<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
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 MARCH 22, 1997
--------------------------------------
- --- 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
incorporation or organization) Identification No.)
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 May 1, 1997: 20,918,333
1
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PART I. FINANCIAL INFORMATION
QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Twelve Weeks Ended
March 22, March 23,
1997 1996
- --------------------------------------------------------------------------------
Sales $233,154 $176,627
Cost of sales and related occupancy expenses 174,913 133,313
Marketing, general and administrative expenses 45,374 33,486
- --------------------------------------------------------------------------------
OPERATING INCOME 12,867 9,828
Interest income 189 72
Interest expense (2,777) (2,588)
- --------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 10,279 7,312
Taxes on income
Current 3,559 2,223
Deferred 300 406
- --------------------------------------------------------------------------------
Total taxes on income 3,859 2,629
- --------------------------------------------------------------------------------
NET EARNINGS $ 6,420 $ 4,683
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EARNINGS PER SHARE $ .40 $ .32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted average shares outstanding 16,017 14,554
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
2
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QUALITY FOOD CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------
March 22, December 28,
1997 1996
- --------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 66,349 $ 14,571
Accounts receivable 19,320 10,754
Notes receivable 5,375 -
Inventories 121,324 36,954
Prepaid expenses 19,482 6,208
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 231,850 68,487
PROPERTIES
Land 53,343 15,025
Buildings, fixtures and equipment 276,381 155,038
Leasehold improvements 92,622 41,511
Property under capital leases 21,191 -
Construction in progress 12,297 9,910
- --------------------------------------------------------------------------------
455,834 221,484
Accumulated depreciation and amortization (64,965) (60,821)
- --------------------------------------------------------------------------------
390,869 160,663
LEASEHOLD INTEREST, net of accumulated
amortization of $11,816 and $11,257 106,446 27,585
Real estate held for investment 6,423 6,048
GOODWILL, net of accumulated
amortization of $2,374 and $2,084 234,528 33,691
OTHER ASSETS 34,059 7,543
- --------------------------------------------------------------------------------
$1,004,175 $ 304,017
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 88,651 $ 35,548
Accrued payroll and related benefits 37,899 15,884
Accrued business and sales taxes 9,361 5,413
Other accrued expenses 34,987 7,240
Federal income taxes payable 6,422 945
Notes payable 5,183 -
Current portion of capital lease obligations 617 -
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 183,120 65,030
DEFERRED INCOME TAXES 63,601 12,142
OTHER LIABILITIES 18,702 5,047
LONG-TERM DEBT 400,278 145,000
CAPITAL LEASE OBLIGATIONS 26,774 -
SHAREHOLDERS' EQUITY
Common stock, at stated value - authorized
60,000,000 shares, issued and outstanding
20,827,000 shares and 14,646,000 shares 263,427 34,945
Retained earnings 48,273 41,853
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 311,700 76,798
- --------------------------------------------------------------------------------
$1,004,175 $ 304,017
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
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QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TWELVE WEEKS ENDED MARCH 22, 1997
(unaudited)
(in thousands)
- --------------------------------------------------------------------------------
Common Stock
-------------------- Retained
Shares Amount Earnings Total
- --------------------------------------------------------------------------------
BALANCE AT
DECEMBER 28, 1996 14,646 $ 34,945 $ 41,853 $ 76,798
NET EARNINGS - - 6,420 6,420
COMMON STOCK ISSUED 6,181 228,482 - 228,482
- --------------------------------------------------------------------------------
BALANCE AT
MARCH 22, 1997 20,827 $ 263,427 $ 48,273 $ 311,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
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QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
-----------------------------------------------------------------------------
Twelve Weeks Ended
March 22, March 23,
1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,420 $ 4,683
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 4,144 3,695
Amortization of leasehold interest and other 1,049 850
Amortization of debt issuance costs 49 43
Deferred income taxes 300 406
Other 100 -
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable 3,054 457
Inventories (3,342) 882
Prepaid expenses 963 (681)
Accounts payable (106) 928
Accrued payroll and related benefits (2,236) (2,490)
Accrued business and sales taxes 171 (1,837)
Other accrued expenses 6,807 1,103
Federal income taxes payable 2,655 2,222
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 20,028 10,261
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures, net (5,101) (8,482)
Acquisition of KUI (34,087) -
Acquisition of Hughes (346,023) -
