SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2000
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 of Incorporation) (I.R.S. Employer No.)
455 E. Ellis Road, Muskegon, MI 49441
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (231) 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 October 28, 2000: 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
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheets, October 28, 2000 (unaudited)
and January 29, 2000 (audited) ..............................................................3
Condensed consolidated statements of operations (unaudited)
for the three months and nine months ended October 28, 2000,
and
October 30, 1999 ............................................................................4
Condensed consolidated statements of cash flows (unaudited) for the
nine months ended October 28, 2000, and October 30, 1999.....................................5
Notes to condensed consolidated financial statements (unaudited).............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
QUALITY STORES, INC..........................................................................9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...........................................................................13
ITEM 2. CHANGES IN SECURITIES.......................................................................13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................13
ITEM 5. OTHER INFORMATION...........................................................................13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................13
INDEX TO EXHIBITS.............................................................................................15
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QUALITY STORES, INC.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Data)
October 28, January 29,
2000 2000
-------------- ------------
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 9,279 $ 11,029
Receivables, net 17,389 7,742
Inventory 422,670 365,383
Other 8,041 10,235
-------- --------
Total current assets 457,379 394,389
Property, improvements, and equipment, net 138,261 123,467
Goodwill, net 288,246 293,895
Other assets 11,876 10,712
-------- --------
Total assets $895,762 $822,463
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $161,907 $124,012
Accrued expenses and other liabilities 38,774 56,102
Current portion of long-term debt and capital lease obligations 21,764 22,371
-------- --------
Total current liabilities 222,445 202,485
Long-term debt, less current portion 430,654 388,554
Other long-term liabilities 6,643 6,797
-------- --------
Total liabilities 659,742 597,836
Stockholder's equity:
Common stock, $.01 par value: authorized shares-3,000; issued and
outstanding shares-100 (wholly owned by QSI Holdings, Inc.)
Additional paid-in capital 226,377 209,377
Retained earnings 9,643 15,250
-------- --------
Total stockholder's equity 236,020 224,627
-------- --------
Total liabilities and stockholder's equity $895,762 $822,463
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
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QUALITY STORES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Ratio)
Three Months Ended
---------------- --- ---------------
October 28, October 30,
2000 1999
---------------- ---------------
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Net sales $ 252,588 $ 287,085
Cost of sales 178,001 202,749
--------- ---------
Gross profit 74,587 84,336
Selling, general, and administrative expense 66,152 70,691
Merger integration expenses -- 4,357
Store closing expenses 7,900 --
Amortization of intangibles 1,382 2,306
--------- ---------
Operating income (loss) (847) 6,982
Interest expense 12,880 9,392
--------- ---------
Loss before income taxes (13,727) (2,410)
Income tax credit (5,188) (10)
--------- ---------
Net loss and comprehensive loss $ (8,539) $ (2,400)
========= =========
Deficiency of earnings to fixed charges $ (13,727) $ (2,410)
========= =========
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Nine Months Ended
---------------- --- ---------------
October 28, October 30,
2000 1999
---------------- ---------------
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Net sales $ 858,534 $ 777,051
Cost of sales 606,175 549,335
--------- ---------
Gross profit 252,359 227,716
Selling, general, and administrative expense 207,837 178,356
Merger integration expenses 1,850 11,996
Store closing expenses 7,900 --
Amortization of intangibles 5,767 5,156
--------- ---------
Operating income 29,005 32,208
Interest expense 35,110 23,946
--------- ---------
Income (loss) before income taxes (6,105) 8,262
Income taxes (credit) (498) 5,289
--------- ---------
Net income (loss) and comprehensive income (loss) $ (5,607) $ 2,973
========= =========
Ratio (deficiency) of earnings to fixed charges $ (6,105) 1.3 x
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
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QUALITY STORES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months Ended
----------------------------------
October 28, October 30,
2000 1999
------------ -------------
Operating Activities
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Net income (loss) $ (5,607) $ 2,973
Adjustments to reconcile net income (loss) to net cash used in operations:
Depreciation and amortization 21,390 16,293
Changes in operating assets and liabilities:
