<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 SEPTEMBER 9, 1995
----------------------------------------
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: 0-15590
-------
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 October 16, 1995: 14,430,228
<PAGE>
PART I. FINANCIAL INFORMATION
QUALITY FOOD CENTERS, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
12 Weeks Ended 36 Weeks Ended
September 9, September 3, September 9, September 3,
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $176,057,608 $135,471,335 $490,534,175 $383,639,282
Cost of sales and related
occupancy expenses 132,861,584 101,240,692 369,177,091 286,310,208
Marketing, general and
administrative expenses 33,097,036 25,189,890 92,475,858 70,517,421
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 10,098,988 9,040,753 28,881,226 26,811,653
Interest income 75,572 221,005 425,707 572,040
Interest expense (2,937,633) -- (5,885,050) --
Other expense -- -- (1,400,000) --
- ------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 7,236,927 9,261,758 22,021,883 27,383,693
Taxes on income
Current 2,555,000 2,615,000 7,343,000 7,945,000
Deferred 70,000 564,000 1,010,000 1,461,000
- ------------------------------------------------------------------------------------------------------
Total taxes on income 2,625,000 3,179,000 8,353,000 9,406,000
- ------------------------------------------------------------------------------------------------------
NET EARNINGS $ 4,611,927 $ 6,082,758 $ 13,668,883 $ 17,977,693
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ .32 $ .31 $ .83 $ .91
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding 14,553,000 19,695,000 16,401,000 19,650,000
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Dividends per common share $ -- $ .05 $ .05 $ .15
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
QUALITY FOOD CENTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
September 9, December 31,
1995 1994
- ------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,152,943 $ 35,162,625
Accounts receivable 7,553,010 3,285,717
Inventories 33,436,300 23,615,073
Prepaid expenses 5,783,710 2,645,579
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 56,925,963 64,708,994
PROPERTIES
Land 9,022,521 9,721,225
Buildings, fixtures and equipment 125,935,140 96,096,154
Leasehold improvements 38,940,743 32,577,792
- ------------------------------------------------------------------------------
173,898,404 138,395,171
Accumulated depreciation and amortization (44,579,739) (36,095,273)
- ------------------------------------------------------------------------------
129,318,665 102,299,898
LEASEHOLD INTEREST, net of accumulated
amortization of $8,997,485 and $7,946,985 28,454,652 16,133,654
Real estate held for investment 19,222,905 19,166,054
GOODWILL, net of accumulated
amortization of $678,916 and $136,137 33,627,613 2,185,369
OTHER ASSETS 10,776,720 3,419,633
- ------------------------------------------------------------------------------
$278,326,518 $207,913,602
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,585,377 $ 24,043,452
Accrued payroll and related benefits 11,719,552 9,941,414
Accrued business and sales taxes 4,851,094 3,915,494
Other accrued expenses 4,011,707 2,692,404
Federal income taxes payable 3,808,000 340,000
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 52,975,730 40,932,764
DEFERRED INCOME TAXES 13,813,000 8,803,000
OTHER LIABILITIES 5,400,000 --
LONG-TERM DEBT 168,000,000 --
SHAREHOLDERS' EQUITY
Common stock, at stated value, authorized
60,000,000 shares, issued and outstanding
14,430,068 and 19,349,147 28,249,596 26,644,616
Retained earnings 9,888,192 131,533,222
- ------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 38,137,788 158,177,838
- ------------------------------------------------------------------------------
$278,326,518 $207,913,602
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
THIRTY-SIX WEEKS ENDED SEPTEMBER 9, 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 13,668,883 13,668,883
COMMON STOCK ISSUED 1,949,059 45,115,064 -- 45,115,064
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
SEPTEMBER 9, 1995 14,430,068 $ 28,249,596 $ 9,888,192 $ 38,137,788
