SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 7, 1999
QUALITY STORES, INC.
(Exact name of registrant as specified in charter)
Delaware 0-24902 42-1425562
(State or other (Commission file (IRS employer
jurisdiction of number) identification no.)
incorporation)
455 E. Ellis Road, Muskegon, MI 49441
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (616) 798-8787
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
<TABLE>
<CAPTION>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
<S> <C>
(a) Financial Statements of the Business Acquired.
QUALITY STORES, INC. Page
Consolidated Balance Sheets - January 30, 1999 and January 31, 1998 F-1
Consolidated Statements of Income - Years ended January 30, 1999 and January 31, 1998 F-2
Consolidated Statements of Stockholders' Equity - Years ended January 30, 1999
and January 31, 1998 F-3
Consolidated Statements of Cash Flows - Years ended January 30, 1999
and January 31, 1998 F-4
Notes to Consolidated Financial Statements F-5
Independent Auditors' Report F-12
Consolidated Balance Sheets - January 31, 1998 and February 1, 1997 F-13
Consolidated Statements of Income - Years ended January 31, 1998 and February 1, 1997 F-14
Consolidated Statements of Stockholders' Equity - Years ended January 31, 1998
and February 1, 1997 F-15
Consolidated Statements of Cash Flows - Years ended January 31, 1998
and February 1, 1997 F-16
Notes to Consolidated Financial Statements F-17
Independent Auditors' Report F-24
Independent Auditors' Report F-25
(b) Pro Forma Financial Information
CENTRAL TRACTOR FARM & COUNTRY, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet - May 1, 1999 F-27
Notes to Pro Forma Condensed Consolidated Balance Sheet F-28
Pro Forma Condensed Consolidated Statement of Income (Unaudited) -
Year ended October 31, 1998 F-30
Notes to Pro Forma Condensed Consolidated Statement of Income F-31
Pro Forma Condensed Consolidated Statement of Income (Unaudited) -
Six Months ended May 1, 1999 F-32
Notes to Pro Forma Condensed Consolidated Statement of Income F-33
</TABLE>
(c) Exhibits.
The following documents are filed as exhibits to this report:
Exhibit No. Description
2.1 Agreement and Plan of Reorganization, dated as of March 27,
1999, among CT Holding, Inc., Central Tractor Farm & Country,
Inc. and Quality Stores, Inc.*
99.1 Second Amended and Restated Credit Agreement, dated as of May
7, 1999.*
- ---------
* Previously filed.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Quality Stores, Inc., and Subsidiaries. Amounts in thousands.
ASSETS
- ----------------------------------------------------------------
January 30, January 31,
1999 1998
------------ -----------
<S> <C> <C>
Current Assets
Cash ........................................................... $ 948 $ 791
Accounts receivable (net of reserves of $424 in 1998 and $400 in
1997) ..................................................... 3,326 3,085
Inventories .................................................... 85,294 81,284
Prepaid expenses ............................................... 1,874 1,636
Deferred income taxes .......................................... 475 180
-------- --------
TOTAL CURRENT ASSETS ........................................... 91,917 86,976
Property and Equipment
Land ........................................................... 2,421 2,444
Buildings and improvements ..................................... 45,999 43,747
Furniture, fixtures and equipment .............................. 59,452 53,535
-------- --------
107,872 99,726
Less accumulated depreciation .................................. 55,850 48,226
-------- --------
NET PROPERTY AND EQUIPMENT ..................................... 52,022 51,500
Other Assets
Notes receivable ............................................... 424 501
Unamortized financing costs .................................... 202 246
-------- --------
TOTAL OTHER ASSETS ............................................. 626 747
-------- --------
$144,565 $139,223
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
January 30, January 31,
1999 1998
------------ -----------
<S> <C> <C>
Current Liabilities
Notes payable to banks ......................................... $ 3,667 $ 7,440
Accounts payable ............................................... 45,593 32,074
Dividends payable .............................................. 606 567
Accrued expenses ............................................... 17,252 12,288
Current maturities of long-term debt ........................... 5,000 5,380
-------- --------
TOTAL CURRENT LIABILITIES ...................................... 72,118 57,749
LONG-TERM DEBT, less current maturities ........................ 28,867 43,857
Deferred Credits
Deferred income taxes .......................................... 525 1,130
Deferred other ................................................. 117 267
-------- --------
TOTAL DEFERRED CREDITS ......................................... 642 1,397
Stockholders' Equity ........................................... 42,938 36,220
-------- --------
$144,565 $139,223
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Quality Stores, Inc., and Subsidiaries. Amounts in thousands, except share data.
Year ended
-----------------------------
January 30, January 31,
1999 1998
----------- ------------
Net Sales .............................. $ 525,284 $ 470,942
Cost of Goods Sold ..................... 373,662 335,493
--------- ---------
Gross profit ...................... 151,622 135,449
Operating Expenses ..................... 131,645 122,686
--------- ---------
Operating income .................. 19,977 12,763
Other Expense (Income)
Interest, net ..................... 4,504 4,547
Other ............................. 20 (616)
--------- ---------
4,524 3,931
--------- ---------
Income Before Taxes on Income .......... 15,453 8,832
Taxes on Income ........................ 5,960 3,450
--------- ---------
Net Income ............................. $ 9,493 $ 5,382
========= =========
Income Per Share of Common Stock-Basic . $ 3.79 $ 2.00
========= =========
Income Per Share of Common Stock-Diluted $ 3.61 $ 1.90
========= =========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Quality Stores, Inc., and Subsidiaries. Amounts in thousands, except share data.
6%
Cumulative Voting Non-Voting Additional
preferred common common contributed Retained
stock stock stock capital earnings Total
---------- --------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
February 1, 1997 $ 9,638 $ 311 $ 2,104 $ -- $ 21,650 $ 33,703
Net income for the year -- -- -- -- 5,382 5,382
Redemption of common and
preferred stock
52,056 non-voting shares (804) -- (44) (259) (1,458) (2,565)
Sale of common stock
8,224 non-voting shares -- -- 8 259 -- 267
Exchange of stock 622 -- (16) -- (606) --
Preferred stock dividends
$6.00 per share -- -- -- -- (567) (567)
-------- -------- -------- -------- -------- --------
BALANCE,
January 31, 1998 $ 9,456 $ 311 $ 2,052 $ -- $ 24,401 $ 36,220
Net income for the year -- -- -- -- 9,493 9,493
Redemption of common and
preferred stock
66,988 non-voting shares (1,396) -- (53) (1,145) (764) (3,358)
Sale of common stock
44,490 non-voting shares -- -- 44 1,145 -- 1,189
Exchange of stock 2,042 -- (55) -- (1,987) --
Preferred stock dividends
$6.00 per share -- -- -- -- (606) (606)
-------- -------- -------- -------- -------- --------
BALANCE,
January 30, 1999 $ 10,102 $ 311 $ 1,988 $ -- $ 30,537 $ 42,938
======== ======== ======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quality Stores, Inc., and Subsidiaries. Amounts in thousands.