Receivables (9,647) 1,952
Inventory (57,287) (44,850)
Accounts payable 37,895 (9,885)
Other (15,134) (1,133)
--------- ---------
Net cash used in operating activities (28,390) (34,650)
Investing Activities
Purchases of property, improvements, and equipment (38,117) (22,285)
Acquisitions -- (112,368)
Other, net 7,582 1,553
--------- ---------
Net cash used in investing activities (30,535) (133,100)
Financing Activities
Capital contribution from parent 15,000 --
Dividend to parent -- (1,061)
Net borrowings under line of credit 52,850 47,000
Proceeds from issuance of long-term debt -- 220,000
Payments on long-term debt (11,357) (91,271)
Other, net 682 (6,398)
--------- ---------
Net cash provided by financing activities 57,175 168,270
Net increase (decrease) in cash and cash equivalents (1,750) 520
Cash and cash equivalents at beginning of period 11,029 5,144
--------- ---------
Cash and cash equivalents at end of period $ 9,279 $ 5,664
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
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QUALITY STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
Quality Stores, Inc., formerly Central Tractor Farm & Country, Inc., is a wholly
owned subsidiary of QSI Holdings, Inc., formerly CT Holding, Inc. ("Holdings"),
an affiliate of J.W. Childs Equity Partners, L.P. ("Childs"). The consolidated
financial statements include Quality Stores, Inc., and its wholly owned
subsidiary, Country General, Inc. ("Country General"), as well as the former
Quality Stores, Inc. and its wholly owned subsidiaries, since the date of
acquisition (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 subsidiaries. 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.
On August 17, 1999, the Board of Directors of the Company changed the Company's
fiscal year. The Company's fiscal year now ends on the Saturday closest to
January 31. 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 fiscal year ended January
29, 2000 ("Form 10-K").
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounts Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires companies to record
derivative instruments on the balance sheet at fair value and establishes
accounting rules for changing in fair value that result from hedging activities.
The Company currently engages in limited hedging activities that require use of
derivative instruments and has not completed all of the complex analyses
necessary to determine the effect of adopting SFAS No. 133 on its consolidated
financial position or future results of operations.
NOTE 2. ACQUISITIONS
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 Holdings. 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, including $4.7 million of
transaction expenses, was $208.0 million.
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 will continue to operate stores primarily under the Central Tractor Farm
& Country, Country General, and Quality Farm & Fleet names. Since the merger,
new stores opened are operating under the Quality Farm & Country name. The
Company expects to convert all of the stores over time to the Quality Farm &
Country name.
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The non-cash portion of the Merger consideration was contributed to the Company
by Holdings (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 existing credit facility with Fleet National Bank, as administrative agent
for the banks, financial institutions, and other institutional lenders party
thereto.
The acquisition of Quality Stores has been accounted for as a purchase and the
results of operations of Quality Stores have been 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 44,074
--------
Excess of cost of acquisition over the allocated fair
value of the underlying tangible net assets $163,969
========
NOTE 3. PRO FORMA RESULTS
The pro forma results of operations presented below are based on the historical
financial statements of the Company included in this Form 10-Q, adjusted to give
effect to: (i) the acquisition of Quality Stores by the Company and (ii) the
debt financing arrangements executed in connection with the acquisition of
Quality Stores, as though these transactions had occurred on January 31, 1999.
Pro Forma Results of Operations
-------------------------------
(In Thousands)
Nine Months Ended
October 30, 1999
---------------------
Net sales $920,454
Operating income 34,128
Net income 1,219
Ratio of earnings to fixed charges 1.2 x
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.
NOTE 4. STORE CLOSINGS
On September 1, 2000, the Company announced the closing of 17 under-performing
stores. Expenses related to the liquidation of inventory and equipment,
remaining lease obligations, and other charges associated with the closings,
which commenced September 25, 2000, are estimated to be $7.9 million.
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NOTE 5. AMENDED CREDIT FACILITY
On May 7, 1999, the Company amended its bank credit facility to allow for
borrowings up to $320.0 million, consisting of $220.0 million under two term
loan facilities (Tranche A and B) and a $100.0 million revolving credit
facility. On March 31, 2000, this credit facility was again amended, among other
things, to increase the revolving credit facility by $60 million (collectively,
the Amended Credit Facility). The amendment also added provisions for seasonal
"clean down" periods for the revolving credit facility and amended certain other
covenants.