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Thirty-Six Weeks Ended
September 9, September 3,
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 13,668,883 $ 17,977,693
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 8,640,629 6,725,914
Amortization of leasehold interest and other 2,073,587 953,015
Deferred income taxes 1,010,000 1,461,000
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (1,201,766) (1,175,667)
Inventories (1,280,227) (3,471,414)
Prepaid expenses (3,138,131) (1,791,612)
Accounts payable (7,250,075) (3,089,684)
Accrued payroll and related benefits 1,778,138 (369,583)
Accrued business and sales taxes 935,600 431,651
Other accrued expenses 1,319,303 (908,348)
Federal income taxes payable 4,121,000 2,321,000
- -------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 20,676,941 19,063,965
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures, net (20,722,917) (16,156,989)
Cash portion of Olson's merger (17,814,527) --
Increase in real estate held for investment (56,851) (500,000)
Other (653,395) (330,265)
Proceeds from sale of real estate 1,340,000 --
- -------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (37,907,690) (16,987,254)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 27,045,064 1,915,677
Common stock repurchased (177,849,947) --
Net proceeds under revolving credit facility 4,000,000 --
Proceeds from long-term debt 140,000,000 --
Cash dividends paid (974,050) (2,913,992)
- -------------------------------------------------------------------------------------
Cash Used by Financing Activities (7,778,933) (998,315)
- -------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (25,009,682) 1,078,396
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 35,162,625 31,256,492
- -------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 10,152,943 $ 32,334,888
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID DURING THE THIRTY-SIX WEEKS FOR:
Income taxes $ 3,392,000 $ 5,620,000
Interest (net of $68,238 of interest capitalized) $ 5,422,194 $ --
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</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 second quarter of 1995,
the Company utilized $653,000 of the tax asset to reduce current taxes payable.
See accompanying notes to financial statements.
6
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
12 AND 36 WEEKS ENDED SEPTEMBER 9, 1995 AND SEPTEMBER 3, 1994
(UNAUDITED)
NOTE A - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 9, 1995 and for the 12 and 36
weeks ended September 9, 1995 and September 3, 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) for the year ended December 31, 1994,
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 36 WEEKS ENDED SEPTEMBER 9, 1995 AND SEPTEMBER 3, 1994
(UNAUDITED)
(CONTINUED)
Goodwill of $31.1 million 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 $4.0 million 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 $12.0 million and certain other tax
credit carryforwards totaling approximately $1.2 million to the former
shareholders of Olson's when utilized. A deferred tax asset and a
corresponding liability of $5.4 million related to these carryforward items
were recorded in other assets and other liabilities in the Company's
financial statements. During the second quarter of 1995, the Company 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 $24.0 million in long-term debt assumed in connection with the
Olson's merger was partially repaid with cash and partially refinanced with
$15.0 million in borrowings under the Company's line of credit.
8
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
12 AND 36 WEEKS ENDED SEPTEMBER 9, 1995 AND SEPTEMBER 3, 1994
(UNAUDITED)
(CONTINUED)
NOTE D - RECAPITALIZATION
During the second quarter of 1995, 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 7.0 million 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 7.0 million of the 11.2
million shares of its common stock that were tendered, resulting in a
proration of 62.6127%; and entered into a new $220.0 million credit facility
to finance the tender offer, Olson's merger and provide additional capital.
