SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 200549
-------------
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
__ SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24902
QUALITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 42-1425562
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer No.)
455 E. Ellis Road, Muskegon, MI 49443
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (616) 798-8787
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 31, 1999: 100. All of the registrant's stock
is held by QSI Holdings, Inc. and is not publicly traded.
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QUALITY STORES, INC.
INDEX
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PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS - CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed consolidated balance sheets, May 1, 1999 (unaudited) and October 31, 1998 3
Condensed consolidated statements of income (unaudited), for the three months and six months ended
May 1, 1999 and the three months and six months ended May 2, 1998 4
Condensed consolidated statements of cash flows (unaudited), for the six months ended May 1, 1999 and
May 2, 1998 5
Notes to condensed consolidated financial statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CENTRAL TRACTOR FARM & COUNTRY, INC. 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
INDEX TO EXHIBITS 16
Exhibit 3.1 - Certificate of Incorporation, as amended
Exhibit 12 - Statement Re: Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule (electronic copy only)
Exhibit 99 - Important Factors Regarding Forward-Looking Statements
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CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Balance Sheets
(In thousands except share data)
May 1, October 31,
1999 1998
---------- -----------
(unaudited) (Note)
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ASSETS
Current assets:
Cash and cash equivalents $ 10,930 $ 6,971
Recoverable income taxes 2,628 3,134
Trade receivables, net 5,820 4,648
Inventory 269,902 217,064
Other 5,090 3,010
-------- --------
Total current assets 294,370 234,827
Property, improvements and equipment, net 48,358 41,627
Goodwill, net 133,241 134,037
Other assets 8,513 8,354
-------- --------
Total assets $484,482 $418,845
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to bank $ 73,675 $ 32,075
Current portion of long-term debt and capital lease obligations 3,250 3,159
Accounts payable 101,612 78,322
Accrued expenses and other liabilities 18,838 22,862
-------- --------
Total current liabilities 197,375 136,418
Long-term debt, less current portion 147,500 149,000
Other long-term liabilities 7,367 3,670
-------- --------
Total liabilities 352,242 289,088
Stockholder's equity:
Common stock, $.01 par value: authorized shares-3,000; issued
and outstanding shares-100 (wholly-owned by CT Holding,
Inc.) -- --
Additional paid-in capital 119,155 119,155
Retained earnings 13,085 10,602
-------- --------
Total stockholder's equity 132,240 129,757
-------- --------
Total liabilities and stockholder's equity $484,482 $418,845
======== ========
<FN>
Note: The balance sheet at October 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
</FN>
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CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands)
Three months ended
---------------------------
May 1, 1999 May 2, 1998
----------- -----------
Net sales $159,136 $143,717
Cost of sales 111,909 101,216
-------- --------
Gross profit 47,227 42,501
Selling, general and administrative expense 38,345 33,473
Amortization of intangibles 985 860
-------- --------
Operating income 7,897 8,168
Interest expense 5,475 5,514
-------- --------
Income before income taxes 2,422 2,654
Income taxes 1,425 1,279
-------- --------
Net income and comprehensive income $ 997 $ 1,375
======== ========
Ratio of earnings to fixed charges 1.4x 1.4x
======== ========
Six months ended
---------------------------
May 1, 1999 May 2, 1998
----------- -----------
Net sales $305,283 $288,110
Cost of sales 215,429 203,990
-------- --------
Gross profit 89,854 84,120
Selling, general and administrative expense 72,087 67,568
Amortization of intangibles 1,957 1,726
-------- --------
Operating income 15,810 14,826
Interest expense 10,434 10,798
-------- --------
Income before income taxes 5,376 4,028
Income taxes 2,893 2,064
-------- --------
Net income and comprehensive income $ 2,483 $ 1,964
======== ========
Ratio of earnings to fixed charges 1.4x 1.3x
======== ========
See accompanying notes to condensed consolidated financial statements.
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CENTRAL TRACTOR FARM & COUNTRY, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six months ended
-------------------------------
May 1, 1999 May 2, 1998
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Operating Activities
Net income $ 2,483 $ 1,964
Adjustments to reconcile net income to net cash (used in)
provided by operations:
Depreciation and amortization 5,251 4,887
Deferred income taxes 2,893 2,064
Changes in operating assets and liabilities (28,458) 9,020
-------- --------
Net cash (used in) provided by operating activities (17,831) 17,935
Investing Activities
Purchases of property, improvements and equipment, net (8,276) (1,437)
Purchase of net operating assets of and advances to H.C
Shaw Co. (9,446) --
Other (496) 318
-------- --------
Net cash used in investing activities (18,218) (1,119)
Financing Activities
Capital contribution from parent -- 120
Net borrowings (repayments) under line of credit 41,600 (7,750)
Payments on long-term debt (1,500) (1,500)
Other (92) (85)
-------- --------
Net cash provided by (used in) financing activities 40,008 (9,215)
Net increase in cash and cash equivalents 3,959 7,601
Cash and cash equivalents at beginning of period 6,971 7,378
-------- --------
Cash and cash equivalents at end of period $ 10,930 $ 14,979
======== ========
See accompanying notes to condensed consolidated financial statements.
