<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 7, 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 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, 1996 14,588,807.
<PAGE>
PART I. FINANCIAL INFORMATION
QUALITY FOOD CENTERS, INC.
STATEMENT OF EARNINGS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Twelve Weeks Ended 36 Weeks Ended
September 7, September 9, September 7, September 9,
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $186,142 $176,058 $547,166 $490,534
Cost of sales and related occupancy expenses 139,015 132,862 410,549 369,177
Marketing, general and administrative expenses 35,842 33,097 103,850 92,476
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,285 10,099 32,767 28,881
Interest income 117 76 301 426
Interest expense (2,148) (2,938) (6,901) (5,885)
Other expense - - - (1,400)
- -------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 9,254 7,237 26,167 22,022
Taxes on income
Current 3,188 2,555 8,413 7,343
Deferred 121 70 959 1,010
- -------------------------------------------------------------------------------------------------------------------
Total taxes on income 3,309 2,625 9,372 8,353
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 5,945 $ 4,612 $ 16,795 $ 13,669
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ .40 $ 0.32 $ 1.14 $ .83
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 14,893 14,553 14,766 16,401
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Dividends per common share $ - $ - $ - $ 0.05
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
QUALITY FOOD CENTERS, INC.
BALANCE SHEETS
(dollars in thousands)
- ---------------------------------------------------------------------------
September 7, December 30,
1996 1995
- ---------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,570 $ 10,933
Accounts receivable 9,655 9,031
Inventories 35,670 36,706
Prepaid expenses 6,442 5,524
- ---------------------------------------------------------------------------
TOTAL CURRENT ASSETS 63,337 62,194
PROPERTIES
Land 15,025 8,576
Building, fixtures and equipment 152,331 132,594
Leasehold improvements 43,084 38,767
Construction in progress 6,927 15,954
- ---------------------------------------------------------------------------
217,367 195,891
Accumulated depreciation and amortization (59,878) (48,810)
- ---------------------------------------------------------------------------
157,489 147,081
LEASEHOLD INTEREST, net of accumulated
amortization of $10,719 and $9,535 27,382 27,954
Real estate held for investment 5,888 5,622
GOODWILL, net of accumulated
amortization of $1,751 and $1,009 33,857 34,599
OTHER ASSETS 5,657 5,428
- ---------------------------------------------------------------------------
$ 293,610 $ 282,878
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,414 $ 34,173
Accrued payroll and related benefits 13,041 12,556
Accrued business and sales taxes 5,260 5,037
Other accrued expenses 5,916 4,720
Federal income taxes payable 3,709 405
Current portion of long-term debt 18,900 -
- ---------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 80,240 56,891
DEFERRED INCOME TAXES 11,735 9,992
OTHER LIABILITIES 6,128 6,127
LONG-TERM DEBT 131,100 164,500
SHAREHOLDERS' EQUITY
Common stock at stated value - authorized
60,000,000 shares, issued and outstanding
14,579,000 shares and 14,432,000 shares 31,176 28,932
Retained earnings 33,231 16,436
- ---------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 64,407 45,368
- ---------------------------------------------------------------------------
$ 293,610 $ 282,878
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 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 - - 16,795 16,795
COMMON STOCK ISSUED 147 2,244 - 2,244
- --------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 7, 1996 14,579 $ 31,176 $ 33,231 $ 64,407
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Thirty-Six Weeks Ended
September 7, September 9,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES $ 16,795 $ 13,669
Net earnings
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 11,063 8,641
Amortization of leasehold interest and other 2,526 2,074
Amortization of debt issuance costs 128 86
Deferred income taxes 959 1,010
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (624) (1,202)
Inventories 1,036 (1,280)
Prepaid expenses (1,046) (3,224)
Accounts payable (759) (7,250)
Accrued payroll and related benefits 485 1,778
Accrued business and sales taxes 223 935
Other accrued expenses 1,196 1,319
Federal income taxes payable 4,088 4,121
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 36,070 20,677
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures, net (25,000) (20,780)
Cash portion of Olson's merger - (17,815)
Other (827) (653)