Year ended
--------------------------------
January 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income .............................................. $ 9,493 $ 5,382
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ......................... 8,828 8,560
Loss (Gain) on disposal of property and equipment ..... 20 (616)
Provision for bad debts ............................... 295 79
Change in deferred other .............................. (147) (442)
Deferred income taxes ................................. (900) (315)
Changes in operating assets and liabilities
Accounts receivable .................................. (536) (152)
Inventories .......................................... (4,010) (5,853)
Prepaid expenses ..................................... (238) 9
Accounts payable ..................................... 13,519 (7,218)
Accrued expenses ..................................... 4,964 1,222
-------- --------
Net cash provided by operating activities ............ 31,288 656
Cash Flows from Investing Activities
Additions to property and equipment .................... (9,591) (7,283)
Proceeds from disposal of property and equipment ....... 263 1,291
(Increase) decrease in notes receivable and other assets 77 (250)
-------- --------
Net cash used in investing activities ................ (9,251) (6,242)
Cash Flows from Financing Activities
Change in notes payable to banks ....................... (3,773) 5,620
Long-term debt financing ............................... 28,000 9,500
Financing costs ........................................ (1) (68)
Reduction of long-term debt ............................ (43,370) (6,579)
Issuance of common stock ............................... 1,189 267
Redemption of common and preferred stock ............... (3,358) (2,565)
Dividends on preferred stock ........................... (567) (578)
-------- --------
Net cash provided by (used in) financing activities .. (21,880) 5,597
-------- --------
Net Increase In Cash .................................... 157 11
Cash, at beginning of year .............................. 791 780
-------- --------
Cash, at end of year .................................... $ 948 $ 791
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quality Stores, Inc., and Subsidiaries
Note 1
SUMMARY OF ACCOUNTING POLICIES
Quality Stores Inc., (the "Company") operates a chain of specialty retail stores
in the Midwest under the names Quality Farm & Fleet and County Post.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
year 1998 ended January 30, 1999 and fiscal year 1997 ended January 31, 1998.
Fiscal 1998 and 1997 were comprised of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market, on a last-in, first-out
(LIFO) basis.
Property, Equipment, and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets, principally by the straight-line method
for financial reporting purposes and by accelerated methods for tax purposes.
Taxes on Income
Deferred income taxes are recorded for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities, and result principally from book and tax basis of property and
equipment, accrued liabilities, and differences in inventory valuation.
Use of Estimates and Assumptions
The preparation of financial statements in conformity 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Amortization of Unamortized Financing Costs
Financing costs are being amortized on a straight line basis over the life of
the debt instrument.
Store Pre-Opening Costs
Non-capital expenditures associated with opening new retail stores are charged
to operations as incurred.
Note 2
NOTES PAYABLE TO BANKS
Notes payable to banks are current amounts borrowed under line of credit
arrangements totaling $35,000,000, as fully described in Note 3. The effective
interest rate, at the banks' prime rate, was 7.75% at January 30, 1999.
F-5
<PAGE>
Note 3
LONG TERM DEBT
Long-term debt consists of the following (in thousands):
January 30, January 31,
1999 1998
------------ -----------
Senior notes $25,800 $30,000
7.60% mortgage note to bank 851 912
Bank term notes 7,050 8,045
Revolving bank loans -- 10,000
Other notes payable 166 280
------- -------
33,867 49,237
Less current maturities 5,000 5,380
------- -------
$28,867 $43,857
======= =======
The Senior notes are unsecured notes to insurance companies due in annual
installments of $4,200,000 beginning in January 1999, with a final payment of
$4,800,000 in 2005. Interest at 8.80% is payable semi-annually.
The mortgage note to bank is payable in monthly installments of $10,750,
including interest, over the term of the note and matures in 2003.
Bank term notes consist of two obligations. One is payable in quarterly
installments of $114,500 through 2004, plus interest at 8.15%. The second is
payable in monthly installments of $35,435, including interest of 7.2%, through
2002.
The mortgage and bank term notes are collateralized by certain of the Company's
land, buildings and equipment. Also, certain obligations are subject to terms of
loan agreements, covenants of which provide for maintenance of certain financial
ratios. As of January 30, 1999, the Company was in full compliance with all
covenants.
The Company has available lines of credit in three agreements. One agreement
provides for borrowing up to $15,000,000 through May 31, 2001. One agreement
provides for borrowing up to $10,000,000 through January 17, 2000. The other
agreement provides for borrowing up to $10,000,000 through June 1, 2001.
Interest on all three agreements is payable at the bank's prime rate or LIBOR
options. The effective rate for these agreements was 7.75% at January 30, 1999.
Of the total $35,000,000 available, $31,333,000 was unused at January 30, 1999.
The other notes payable are due in varying installments through 2000.
The carrying amount of long-term debt approximates fair value.
Annual maturities of long-term debt for the years ending in 2000 through 2004
are expected to be $5,000,000, $4,870,000, $4,860,000, $8,830,000 and
$5,200,000, respectively.
The Company has guaranteed $1,300,000 of a bank note related to an investment in
which the Company has a minority position.
F-6
<PAGE>
Note 4
LEASE OBLIGATIONS
The Company leases certain of its business facilities under operating leases. At
January 30, 1999, the Company has minimum lease commitments outstanding as
follows (in thousands):
Fiscal year ending
2000 $ 8,637
2001 7,139
2002 5,627
2003 4,134
2004 3,417
2005 and thereafter 9,363
---------
Total minimum lease payments $ 38,317
=========
Rental expense on operating leases amounted to $10,259,000 and $9,604,000 for
the years ended January 30, 1999 and January 31, 1998, respectively.
A significant portion of the operating leases have renewal options.