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CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
Central Tractor Farm & Country, Inc. is a wholly-owned subsidiary of CT
Holding, Inc.("Holding"), an affiliate of J.W. Childs Equity Partners, L.P.
("Childs"). The consolidated financial statements include Central Tractor Farm &
Country, Inc. and its wholly-owned subsidiary, Country General, Inc. ("Country
General") (hereinafter collectively the "Company").
The condensed unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions for the
Securities and Exchange Commission's Form 10-Q and Article 10 of Regulation S-X,
and do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The condensed unaudited consolidated financial statements include the
accounts of the Company and its subsidiary. All material intercompany items and
transactions have been eliminated in the consolidation. In the preparation of
the condensed unaudited consolidated financial statements, all adjustments
(consisting of normal recurring accruals) have been made which are, in the
opinion of management, necessary for the fair and consistent presentation of
such financial statements. The operating results for the interim periods are not
necessarily indicative of the results that may be expected for the year.
It is suggested that the condensed unaudited consolidated financial
statements contained herein be read in conjunction with the statements and notes
in the Company's Annual Report on Form 10-K for the year ended October 31, 1998
("Form 10-K").
NOTE 2. ACQUISITIONS
In January 1999, the Company acquired nine retail stores and certain
net operating assets from H.C. Shaw Co., a privately-owned specialty retailer,
for approximately $7.0 million, subject to post-closing adjustments. The
transaction was accounted for as a purchase. The accounts and transactions of
the acquired stores are included in the accompanying condensed unaudited
consolidated financial statements from the date of acquisition. Proforma results
of operations as if the acquisition had occurred on November 2, 1997 are not
materially different from the historical results of operations presented herein.
On May 7, 1999, the Company acquired Quality Stores, Inc. ("Quality
Stores") in a transaction in which Quality Stores was merged with and into the
Company (the "Merger"). In connection with the Merger, the former shareholders
and option holders of Quality Stores received, in the aggregate, $111.5 million
in cash and 792,430 shares of common stock of Holding. In connection with the
Merger, the Company also repaid approximately $42.1 million in debt owed by
Quality Stores. The total purchase price for Quality Stores was approximately
$208.0 million, subject to post closing adjustment.
Quality Stores, based in Muskegon, Michigan, had a strong presence in
Michigan and Ohio and, at the time of the Merger, operated a chain of 114
stores, with annual sales of approximately $525 million, which offer merchandise
oriented to farm and country living, including animal care products, farm and
ranch supplies, workwear,
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and lawn and garden products. In connection with the Merger, the Company changed
its name from "Central Tractor Farm & Country, Inc." to "Quality Stores, Inc."
and relocated its headquarters to Muskegon, Michigan. The Company will continue
to operate stores primarily under the Central Tractor Farm & Country, Country
General and Quality Farm & Fleet names.
The non-cash portion of the Merger consideration was contributed to the
Company by Holding (which, in connection with the Merger, changed its name to
QSI Holdings, Inc.). The Company funded the cash portion of the Merger
consideration and various fees and expenses associated with the Merger from
funds drawn under an amendment and restatement of the Company's Credit Agreement
with Fleet National Bank, as administrative agent for the banks, financial
institutions and other institutional lenders party thereto (the "New Credit
Facility"). Among other things, the amendment and restatement of the New Credit
Facility increased the aggregate principal amount of the facility from
$150,000,000 to $320,000,000, consisting of a $220,000,000 term loan facility
and a $100,000,000 revolving credit facility.
The acquisition of Quality Stores will be accounted for as a purchase
and the results of operations of Quality Stores will be included in the
consolidated financial statements from the date of purchase. The estimated cost
of the acquisition over the estimated fair value of the underlying tangible net
assets is as follows (in thousands):
Cost of acquiring Quality Stores capital stock $208,043
Fair value of underlying tangible net assets acquired 51,886
-------
Excess of cost of acquisition over the allocated fair
value of the underlying tangible net assets $156,157
========
NOTE 3. PRO FORMA RESULTS
The pro forma results of operations presented below is based on the
historical financial statements of the Company included in this Form 10-Q
filing, adjusted to give effect to: (i) the acquisition of Quality Stores by the
Company and (ii) the debt financing arrangements in connection with the
acquisition of Quality Stores, as though these transactions had occurred on
November 2, 1997.
Pro forma adjustments to the historical financial statements are based
upon available data and certain assumptions that the Company believes are
reasonable. The pro forma results of operations are not necessarily indicative
of the Company's results of operations that might have occurred had the
aforementioned transactions been completed as of the date indicated above and do
not purport to represent what the Company's consolidated results of operations
might be for any future period or date.