Increase in real estate held for investment (376) (18)
Other (322) (704)
- --------------------------------------------------------------------------------
Net Cash Used by Investing Activities (385,909) (9,204)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 324 156
Proceeds from March 19, 1997 financings-
Issuance of common stock 192,199 -
Issuance of senior subordinated notes 146,250 -
Proceeds under credit facility 248,001 -
Payment of outstanding credit facility (197,000) -
Proceeds from (repayments of) long-term debt 27,885 (1,000)
- --------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 417,659 (844)
- --------------------------------------------------------------------------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 51,778 213
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 14,571 10,933
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 66,349 $ 11,146
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
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QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996
(unaudited)
NOTE A - NATURE OF OPERATIONS
Quality Food Centers, Inc. ("QFC") is a multi-regional operator of
premium supermarkets, operating 146 stores and employing more than 10,000
people. The Company has been in operation since 1954 and currently operates
89 stores in the Puget Sound region of Washington State primarily under the
names QFC and Stock Market and 57 stores in Southern California under the
Hughes Family Market ("Hughes") name.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Preparation - The consolidated financial statements as of
and for the twelve weeks ended March 22, 1997 and March 23, 1996 are unaudited,
but in the opinion of management include all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the consolidated financial
position and results of operations and cash flows for the periods presented.
All significant intercompany transactions and account balances have been
eliminated in consolidation.
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 conjuction with the annual audited
financial statements and the accompanying notes included in the Company's
Annual Report on Form 10-K/A for the year ended December 28, 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 (except for Hughes' which ends on the last Sunday in December), and
its reporting quarters consist of three 12-week quarters and a 16-week fourth
quarter.
Earnings Per Share - Earnings per share is based upon the weighted average
number of common shares and common share equivalents outstanding during the
period.
NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION
On March 19, 1997, the Company completed (i) the sale of 5,175,000 shares
of the Company's common stock to the public for net proceeds of $192.2 million,
(ii) the private placement of $150.0 million of 8.7% senior subordinated notes
for net proceeds of $146.3 million, and (iii) entered into an agreement to amend
and restate its existing credit facility resulting in net proceeds of $248.0
million. The Company utilized $359.8 million of the proceeds to finance the
acquisition of Hughes and $197.0 million to refinance
the Company's bank indebtedness outstanding at the time of the financings
[including $59.1 million incurred in connection with the acquisition of Keith
Uddenberg, Inc. ("KUI")], leaving approximately $29.7 million of cash for
general corporate purposes.
Cash paid for income taxes and interest expense was as follows (in
thousands):
Twelve Weeks Ended
March 22, March 23,
1997 1996
- --------------------------------------------------------------------------------
Income taxes $ 900 $ -
Interest (net of $212 and $177 of interest capitalized) $3,360 2,163
- --------------------------------------------------------------------------------
6
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QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996
(unaudited)
NOTE D - KEITH UDDENBERG, INC. ACQUISITION
On February 14, 1997, the principal operations of KUI, including assets and
liabilities related to 25 grocery stores in the western and southern Puget Sound
region of Washington, were merged into a subsidiary of the Company. The merger,
which has been accounted for under the purchase method of accounting, was
effected through the acquisition of 100% of the outstanding voting securities of
KUI for consideration consisting of $35.3 million cash, 904,646 shares of the
Company's common stock, (which as of February 14, 1997 had a value of $36.0
million) and the assumption by the Company of approximately $23.8 million of
indebtedness of KUI.
For financial reporting purposes, the consideration paid for the operations
of KUI has been allocated to the fair value of assets acquired and liabilities
assumed. Goodwill of $57.6 million has been recorded as a result of the merger
and is being amortized over 40 years. Because the transaction 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 KUI merger (in thousands):
Cash $ 1,262
Inventories 15,985
Other current assets 4,749
--------
Total current assets 21,996
Property, plant and equipment 25,047
Leasehold interest 20,000
Goodwill 53,481
Other assets 12,330
Current liabilities (16,507)
Deferred income taxes (17,431)
Other liabilities (3,839)
Long-term debt (23,768)
--------
$ 71,309
--------
--------
Long-term debt of $23.8 million assumed in connection with the merger was
subsequently repaid.
