<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 15, 1996
____ 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 (I.R.S. Employer
of incorporation or Identification No.)
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, 1996: 14,577,252
1
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PART I. FINANCIAL INFORMATION
QUALITY FOOD CENTERS, INC.
STATEMENTS OF EARNINGS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Twelve Weeks Ended 24 Weeks Ended
June 15, June 17, June 15, June 17,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 184,397 $ 175,539 $ 361,024 $ 314,477
Cost of sales and related occupancy expenses 138,221 131,659 271,534 236,316
Marketing, general and administrative expenses 34,522 32,809 68,008 59,380
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,654 11,071 21,482 18,781
Interest income 112 76 184 350
Interest expense (2,165) (2,875) (4,753) (2,947)
Other expense - - - (1,400)
- ----------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 9,601 8,272 16,913 14,784
Taxes on income
Current 3,002 2,455 5,225 4,787
Deferred 432 540 838 940
- ----------------------------------------------------------------------------------------------------------
Total taxes on income 3,434 2,995 6,063 5,727
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NET EARNINGS $ 6,167 $ 5,277 $ 10,850 $ 9,057
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EARNINGS PER SHARE $ .42 $ .36 $ .74 $ .52
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 14,798 14,821 14,686 17,333
- ----------------------------------------------------------------------------------------------------------
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Dividends per common share $ - $ - $ - $ .05
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</TABLE>
See accompanying notes to financial statements.
2
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QUALITY FOOD CENTERS, INC.
BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------
June 15, December 30,
1996 1995
- --------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,727 $ 10,933
Accounts receivable 8,887 9,031
Inventories 34,843 36,706
Prepaid expenses 6,526 5,524
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 58,983 62,194
PROPERTIES
Land 8,576 8,576
Buildings, fixtures and equipment 137,657 132,594
Leasehold improvements 41,633 38,767
Construction in progress 21,765 15,954
- --------------------------------------------------------------------------------
209,631 195,891
Accumulated depreciation and amortization (56,256) (48,810)
- --------------------------------------------------------------------------------
153,375 147,081
LEASEHOLD INTEREST, net of accumulated
amortization of $10,326 and $9,535 30,463 27,954
Real estate held for investment 5,837 5,622
GOODWILL, net of accumulated
amortization of $1,503 and $1,009 34,105 34,599
OTHER ASSETS 5,821 5,428
- --------------------------------------------------------------------------------
$ 288,584 $ 282,878
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,577 $ 34,173
Accrued payroll and related benefits 12,340 12,556
Accrued business and sales taxes 5,047 5,037
Other accrued expenses 4,969 4,720
Federal income taxes payable 520 405
Current portion of long-term debt 12,600 -
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 72,053 56,891
DEFERRED INCOME TAXES 11,614 9,992
OTHER LIABILITIES 6,128 6,127
LONG-TERM DEBT 140,400 164,500
SHAREHOLDERS' EQUITY
Common stock, at stated value - authorized
60,000,000 shares, issued and outstanding
14,567,000 shares and 14,432,000 shares 31,103 28,932
Retained earnings 27,286 16,436
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 58,389 45,368
- --------------------------------------------------------------------------------
$ 288,584 $ 282,878
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
TWENTY-FOUR WEEKS ENDED JUNE 15, 1996
(unaudited)
(in thousands)
- --------------------------------------------------------------------------------
COMMON STOCK Retained
---------------------
Shares Amount Earnings Total
- --------------------------------------------------------------------------------
BALANCE AT
DECEMBER 30, 1995 14,432 $ 28,932 $ 16,436 $ 45,368
NET EARNINGS - - 10,850 10,850
COMMON STOCK ISSUED 135 2,171 - 2,171
- --------------------------------------------------------------------------------
BALANCE AT
JUNE 15, 1996 14,567 $ 31,103 $ 27,286 $ 58,389
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
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QUALITY FOOD CENTERS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
- --------------------------------------------------------------------------------
Twenty-Four Weeks Ended
June 15, June 17,
1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 10,850 $ 9,057
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 7,437 5,568
Amortization of leasehold interest and other 1,691 1,126
Amortization of debt issuance costs 85 43
Deferred income taxes 838 940
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable 144 1,691
Inventories 1,863 (777)
Prepaid expenses (1,087) (3,749)
Accounts payable 2,404 (5,050)
Accrued payroll and related benefits (217) (209)
Accrued business and sales taxes 10 676
Other accrued expenses 250 459
Federal income taxes payable 899 1,565
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 25,167 11,340
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures, net (17,040) (13,596)