Note 5
STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following (in thousands):
January 30, January 31,
1999 1998
----------- -----------
Contributed capital
6% cumulative preferred stock,
$100 par - shares authorized
117,961; issued 101,024 and
94,566 $ 10,102 $ 9,456
Voting common stock $1 par -
shares authorized 775,000;
issued 310,897 311 311
Non-voting common stock $1 par -
shares authorized 3,000,000;
issued 1,988,502 and 2,052,219 1,988 2,052
-------- --------
12,401 11,819
Retained earnings 30,537 24,401
-------- --------
$ 42,938 $ 36,220
======== ========
Note 6
STOCK OPTION PLAN
The Company has an Executive Incentive Stock Option Plan and a Non-Qualified
Stock Option Plan. The Executive Incentive Stock Option Plan provides that
options may be granted to designated key management team members. The
Non-Qualified Stock Option Plan provides that options may be granted to
non-employee Directors. These plans allow the participants to purchase shares of
the Company's non-voting common stock at a price equal to the fair market value
F-7
<PAGE>
Note 6
STOCK OPTION PLAN continued . . .
of such stock on the date of the grant of the option. The options are
exercisable two years after the date of the option and expire from five to ten
years from the option date. A summary of changes in stock options follows (in
thousands of shares):
Number of Option Price Weighted Average
Shares Per Share Exercise Price
--------- ----------------- ----------------
Outstanding at
February 1, 1997 263 $16.00 - $47.85 $ 19.03
Granted 22 40.00 - 44.00 40.18
Exercised (3) 16.00 - 31.00 22.23
Expired --
Cancelled (4) 16.00 - 43.50 35.20
------
Outstanding at
January 31, 1998 278 16.00 - 47.85 20.50
Granted 23 37.00 - 40.70 37.17
Exercised (23) 16.00 - 31.00 16.76
Expired --
Cancelled (4) 31.00 - 43.50 40.41
------
Outstanding at
January 30, 1999 274 16.00 - 47.85 21.92
======
Exercisable at
January 30, 1999 231 $16.00 - $47.85 $ 18.87
======
As of January 30, 1999, stock options outstanding had a weighted average
remaining contractual life of 3.6 years.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which became effective January 1, 1996, establishes a
fair value method of accounting for stock options. However, SFAS No. 123 allows
companies to continue to account for stock options granted to employees under
the intrinsic value method in accordance with APB Opinion 25, provided pro forma
net income and earning per share disclosures are made as if the provisions of
SFAS No. 123 were adopted. The Company has elected to continue to account for
its stock options granted to employees in accordance with APB Opinion 25 and
therefore, has not recorded compensation expense upon granting of stock options.
The effect of applying SFAS No. 123's fair value method to the Company's stock
options granted to employees results in net income and earnings per share that
are not materially different from the amounts reported for both 1998 and 1997.
F-8
<PAGE>
Note 7
TAXES ON INCOME
Provisions for federal and state income taxes in the consolidated statements of
income consist of the following components (in thousands):
Year ended
---------------------------------
January 30, January 31,
1999 1998
-------------- -------------
Current
Federal $ 6,150 $ 3,415
State and local 710 350
------- -------
6,860 3,765
Deferred (900) (315)
------- -------
Total $ 5,960 $ 3,450
======= =======
The following summary reconciles taxes at the federal statutory tax rates with
the actual taxes and effective rates (in thousands):
Year ended Year ended
--------------------- ---------------------
January 30, 1999 January 31, 1998
--------------------- ---------------------
Amount Percent Amount Percent
--------- ---------- --------- ----------
Income taxes at
statutory rate $5,409 35.0% $3,091 35.0%
State and local
taxes net of
federal income
tax benefit 461 3.0 228 2.6
Other - net 90 0.6 131 1.5
------ ---- ------ ----
$5,960 38.6% $3,450 39.1%
====== ==== ====== ====
Deferred tax assets totaling $475,000 consist primarily of temporary differences
related to certain accruals, state taxes and reserves. Deferred tax liabilities
totaling $525,000 consist primarily of temporary differences related to property
and equipment, and LIFO inventories.
Note 8
INCOME PER COMMON SHARE
In compliance with the Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", the Company computes basic income per common share
based on the weighted average number of all common shares outstanding during
each year (2,345,000 in 1998 and 2,403,000 in 1997), after giving effect to
dividend requirements of the 6% cumulative preferred stock. Diluted income per
share also includes the effect of potential common shares (dilutive stock
options) outstanding during the period. In 1998 and 1997, all options were
included in the computation of fully diluted income per share.
F-9
<PAGE>
Note 8
INCOME PER COMMON SHARE continued . . .
Year ended
(in thousands)
----------------------------------
January 30, January 31,
1999 1998
------------ ------------
Net income $ 9,493 $ 5,382
Less: dividends
on preferred shares (606) (567)
------- -------
Net income available
to common shareholders 8,887 4,815
Average common
shares outstanding 2,345 2,403
Income per share-basic $ 3.79 $ 2.00
Average common
and common equivalent
shares outstanding 2,459 2,539
Income per share - diluted $ 3.61 $ 1.90
Note 9
EMPLOYEE BENEFIT PLANS
The Company maintains an employee stock ownership plan (ESOP) covering
substantially all team members. Funding is provided by Company contributions in
cash or Company stock, in amounts determined by the Board of Directors. The plan
expense was $650,000 for both of the years ended January 30, 1999 and January
31, 1998. The 1997 contribution was funded entirely with cash. It is the
Company's intention to fund the contribution for 1998 also in cash. Upon an
occurrence of a distributable event as defined in the ESOP plan document, the
Company could be obligated to purchase shares of stock from the ESOP.
In 1995, the ESOP plan was amended whereby the Company's preferred stock was
issued and substituted for existing common stock of those individuals in the
plan who are classified as former active participants. This stock will pay an
annual dividend of 6%. In addition, certain rules regarding distributions were
amended.
The Company also maintains a 401K plan covering substantially all team members.
The Company matches team member contributions based on a discretionary formula.
Plan expense for the years ended January 30, 1999 and January 31, 1998 was
$645,000 and $573,000, respectively.
Note 10
INFORMATION ON INVENTORIES AND INCOME
If the Company had used the first-in, first-out (FIFO) method of inventory
accounting, inventories would have been approximately $12,200,000 and
$12,600,000 higher at January 30, 1999 and January 31, 1998, respectively, than
reported in these financial statements. Net income for the years then ended
would have been approximately $9,200,000 and $5,300,000, respectively.
F-10
<PAGE>
Note 11
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended
(in thousands)
---------------------------
January 30, January 31,
1999 1998
----------- -----------
Cash paid during the year for:
Interest $5,047 $4,624
Income taxes $5,054 $3,138
Note 12
TRANSACTIONS WITH RELATED PARTIES
The Company leases certain facilities from an entity controlled by certain
officers of the Company. All leases are at fair market value and have basic
terms of 5 to 12 years with options to renew. Rent expense under those leases
totaled approximately $979,000 in fiscal 1998 and $956,000 in fiscal 1997.