NOTE E - HUGHES MARKETS, INC. ACQUISITION
On March 19, 1997, the Company acquired the principal operations of
Hughes, including the assets and liabilities related to 57 grocery stores
located in Southern California and a 50% interest in Santee Dairies, Inc.,
one of the largest dairy plants in California. The acquisition, which has
been accounted for under the purchase method of accounting, was effected
through the acquisition of 100% of the outstanding voting securities of
Hughes, for cash consideration of approximately $359.8 million, and the
assumption by the Company of approximately $33.2 million of indebtedness
(including $6.1 million of current indebtedness) of Hughes, consisting
primarily of capitalized store leases.
7
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QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996
(unaudited)
NOTE E - continued
For financial reporting purposes, the consideration paid for Hughes has
been allocated to the fair value of assets acquired and liabilities assumed.
Goodwill of $147.7 million has been recorded as a result of the acquisition
and is being amortized over 40 years. Because the transaction 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 Hughes merger (in thousands):
Cash $ 13,767
Inventories 65,042
Other current assets 20,782
------------
Total current assets 99,591
Property, plant and equipment 182,999
Property under capital leases 21,191
Leasehold interest 59,353
Goodwill 147,729
Other assets 14,178
Current liabilities (94,935)
Deferred income taxes (33,584)
Other liabilities (9,680)
Long-term debt (278)
Capital lease obligation (26,774)
------------
$ 359,790
-----------
-----------
NOTE F - PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information assumes that the acquisitions of
KUI and Hughes and the related financings each occurred as of the beginning of
each period presented (in thousands, except per share data):
Twelve Weeks Twelve Weeks
Ended Ended
March 22, 1997 March 23, 1996
-------------- --------------
Sales $475,894 $479,534
Net earnings 6,563 5,691
Earnings per share .31 .28
NOTE G - ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share" was recently issued and is effective for the Company's fiscal year
ending December 27, 1997. This Statement requires a change in the
presentation of earnings per share. Early adoption of this Statement is not
permitted. Management believes that the impact of the adoption of this
Statement on the financial statements, taken as a whole, will not be material.
8
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QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
The information contained herein contains forward-looking statements that
involve a number of risks and uncertainties. A number of factors could cause
results to differ materially from those anticipated by such forward-looking
statements. These factors include, but are not limited to, the competitive
environment in the supermarket industry in general and in the Company's specific
market areas, changes in prevailing interest rates and the availability of
financing, inflation, changes in costs of goods and services, economic
conditions in general and in the Company's specific market areas, labor
disturbances, demands placed on management by the substantial increase in the
size of the Company because of the acquisitions described below, and changes in
the Company's acquisition plans. In addition, such forward-looking statements
are necessarily dependent upon assumptions, estimates and data that may be
incorrect or imprecise. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized.
TWELVE WEEKS ENDED MARCH 22, 1997 COMPARED TO THE TWELVE WEEKS ENDED MARCH 23,
1996
During the twelve weeks ended March 22, 1997, the Company acquired 82
stores from Hughes Markets, Inc. ("Hughes") and Keith Uddenberg, Inc. ("KUI")
operating under the "Hughes Market" "Stock Market" and "Thriftway" names.
(See Notes D and E to the Company's consolidated financial statements for the
twelve weeks ended March 22, 1997.) The acquisitions more than doubled the
size of the Company and managing the Company and integrating the acquired
businesses will present new challenges to management. In order to facilitate
this phase of the Company's development, the Company has hired a new chief
executive officer, a senior vice president of corporate development and a
senior vice president of marketing and public affairs to pursue and integrate
acquisitions at a holding company level, thus allowing current senior
management to remain focused on existing operations. Because of the magnitude
of the acquisitions, the Company's operations are not comparable to QFC's
or Hughes' historical operations. The Company's capitalization has also
changed, reflecting the issuance of shares as well as a significant increase
in long-term debt and a related increase in interest expense. The results of
operations for the twelve weeks ended March 22, 1997 include the results of
operations of the acquired KUI stores for five weeks and Hughes stores for
five days and the effects of the related financings for four days.