Cash portion of Olson's merger - (17,815)
Increase in real estate held for investment (215) (57)
Other (789) (180)
Proceeds from sale of real estate - 1,340
- --------------------------------------------------------------------------------
Net Cash Used by Investing Activities (18,044) (30,308)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,171 26,978
Common stock repurchased - (177,850)
Proceeds from (repayments of) long-term debt (11,500) 143,100
Cash dividend paid - (974)
- --------------------------------------------------------------------------------
Net Cash Used by Financing Activities (9,329) (8,746)
- --------------------------------------------------------------------------------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (2,206) (27,714)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 10,933 35,163
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 8,727 $ 7,449
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995
(unaudited)
NOTE A - NATURE OF OPERATIONS
Quality Food Centers, Inc.(QFC) is the second largest supermarket chain in
the Seattle/Puget Sound region of Washington State, and the largest independent
chain. The Company has been in operation since 1954 and currently operates 62
stores and employs over 4,200 people.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Preparation - The financial statements as of and for the
twelve and twenty-four weeks ended June 15, 1996 and June 17, 1995 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 20, 1996 (File No. 0-15590) for the year ended December 30, 1995
filed with the SEC on March 29, 1996.
Complying 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 revenue and expenses during
the reporting periods. Actual results could differ from the estimates.
Certain prior years' balances have been reclassified to conform to
classifications used in the current year.
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.
Earnings Per Share - Earnings per share are based upon the weighted average
number of common shares and common share equivalents outstanding during the
period.
NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense for the twenty-four weeks
ended June 15, 1996 and June 17, 1995 was as follows (in thousands):
Twenty-Four Weeks Ended
June 15, June 17,
1996 1995
- --------------------------------------------------------------------------------
Income taxes $ 4,325 $ 3,392
Interest (net of $567 of interest capitalized) 4,278 -
- --------------------------------------------------------------------------------
6
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QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995
(unaudited)
NOTE C - continued
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
$60.1 million (Note D). In connection with the merger, liabilities assumed were
as follows (in thousands):
Fair value of assets acquired $ 69,246
Cash paid (18,000)
Long-term debt assumed (24,000)
Common stock issued (18,070)
---------
Current liabilities assumed $ 9,176
---------
---------
During the first quarter of 1995, the Company recorded $4.0 million as an
increase in goodwill and deferred income taxes to record 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. Accordingly, 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. The Company utilized $784,000 of the tax asset during the 12
weeks ended June 15, 1996 and $653,000 of the tax asset during the 12 weeks
ended June 17, 1995.
NOTE D - 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 $18.0 million cash, 752,941 shares of the Company's common stock,
which as of March 2, 1995 had a value of $18.1 million, and the assumption by
the Company of approximately $24.0 million of indebtedness of Olson's. The
merger has been accounted for under the "purchase" method of accounting.
Goodwill of $32.4 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.
Following is a summary of the assets and liabilities recorded as a result
of the Olson's merger (in thousands):
Cash $ 182
Inventories 8,541
Other current assets 453
--------
Total current assets 9,176
Property plant and equipment (net) 18,087
Leasehold interest 12,829
Goodwill 32,367
Other assets 7,487
Current liabilities (9,176)
Deferred income taxes (4,000)
Other liabilities (6,700)
--------
$ 60,070
--------
--------
7
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995
(unaudited)
NOTE E - RECAPITALIZATION
During the second quarter of 1995, the Company completed a
recapitalization. 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 shares of its common stock and entered into a new $220.0
million credit facility to finance the tender offer, Olson's merger, and provide
additional capital. Additionally, the Company sold 1.0 million newly issued
shares of its common stock to Zell/Chilmark Fund LP (Zell/Chilmark) at $25.00
per share on March 29, 1995. Zell/Chilmark acquired 2,975,000 additional shares
at $25.00 per share, plus an amount equal to a 5% annual return on such amount
from March 17, 1995 through January 16, 1996, directly from the Company's
chairman and chief executive officer in a separate transaction that closed on
January 16, 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 paid in connection with the recapitalization aggregated approximately
$4.3 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 $2.9 million were recorded as a direct
reduction to shareholders' equity.