Note 13
QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the fiscal years ended January 30, 1999 and January 31, 1998 (in thousands,
except share data):
<TABLE>
<CAPTION>
Fiscal Year Ended January 30, 1999
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $ 122,870 $ 147,358 $ 115,921 $ 139,135 $ 525,284
Gross Profit 32,243 41,672 35,117 42,590 151,622
Net Income (1,300) 4,788 555 5,450 9,493
Net Income per
share-basic $ (.55) $ 2.04 $ .24 $ 2.06 $ 3.79
<CAPTION>
Fiscal Year Ended January 31, 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $ 103,471 $ 135,132 $ 111,787 $ 120,552 $ 470,942
Gross Profit 28,437 38,619 33,282 35,111 135,449
Net Income (1,769) 3,762 1,354 2,035 5,382
Net Income per
share-basic $ (.74) $ 1.57 $ .56 $ .61 $ 2.00
</TABLE>
F-11
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of Quality Stores, Inc.
We have audited the accompanying consolidated balance sheets of Quality Stores,
Inc. as of January 30, 1999 and January 31, 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 30, 1999,
and January 31, 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 1, 1999
F-12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Quality Stores, Inc., and Subsidiaries. Amounts in thousands.
ASSETS
- -------------------------------------------------------------
January 31, February 1,
1998 1997
------------ -----------
<S> <C> <C>
Current Assets
Cash ......................................................... $ 791 $ 780
Accounts receivable (net of reserves of $400 in 1997 and 1996) 3,085 3,012
Inventories .................................................. 81,284 75,431
Prepaid expenses ............................................. 1,636 1,645
Deferred income taxes ........................................ 180 170
-------- --------
TOTAL CURRENT ASSETS ......................................... 86,976 81,038
Property and Equipment
Land ......................................................... 2,444 2,610
Buildings and improvements ................................... 43,747 43,146
Furniture, fixtures and equipment ............................ 53,535 53,282
-------- --------
99,726 99,038
Less accumulated depreciation ................................ 48,226 45,642
-------- --------
NET PROPERTY AND EQUIPMENT ................................... 51,500 53,396
Other Assets
Notes receivable ............................................. 501 250
Unamortized financing costs .................................. 246 235
-------- --------
TOTAL OTHER ASSETS ........................................... 747 485
-------- --------
$139,223 $134,919
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
January 31, February 1,
1998 1997
------------ -----------
<S> <C> <C>
Current Liabilities
Notes payable to banks ....................................... $ 7,440 $ 1,820
Accounts payable ............................................. 32,074 39,292
Dividends payable ............................................ 567 578
Accrued expenses ............................................. 12,288 11,066
Current maturities of long-term debt ......................... 5,380 1,350
-------- --------
TOTAL CURRENT LIABILITIES .................................... 57,749 54,106
LONG-TERM DEBT, less current maturities ...................... 43,857 44,966
Deferred Credits
Deferred income taxes ........................................ 1,130 1,435
Deferred other ............................................... 267 709
-------- --------
TOTAL DEFERRED CREDITS ....................................... 1,397 2,144
Stockholders' Equity ......................................... 36,220 33,703
-------- --------
$139,223 $134,919
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-13
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Quality Stores, Inc., and Subsidiaries. Amounts in thousands, except share data.
Year ended
----------------------------------
January 31, February 1,
1998 1997
------------ --------------
Net Sales .............................. $ 470,942 $ 451,365
Cost of Goods Sold ..................... 335,493 319,673
--------- ---------
Gross profit ......................... 135,449 131,692
Operating Expenses ..................... 122,686 116,838
--------- ---------
Operating income ..................... 12,763 14,854
Other (Income) Expense
Interest, net ........................ 4,547 4,393
Other ................................ (616) (199)
--------- ---------
3,931 4,194
--------- ---------
Income Before Taxes on Income .......... 8,832 10,660
Taxes on Income ........................ 3,450 3,904
--------- ---------
Net Income ............................. $ 5,382 $ 6,756
========= =========
Income Per Share of Common Stock-Basic.. $ 2.00 $ 2.54
========= =========
Income Per Share of Common Stock-Diluted $ 1.90 $ 2.41
========= =========
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Quality Stores, Inc., and Subsidiaries. Amounts in thousands, except share data.
6%
Cumulative Voting Non-Voting Additional
preferred common common contributed Retained
stock stock stock capital earnings Total
---------- --------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
February 3, 1996 $ 8,951 $ 316 $ 2,147 $ -- $ 17,352 $ 28,766
Net income for the year -- -- -- -- 6,756 6,756
Redemption of common stock
28,914 non-voting shares -- -- (29) (54) (1,030) (1,113)
4,815 voting shares -- (5) -- -- (181) (186)
Sale of common stock
3,598 non-voting shares -- -- 4 54 -- 58
Exchange of stock 687 -- (18) -- (669) --
Preferred stock dividends
$6.00 per share -- -- -- -- (578) (578)
-------- -------- -------- -------- -------- --------
BALANCE,
February 1, 1997 $ 9,638 $ 311 $ 2,104 $ -- $ 21,650 $ 33,703
Net income for the year -- -- -- -- 5,382 5,382
Redemption of common
and preferred stock
49,861 non-voting shares (804) -- (44) (259) (1,458) (2,565)
Sale of common stock
8,224 non-voting shares -- -- 8 259 -- 267
Exchange of stock 622 -- (16) -- (606) --
Preferred stock dividends
$6.00 per share -- -- -- -- (567) (567)
-------- -------- -------- -------- -------- --------
BALANCE,
January 31, 1998 $ 9,456 $ 311 $ 2,052 $ -- $ 24,401 $ 36,220
======== ======== ======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Quality Stores, Inc., and Subsidiaries. Amounts in thousands.