The table below sets forth items in the Company's statements of earnings
as a percentage of sales:
12 Weeks Ended
--------------------------------
March 22, March 23,
1997 1996
----------- ----------
Sales 100.0% 100.0%
Cost of sales & related
occupancy expenses 75.0 75.4
Marketing, general &
administrative expenses 19.5 19.0
--------- ---------
Operating income 5.5 5.6
Interest income .1 .1
Interest expense (1.2) (1.5)
---------- ----------
Earnings before income taxes 4.4 4.2
Taxes on income 1.6 1.5
---------- ----------
Net earnings 2.8% 2.7%
---------- ----------
---------- ----------
SALES
Sales for the 12 weeks ended March 22, 1997 increased approximately $56.5
million, or 32.0%, compared with the same period in 1996. The increase in
total sales reflects the acquisition of the 25 KUI stores for five weeks, the
57 Hughes stores for five days, sales from the two Food Giant stores acquired
in October 1996 and an increase in same store sales (same store sales exclude
sales in stores opened or acquired during the previous 12 months) of
approximately 4.2% for the quarter. The increase in same store sales is due
to improved merchandising and strong sales in remodeled and replacement
stores while the Company experienced 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 same store sales should remain positive in 1997.
Further, modest or no inflation is anticipated for the remainder of 1997 and the
regional economies are projected to remain healthy.
9
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QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
OPERATING INCOME
The Company's cost of sales and related occupancy expenses improved to
75.0% of sales for the first quarter of 1997 from 75.4% for the first quarter of
1996 due to improved buying and merchandising, a greater mix of sales in higher
margin service departments in the QFC stores and lower occupancy expenses as a
percentage of sales offset, in part, by lower margins in the stores acquired
during the quarter.
Marketing, general and administrative expenses increased to 19.5% of sales
for the first quarter of 1997 from 19.0% of sales for the first quarter of 1996
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 expenses associated with the
initial integration of the acquired stores..
As a result of the above factors, operating margins declined slightly to
5.5% of sales for the first quarter of 1997 compared to 5.6% of sales for the
comparable period in 1996 which, combined with the 32.0% increase in sales,
produced a 30.9% increase in operating income for the quarter.
INTEREST
Interest income increased to $189,000 in the first quarter of 1997,
compared to $72,000 in the same period in 1996, reflecting the increase in the
Company's cash balances and higher interest rates.
The $189,000 increase in interest expense for the first quarter of 1997
reflects four days interest on the additional debt incurred in connection with
the acquisitions offset by lower debt balances than in the comparable year prior
to such borrowings. Interest expense is net of approximately $212,000 and
$177,000 of interest capitalized in connection with store construction and
remodeling costs incurred during the 12 weeks ended March 22, 1997 and March 23,
1996, respectively.
INCOME TAXES
The Company's effective federal income tax rate increased from 36.0% in
1996 to 37.5% in 1997 due to an increase in non-deductible goodwill resulting
from the KUI and Hughes acquisitions. The difference between the Company's
effective income tax rate and the federal statutory rate for the first quarter
of 1997 is primarily due to non-deductible amortization of goodwill that
was acquired through various acquisitions by the Company, including the KUI and
Hughes acquisitions. As a result of these acquisitions, a portion of the
Company's income will be taxable in the state of California, which, combined
with the non-deductible goodwill amortization, will result in an estimated
effective tax rate of approximately 43%.