On September 22 and 27, 2000, the Amended Credit Facility was amended, among
other things, to waive events of default concerning certain financial covenants
and the seasonal "clean-down" period by amending these provisions. On December
4, 2000, the facility was further amended, among other things, to reduce the
"clean-down" requirements pertaining to the revolving credit facility during the
period from December 4, 2000 to December 25, 2000 and during the period from
January 2, 2001 through January 15, 2001.
The Tranche A term loan under the Amended Credit Facility is payable in
quarterly installments alternating between $2.5 million and $7.5 million through
October 31, 2004 with final quarterly installments of $11.25 million and $3.75
million, while the Tranche B term loan has quarterly principal installments
alternating between $0.15 million and $0.45 million through October 31, 2004 and
then alternating between $28.35 million and $9.45 million through April 30,
2006. The revolving credit debt is due in full on October 30, 2004. The Company
is also required to make mandatory prepayments on the term loan facilities in a
variety of circumstances, including sales of assets and equity issuances, as
well as from the Company's excess cash flow, as defined.
Borrowings under the Amended Credit Facility are secured by all assets of the
Company and bear interest at the prime or eurodollar rates plus a margin. The
revolving credit agreement is also subject to a 0.5% commitment fee on its
unused portions. The Amended Credit Facility contains certain covenants which
require the Company to maintain certain financial ratios and also restricts,
among other things, the payment of dividends, incurrence of additional debt,
capital expenditures, mergers and acquisitions, and the disposition of assets.
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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
Third Quarter of Fiscal 2000 Compared to Third Quarter of Fiscal 1999
Net sales for the third quarter of fiscal 2000 were $252.6 million, a decrease
of $34.5 million, or 12.0%, as compared to net sales for the third quarter of
fiscal 1999 of $287.1 million. This decrease was primarily due to a decrease in
comparable store sales and stores closed during fiscal 1999, partially offset by
new stores opened since the end of the third quarter of 1999. Comparable store
sales, including comparable stores acquired in the Quality Stores acquisition
during 1999, decreased 17.6% in the third quarter of fiscal 2000 as compared to
the third quarter of fiscal 1999. The decrease was primarily the result of
out-of-stock issues resulting from interruptions in normal vendor shipping
patterns which began while the Company was renegotiating its credit facility,
and unusually high sales of generators during fiscal 1999 related to customers'
preparation for "year 2000" problems.
Gross profit for the third quarter of fiscal 2000 was $74.6 million, a decrease
of $9.7 million, or 11.5%, as compared to $84.3 million for the third quarter of
fiscal 1999, principally as a result of the sales decrease noted above. Gross
profit as a percentage of net sales increased to 29.5% for the third quarter of
fiscal 2000, as compared to 29.4% for the third quarter of fiscal 1999. The
increase in gross profit percentage is attributable to the realization of the
increased purchasing power of the Company resulting from the acquisition of
Quality Stores in fiscal 1999.
Selling, general and administrative (SGA) expenses for the third quarter of
fiscal 2000 were $66.2 million, a decrease of $4.5 million, or 6.4%, as compared
to SGA expenses for the third quarter of fiscal 1999 of $70.7 million. This
decrease is due to the realization of synergies from the merger and other
expense reduction efforts. SGA expenses increased as a percentage of net sales
to 26.2% for the third quarter of fiscal 2000 as compared to 24.6% for the third
quarter of fiscal 1999 because of the lower sales volume for the third quarter
of fiscal 2000.
There were no merger and integration expenses during the third quarter of fiscal
2000, compared to such charges of $4.4 million for the third quarter of fiscal
1999. The merger and integration expenses related to the costs associated with
the merger of Quality Stores into the Company and were substantially complete at
the end of the first quarter of fiscal 2000.
Store closing expenses relate to a charge of $7.9 million taken for the closing
of 17 under-performing stores in September 2000. These expenses relate to the
liquidation of inventory and equipment, remaining lease obligations, and other
charges associated with the closings.
Operating loss for the third quarter of fiscal 2000 was $0.8 million, a decrease
of $7.8 million as compared to operating income of $7.0 million for the third
quarter of fiscal 1999. Operating income (loss) as a percentage of net sales
decreased to (0.3%) for the third quarter of fiscal 2000 from 2.4% for the third
quarter of fiscal 1999. The operating loss for the third quarter of fiscal 2000
was primarily the result of the lower sales volume and effect of store closing
expenses recorded during the quarter as compared to the third quarter of fiscal
1999.