Proceeds from sale of real estate 2,650 1,340
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (23,177) (37,908)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,244 27,045
Common stock repurchased - (177,850)
Net proceeds under revolving credit facility - 4,000
Proceeds from (repayments of) long-term debt (14,500) 140,000
Cash dividend paid - (974)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (12,256) (7,779)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 637 (25,010)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 10,933 35,163
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 11,570 $ 10,153
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 1996 AND SEPTEMBER 9, 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 thirty-six weeks ended September 7, 1996 and September 9, 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. Accrual 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-weeks 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 thirty-six weeks
ended September 7, 1996 and September 9, 1995 was as follows (in thousands):
Thirty-Six Weeks Ended
September 7, September 9,
1996 1995
- --------------------------------------------------------------------------------
Income taxes $ 4,325 $ 3,392
Interest (net of interest capitalized
of $943 and $68, respectively) 6,602 5,422
- --------------------------------------------------------------------------------
6
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 1996 AND SEPTEMBER 9, 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, consideration provided
was 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 lose
carryforwards totaling approximately $12.0 million and certain other tax credit
carryforwards totally 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 carry forwards are utilized
by the Company. The Company utilized $784,000 of the tax asset during the
second quarter of 1996 and $653,000 of the tax asset during the second quarter
of 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
-------
-------
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 1996 AND SEPTEMBER 9, 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.
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWELVE AND THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 1996 COMPARED TO THE TWELVE AND
THIRTY-SIX WEEKS ENDED SEPTEMBER 9, 1995
The table below sets forth items in the Company's statements of earnings as
a percentage of sales:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------------ ---------------------------------
September 7, September 9, September 7, September 9,
1996 1995 1996 1995
% % % %
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales & related
occupancy expenses 74.7 75.5 75.0 75.3
Marketing, general &
administrative expenses 19.2 18.8 19.0 18.8
--------- ---------- ---------- ----------
Operating income 6.1 5.7 6.0 5.9
Interest income .1 .1 .1 .1
Interest expense (1.2) (1.7) (1.3) (1.2)
Other expense . . . (.3)
--------- ---------- ---------- ----------
Earnings before income taxes 5.0 4.1 4.8 4.5
Taxes on income (1.8) (1.5) (1.7) (1.7)
--------- ---------- ---------- ----------
Net earnings 3.2% 2.6% 3.1% 2.8%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
SALES
Sales for the 12 weeks ended September 7, 1996 increased $10.1 million, or
5.7%, compared with the same period in 1995. This increase reflects the
addition of two new stores since September 9, 1995, higher sales in remodeled
stores and an increase in same store sales of approximately 3.4% with no
inflation in retail food prices.
Sales for the 36 weeks ended September 7, 1996 increased $56.6 million,
or 11.5%, compared with the same period in 1995. The increase for the 36
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 2.1% 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 and acquiring 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 fourth quarter of the year as the Company laps the dates of certain store
openings and remodelings which impacted the Company's stores in 1995.
Further, modest inflation is anticipated for the remainder of 1996 and the
regional economy is projected to be healthier than in recent years.
9
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
OPERATING INCOME
Operating income increased 11.7% for the 12 weeks ended September 7, 1996
as compared to the same period in 1995, reflecting the 5.7% increase in sales
and improved operating margins of 6.l% in 1996 compared to 5.7% in 1995, as
discussed below. Operating income increased 13.5% for the 36 weeks ended
September 7, 1996 as compared to the same period in 1995, reflecting the 11.5%
increase in sales and the increase in operating margins to 6.0% of sales from
5.9% of sales in 1995 as discussed below.