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Pro Forma Results of Operations
Three Months Ended Six Months Ended
----------------------------- ----------------------------
May 1, 1999 May 2, 1998 May 1, 1999 May 2, 1998
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Net sales $ 289,018 $ 266,587 $ 574,300 $ 531,532
Operating income 8,667 7,099 24,039 15,483
Net (loss) income (1,305) (2,234) 2,134 (3,458)
(Deficiency) ratio of earnings to
fixed charges (811) (2,632) 1.3x (3,557)
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7
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NOTE 4. NEW CREDIT FACILITY
On May 7, 1999, the Company entered into the New Credit Facility, which
consists of a $220.0 million, seven-year term loan facility, which was fully
funded, and a $100.0 million revolving credit facility under which $60.0 million
was outstanding on May 7, 1999. The amounts originally funded and drawn under
the New Credit Facility were used, in part, to repay outstanding borrowings
under the Company's prior credit facility.
The New Credit Facility will mature on April 30, 2006. Borrowings under
the New Credit Facility will bear interest at rates based upon prime or the
Eurodollar Rate plus a margin. The term loans must be repaid in quarterly
installments beginning July 31, 1999, plus prepayments based on the Company's
excess cash flow, as defined. The installments, on an annual basis, are as
follows:
FISCAL YEAR AMOUNT
----------- ------
1999 $ 3,100,000
2000 13,700,000
2001 21,200,000
2002 21,200,000
2003 21,200,000
2004 26,200,000
2005 75,600,000
2006 37,800,000
-------------
$ 220,000,000
=============
The New Credit Facility agreement contains covenants which require the
Company to maintain a minimum Fixed Charge Coverage Ratio, a minimum Interest
Coverage Ratio and a maximum Debt to EBITDA Ratio (all as defined in the New
Credit Facility agreement). The covenants also restrict, among other things, the
payment of dividends, incurrence of debt and capital expenditures.
The New Credit Facility is secured by substantially all of the assets
of the Company.
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QUALITY STORES, INC.
Certain statements in this Report may contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of
1995). All forward-looking statements involve uncertainty, and actual future
results and trends may differ materially depending on a variety of factors. For
a discussion identifying some important factors that could cause actual results
or trends to differ materially from those anticipated in the forward-looking
statements contained herein, please see Exhibit 99 to this Report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Second Quarter of Fiscal 1999 Compared to Second Quarter of Fiscal 1998
Net sales for the second quarter of fiscal 1999 were $159.1 million, an
increase of $15.4 million, or 10.7%, as compared to net sales for the second
quarter of fiscal 1998 of $143.7 million. This increase was due principally to
$20.0 million of sales derived in 1999 from new stores opened or acquired in
fiscal 1999 to date and to a comparable store sales increase of 0.5%, partially
offset by $3.6 million of sales derived in 1998 from stores closed in fiscal
1998.
Gross profit for the second quarter of fiscal 1999 was $47.2 million,
an increase of $4.7 million or 11.1%, as compared to $42.5 million for the
second quarter of fiscal 1998, as a result of the increase in net sales
discussed above and an increase in gross profit percentage. Gross profit as a
percentage of net sales increased to 29.7% for the second quarter of fiscal
1999, as compared to 29.6% for the second quarter of fiscal 1998. The increase
in the gross profit percentage is attributable to the fuller realization of the
increased purchasing power of the Company resulting from the acquisition of
Country General during fiscal 1997, partially offset by lower gross margins from
the new stores opened in fiscal 1999 as compared to comparable stores.
Selling, general and administrative (SGA) expenses for the second
quarter of fiscal 1999 were $38.3 million, an increase of $4.9 million, or 14.6
%, as compared to the second quarter of fiscal 1998. SGA expenses as a
percentage of net sales were 24.1% for the second quarter of fiscal 1999 as
compared to 23.3% for the second quarter of fiscal 1998. This increase is due to
the pre-opening costs incurred for and the proportionately higher initial SGA
expenses associated with the new stores opened in fiscal 1999.
Amortization of intangibles remained relatively constant at $1.0
million for the second quarter of fiscal 1999 as compared to $0.9 million for
the second quarter of fiscal 1998.
Operating income for the second quarter of fiscal 1999 was $7.9
million, a decrease of $0.3 million, or 3.3%, as compared to $8.2 million for
the second quarter of fiscal 1998. Operating income as a percentage of net sales
decreased to 5.0% for the second quarter of fiscal 1999 from 5.7% for the second
quarter of fiscal 1998. The decrease was the result of the factors affecting net
sales, gross profit and SGA expenses discussed above.
Interest expense remained constant at $5.5 million for the second
quarter of fiscal 1999 and for the second quarter of fiscal 1998.
Income taxes for the second quarter of fiscal 1999 were $1.4 million,
an increase of $0.1 million as compared to the second quarter of fiscal 1998.
Income tax as a percentage of pretax earnings was 58.8% in 1999, compared to
48.2% in 1998. This increase is due primarily to amortization of goodwill
related to the acquisition of the Company by Childs, which is not deductible for
income tax purposes, being spread over a smaller pre-tax income base.