Interest expense increased to $12.9 million for the third quarter of fiscal
2000, as compared to $9.4 million for the third quarter of fiscal 1999. The
increase is due principally to additional borrowings used to finance the
acquisition of Quality Stores, higher borrowings under the Company's revolving
credit facility to support increased inventory levels, an increase in average
interest rates between years, and amortization of additional deferred financing
costs and other bank charges.
The credit for income taxes for the third quarter of fiscal 2000 was $5.2
million, compared to a credit of $10,000 for the third quarter of fiscal 1999.
The third quarter income tax credit as a percentage of the pretax loss was 37.8%
in
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2000. Goodwill amortization, which is not deductible for income tax purposes,
has a significant effect on the Company's effective income tax rate.
The net loss for the third quarter of fiscal 2000 was $8.5 million, compared to
a net loss of $2.4 million for the third quarter of fiscal 1999, as a result of
the factors discussed above.
Nine Months Ended October 28, 2000, Compared to Nine Months Ended October 30,
1999
Net sales for the nine months ended October 28, 2000, were $858.5 million, an
increase of $81.4 million, or 10.5%, as compared to net sales for the nine
months ended October 30, 1999, of $777.1 million. The increase was primarily due
to sales from stores acquired in the Quality Stores acquisition in May 1999, and
new stores opened since the end of the third quarter of fiscal 1999, partially
offset by a decrease in comparable store sales and stores closed during fiscal
1999. Comparable store sales, including comparable stores acquired in the
Quality Stores acquisition during 1999, decreased 11.1% between fiscal periods.
The decrease was primarily the result of cool, wet weather conditions in the
Company's northeast markets, dry and drought conditions in Colorado and
Nebraska, interruptions in normal vendor shipping patterns which began while the
Company was renegotiating its credit facility, and unusually high sales of
generators during fiscal 1999 related to customers' preparation for "year 2000"
problems.
Gross profit for the nine months ended October 28, 2000 was $252.4 million, an
increase of $24.7 million, or 10.8%, as compared to $227.7 million for the nine
months ended October 30, 1999, principally as a result of the margin on the
increase in net sales discussed above. Gross profit as a percentage of net sales
was 29.4% and 29.3% for the nine months ended October 28, 2000 and October 30,
1999, respectively.
Selling, general, and administrative (SGA) expenses for the nine months ended
October 28, 2000 were $207.8 an increase of $29.4 million, or 16.5%, as compared
to SGA expenses of $178.4 million for the nine months ended October 30, 1999.
The increase is due to expenses related to the stores acquired from Quality
Stores during fiscal 1999 and expenses related to new stores opened since the
third quarter of fiscal 1999, offset by the realization of synergies from the
merger and other expense reduction efforts. SGA expenses as a percentage of net
sales were 24.2% for the nine months ended October 28, 2000, as compared to
23.0% for the nine months ended October 30, 1999. This increase as a percentage
of net sales was primarily due to the decrease in comparable store sales and
higher expenses as a percentage of sales in the new stores opened since the end
of the third quarter of fiscal 1999 that were not offset by expense reduction
efforts.
Merger and integration expenses for the nine months ended October 28, 2000 were
$1.9 million, a decrease of $10.1 million, or 84.2%, as compared to the nine
months ended October 30, 1999. The integration of Quality Stores into the
Company was substantially complete at the end of the first quarter of fiscal
2000.
Store closing expenses relate to a charge of $7.9 million taken for the closing
of 17 under-performing stores in September 2000. These expenses relate to the
liquidation of inventory and equipment, remaining lease obligations, and other
charges associated with the closings.
Amortization of intangibles increased to $5.8 million for the nine months ended
October 28, 2000, as compared to $5.2 million for the nine months ended October
30, 1999. The increase is due to higher amortization of goodwill recognized in
the nine months ended October 28, 2000 as part of the Quality Stores
acquisition.
Operating income for the nine months ended October 28, 2000 was $29.0 million, a
decrease of $3.2 million, or 9.9%, as compared to $32.2 million for the nine
months ended October 30, 1999. Operating income as a percentage of net sales was
3.4% for the nine months ended October 30, 2000, as compared to 4.1% for the
nine months ended October 30, 1999. The decrease was primarily the result of
higher SGA expenses, store closing charges and amortization of intangibles
during the nine months ended October 28, 2000.