Year ended
-----------------------------------
January 31, February 1,
1998 1997
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income .............................................. $ 5,382 $ 6,756
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ....................... 8,560 8,248
Gain on disposal of property and equipment .......... (616) (200)
Change in allowance for bad debts ................... -- 120
Change in deferred other ............................ (442) (449)
Deferred income taxes ............................... (315) (490)
Changes in operating assets and liabilities
Accounts receivable ................................. (73) 318
Inventories ......................................... (5,853) (12,512)
Prepaid expenses .................................... 9 279
Accounts payable .................................... (7,218) 7,091
Accrued expenses .................................... 1,222 2,899
-------- --------
Total adjustments .............................. (4,726) 5,304
-------- --------
Net cash provided by operating activities .......... 656 12,060
Cash Flows from Investing Activities
Additions to property and equipment ................... (7,283) (8,105)
Proceeds from disposal of property and equipment ...... 1,291 833
Reduction in notes receivable and other assets ........ 131 3,227
Increase in notes receivable and other assets ......... (381) (2,352)
-------- --------
Net cash used in investing activities ............. (6,242) (6,397)
Cash Flows from Financing Activities
Change in notes payable to banks ...................... 5,620 (940)
Long-term debt financing .............................. 9,500 5,000
Financing costs ....................................... (68) (16)
Reduction of long-term debt ........................... (6,579) (8,478)
Issuance of common stock .............................. 267 58
Redemption of common stock ............................ (2,565) (1,299)
Dividends on preferred stock .......................... (578) (537)
-------- --------
Net cash provided by (used in) financing activities 5,597 (6,212)
-------- --------
Net Increase (Decrease) In Cash ......................... 11 (549)
Cash, at beginning of year .............................. 780 1,329
-------- --------
Cash, at end of year .................................... $ 791 $ 780
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quality Stores, Inc., and Subsidiaries
Note 1
SUMMARY OF ACCOUNTING POLICIES
Quality Stores Inc., (the "Company") operates a chain of specialty retail stores
in the Midwest under the names Quality Farm & Fleet and County Post.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
year 1997 ended January 31, 1998 and fiscal year 1996 ended February 1, 1997.
Fiscal 1997 and 1996 were comprised of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market, on a last-in, first-out
(LIFO) basis.
Property, Equipment, and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets, principally by the straight-line method
for financial reporting purposes and by accelerated methods for tax purposes.
Taxes on Income
Deferred income taxes are recorded for temporary differences between the
financial reporting basis and the tax basis of the company's assets and
liabilities, and result principally from book and tax basis of property and
equipment, accrued liabilities, and differences in inventory valuation.
Use of Estimates and Assumptions
The preparation of financial statements in conformity 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Amortization of Unamortized Financing Costs
Financing costs are being amortized on a straight line basis over the life of
the debt instrument.
Store Pre-Opening Costs
Non-capital expenditures associated with opening new retail stores are charged
to operations as incurred.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to
conform to the classifications used in 1997.
Note 2
NOTES PAYABLE TO BANKS
Notes payable to banks are current amounts borrowed under line of credit
arrangements totaling $35,000,000, as fully described in Note 3. The effective
interest rate, at the banks' prime rate, was 8.5% at January 31, 1998.
F-17
<PAGE>
Note 3
LONG TERM DEBT
Long-term debt consists of the following (in thousands):
January 31, February 1,
1998 1997
------------ ------------
Senior notes $30,000 $30,000
7.35% mortgage note to bank 912 970
Industrial revenue bonds -- 350
Bank term notes 8,045 4,610
Revolving bank loans 10,000 10,000
Other notes payable 280 386
------- -------
49,237 46,316
Less current maturities 5,380 1,350
------- -------
$43,857 $44,966
======= =======
The Senior notes are unsecured notes to insurance companies due in annual
installments of $4,200,000 beginning in January 1993, with a final payment of
$4,800,000 in 2005. Interest at 8.80% is payable semi-annually.
The mortgage note to bank is payable in monthly installments of $10,633,
including interest, over the term of the note and matures in 2003.
Industrial revenue bonds consist of one obligation, payable in quarterly
installments of $29,167, plus interest at 90.4% of the bank's prime rate. These
bonds were paid off during fiscal 1997.
Bank term notes consist of three obligations. One is payable in quarterly
installments at $114,500 through 2004, plus interest at 8.15%. The second
obligation is payable in quarterly installments of $165,631, including interest
at 6.63%, through 1998. The third is payable in monthly installments of $35,435,
including interest of 7.2%, through 2002.
The mortgage, industrial revenue bonds and bank term notes are collateralized by
certain of the Company's land, buildings and equipment. Also, certain
obligations are subject to terms of loan agreements, covenants of which provide
for maintenance of certain financial ratios. As of January 31, 1998, the Company
was in violation of the fixed charge coverage covenant, for which waivers have
been received.
Revolving bank loans consist of three obligations. One is under an agreement
which provides for borrowing up to $15,000,000 through May 31, 2000. One
obligation is under an agreement which provides for borrowing up to $10,000,000
through January 31, 2000. The other obligation is under an agreement which
provides for borrowing up to $10,000,000 through June 1, 2000. Interest on all
three obligations is payable at the bank's prime rate or LIBOR options. The
effective rate for these obligations was 6.5447% - 6.5938% at January 31, 1998.
Of the total $35,000,000 available, $17,560,000 was unused at January 31, 1998.
The other notes payable are due in varying installments through 2000.
The carrying amount of long-term debt approximates fair value.
Annual maturities of long-term debt for the years ending in 1999 through 2003
are expected to be $5,380,000, $4,950,000, $14,860,000, $4,860,000 and
$8,830,000, respectively.
F-18
<PAGE>
Note 4
LEASE OBLIGATIONS
The Company leases certain of its business facilities under operating leases. At
January 31, 1998, the Company has minimum lease commitments outstanding as
follows (in thousands):
Fiscal year ending
1999 $ 8,532
2000 7,007
2001 5,586
2002 3,743
2003 2,520
2004 and thereafter 5,634
---------
Total minimum lease payments $ 33,022
=========
Rental expense on operating leases amounted to $9,604,000 and $9,092,000 for the
years ended January 31, 1998 and February 1, 1997, respectively.
A significant portion of the operating leases have renewal options.
Note 5
STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Contributed capital
6% cumulative preferred stock,
$100 par - shares authorized
117,961; issued 94,566 and
96,382 $ 9,456 $ 9,638
Voting common stock, $1 par -
shares authorized 775,000;
issued 310,897 and 310,897 311 311
Non-voting common stock, $1 par -
shares authorized 3,000,000;
issued 2,052,219 and 2,103,571 2,052 2,104
--------- ---------
11,819 12,053
Retained earnings 24,401 21,650
--------- ---------
$36,220 $33,703
========= =========
Note 6
STOCK OPTION PLAN
The Company has an Executive Incentive Stock Option Plan and a Non-Qualified
Stock Option Plan. The Executive Incentive Stock Option Plan provides that
options may be granted to designated key management team members. The
Non-Qualified Stock Option Plan provides that options may be granted to
non-employee Directors. These plans allow the participants to purchase shares of
the Company's non-voting common stock at a price equal to the fair market value
F-19
<PAGE>
Note 6
STOCK OPTION PLAN continued . . .