8
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWELVE AND TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 COMPARED TO THE TWELVE AND
TWENTY-FOUR WEEKS ENDED JUNE 17, 1995
The table below sets forth items in the Company's statements of earnings as
a percentage of sales:
12 Weeks Ended 24 Weeks Ended
------------------ ------------------
June 15, June 17, June 15, June 17,
1996 1995 1996 1995
% % % %
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales & related
occupancy expenses 75.0 75.0 75.2 75.1
Marketing, general &
administrative expenses 18.7 18.7 18.9 18.9
-------- -------- -------- --------
Operating income 6.3 6.3 5.9 6.0
Interest income .1 .1 .1 .1
Interest expense (1.2) (1.7) (1.3) (1.0)
Other expense - - - (.4)
-------- -------- -------- --------
Earnings before income taxes 5.2 4.7 4.7 4.7
Taxes on income (1.9) (1.7) (1.7) (1.8)
-------- -------- -------- --------
Net earnings 3.3% 3.0% 3.0% 2.9%
-------- -------- -------- --------
-------- -------- -------- --------
SALES
Sales for the 12 weeks ended June 15, 1996 increased approximately $8.9
million, or 5.0%, compared with the same period in 1995. This increase reflects
the addition of two new stores since June 17, 1995, higher sales in remodeled
stores and an increase in same store sales of approximately 1.7% with no
inflation in retail food prices.
Sales for the 24 weeks ended June 15, 1996 increased approximately $46.5
million, or 14.8%, compared with the same period in 1995. The increase for the
24 weeks reflects the addition of 17 stores (12 of which were acquired from
Olson's on March 2, 1995, 3 of which were acquired on March 29, 1995 from
another independent operator, one acquired store that opened in August 1995 and
a new store that opened in November 1995), higher sales in remodeled stores, and
an increase in same store sales of approximately 1.4% with no food price
inflation. These factors were offset in part by lower sales in certain
existing stores due to the opening and remodeling of competitors' stores located
near QFC stores. In addition, sales growth has been impacted by new 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. Additionally, the supermarket industry continues to be highly
competitive.
Management believes that this trend in same store sales will continue in
the second half of the year as the Company laps the dates of many of the store
openings and remodelings which impacted the Company's stores in 1995. Further,
modest inflation is anticipated for 1996 and the regional economy is projected
to be healthier than in recent years.
9
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QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
OPERATING INCOME
Operating income increased 5% for the 12 weeks ended June 15, 1996 as
compared to the same period in 1995, reflecting the 5% increase in sales and
flat operating margins of 6.3% as discussed below. Operating income increased
14% for the 24 weeks ended June 15, 1996 as compared to the same period in 1995,
reflecting the 14.8% increase in sales offset by a slight decrease in operating
margins to 5.9% of sales from 6.0% of sales in 1995 as discussed below.
The Company's cost of sales and related occupancy expenses for the 12 weeks
ended June 15, 1996, remained unchanged as a percent of sales at 75.0% and
increased slightly to 75.2% of sales for the 24 weeks ended June 15, 1996
compared to 75.1% in the same period in 1995. The slight increase in the 24
weeks ended June 15, 1996 is due to higher occupancy expenses resulting from the
1995 acquisitions and new stores and a $165,000 LIFO charge in 1996 compared to
no charge in 1995. Marketing, general and administrative expenses remained
unchanged at 18.7% of sales for the 12 weeks ended June 15, 1996 and 18.9% for
the 24 weeks ended June 15, 1996 as compared to the same periods in 1995, due to
the Company's continued focus on expense controls.
INTEREST INCOME
Interest income increased $36,000 for the 12 weeks ended June 15, 1996
compared to the same period in 1995 as the Company's increased cash flows from
operations resulted in increased cash balances during the 12 weeks ended June
15, 1996 as compared to the same period in 1995.
Interest income decreased by $166,000 for the 24 weeks ended June 15, 1996
compared to the same period in 1995, reflecting lower average cash balances due
to the recapitalization completed on March 29, 1995, offset by higher interest
rates in 1996 than in 1995.
INTEREST EXPENSE
Interest expense reflects interest on the debt assumed (and refinanced) in
the March 2, 1995 Olson's merger and debt incurred in connection with the
recapitalization completed on March 25, 1995. Interest expense is reported net
of interest capitalized in connection with store construction and remodeling
costs.