The Company's cost of sales and related occupancy expenses decreased to
74.7% of sales and 75.0% of sales for the 12 and 36 weeks ended September
7,1996, respectively, as compared to 75.5% and 75.3% in the comparable periods
in 1995. The improvement in cost of sales and related occupancy expenses is a
result of improved buying and merchandising and a greater mix of sales in higher
margin service departments, which more than offset higher occupancy expenses
resulting from the 1995 acquisitions and new stores.
Marketing, general and administrative expenses increased to 19.2% of sales
and 19.0% of sales for the 12 and 36 weeks ended September 7, 1996,
respectively, as compared to 18.8% of sales for both the 12 and 36 week periods
in 1995. The increase in expenses is primarily attributable to contractual rate
increases from union contracts effective in May and August of 1996 and a 10%
increase in the union benefit contributions rate effective in July 1996 as well
as additional startup and promotional expenses incurred in connection with
remodels completed during the 12 weeks ended September 7, 1996.
INTEREST INCOME
Interest income increased $41,000 for the 12 weeks ended September 7, 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
September 7, 1996 as compared to the same period in 1995.
Interest income decreased by $125,000 for the 36 weeks ended September 7,
1996 compared to the same period in 1995, reflecting lower average cash balances
due to the recapitalization completed on March 29, 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 $0.8 million to $2.1 million (net of $.4 million
of capitalized interest) for the 12 weeks ended September 7, 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
September 7, 1996 as compared to the same period in 1995, coupled with lower
borrowing rates in 1996 than in 1995.
Interest expense increased $1.0 million to $6.9 million (net of $.9 million
of capitalized interest) for the 36 weeks ended September 7, 1996 compared to
the same period in 1995 as all 36 weeks in 1996 reflect interest associated with
the Company's debt incurred in March 1995 as compared to only 23 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 36 week periods ended September 7, 1996 as compared to 36.3% for the 12
weeks ended September 9, 1995 and 37.9% during the 36 weeks ended September 9,
1995 due to the non-deductible one-time charge of $1.4 million recorded as
other expense 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 recorded in connection with 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 11.7% increase in operating income for the 12 weeks ended September 7,
1996 combined with a reduction in interest expense and a lower effective tax
rate than in the same period in 1995, resulted in a 28.9% increase in net
earnings to $5.9 million, compared to $4.6 million in the same period in 1995.
Earnings per share increased to 40 cents per share on 14,893,000 weighted
average shares outstanding, compared to 32 cents per share on 14,553,000
weighted average shares outstanding in the same period in 1995.
Net earnings for the 36 weeks ended September 7, 1996 increased 22.9% to
$16.8 million compared with $13.7 million for the same period in 1995, due to
the 13.5% 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. Earnings per share were $1.14 per share on 14,766,000 weighted average
shares outstanding, compared with 83 cents per share on 16,401,000 weighted
average shares outstanding for 1995. Excluding the one-time charge of $1.4
million for other expense, net earnings for 1995 would have been $15.1 million,
or 92 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 increased $0.6 million
during the 36 weeks ended September 7, 1996 to $11.6 million primarily due to an
increase in cash provided by operations to $36.1 million, and $2.7 million of
proceeds received from the sale of real estate which more than offset capital
expenditures of $25.0 million and the repayment of $14.5 million of long-term
debt. The ratio of current assets to current liabilities at September 7, 1996
dcreased to .79 to 1, compared with 1.09 to 1 at December 30, 1995, due
primarily to $18.9 million of the Company's long-term debt being classified as
a current liability at September 7, 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 $70.0 million of unused borrowings available at September 7,
1996 from the Company's credit facility (discussed below).
The Company's expansion and remodeling and new store activities for the
period from 1986 through September 7, 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 5 6 - 62,000 25,000
--- --- --- --------- --------
TOTAL 35 14 41 1,621,000 $281,300
--- --- --- --------- --------
--- --- --- --------- --------
* Includes replacement stores.