of such stock on the date of the grant of the option, The options are
exercisable two years after the date of the option and expire from five to ten
years from the option date. A summary of changes in stock options follows (in
thousands of shares):
Number of Option Price Weighted Average
Shares Per Share Exercise Price
--------- --------------- ---------------
Outstanding at February 3, 1996 268 $ 4.63 - $47.85 $ 19.09
Granted ----
Exercised (3) 4.63 - 31.00 15.93
Expired ----
Cancelled (2) 16.00 - 43.50 34.72
----
Outstanding at February 1, 1997 263 16.00 - 47.85 19.03
Granted 22 40.00 - 44.00 40.18
Exercised (3) 16.00 - 31.00 22.23
Expired ----
Cancelled (4) 16.00 - 43.50 35.20
----
Outstanding at January 31, 1998 278 16.00 - 47.85 20.50
====
Exercisable at January 31, 1998 256 $16.00 - $47.85 $ 18.86
====
As of January 31, 1998, stock options outstanding had a weighted average
remaining contractual life of 4.1 years.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which became effective January 1, 1996, establishes a
fair value method of accounting for stock options. However, SFAS No. 123 allows
companies to continue to account for stock options granted to employees under
the intrinsic value method in accordance with APB Opinion 25, provided pro forma
net income and earning per share disclosures are made as if the provisions of
SFAS No. 123 were adopted. The Company has elected to continue to account for
its stock options granted to employees in accordance with APB Opinion 25 and
therefore, has not recorded compensation expense upon granting of stock options.
The effect of applying SFAS No. 123's fair value method to the Company's stock
options granted to employees results in net income and earnings per share that
are not materially different from the amounts reported for both 1997 and 1996.
Note 7
TAXES ON INCOME
Provisions for federal and state income taxes in the consolidated statements of
income consist of the following components (in thousands):
Year ended
---------------------------------
January 31, February 1,
1998 1997
------------ -----------
Current
Federal $ 3,415 $ 3,840
State and local 350 554
------- -------
3,765 4,394
Deferred (315) (490)
------- -------
Total $ 3,450 $ 3,904
======= =======
F-20
<PAGE>
Note 7
TAXES ON INCOME continued . . .
The following summary reconciles taxes at the federal statutory tax rates with
the actual taxes and effective rates (in thousands):
Year ended Year ended
-------------------- ------------------
January 31, 1998 February 1, 1997
-------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Income taxes at
statutory rate $3,091 35.0% $3,624 34.0%
State and local
taxes net of
federal income
tax benefit 228 2.6 366 3.4
Other - net 131 1.5 (86) (0.8)
------ -------- ------ -----
$3,450 39.1% $3,904 36.6%
====== ======== ====== =====
Deferred tax assets totaling $180,000 consist primarily of temporary differences
related to certain accruals, state taxes and reserves. Deferred tax liabilities
totaling $1,130,000 consist primarily of temporary differences related to
property and equipment, and LIFO inventories.
Note 8
INCOME PER COMMON SHARE
In compliance with the Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", the Company computes basic income per common share
based on the weighted average number of all common shares outstanding during
each year (2,403,000 in 1997 and 2,430,000 in 1996), after giving effect to
dividend requirements of the 6% cumulative preferred stock. Diluted income per
share also includes the effect of potential common shares (dilutive stock
options) outstanding during the period. In 1997 and 1996, all options were
included in the computation of fully diluted income per share.
F-21
<PAGE>
Note 8
INCOME PER COMMON SHARE continued . . .
Year ended
(in thousands)
---------------------------------
January 31, February 1,
1998 1997
------------ -----------
Net income $ 5,382 $ 6,756
Less: dividends on preferred shares (567) (578)
------- -------
Net income available to common
shareholders 4,815 6,178
Average common shares outstanding 2,403 2,430
Income per share-basic $ 2.00 $ 2.54
Average common and common
equivalent shares outstanding 2,539 2,564
Income per share - diluted $ 1.90 $ 2.41
Note 9
EMPLOYEE BENEFIT PLANS
The Company maintains an employee stock ownership plan (ESOP) covering
substantially all team members. Funding is provided by Company contributions in
cash or Company stock, in amounts determined by the Board of Directors. The plan
expense was $650,000 and $700,000 for the years ended January 31, 1998 and
February 1, 1997, respectively. The 1996 contribution was funded entirely with
cash. It is the Company's intention to fund the contribution for 1997 also in
cash. Upon an occurrence of a distributable event as defined in the ESOP plan
document, the Company could be obligated to purchase shares of stock from the
ESOP.
In 1995, the ESOP plan was amended whereby the Company's preferred stock was
issued and substituted for existing common stock of those individuals in the
plan who are classified as former active participants. This stock will pay an
annual dividend of 6%. In addition, certain rules regarding distributions were
amended.
The Company also maintains a 401K plan covering substantially all team members.
The Company matches team member contributions based on a discretionary formula.
Plan expense for the years ended January 31, 1998 and February 1, 1997 was
$573,000 and $632,000, respectively.
Note 10
INFORMATION ON INVENTORIES AND INCOME
If the Company had used the first-in, first-out (FIFO) method of inventory
accounting, inventories would have been approximately $12,600,000 and
$12,800,000 higher at January 31, 1998 and February 1, 1997, respectively, than
reported in these financial statements. Net income for the years then ended
would have been approximately $5,300,000 and $6,900,000, respectively.
F-22
<PAGE>
Note 11
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended
(in thousands)
---------------------------
January 31, February 1,
1998 1997
----------- -----------
Cash paid during the year for:
Interest $4,624 $4,409
Income taxes $3,138 $2,844
Note 12
TRANSACTIONS WITH RELATED PARTIES
The Company leases certain facilities from an entity controlled by certain
officers of the Company. All leases are at fair market value and have basic
terms of 5 years with options to renew for 3 successive 5 year terms. Rent
expense under those leases totaled approximately $956,000 in fiscal 1997 and
$889,000 in fiscal 1996.
Note 13
QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the fiscal years ended January 31, 1998 and February 1, 1997 (in thousands,
except share data):
Fiscal Year Ended January 31, 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------- --------- --------- --------- ---------
Net Sales $ 103,471 $ 135,132 $ 111,787 $ 120,552 $ 470,942
Gross Profit 28,437 38,619 33,282 35,111 135,449
Net Income (1,769) 3,762 1,354 2,035 5,382
Net Income
per share-basic $ (.74) $ 1.57 $ .56 $ .61 $ 2.00
Fiscal Year Ended February 1, 1997
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------- --------- --------- --------- ---------
Net Sales $ 95,055 $ 128,902 $ 110,222 $ 117,186 $ 451,365
Gross Profit 26,753 37,635 31,887 35,417 131,692
Net Income (2,168) 4,763 1,253 2,908 6,756
Net Income
per share-basic $ (.89) $ 1.96 $ .52 $ .96 $ 2.54
F-23
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of Quality Stores, Inc.