NET EARNINGS
The increase in operating income offset by the increase in the effective
tax rate resulted in an increase in net earnings for the 12 weeks ended March
22, 1997 to $6.4 million compared with $4.7 million in the first quarter of
1996. Earnings per share were 40 cents on 16,017,000 weighted average shares
outstanding, compared with 32 cents on 14,554,000 weighted average
shares outstanding for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principle source of liquidity has been cash generated from
operations and its revolving credit facility. On March 19, 1997, the Company
completed (i) the sale of 5,175,000 shares of the Company's common stock to
the public for net proceeds of $192.2 million, (ii) the private placement of
$150.0 million of 8.7% senior subordinated notes for net proceeds of $146.3
million, and (iii) entered into an agreement to amend and restate its
existing credit facility resulting in net proceeds of $248.0 million. The
Company utilized $359.8 million of the proceeds to finance the acquisition of
Hughes and $197.0 million to refinance the Company's bank indebtedness
outstanding at the time of the financings (including $59.1 million incurred
in connection with the acquisition of KUI), leaving approximately $29.7
million of cash for general corporate purposes. This amount, together with
cash provided by operations of $20.0 million, more than offset capital
expenditures and other investing activities during the 12 weeks ended March
22, 1997, and resulted in an increase in cash and cash equivalents of $51.8
million during the quarter to $66.3 million. The ratio of current assets to
current liabilities at March 22, 1997 improved to 1.27 to 1, compared with
1.05 to 1 at December 28, 1996.
10
<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 1987 through March 22, 1997 are summarized below (dollars in
thousands):
NEW OR SQUARE
MAJOR(1) ACQUIRED FEET CAPITAL
REMODELS STORES ADDED EXPENDITURES(2)
-------- ------ ----- ---------------
1987 2 - 8,000 $ 5,700
1988 5 - 16,000 7,600
1989 2 2 85,000 9,900
1990 3 3 107,000 16,600
1991 3 3 127,000 25,900
1992 6 3 137,000 26,800
1993 3 5 173,000 43,000
1994 4 7 239,000 28,200
1995 7 17 609,000 89,100
1996 13 2 111,000 33,000
1997 1 82 3,039,000 436,600
-- --- --------- ---------
TOTAL 49 124 4,651,000 $ 722,400
-- --- --------- ---------
-- --- --------- ---------
(1) Includes replacement stores.
(2) Includes $71.3 million for the acquisition of KUI, $359.8 million for the
acquisition of Hughes and expenditures for the purchase of real estate
held for investment.
With the acquisition of Hughes and KUI, 1997 was the Company's most
active year to date in terms of growth. In addition, on April 30, 1997, the
Company opened its 45,000 square foot Harvard Market QFC store located in
Seattle, Washington. QFC also continues to invest in its existing stores to
keep them up-to-date. In addition to the remodeling of one of the two Food
Giant stores the Company acquired in 1996, the Company's fiscal 1997 remodel
plans currently include 12 of its QFC stores and 13 of the stores it acquired
in the KUI acquisition. 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 has sold one of the stores it acquired from KUI and is actively
marketing four other KUI stores. In addition, the Company has signed an
agreement to acquire a store in Port Hadlock, located in the Western Puget
Sound region of Washington state from a local independent retailer. The
Company has also entered into lease agreements for two QFC stores to be built
in the Portland, Oregon area, which are expected to be opened in early 1998
and has entered into agreements for two sites in the Olympia, Washington
area. The Company will own its store pads and plans to open the Olympia QFC
stores in 1998 as well. The Company's plans for the remainder of 1997 in
southern California currently include one new store, two replacement stores
and two major store remodels.
The Company owns the real estate at 11 of its 146 store facilities
currently 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
shopping centers 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. The Company, through Hughes, also owns a 600,000 square foot
distribution facility in Irwindale, California.
As part of the Hughes acquisition, the Company acquired a 50% interest in
Santee Dairies, Inc. ("Santee"),one of the largest dairy plants in California.
Santee has begun construction of a new dairy plant in order to provide a
consistent source of milk, accommodate expected expansion and contain operating
costs. The estimated cost of construction is approximately $100.0 million
(including production equipment and capitalized interest and other costs). The
new dairy is scheduled to be completed in December 1997 and be operational by
March 1998. Approximately 50% of the aggregate budgeted capital expenditures
have been made. Negotiations are currently under way with certain parties to
provide Santee with approximately $80.0 million of senior secured notes to
finance construction costs. The prospective lenders have orally agreed in
principle to certain primary terms of such long-term financing, including the
applicable interest rate and have been paid a non-refundable fee in connection
therewith. There is no assurance, however, that Santee will be able to obtain
this long-term financing on acceptable terms, or at all. In that regard, the
Company, and the other 50% partner, may be required to provide certain credit
support for any long-term financing which Santee may arrange or otherwise enter
into agreements intended to assure repayment of such indebtedness. Santee is
currently in default under certain of the financial covenants relating to its
existing credit facilities,
11
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
and is negotiating with its lender to extend its existing credit facilities and
to obtain the appropriate waivers. Notwithstanding such default, its lender has
allowed Santee to continue to borrow under its existing credit facility without
a formal waiver.