** Includes purchase of real estate held for investment.
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
After adding 46% to its square footage in 1995, the Company's most active
year to date in terms of growth, 1996 has been another productive year. In
March 1996, the Company opened a new 41,000 square foot store in the Northgate
area, which replaced a 14,000 square foot store in the same area. In August
1996, the Company opened a 66,000 square foot University Village store,
replacing a 31,000 square foot store. The Company has also commenced
construction of a new 45,000 square foot Harvard Market store which is expected
to be completed in early 1997. On October 19,1996 the Company acquired two
stores located in Seattle, Washington from a local independent retailer. The
stores are 18,000 and 26,900 square feet, and the Company plans to substantially
remodel both stores. Additionally, the Company has secured a number of other
sites that are still in the entitlement process or subject to other
contingencies. The Company continues to invest in its existing stores to keep
them up-to-date. In addition to the two replacement stores, as of October
20, 1996, the Company has remodeled three of the stores acquired from Olson's
in 1995 and has completed re-remodelings of eight other stores.
In September 1996, the Company announced that it had appointed a new chief
executive officer of a soon to be established holding company which will
actively pursue other new store sites and acquisition opportunities in the
Company's existing markets, in contiguous markets, as well as in new markets.
The Company owns the real estate at five of its 62 store facilities in
operation. The Company owns the strip shopping centers where two of these
stores are located; however, the real estate operations of these centers are
currently insignificant to the Company's results of operations. The Company
sold an owned shopping center in the third quarter of 1996 as well as one in the
first quarter of 1995. The remaining shopping centers are for sale, however,
the Company plans to retain ownership of its store building 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
payments 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 receivable and intangible assets. The Company
had $150.0 million of borrowing under the facility, with an interest rate of
1.25% over IBOR, or 6.66% at September 7, 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.
The Company has from time to time issued its shares of common stock to
finance acquisitions, as it did for a portion of the Olson's merger in 1995.
The Company anticipates continuing the issuance of authorized but unissued
shares of capital stock as one of its financing sources for future growth.
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
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.
INFLATION
The Company's sales for the 12 and 36 weeks ended September 7, 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.
<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
Not applicable
ITEM 5. OTHER INFORMATION
On September 11, 1996, the Company announced that Christopher Sinclair will
become President, Chief Executive Officer and a director of a soon-to-be formed
holding company and that Stuart M. Sloan will be Chairman of the Board of
Directors. Dan Kourkoumelis will remain President and become Chief Executive
Officer of the Company.
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.
<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 21, 1996 /s/ Marc W. Evanger
----------------------------
Marc W. Evanger
Vice President
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
- -------------- -------
11.0 Statement regarding computation
of per share earnings
27.0 Financial Data Schedule
<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 7, 1996 and September 9, 1995
are based on the following:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 7, 1996 September 9, 1995 September 7, 1996 September 9, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 14,576,000 14,423,000 14,518,000 16,273,000
Dilutive effect of
stock options 317,000 130,000 248,000 128,000
--------------- --------------- -------------- --------------
Weighted average
number of shares 14,893,000 14,553,000 14,766,000 16,401,000
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-07-1996
<EXCHANGE-RATE> 1
<CASH> 11,570
<SECURITIES> 0
<RECEIVABLES> 9,655
<ALLOWANCES> 0
<INVENTORY> 35,670
<CURRENT-ASSETS> 63,337
<PP&E> 217,367
<DEPRECIATION> (59,878)
<TOTAL-ASSETS> 293,610
<CURRENT-LIABILITIES> 80,240
<BONDS> 0
0
0
<COMMON> 31,176
<OTHER-SE> 33,231
<TOTAL-LIABILITY-AND-EQUITY> 293,610
<SALES> 547,166
<TOTAL-REVENUES> 547,166
<CGS> 410,549
<TOTAL-COSTS> 514,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,901)
<INCOME-PRETAX> 26,167
<INCOME-TAX> 9,372
<INCOME-CONTINUING> 16,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,795
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