Net income for the second quarter of fiscal 1999 was $1.0 million, as
compared to $1.4 million for the second quarter of fiscal 1998, as a result of
the factors discussed above.
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Six months ended May 1, 1999 Compared to Six months ended May 2, 1998
Net sales for the six months ended May 1, 1999 were $305.3 million, an
increase of $17.2 million, or 6.0%, as compared to net sales for the six months
ended May 2, 1998 of $288.1 million. This increase was due principally to $21.4
million of sales derived in 1999 from new stores opened or acquired in fiscal
1999 to date and to a comparable store sales increase of 3.3%, partially offset
by $11.1 million of sales derived in 1998 from stores closed in fiscal 1998.
Gross profit for the six months ended May 1, 1999 was $89.8 million, an
increase of $5.7 million or 6.8%, as compared to $84.1 million for the six
months ended May 2, 1998, as a result of the increase in net sales discussed
above and an increase in gross profit percentage. Gross profit as a percentage
of net sales increased to 29.4% for the six months ended May 1, 1999, as
compared to 29.2% for the six months ended May 2, 1998. The increase in the
gross profit percentage is attributable to the fuller realization of the
increased purchasing power of the Company resulting from the acquisition of
Country General during fiscal 1997, partially offset by lower gross margins from
the new stores opened in fiscal 1999 as compared to comparable stores.
Selling, general and administrative (SGA) expenses for the six months
ended May 1, 1999 were $72.1 million, an increase of $4.5 million, or 6.7%, as
compared to the six months ended May 2, 1998. SGA expenses as a percentage of
net sales remained relatively constant at 23.6% for the six months ended May 1,
1999 as compared to 23.5% for the six months ended May 2, 1998.
Amortization of intangibles remained relatively constant at $2.0
million for the six months ended May 1, 1999 as compared to $1.7 million for the
six months ended May 2, 1998.
Operating income for the six months ended May 1, 1999 was $15.8
million, an increase of $1.0 million, or 6.6%, as compared to $14.8 million for
the six months ended May 2, 1998. Operating income as a percentage of net sales
increased to 5.2% for the six months ended May 1, 1999 from 5.1% for the six
months ended May 2, 1998. The increase was the result of the factors affecting
net sales, gross profit and SGA expenses discussed above.
Interest expense was $10.4 million for the six months ended May 1, 1999
as compared to $10.8 million for the six months ended May 2, 1998. The decrease
in interest expense is attributable to a lower average debt balance and a
decrease in interest rates on the Company's variable rate borrowings.
Income taxes for the six months ended May 1, 1999 were $2.9 million, an
increase of $0.8 million as compared to the six months ended May 2, 1998. Income
tax as a percentage of pretax earnings remained relatively constant at 53.8% in
1999, compared to 51.2% in 1998.
Net income for the six months ended May 1, 1999 was $2.5 million, as
compared to $2.0 million for the six months ended May 2, 1998, as a result of
the factors discussed above.
Acquisition of Quality Stores, Inc.
On May 7, 1999, the Company acquired Quality Stores in a transaction in
which Quality Stores was merged with and into the Company. In connection with
the Merger, the former shareholders and option holders of Quality Stores
received, in the aggregate, $111.5 million in cash and 792,430 shares of common
stock of Holding. In connection with the Merger, the Company also repaid
approximately $42.1 million in debt owed by Quality Stores. The total purchase
price for Quality Stores was approximately $208.0 million, subject to post
closing adjustment.
Quality Stores, based in Muskegon, Michigan, had a strong presence in
Michigan and Ohio and, at the time of the Merger, operated a chain of 114
stores, with annual sales of approximately $525 million, which offer merchandise
oriented to farm and country living, including animal care products, farm and
ranch supplies, workwear, and lawn and garden products. In connection with the
Merger, the Company changed its name from "Central Tractor Farm & Country, Inc."
to "Quality Stores, Inc." and relocated its headquarters to Muskegon, Michigan.
The Company
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will continue to operate stores primarily under the Central Tractor Farm &
Country, Country General and Quality Farm & Fleet names.
The non-cash portion of the Merger consideration was contributed to the
Company by Holding (which, in connection with the Merger, changed its name to
QSI Holdings, Inc.). The Company funded the cash portion of the Merger
consideration and various fees and expenses associated with the Merger from
funds drawn under the New Credit Facility. Among other things, the New Credit
Facility increased the aggregate principal amount of the facility from
$150,000,000 to $320,000,000, consisting of a $220,000,000 term loan facility
and a $100,000,000 revolving credit facility.
The acquisition of Quality Stores will be accounted for as a purchase
and the results of operations of Quality Stores will be included in the
consolidated financial statements from the date of purchase.