Initial borrowings under the credit facility were $168.0 million which were
used to refinance the $15.0 million note outstanding at March 25, 1995
arising from the Olson's merger and to finance the tender offer. Also, the
Company sold 1.0 million 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 36 WEEKS ENDED SEPTEMBER 9, 1995 COMPARED TO THE 12 AND 36 WEEKS ENDED
SEPTEMBER 3, 1994
The following table sets forth the percentage relationship to sales
of items in the statements of earnings:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------- -------------------
Sept. 9, Sept. 3, Sept. 9, Sept. 3,
1995 1994 1995 1994
% % % %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales 100.0 100.0 100.0 100.0
Cost of sales & related
occupancy expenses 75.5 74.7 75.3 74.6
Marketing, general &
administrative expenses 18.8 18.6 18.8 18.4
-------- -------- -------- --------
Operating income 5.7 6.7 5.9 7.0
Interest income - .2 .1 .2
Interest expense (1.6) - (1.2) -
Other expense - - (.3) -
-------- -------- -------- --------
Earnings before income taxes 4.1 6.9 4.5 7.2
Taxes on income 1.5 2.4 1.7 2.5
-------- -------- -------- --------
Net earnings 2.6 4.5 2.8 4.7
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SALES
Sales for the 12 weeks ended September 9, 1995 increased $40.6
million, or 30.0%, compared with the same period in 1994. This sales
increase reflects sales from the five stores that were new or acquired during
the third quarter of 1994, increased sales in remodeled stores, and sales from
the 12 Olson's stores merged on March 2, 1995, the three stores acquired from
Puget Sound Marketing on March 26, 1995, and the Rainier Market replacement
store which opened in August 1995. These factors were offset in part by
continued food price deflation of approximately 1%, a softer local economy
and lower sales in certain existing stores due to the opening and remodeling
of competitive stores located near the Company's stores. The sales decrease
associated with competitive store openings and remodels was further impacted
as sales were higher than normal in the Company's stores in the third quarter
of 1994 due to the closure of certain of these competitive stores while they
were being remodeled or replaced. Comparable store sales decreased 3.6% for
the quarter. Comparable store sales exclude sales in new stores and stores
remodeled during the last 12 months.
Sales for the 36 weeks ended September 9, 1995 increased 27.9% to
$490.5 million, compared with $383.6 million for the same period in 1994, due to
the same factors described above. Comparable store sales decreased
approximately 1.6% 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, many of which 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 74.7% of sales for the third quarter of 1994 to 75.5% for the
third quarter of 1995 due primarily to higher occupancy costs associated with
the 47.4% increase in store square footage over the third quarter a year ago.
Marketing, general and administrative expenses increased from 18.6% of sales
during the third quarter last year to 18.8% of sales for the third 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. Amortization of goodwill and
non-compete agreements increased $477,000 for the third quarter of 1995,
compared to the same period in the prior year, due to 1995 acquisitions. In
addition, the third quarter of 1995 included approximately $400,000 in labor
costs associated with the Labor Day holiday. This holiday fell in the fourth
quarter last year. Due to the above factors operating margins decreased from
6.7% of sales for the third quarter of 1994 to 5.7% for the third quarter of
1995. Operating income increased 11.7% for the quarter to $10.1 million
compared with $9.0 million last year.
For the 36 weeks ended September 9, 1995, operating income increased
by 7.7% as the 27.9% increase in sales was offset by a decline in operating
margins from 7.0% in 1994 to 5.9% in 1995 due to the same factors described
above.
INTEREST
Interest income decreased $145,000 and $146,000 during the 12 and 36
weeks ended September 9, 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.
11
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 approximately $39,278 and $68,238
of interest capitalized in connection with store construction and remodeling
costs incurred during the 12 and 36 weeks ended September 9, 1995, respectively.
NET EARNINGS
The Company's effective federal income tax rate increased to 36.3%
in the third quarter of 1995 from 34.3% in the third quarter of 1994 due to
the non-deductible amortization of goodwill and certain other assets that
were included in the Olson's merger. Reflecting this higher effective tax
rate and the $2.9 million in interest expense associated with the recently
completed recapitalization, net earnings for the third quarter of 1995 were
$4.6 million. This compares with $6.1 million in the corresponding 1994
quarter in which there was no interest expense. As a result of the
recapitalization completed on March 29, 1995, weighted average shares
declined from 19.7 million in the third quarter of 1994 to 14.6 million in
the third quarter of 1995. Reflecting the new capital structure, earnings
per share improved to $0.32 from $0.31 in the third quarter a year ago.