Interest expense decreased $0.7 million to $2.2 million (net of $0.4
million of capitalized interest) for the 12 weeks ended June 15, 1996 compared
to the same period in 1995 as the Company's increased cash flows from operations
enabled it to reduce its average outstanding debt during the 12 weeks ended June
15, 1996 as compared to the same period in 1995, coupled with lower borrowing
rates in 1996 than in 1995.
Interest expense increased $1.8 million to $4.8 million (net of $0.6
million of capitalized interest) for the 24 weeks ended June 15, 1996 compared
to the same period in 1995 as all 24 weeks in 1996 reflect interest associated
with the Company's debt incurred in March 1995 as compared to only 11 weeks in
the same period in the prior year.
OTHER EXPENSE
The Company incurred a one-time charge of $1.4 million in the first quarter
of 1995 for fees paid in connection with its recapitalization. This charge is
not deductible for federal income tax purposes. The remaining costs of
approximately $2.9 million incurred in connection with the recapitalization were
recorded as a reduction in shareholders' equity (see Note E to the financial
statements).
INCOME TAXES
The Company's effective federal income tax rate decreased to 35.8% for the
12 and 24 week periods ended June 15, 1996 as compared to 36.2% for the 12 weeks
ended June 17, 1995 and 38.7% during the 24 weeks ended June 17, 1995 due to the
non-deductible one-time charge of $1.4 million recorded in the first quarter of
1995. The difference between the Company's effective income tax rate and the
federal statutory rate for 1996 is primarily due to the non-deductible
amortization of goodwill and certain other assets that were included in the
Olson's merger.
10
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
NET EARNINGS
The 5% increase in operating income for the 12 weeks ended June 15, 1996
combined with a reduction in interest expense and a lower effective tax rate
than the same period in 1995, resulted in a 16.9% increase in net earnings to
$6.2 million compared to $5.3 million in the same period in 1995. Earnings per
share increased to 42 cents per share on 14,798,000 weighted average shares
outstanding, compared to 36 cents per share on 14,821,000 weighted average
shares outstanding in the same period in 1995.
The 14% increase in operating income, the $1.4 million decrease in other
expense and the decrease in the effective tax rate offset by higher interest
expense, resulted in a 19.8% increase in net earnings for the 24 weeks ended
June 15, 1996 to $10.9 million compared with $9.1 million for the same period in
1995. Earnings per share were 74 cents per share on 14,686,000 weighted average
shares outstanding, compared with 52 cents per share on 17,333,000 weighted
average shares outstanding for 1995. Excluding the one-time charge of $1.4
million in other expense, net earnings for 1995 would have been $10.5 million,
or 60 cents per share.
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 $2.2 million
during the 24 weeks ended June 15, 1996 to $8.7 million as cash provided by
operations of $25.2 million was more than offset by capital expenditures of
$17.3 million and the repayment of $11.5 million of long-term debt. The ratio
of current assets to current liabilities at June 15, 1996 decreased to .82 to 1,
compared with 1.09 to 1 at December 30, 1995, due primarily to $12.6 million of
the Company's long term debt being classified as a current liability at June 15,
1996, while none of the long-term debt was repayable within 12 months as of
December 30, 1995. The Company believes it can service these debt payments with
cash generated from operations or through usage of a portion of the $67.0
million of borrowings available at June 15, 1996 in the Company's credit
facility (discussed below).
The Company's expansion and remodeling and new store activities for the
period from 1986 through June 15, 1996 are summarized below (dollars in
thousands):
NEW OR SQUARE
MAJOR ACQUIRED FEET CAPITAL
REMODELS RE-REMODELS STORES ADDED EXPENDITURES*
-------- ----------- ------ ----- ------------
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 17 609,000 89,100
1996 1 3 - 27,000 17,300
-- -- -- --------- ---------
TOTAL 31 11 41 1,586,000 $273,600
-- -- -- --------- ---------
-- -- -- --------- ---------
* Includes purchase of real estate held for investment.
11
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
1995 was the Company's most active year to date in terms of growth with an
increase in square footage of 46% from the 17 stores added. The Company opened
a new 41,000 square foot store in the Northgate area on March 20, 1996, which
replaced a 14,000 square foot store in the same area. Construction of a 66,000
square foot store that will replace the 31,000 square foot University Village
store, and the new 45,000 square foot Harvard market store are underway.