New Credit Facility
On May 7, 1999, the Company entered into the New Credit Facility, an
amendment and restatement of its prior credit facility, which consists of a
$220.0 million, seven-year term loan facility, which was fully funded, and a
$100.0 million revolving credit facility under which $60.0 million was
outstanding on May 7, 1999. The amounts originally funded and drawn under the
New Credit Facility were used, in part, to repay outstanding borrowings under
the Company's prior credit facility.
The New Credit Facility will mature on April 30, 2006. Borrowings under
the New Credit Facility will bear interest at rates based upon prime or the
Eurodollar Rate plus a margin. The term loans must be repaid in quarterly
installments beginning July 31, 1999, plus prepayments based on the Company's
excess cash flow, as defined. The installments, on an annual basis, are as
follows:
FISCAL YEAR AMOUNT
----------- ------
1999 $ 3,100,000
2000 13,700,000
2001 21,200,000
2002 21,200,000
2003 21,200,000
2004 26,200,000
2005 75,600,000
2006 37,800,000
-------------
$ 220,000,000
=============
The New Credit Facility agreement contains covenants which require the
Company to maintain a minimum Fixed Charge Coverage Ratio, a minimum Interest
Coverage Ratio and a maximum Debt to EBITDA Ratio (all as defined in the New
Credit Facility agreement). The covenants also restrict, among other things, the
payment of dividends, incurrence of debt and capital expenditures.
The New Credit Facility is secured by substantially all of the assets
of the Company.
Liquidity and Capital Resources
In addition to cash to fund operations, the Company's primary on-going
cash requirements are those necessary for the Company's expansion program,
including inventory purchases and capital expenditures, and debt service. The
Company's primary sources of liquidity have been funds provided from operations,
borrowings pursuant to the Company's revolving and term credit facilities,
short-term trade credit and additional equity investments.
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On May 1, 1999, the Company had working capital of $97.0 million, a
$1.4 million decrease from working capital of $98.4 million on October 31, 1998.
This decrease resulted primarily from a $64.9 million aggregate increase in the
Company's note payable to bank and accounts payable, partially offset by a $52.8
million increase in inventory, a $6.7 million increase in other current assets,
and a $4.0 million decrease in accrued expenses. The increases in the Company's
note payable to bank, accounts payable and inventory are due primarily to the
Company's new store expansion program for fiscal 1999 and the purchase of the
H.C. Shaw Co. stores in January 1999.
Net cash used in operating activities was $17.8 million for the six
months ended May 1, 1999. This was a decrease of $35.7 million from the six
months ended May 2, 1998, during which $17.9 million of cash was generated by
operating activities. This decrease resulted primarily from an increase in
inventory during the first six months of fiscal 1999 as compared to a smaller
increase during the same period in the prior year. The Company's capital
expenditures, exclusive of the H.C. Shaw Co. acquisition, were $8.3 million and
$1.4 million for the six months ended May 1, 1999 and May 2, 1998, respectively.
The increase is primarily attributable to the Company's new store expansion
program for fiscal 1999. In addition, the Company had cash provided by financing
activities of $40.0 million during the six months ended May 1, 1999 as compared
to cash used in financing activities of $9.2 million during the six months ended
May 2, 1998. The increase in cash provided by financing activities during the
first six months of fiscal 1999, as compared to the first six months of fiscal
1998, is attributable to the purchase of the H.C. Shaw Co. stores and subsequent
cash advances and the funding of the inventory build-up and capital expenditures
related to the Company's new store expansion program for fiscal 1999.
The Company anticipates that its principal uses of cash in the
foreseeable future will be working capital requirements, debt service
requirements and capital expenditures, as well as expenditures relating to
acquisitions. Based upon current and anticipated levels of operations, the
Company believes that its cash flow from operations, together with amounts
available under the New Credit Facility, will be adequate to meet its
anticipated requirements in the foreseeable future for working capital, capital
expenditures and debt service. The Company expects that if it were to pursue
further significant acquisitions, it would arrange prior to the acquisitions any
additional debt or equity financing required to fund the acquisitions. There can
be no assurance, however, that the Company's business will continue to generate
sufficient cash flow from operations in the future to service its debt, and the
Company may be required to refinance all or a portion of its existing debt or to
obtain additional financing or to reduce its capital spending. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained. The inability to obtain additional financing could
have a material adverse effect on the Company.
Seasonality
Unlike many specialty retailers, historically the Company has generated
positive operating income in each of its four fiscal quarters. However, because
the Company is an agricultural specialty retailer, its sales necessarily
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
its use of part-time employees. Historically, the Company's sales and operating
income have been highest in the third quarter of each fiscal year due to the
farming industry's planting season and the sale of seasonal products. Working
capital needs are highest during the second quarter. The Company expects these
trends to continue for the foreseeable future.
Inflation
Management does not believe its operations have been materially
affected by inflation.
Year 2000
The Year 2000 issue, common to most companies, concerns the inability
of information and other systems to correctly recognize and properly process
date-sensitive information after 1999 due to the use of only the last two digits
to refer to a year. This problem could affect both information systems (software
and hardware) and other equipment that relies on microprocessors. Management has
completed a company-wide evaluation of this impact
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on its computer systems, applications and other date-sensitive equipment.
