------
Stuart M. Sloan
Chairman
Chief Executive Officer
Date: July 19, 1995 /s/ Marc W. Evanger
--------------------------------
Marc W. Evanger
Vice President
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit
- ------------- -------
11.0 Statement regarding computation of per share earnings
27.0 Financial Data Schedule
19
<PAGE>
QUALITY FOOD CENTERS, INC.
EXHIBIT 11.0
COMPUTATION OF PER SHARE EARNINGS
Calculations of per share earnings reported in this report on Form 10-Q for
the 12 and 24 week periods ended June 17, 1995 and June 11, 1994 are based
on the following:
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
June 17, June 11, June 17, June 11,
1995 1994 1995 1994
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Weighted average
shares
outstanding 14,698,195 19,427,037 17,198,228 19,390,291
Dilutive effect
of stock options 122,805 119,963 134,772 135,709
---------- ---------- ---------- -----------
Weighted average
number of
shares 14,821,000 19,547,000 17,333,000 19,526,000
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-17-1995
<CASH> 7,448
<SECURITIES> 0
<RECEIVABLES> 4,660
<ALLOWANCES> 0
<INVENTORY> 32,933
<CURRENT-ASSETS> 51,394
<PP&E> 166,784
<DEPRECIATION> 41,511
<TOTAL-ASSETS> 269,215
<CURRENT-LIABILITIES> 49,513
<BONDS> 0
<COMMON> 28,183
0
0
<OTHER-SE> 5,276
<TOTAL-LIABILITY-AND-EQUITY> 269,215
<SALES> 314,477
<TOTAL-REVENUES> 314,477
<CGS> 236,316
<TOTAL-COSTS> 59,380
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,947
<INCOME-PRETAX> 14,784
<INCOME-TAX> 5,727
<INCOME-CONTINUING> 9,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,057
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