We have audited the accompanying consolidated balance sheet of Quality Stores,
Inc. as of January 31, 1998 and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company for the year ended February
1, 1997 were audited by other auditors whose report, dated February 28, 1997,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the fiscal 1997 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
January 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 5, 1998
F-24
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Quality Stores, Inc.
We have audited the consolidated balance sheet of Quality Stores, Inc. (a
Delaware Corporation) and Subsidiaries as of February 1, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quality Stores, Inc. and
Subsidiaries as of February 1, 1997, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
February 28, 1997
F-25
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Pro Forma Condensed Consolidated Financial Statements
The following unaudited Pro Forma Condensed Consolidated Financial Statements
are based on the historical consolidated financial information of Central
Tractor Farm & Country, Inc. ("Central Tractor"), adjusted to give effect to: i)
the acquisition of Quality Stores, Inc. ("Quality") by merger into Central
Tractor; and ii) the debt financing in connection with the acquisition of
Quality. The Pro Forma Consolidated Balance Sheet gives effect to the
acquisition and related financing as though the transactions had occurred on May
1, 1999 (Central Tractor's most recent balance sheet date). The Pro Forma
Condensed Consolidated Statements of Income give effect to the acquisition and
related financing as though the transactions had occurred as of November 2,
1997.
The pro forma adjustments are based upon available data and certain assumptions
that Central Tractor management believes are reasonable. The unaudited Pro Forma
Condensed Consolidated Financial Statements are not necessarily indicative of
Central Tractor's financial position or results of operations that might have
occurred had the aforementioned transactions been completed as of the dates
indicated above and do not purport to represent what Central Tractor's
consolidated financial position or results of operations might be for any future
period or date. The unaudited Pro Forma Condensed Consolidated Financial
Statements should be read in conjunction with the historical financial
statements of Central Tractor and Quality.
The merger of Quality into Central Tractor will be accounted for using the
purchase method of accounting. The total purchase price will be allocated to the
tangible and intangible assets and the liabilities of Quality based upon their
fair values. The allocation of the aggregate purchase price included in the
unaudited Pro Forma Condensed Consolidated Financial Statements is preliminary.
However, Central Tractor management does not expect that the final allocation of
the purchase price will materially alter the pro forma financial position and
results of operations appearing in the following pages.
F-26
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
(in thousands of dollars)
Historical Historical Pro Forma
Central Tractor Quality Pro Forma Central Tractor
May 1, 1999 May 1, 1999 Adjustments May 1, 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,930 $ 4,527 $ -- $ 15,457
Trade accounts receivable 5,820 5,040 -- 10,860
Inventories 269,902 119,940 12,354 (1) 402,196
Other current assets 7,718 4,370 -- 12,088
----------------------------------------------------------------------
Total current assets 294,370 133,877 12,354 440,601
Property, improvements and
equipment, net 48,358 52,823 3,300 (2) 104,481
Goodwill, net 133,241 -- 156,157 (3) 289,398
Deferred financing costs, net 6,543 188 4,812 (4) 11,543
Other assets 1,970 412 -- 2,382
----------------------------------------------------------------------
Total assets $484,482 $187,300 $176,623 $848,405
======================================================================
Liabilities and stockholders' equity
Current liabilities:
Notes payable to banks $ 73,675 $ 3,081 $ (6,879)(5) $ 69,877
Accounts payable and accrued
expenses 120,450 95,689 3,806 (7) 219,945
Current portion of long-term debt
and capital lease obligations 3,250 5,000 (1,800)(6) 6,450
----------------------------------------------------------------------
Total current liabilities 197,375 103,770 (4,873) 296,272
Long-term debt and capital lease
obligations, less current portion 148,809 38,692 132,608 (6) 320,109
Other noncurrent liabilities 6,058 642 1,320 (7) 8,020
----------------------------------------------------------------------
Total liabilities 352,242 143,104 129,055 624,401
Stockholders' equity 132,240 44,196 47,568 (8) 224,004
----------------------------------------------------------------------
Total liabilities and stockholders'
equity $484,482 $187,300 $176,623 $848,405
======================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-27
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet
(in thousands of dollars)
Pro forma adjustments include adjustments necessary to complete the acquisition.
Sources and uses of cash in connection with the transactions are as follows:
Cash sources:
Bank term-loan financing of $174,500, less reduction of bank
revolving facility of $3,798 $170,702
--------
Total cash sources $170,702
========
Cash uses:
Aggregate consideration to acquire Quality capital stock $111,529
Repayment of existing notes payable to bank and long-term
debt of Quality, including prepayment premium of $2,650 49,423
Transaction fees and expenses 9,750
--------
Total cash uses $170,702
========
A description of the pro forma adjustments is as follows:
(1) To increase certain inventories to estimated fair value, representing
estimated selling price less a reasonable profit margin.
(2) To increase acquired property, plant and equipment assets to estimated fair
value.
(3) To increase goodwill for the excess of cost of acquisition over the
allocated fair value of the underlying tangible net assets as follows:
Estimated purchase price of Quality representing cash of
$111,529 and fair value of common stock issued in merger
of $91,764, and transaction fees and expenses of $4,750 $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
========
(4) The adjustments to deferred financing costs consist of:
Fees and expenses relating to financing arrangements in
connection with the acquisition $ 5,000
Eliminate unamortized deferred financing costs relating to
Quality debt to be repaid (188)
--------
Pro forma adjustment to deferred financing costs $ 4,812
========
F-28
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet (continued)
(in thousands dollars)
(5) The adjustments to notes payable to banks consist of:
Reduction of Central Tractor note payable to bank from
proceeds of bank term-loan financing $ (3,798)
Repayment of Quality notes payable to banks (3,081)
----------
Pro forma adjustment to notes payable to banks $ (6,879)
==========
(6) The adjustments to long-term debt consist of:
Proceeds from new bank term loan financing $ 174,500
Repayment of existing Quality long-term debt (43,692)
----------
Pro forma adjustments to long-term debt, including
current portion $130,808
Less current portion adjustment (1,800)
----------
Long-term portion adjustment $132,608
==========
(7) The adjustment represents deferred tax liabilities provided for basis
differences of acquired net assets.