Systems and equipment that are not Year 2000 compliant have been identified and
remediation efforts are in process. Management estimates that over 90 percent of
remediation efforts were completed as of May 31, 1999. All remediation efforts
and testing of product/equipment are expected to be completed by September 1,
1999.
The Company is also in the process of monitoring the progress of
material third parties (vendors and suppliers) in their efforts to become Year
2000 compliant. Those third parties include, but are not limited to: product
suppliers, third party benefit administrators, third party logistic providers,
insurance institutions, mainframe computer services suppliers, financial
institutions and utilities. The Company has requested confirmation from all
material third parties that they will be timely Year 2000 compliant. Through May
31, 1999, the Company had received confirmations from approximately 70% of the
third parties that were sent these requests.
Through May 31, 1999, the Company has spent approximately $1.6 million
to address Year 2000 issues. Total costs to address Year 2000 issues are
currently estimated not to exceed $2.0 million and consist primarily of costs
for the remediation of internal systems, including internal programming time.
Funds for these costs are expected to be provided by the operating cash flows of
the Company. The majority of the costs of internal system remediation efforts
relate to the costs of on-staff systems engineers and, therefore, are not
necessarily incremental costs. The Company has not canceled or delayed any other
material projects as a result of this work.
The Company could be faced with severe consequences if Year 2000 issues
are not identified and resolved in a timely manner by the Company and material
third parties. A worst-case scenario would result in the short-term inability of
the Company to sell products in its stores due to unresolved Year 2000 issues.
This would result in lost revenues; however, the amount would be dependent on
the length and nature of the disruption, which cannot be predicted or estimated.
In light of the possible consequences, the Company is devoting the resources
needed to address Year 2000 issues in a timely manner. Management receives
monthly updates as to project status. While management expects a successful
resolution of these issues, there can be no guarantee that the Company and
material third parties, on which the Company relies, will address all Year 2000
issues on a timely basis or that their failure to timely and successfully
address all issues would not have an adverse effect on the Company.
The Company is in the process of developing contingency plans in case
business interruptions do occur. Management expects these plans to be completed
by September 1, 1999.
13
<PAGE>
QUALITY STORES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - See Index to Exhibits included elsewhere herein.
(b) FORM 8-K - The Company filed a Form 8-K dated May 21, 1999 to report its
acquisition of Quality Stores, Inc.
14
<PAGE>
SIGNATURES
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.
Date: June 15, 1999 Quality Stores, Inc.
/s/James F. Hurley
James F. Hurley
Senior Vice President of Finance and
Chief Financial Officer
15
<PAGE>
QUALITY STORES, INC.
INDEX TO EXHIBITS
EXHIBIT 3.1 Certificate of Incorporation, as amended
EXHIBIT 12 Statement Re: Computation of Ratio of Earnings to Fixed Charges
EXHIBIT 27 Financial Data Schedule (electronic copy only)
EXHIBIT 99 Important Factors Regarding Forward-Looking Statements
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
CENTRAL TRACTOR FARM & COUNTRY, INC.
FIRST: The name of the Corporation is Central Tractor Farm & Country,
Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle.
The name and address of the Corporation's registered agent at such address is
Corporation Service Company.
THIRD: The nature of the business and purposes to be conducted or
promoted by the Corporation are as follows:
To engage in any construction, manufacturing, mercantile,
selling, management, service or other business, operation or
activity, and to promote any activity which may be lawfully
carried on by a corporation organized under the General
Corporation Law of the State of Delaware, whether or not
related to the foregoing, and to have and exercise all of the
powers conferred by the laws of the State of Delaware upon
corporations incorporated or organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is three thousand (3,000) shares of
Common Stock with par value $0.01 per share.
Any and all such shares issued, and for which the full consideration
has been paid or delivered, shall be deemed fully paid stock and the holder of
such shares shall not be liable for any further call or assessment or any other
payment thereon.
The Board of Directors is authorized to issue, from time to time, all
or any portion of the capital stock of the Corporation, of any class, which may
have been authorized but not issued or otherwise reserved for issue, to such
person or persons and for such lawful consideration (including property or
services at their fair value), as it may deem appropriate, and generally in its
absolute discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
FIFTH: In furtherance and not in limitation of powers conferred by
statute, it is further provided:
<PAGE>
Restated Certificate of Incorporation of
Central Tractor Farm & Country, Inc.
Page 2
(a) Election of directors need not be by written ballot unless
so provided in the By-Laws of the Corporation.
(b) The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.
SIXTH: (a) Indemnification Other than Actions by or on Behalf of the
Corporation. The Corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, any person who was or is a party or is threatened to be made a party or
is otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that he,
or a person for whom he is the legal representative, is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, member, trustee,
employee or agent of another corporation, partnership, joint venture, limited
liability company, trust or other enterprise or non-profit entity against all
liability, losses, expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) Indemnification in Actions by or on Behalf of the
Corporation. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, member, trustee, employee or agent of another
corporation, partnership, joint venture, limited liability company, trust or
other enterprise or non-profit entity against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application
<PAGE>
Restated Certificate of Incorporation of
Central Tractor Farm & Country, Inc.