Excluding the KUI and Hughes acquisitions, 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 $75.0 million in
1997 in order to remodel existing stores and to acquire and open new stores in
the Pacific Northwest and Southern California. However, the Company will
continue to seek attractive acquisitions of other regional supermarkets and
supermarket chains, as well as additional stores and store sites and actual
capital expenditures may increase significantly to the extent that these
opportunities arise and the Company is able to obtain financing for these
acquisitions. Accordingly, the Company is unable to predict with certainty its
capital expenditure budget for 1997 or any future period.
The Company has discontinued the payment of cash dividends on its common
stock and presently intends to retain available funds to finance the growth and
operations of its businesses.
On March 19, 1997, in connection with the Hughes merger, the Company
entered into a new credit facility which replaced the credit facility it entered
into in connection with its 1995 recapitalization. The new credit facility
consists of (i) a $250 million term loan facility (the "Term Loan Facility"),
(ii) a $125 million revolving credit facility (the "Revolving Credit Facility")
and (iii) a $225 million reducing revolving credit facility (the "Acquisition
Facility"). Principal repayments under the Term Loan Facility are due in
quarterly installments from June 30, 1998 through the final maturity of the new
credit facility in March of 2004 and the Company will be required to repay
borrowings under the Term Loan Facility with the proceeds from certain asset
sales and, under certain circumstances, with cash flow in excess of certain
specified amounts. The Revolving Credit Facility is available for working
capital and other general corporate purposes, including permitted acquisitions,
and any outstanding amounts thereunder will become due on March 31, 2004. The
Acquisition Facility is to be used to consummate permitted acquisitions and will
become due on March 31, 2004. In addition, the maximum amount of available
borrowings under the Acquisition Facility will decline by $25 million each year
(subject to certain possible adjustments) commencing March 31, 2000, and the
borrower thereunder will be required to repay borrowings thereunder to the
extent that they exceed the reduced amount of the Acquisition Facility.
Additionally, the Revolving Credit Facility and the Acquisition Facility may be
used to make investments in Santee in an amount not to exceed $80.0 million to
finance construction of Santee's new dairy. On the date the new credit facility
became effective, the Company borrowed $250.0 million under the Term Loan
Facility. At the Company's option, the interest rate per annum applicable to
the new credit facility will either be (1) the greater of one of the bank
agents' reference rate or 0.5% above the federal funds rate in each case, plus a
margin (0% initially) or (2) IBOR plus a margin (0.875% initially), in each case
with margin adjustments dependent on the borrower's senior funded debt to EBITDA
ratio from time to time. The new credit facility contains a number of
significant covenants that among other things, restrict the ability of the
Company and its subsidiaries to incur additional indebtedness and incur liens on
their assets, in each case subject to specified exceptions, impose specified
financial tests as a precondition to the Company and its subsidiaries'
acquisition of other businesses, and limit the Company and its subsidiaries from
making certain restricted payments (including dividends and repurchases of
stock), subject in certain circumstances to specified financial tests. The
obligations of the Company under the new credit facility have been guaranteed by
certain existing subsidiaries. In addition, the Company has pledged the
outstanding shares of certain subsidiaries as security under the facility. In
addition, the Company and its subsidiaries will be required to comply with
specified financial ratios and tests, including an interest and rental expense
coverage ratio, a total funded debt to EBITDA ratio, a senior funded debt to
EBITDA ratio and a minimum net worth test. The covenants and ratios under the
new credit facility and the Notes described below were negotiated to provide
appropriate flexibility to facilitate the Company's growth strategies.