The Company's effective income tax rate was 37.9% for the 36 weeks
ended September 9, 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 34.3% for the
first 36 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 36 weeks ended September 9, 1995
decreased to $13.7 million, or $0.83 per share, compared with 1994 net
earnings of $18.0 million, or $0.91 per share. Excluding the $1.4 million
charge, net earnings and earnings per share for the 36 weeks ended September 9,
1995 would have been $15.1 million and $0.92, 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 $25.0
million during the 36 weeks ended September 9, 1995 to $10.2 million due
primarily to cash utilized to complete the Olson's merger of $17.8 million
and capital expenditures of $20.7 million. The ratio of current assets to
current liabilities at September 9, 1995 decreased to 1.07 to 1, from 1.58 to
1 at December 31, 1994, reflecting this reduction in cash.
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 September 9, 1995 are summarized below:
<TABLE>
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
1995** 5 2 16 554,000 20,700
-- - -- --------- --------
TOTAL 30 8 40 1,504,000 $187,900
-- - -- --------- --------
-- - -- --------- --------
</TABLE>
* Includes purchase of real estate held for investment.
** Includes the 36 weeks ended September 9, 1995.
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. The Company acquired the Rainier
Market store in Seattle in January 1995. The store was closed for demolition
and a replacement store was opened in August 1995. The Puget Sound Marketing
stores are located in Auburn, Enumclaw and Gig Harbor, Washington. The Gig
Harbor store was remodeled during the third quarter of 1995. Additional stores
are under construction, including a 55,000 square foot store currently planned
to open in Federal Way, Washington in November 1995. In addition, 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.
13
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company owns the real estate at five of its 61 store facilities in
operation. As of September 9, 1995, the Company owned the strip shopping
centers where three of these stores are located; however, the real estate
operations of these centers are 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 be approximately $45.0 million (including the cash portion of the
Olson's merger) in 1995, and to remain substantial in 1996 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 $0.20 per share of the
Company's common stock totalling $3.9 million and a dividend of $0.05 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 $220.0 million Credit Facility entered into in connection with
the recapitalization consists of a term loan of $140.0 million (the "Term
Loan") and revolving credit loans of up to $80.0 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
14
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 and
intangible assets. The Company had $168.0 million of borrowings under the
facility with an interest rate, which is 125 basis points over LIBOR, of 7.125%
at September 9, 1995. The Company is currently in compliance with all financial
covenants contained in the Credit Facility.
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 36 weeks ended September 9, 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 (which is described in NOTE D of PART I.) 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
Not applicable.
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) There were no reports on Form 8-K filed during this quarter.
16
<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: October 20, 1995 /s/ Stuart M. Sloan
----------------------------------
Stuart M. Sloan
Chairman
Chief Executive Officer
Date: October 20, 1995 /s/ Marc W. Evanger
----------------------------------
Marc W. Evanger
Vice President
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit
- -------------- -------
11.0 Statement regarding computation
of per share earnings
27.0 Financial Data Schedule
18
<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 36 week periods ended September 9, 1995 and September 3, 1994 are based
on the following:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------ ------------------------
Sept. 9, Sept. 3, Sept. 9, Sept. 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average
shares
outstanding 14,423,104 19,462,191 16,273,187 19,414,258
Dilutive effect
of stock options 129,896 232,809 127,813 235,742
---------- ---------- ---------- ----------
Weighted average
number of
shares 14,553,000 19,695,000 16,401,000 19,650,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-09-1995
<CASH> 10,153
<SECURITIES> 0
<RECEIVABLES> 7,553
<ALLOWANCES> 0
<INVENTORY> 33,436
<CURRENT-ASSETS> 56,926
<PP&E> 173,898
<DEPRECIATION> 44,580
<TOTAL-ASSETS> 278,327
<CURRENT-LIABILITIES> 52,976
<BONDS> 0
<COMMON> 28,250
0
0
<OTHER-SE> 9,888
<TOTAL-LIABILITY-AND-EQUITY> 278,327
<SALES> 490,534
<TOTAL-REVENUES> 490,534
<CGS> 369,177
<TOTAL-COSTS> 92,476
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,885
<INCOME-PRETAX> 22,022
<INCOME-TAX> 8,353
<INCOME-CONTINUING> 13,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,669
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