Page 3
that despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery of the State of Delaware or such other
court shall deem proper.
(c) Indemnification as to Expenses. To the extent that any
person referred to in paragraphs (a) or (b) of this Article SIXTH has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to therein, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
(d) Authorization. Any indemnification under this Article
SIXTH (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, partner, member, trustee, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in paragraph (a) or (b) of this Article SIXTH. Such determination shall be
made: (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in written
opinion, or (iii) by the stockholders.
(e) Expense Advance. Expenses (including attorneys' fees)
incurred by an officer or director of the Corporation in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be paid
by the Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the manner provided in
paragraph (d) of this Article SIXTH upon receipt of an undertaking by or on
behalf of such officer or director to repay such amount, unless it shall
ultimately be determined that such person is entitled to be indemnified by the
Corporation as authorized in this Article SIXTH. Such expenses (including
attorneys' fees) incurred by other employees or agents of the Corporation may be
so paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
(f) Nonexclusivity. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article SIXTH shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, partner, member, trustee, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
<PAGE>
Restated Certificate of Incorporation of
Central Tractor Farm & Country, Inc.
Page 4
(g) Insurance. The Corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, member, trustee,
employee or agent of another corporation, partnership, joint venture, limited
liability company, trust or other enterprise or non-profit entity against any
liability asserted against and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify such person against such liability under the
provisions of this Article SIXTH or Section 145 of the Delaware General
Corporation Law.
(h) "The Corporation". For the purposes of this Article SIXTH,
references to "the Corporation" shall include the resulting corporation and, to
the extent that the Board of Directors of the resulting corporation so decides,
all constituent corporations (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers and employees or agents so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or was
serving at the request of such constituent corporation as director, officer,
partner, member, trustee, employee or agent of another corporation, partnership,
joint venture, limited liability company, trust or other enterprise or
non-profit entity shall stand in the same position under the provisions of this
Article SIXTH with respect to the resulting or surviving corporation if its
separate existence had continued.
(i) Other Indemnification. The Corporation's obligation, if
any, to indemnify any person who was or is serving at its request as a director,
officer, partner, member, trustee, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise
or non-profit entity shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, limited
liability company, trust or other enterprise or non-profit entity or from
insurance.
(j) Other Definitions. For purposes of this Article SIXTH,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, partner,
member, trustee, employee or agent of the Corporation which imposes duties on,
or involves services by, such director, officer, partner, member, trustee,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
SIXTH.
<PAGE>
Restated Certificate of Incorporation of
Central Tractor Farm & Country, Inc.
Page 5
(k) Continuation of Indemnification. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article SIXTH
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, partner, member, trustee,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(l) Amendment or Repeal. Neither the amendment nor repeal of
this Article SIXTH nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article SIXTH shall reduce, eliminate or
adversely affect any right or protection hereunder of any person in respect of
any act or omission occurring prior to the effectiveness of such amendment,
repeal or adoption.
SEVENTH: No director shall be personally liable to the Corporation or
any stockholder for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liability is not permitted under the
General Corporation Law of the State of Delaware as in effect when such breach
occurred. Neither the amendment nor repeal of the Article nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article shall reduce, eliminate or adversely affect the effect of this Article
in respect of any matter occurring, or any cause of action, suit or claim that,
but for this Article, would accrue or arise, prior to the effectiveness of such
amendment, repeal or adoption.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
<PAGE>
CERTIFICATE OF MERGER
OF
QUALITY STORES, INC.
WITH AND INTO
CENTRAL TRACTOR FARM & COUNTRY, INC.
FIRST: The names and states of incorporation of each of the constituent
corporations are Quality Stores, Inc., a Delaware corporation, and Central
Tractor Farm & Country, Inc., a Delaware corporation.
SECOND: An Agreement and Plan of Reorganization (the "Agreement"),
dated as of March 27, 1999, pursuant to which, inter alia, Quality Stores, Inc.
will merge with and into Central Tractor Farm & Country, Inc. and Central
Tractor Farm & Country, Inc. shall be the surviving corporation of the merger,
has been approved, adopted, certified, executed and acknowledged by each of the
aforementioned corporations in accordance with subsection (c) of section 251 of
the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation is "Central Tractor Farm &
Country, Inc.", a Delaware corporation (the "Surviving Corporation"), which
effective as of the merger will change its name to Quality Stores, Inc.
FOURTH: The Certificate of Incorporation of the Surviving Corporation
shall remain in full force and effect and shall remain unchanged, except that
Article FIRST of such Certificate of Incorporation shall be amended to read as
follows:
"FIRST: The name of the Corporation is Quality Stores, Inc."