12
<PAGE>
QUALITY FOOD CENTERS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
As discussed above, on March 19, 1997, the Company issued $150 million
aggregate principal amount of Senior Subordinated Notes in a private
offering. The Notes will mature on March 15, 2007. The Notes bear interest
at 8.70% per annum with interest payable in cash semi-annually on March 15
and September 15 of each year, commencing September 15, 1997. The Notes are
redeemable, in whole or in part, at the option of the Company beginning
March 15, 2002, at redemption prices declining over time from 104.35% of the
principal amount in the year 2002 to 100% of the principal amount in the year
2005 and thereafter, in each case plus accrued and unpaid interest to the
redemption date. In addition, at any time prior to March 15, 2000, the
Company may redeem up to 20% of the aggregate principal amount of the Notes
originally issued at a redemption price of 108% of the principal amount
thereof, plus accrued and unpaid interest to the date of redemption, with the
net cash proceeds of one or more public offerings of common stock of the
Company, provided that at least 80% of the aggregate principal amount of the
Notes originally issued remains outstanding immediately after the occurrence
of such redemption. The obligations of the Company pursuant to the Notes are
guaranteed by certain of QFC's existing subsidiaries (the "Guarantors"). The
Notes are general unsecured obligations of the Company and the Guarantors,
respectively, subordinated in right of payment to all existing and future
senior debt of the Company and the Guarantors, as applicable, including
borrowings and guarantees under the new credit facility. Upon a change of
control, the Company will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of repurchase. The Company will also be obligated in
certain circumstances to offer to repurchase Notes at a purchase price of
100% of the principal amount thereof, plus accrued interest, with the net
cash proceeds of certain sales or other dispositions of assets. The
Indenture relating to the Notes contains certain covenants that limit,
subject to certain significant exceptions, the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness and issue
disqualified stock; pay dividends or make certain other distributions; cause
or permit to exist any consensual restriction on the ability of certain
parties to pay dividends or make certain other distributions; layer
indebtedness; create certain liens securing indebtedness other than senior
debt; enter into certain transactions with affiliates; enter into certain
mergers and consolidations or engage in new lines of business.
The Company is currently in compliance with all financial covenants
contained in both the new credit facility and the Senior Subordinated Notes.
The Company anticipates that cash on hand, cash flow from operations and
borrowings under the new credit facility will be sufficient to provide
financing for the $62 million of capital expenditures which is currently
budgeted through the end of fiscal 1997. However, to the extent that the
Company pursues additional acquisitions or seeks to make additional
expenditures or to the extent that Santee is unable to obtain the required
financing for its new dairy, the Company may be required to seek additional
sources of financing, which may include additional borrowings or sales of its
common stock and there can be no assurance that the Company will be able to
obtain such additional financing on acceptable terms or at all. In December
1996, the Company filed a universal shelf registration statement with the
Securities and Exchange Commission registering for sale to the public, an
aggregate of $500.0 million of securities, under which, after the secondary
common stock offering described above, $298.2 million of common stock,
preferred stock and certain debt securities may be sold. The Company has
from time to time issued shares of common stock for all or a portion of the
purchase price of acquisitions (as it did for a portion of the Olson's Merger
in 1995 and as it did in the KUI acquisition) and may do so again in the
future.
Accounting Pronouncements
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." was recently issued and is effective for the Company's fiscal year
ending December 27, 1997. This Statement requires a change in the
presentation of earnings per share. Early adoption of this Statement is not
permitted. Management believes that the impact of the adoption of this
Statement on the financial statements, taken as a whole, will not be material.
Inflation
The Company's sales for the first quarter of 1997 and 1996 reflect no
food price inflation or deflation.
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
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 earnings per share.
Exhibit 27.0 - Financial Data Schedule.
B. The Company filed a current report on Form 8-K/A on February 18, 1997.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
QUALITY FOOD CENTERS, INC.
(Registrant)
Date: May 20, 1997 /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
16
<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 are
based on the following:
Twelve Weeks Ended
March 22, 1997 March 23, 1996
-------------- --------------
Weighted average
shares outstanding 15,295,000 14,436,000
Dilutive effect of
stock options 722,000 118,000
---------- ----------
Weighted average
number of shares 16,017,000 14,554,000
---------- ----------
---------- ----------
17
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<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-22-1997
<CASH> 66,349
<SECURITIES> 0
<RECEIVABLES> 24,695
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<CURRENT-ASSETS> 231,850
<PP&E> 455,834
<DEPRECIATION> (64,965)
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0
0
<COMMON> 263,427
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