Additionally, several store remodels and re-remodels are underway or on the
drawing table. 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 62 store facilities in
operation. The Company owns 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 $30.0 million in 1996 based on the Company's
announced plans, and to remain substantial in subsequent years as the Company
continues to expand and remodel existing stores and acquire and open new stores.
The Company paid a cash dividend of $.05 per share 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 discussed in Note E to the financial statements consists of a
term loan of $140.0 million and revolving credit loans of up to $80.0 million.
Principal repayments of the term loan are due in quarterly installments from
March 1997 through September 2001. The revolving loans are available 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 or .5% above the federal funds rate or (2) IBOR 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 and intangible assets. The
Company had $153.0 million of borrowings under the facility, with an interest
rate of 1.25% over IBOR, or 6.63%, at June 15, 1996. 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 for additional growth opportunities, through other
institutional financing or further issuance of debt or equity securities.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," was recently issued and is effective for the
Company's fiscal year ending December 28, 1996. The Company, as allowed,
intends to continue to measure stock-based compensation using its current method
of accounting prescribed by Accounting Principle Board (APB) Opinion No. 25.
The Company will be required to disclose certain additional information related
to its stock options and Employee Stock Purchase Plan; however, management
believes the impact to the financial statements, taken as a whole, will not be
material.
12
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
INFLATION
The Company's sales for the 12 and 24 weeks ended June 15, 1996 reflect no
food price inflation or deflation, while sales for the same periods in 1995
reflect food price deflation of approximately 1%.
FORWARD LOOKING INFORMATION
The above discussion contains forward-looking statements that involve a
number of risks and uncertainties. There are certain important factors that
could cause results to differ materially from those anticipated by such
statements. These include, but are not limited to, the competitive environment
in the supermarket industry generally and specifically in the Company's market
areas, economic conditions, inflation, cost changes, and changes in the
Company's expansion plans.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material legal proceedings were commenced during the quarter.
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 30, 1996.
B. Dan Kourkoumelis, Sheli Z. Rosenberg and Ronald A. Weinstein were elected
as Class III directors to serve terms of three years. The board is
comprised of those elected this year and the following directors completing
their terms: John W. Creighton, Jr., Fred B. McLaren, and Samuel Zell,
Class I directors whose terms expire in one year and Maurice F. Olson and
Stuart M. Sloan, Class II 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 III Directors:
Dan Kourkoumelis 13,140,791 180,247
Sheli Z. Rosenberg 13,138,532 182,506
Ronald A. Weinstein 13,138,807 182,231
2. Proposal to amend the Company's 1987 Incentive Stock Option Plan to
reserve an additional 200,000 shares of the Company's common stock for
issuance upon the exercise of options granted under the plan.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
12,233,268 903,784 37,251 146,735
14
<PAGE>
PART II. OTHER INFORMATION
(continued)
3. Proposal to amend the Company's 1990 Employee Stock Purchase Plan to
reserve an additional 300,000 shares of the Company's common stock for
issuance upon purchase of shares under the plan and to increase the
number of shares of common stock issuable in any given
payment period to 150,000.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
12,992,558 147,886 33,859 146,735
4. Ratification of selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 28, 1996.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
13,297,279 10,459 13,300 - 0 -
ITEM 5. OTHER INFORMATION
On June 3, 1996 the Company announced the appointment of Marc Rapaport to
its board of directors, replacing Fred McLaren who has resigned..
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 earnings per share.
Exhibit 27.0 - Financial Data Schedule.
B. There were no reports on Form 8-K filed during this quarter.
15
<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, 1996 /s/ STUART M. SLOAN
-----------------------------
Stuart M. Sloan
Chairman
Chief Executive Officer
Date: July 19, 1996 /s/ MARC W. EVANGER
-----------------------------
Marc W. Evanger
Vice President
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
- -------------- -------
11.0 Statement regarding computation
of per share earnings
27.0 Financial Data Schedule
17
<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 15, 1996 and June 17, 1995 are based on
the following:
Twelve Weeks Ended Twenty-Four Weeks Ended
June 15, 1996 June 17, 1995 June 15, 1996 June 17, 1995
------------- ------------- ------------- -------------
Weighted average
shares outstanding 14,543,000 14,698,000 14,489,000 17,198,000
Dilutive effect of
stock options 255,000 123,000 197,000 135,000
----------- ----------- ----------- ----------
Weighted average
number of shares 14,798,000 14,821,000 14,686,000 17,333,000
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
18
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<PAGE>
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<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> JUN-15-1996
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0
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