FIFTH: The executed Agreement is on file at an office of the Surviving
Corporation. The address of said office is:
3915 Delaware Avenue
Des Moines, Iowa 50513
SIXTH: A copy of the executed Agreement will be furnished by the
Surviving Corporation, on request and without cost, to any stockholder of any
constituent corporation.
<PAGE>
IN WITNESS WHEREOF, said Surviving Corporation has caused this
Certificate to be signed by its duly authorized officer this 7th day of May,
1999.
CENTRAL TRACTOR FARM & COUNTRY,
INC.
By: /S/ ADAM L. SUTTIN
Name: Adam L. Suttin
Title: Vice President
Exhibit 12
CENTRAL TRACTOR FARM & COUNTRY, INC.
Schedule Regarding Computation of Ratio of Earnings to Fixed Charges
(In thousands except ratios)
Three months ended Three months ended
May 1, 1999 May 2, 1998
------------------ ------------------
Fixed charges:
Interest expense $ 5,475 $ 5,514
Portion of rent expense
representing interest 805 742
------- -------
6,280 6,256
======= =======
Earnings:
Income before income taxes 2,422 2,654
Fixed charges 6,280 6,256
------- -------
$ 8,702 $ 8,910
======= =======
Ratio of earnings to fixed charges 1.4x 1.4x
======= =======
Six months ended Six months ended
May 1, 1999 May 2, 1998
---------------- ----------------
Fixed charges:
Interest expense $10,434 $10,798
Portion of rent expense
representing interest 1,520 1,497
------- -------
11,954 12,295
======= =======
Earnings:
Income before income taxes 5,376 4,028
Fixed charges 11,954 12,295
------- -------
$17,330 $16,323
======= =======
Ratio of earnings to fixed charges 1.4x 1.3x
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of Central Tractor Farm & Country, Inc. at and
for the period ended May 1, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> MAY-01-1999
<CASH> 10,930
<SECURITIES> 0
<RECEIVABLES> 6,206
<ALLOWANCES> 386
<INVENTORY> 269,902
<CURRENT-ASSETS> 294,370
<PP&E> 59,022
<DEPRECIATION> 10,664
<TOTAL-ASSETS> 484,482
<CURRENT-LIABILITIES> 197,375
<BONDS> 147,500
0
0
<COMMON> 0
<OTHER-SE> 132,240
<TOTAL-LIABILITY-AND-EQUITY> 484,482
<SALES> 305,283
<TOTAL-REVENUES> 305,283
<CGS> 215,429
<TOTAL-COSTS> 215,429
<OTHER-EXPENSES> 74,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,434
<INCOME-PRETAX> 5,376
<INCOME-TAX> 2,893
<INCOME-CONTINUING> 2,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,483
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual results
and performance to differ materially from those contained in forward-looking
statements made in this report and presented elsewhere by or on behalf of the
Company from time to time.
Ability to Achieve Future Growth
The Company's ability to profitably open stores in accordance with its expansion
plan and to increase the financial performance of its existing stores will be a
significant factor in achieving future growth. The Company's ability to
profitably open stores will depend, in part, on matters not completely within
the Company's control including, among other things, locating and obtaining
store sites that meet the Company's economic, demographic, competitive and
financial criteria, and the availability of capital on acceptable terms.
Further, increases in comparable store sales will depend, in part, on the
soundness and successful execution of the Company's merchandising strategy.
Seasonality
The Company is an agricultural specialty retailer, and consequently its sales
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
to a degree its use of part-time employees. Historically, the Company's sales
and operating income have been highest in the third quarter of each fiscal year
due to the farming industry's planting season and the sale of seasonal products.
Weather, Business Conditions and Government Policy
Unseasonable weather and excessive rain, drought, or early or late frosts may
affect the Company's sales and operating income. In addition, the Company's
sales volume and income from operations depend significantly upon expectations
and economic conditions relevant to consumer spending and the farm economy.
Regional Economy
The majority of the Company's existing stores are located in the Northeastern
United States, the Midwestern United States and the Southeastern United States.
As a result, the Company's sales and profitability are largely dependent on the
general strength of the economy in these regions.
Competition
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers, and from mass merchandisers. Some of these
competitors have substantially greater financial and other resources than the
Company.
Currently, most of the Company's stores do not compete directly in the markets
of other agricultural specialty retail chains. However, the Company's expansion
plans will likely result in new stores being located in markets currently
serviced by one or more of these chains, and there can be no assurance that
these chains, certain of which have announced expansion plans, will not expand
into the Company's markets.
In addition, the Company competes in over half of its markets with mass
merchandisers. The Company believes that its merchandise mix and level of
customer service currently successfully differentiate it from mass
merchandisers, and that as a result the Company has to date not been
significantly impacted by competition from mass merchandisers. However, in the
past certain mass merchandisers have modified their product mix and marketing
strategies in an effort apparently intended to permit them to compete more
effectively in the Company's markets, and it is likely that these efforts will
continue by these and other mass merchandisers.