(8) The adjustment represents the net change to stockholders' equity as a
result of the acquisition:
Fair value of common stock issued to Quality shareholders
in the acquisition $ 91,764
To eliminate historical Quality stockholders' equity (44,196)
---------
Net pro forma adjustment $ 47,568
=========
F-29
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Pro Forma Condensed Consolidated
Statement of Income (Unaudited)
(in thousands of dollars)
Pro Forma
Historical Central Historical Quality Central Tractor
Tractor for the for the twelve for the
year ended months ended Pro Forma year ended
October 31, 1998 October 31, 1998 Adjustments October 31, 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $587,195 $506,701 $ -- $1,093,896
Cost of goods sold 410,179 362,559 14,500 (1) 787,921
583 (2)
100 (3)
---------------------------------------------------------------------------------------
Gross profit 177,016 144,142 (15,183) 305,975
Selling, general and administrative
expenses 134,623 129,335 (14,500) (1) 248,808
(650) (2)
Amortization of intangibles 3,552 -- 3,904 (4) 7,456
---------------------------------------------------------------------------------------
Operating income 38,841 14,807 (3,937) 49,711
Interest expense 20,466 4,679 11,795 (5) 36,940
----------------------------------------------------------------------------------------
Income before income taxes 18,375 10,128 (15,732) 12,771
Income tax expense (benefit) 8,400 4,051 (4,731) (6) 7,720
---------------------------------------------------------------------------------------
Net income $ 9,975 $ 6,077 $(11,001) $ 5,051
=======================================================================================
Ratio of earnings to fixed charges 1.8x 1.3x
============= ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-30
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income
(in thousands of dollars)
(1) To reclassify Quality distribution costs to conform to the financial
reporting presentation utilized in the Central Tractor Financial
Statements.
(2) To reduce operating expenses for certain costs for Quality included in the
twelve months ended October 31, 1998 which will not continue as a result
of the acquisition, and to conform certain accounting policies of Quality
to those of Central Tractor. These changes include:
ESOP contribution $(650)
Reserve for LIFO inventories 583
-----
$ (67)
=====
(3) Represents the incremental depreciation expense as a result of the
increased cost basis of property, improvements and equipment due to
recording the net tangible assets of Quality at estimated fair value in
purchase accounting.
(4) Represents the incremental amount of goodwill amortization (over a period
of 40 years) as a result of the increase in goodwill attributable to the
acquisition.
(5) Represents the incremental amount of interest expense related to the
acquisition:
Interest expense related to new debt:
Senior bank loans in the amount of $170,702 $14,680
Amortization of deferred financing costs 715
Less interest expense and amortization of deferred
financing costs relating to debt to be repaid (3,600)
-------
Pro forma adjustment $11,795
=======
Interest expense was calculated using an assumed average rate of 8.6% on
the senior bank loans for all periods presented, which approximates the
average rate which would have been in effect during the periods pursuant
to the defined rates in the new debt facilities (and based on the
historical underlying index rate during the periods).
A 0.125% increase or decrease in the assumed interest rates for the
additional borrowings related to the acquisition would change the pro
forma interest expense by $213. Pro forma net income would change by $128.
(6) Represents the income tax effect of the pro forma adjustments computed
using a statutory income tax rate of 40%. No tax benefit was provided
related to the pro forma adjustment for the incremental amount of goodwill
amortization since such goodwill will not be deductible for income tax
purposes.
F-31
<PAGE>
<TABLE>
<CAPTION>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Pro Forma Condensed Consolidated
Statement of Income (Unaudited)
(in thousands of dollars)
Pro Forma
Historical Central Historical Quality Central Tractor
Tractor for the for the six for the six months
six months ended months ended Pro Forma ended
May 1, 1999 May 1, 1998 Adjustments May 1, 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $305,283 $269,017 $ -- $574,300
Cost of goods sold 215,429 188,988 7,389 (1) 413,062
1,206 (2)
50 (3)
--------------------------------------------------------------------------------------
Gross profit 89,854 80,029 (8,645) 161,238
Selling, general and administrative
expenses 72,087 68,810 (7,389) (1) 133,290
(218) (2)
Amortization of intangibles 1,957 -- 1,952 (4) 3,909
--------------------------------------------------------------------------------------
Operating income 15,810 11,219 (2,990) 24,039
Interest expense 10,434 1,956 5,897 (5) 18,287
--------------------------------------------------------------------------------------
Income before income taxes 5,376 9,263 (8,887) 5,752
Income tax expense (benefit) 2,893 3,499 (2,774) (6) 3,618
--------------------------------------------------------------------------------------
Net income $ 2,483 $ 5,764 $(6,113) $ 2,134
======================================================================================
Ratio of earnings to fixed charges 1.4x 1.3x
============= ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-32
<PAGE>
CENTRAL TRACTOR FARM & COUNTRY, INC.
Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income
(in thousands of dollars)
(1) To reclassify Quality distribution costs to conform to the financial
reporting presentation utilized in the Central Tractor Financial
Statements.
(2) To reduce operating expenses for certain costs for Quality included in the
six months ended May 1, 1999 which will not continue as a result of the
acquisition, and to conform certain accounting policies of Quality to
those of Central Tractor. These changes include:
ESOP contribution $ (218)
Reserve for LIFO inventories 1,206
-------
$ 988
=======
(3) Represents the incremental depreciation expense as a result of the
increased cost basis of property, improvements and equipment due to
recording the net tangible assets of Quality at estimated fair value in
purchase accounting.
(4) Represents the incremental amount of goodwill amortization (over a period
of 40 years) as a result of the increase in goodwill attributable to the
acquisition.
(5) Represents the incremental amount of interest expense related to the
acquisition:
Interest expense related to new debt:
Senior bank loans in the amount of $170,702 $7,340
Amortization of deferred financing costs 357
Less interest expense and amortization of deferred
financing costs relating to debt to be repaid (1,800)
--------
Pro forma adjustment $5,897
========
Interest expense was calculated using an assumed average rate of 8.6% on
the senior bank loans for all periods presented, which approximates the
average rate which would have been in effect during the periods pursuant
to the defined rates in the new debt facilities (and based on the
historical underlying index rate during the periods).
A 0.125% increase or decrease in the assumed interest rates for the
additional borrowings related to the acquisition would change the pro
forma interest expense by $107. Pro forma net income would change by $64.
(6) Represents the income tax effect of the pro forma adjustments computed
using a statutory income tax rate of 40%. No tax benefit was provided
related to the pro forma adjustment for the incremental amount of goodwill
amortization since such goodwill will not be deductible for income tax
purposes.
F-33
<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.
QUALITY STORES, INC.
By: /s/ James F. Hurley
James F. Hurley
Senior Vice President of Finance
and Chief Financial Officer
Date: July 21, 1999