Interest expense increased to $35.1 million for the nine months ended October
28, 2000, as compared to $23.9 million for the nine months ended October 30,
1999. The increase is due principally to additional borrowings used to finance
the acquisition of Quality Stores, higher borrowings under the Company's
revolving credit facility, an increase in average interest rates between years,
and amortization of additional deferred financing costs and other bank charges.
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The credit for income taxes for the nine months ended October 28, 2000 was $0.5
million as compared to income tax expense for the nine months ended October 30,
1999 of $5.3 million. The credit for income taxes as a percentage of the pretax
loss was 8.2% in 2000, compared to income taxes as a percentage of pretax
earnings of 64.0% in 1999. Goodwill amortization, which is not deductible for
income tax purposes, has a significant effect on the Company's effective income
tax rate.
Net loss for the nine ended October 28, 2000 was $5.6 million, as compared to
net income of $3.0 million for the nine months ended October 30, 1999, as a
result of the factors discussed above.
Amended Credit Facility
On May 7, 1999, the Company amended its bank credit facility to allow for
borrowings up to $320.0 million, consisting of $220.0 million under two term
loan facilities (Tranche A and B) and a $100.0 million revolving credit
facility. On March 31, 2000, this credit facility was again amended, among other
things, to increase the revolving credit facility by $60 million (collectively,
the Amended Credit Facility). The amendment also added provisions for seasonal
"clean down" periods for the revolving credit facility and amended certain other
covenants.
On September 22 and 27, 2000, the Amended Credit Facility was amended, among
other things, to waive events of default concerning certain financial covenants
and the seasonal "clean-down" period by amending these provisions. On December
4, 2000, the facility was further amended, among other things, to reduce the
"clean-down" requirements pertaining to the revolving credit facility during the
period from December 4, 2000 to December 25, 2000 and during the period from
January 2, 2001 through January 15, 2001.
The Tranche A term loan under the Amended Credit Facility is payable in
quarterly installments alternating between $2.5 million and $7.5 million through
October 31, 2004 with final quarterly installments of $11.25 million and $3.75
million, while the Tranche B term loan has quarterly principal installments
alternating between $0.15 million and $0.45 million through October 31, 2004 and
then alternating between $28.35 million and $9.45 million through April 30,
2006. The revolving credit debt is due in full on October 30, 2004. The Company
is also required to make mandatory prepayments on the term loan facilities in a
variety of circumstances, including sales of assets and equity issuances, as
well as from the Company's excess cash flow, as defined.
Borrowings under the Amended Credit Facility are secured by all assets of the
Company and bear interest at the prime or eurodollar rates plus a margin. The
revolving credit agreement is also subject to a 0.5% commitment fee on its
unused portions. The Amended Credit Facility contains certain covenants which
require the Company to maintain certain financial ratios and also restricts,
among other things, the payment of dividends, incurrence of additional debt,
capital expenditures, mergers and acquisitions, and the disposition of assets.
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 under the Company's revolving and term credit facilities, and
short-term trade credit.
On October 28, 2000, the Company had working capital of $234.9 million, a $43.0
million increase from working capital of $191.9 million on July 29, 2000. This
increase resulted primarily from a $57.3 million aggregate increase in the
Company's inventory, partially offset by a $20.6 million increase in accounts
payable and accrued expenses. The increases in the Company's accounts payable
and inventory are due primarily to increases in inventory for the fall season
and the Company's new store expansion program for fiscal 2000.
Net cash used in operating activities was $28.4 million for the nine months
ended October 28, 2000. This was a decrease of $6.3 million from the nine months
ended October 30, 1999, during which $34.7 million of cash was used in operating
activities. This decrease resulted primarily from a smaller investment in net
working capital during the first nine months of fiscal 2000 as compared to the
same period in the prior year. The Company's capital expenditures were $38.1
million and $22.3 million for the nine months ended October 28, 2000, and
October 30, 1999, respectively. The increase is primarily attributable to the
Company's new store expansion program and merger-related capital expenditures in
early fiscal 2000.
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The Company anticipates that its principal uses of cash in the foreseeable
future will be working capital requirements, debt service requirements, and
capital expenditures. The Company intends and expects to reduce the average
level of inventory through the systematic elimination of slow-turning items and
the reduction of promotional circulars, which tend to create inventory
imbalances. Based upon current and anticipated levels of operations, the Company
believes that its cash flow from operations, together with amounts available
under the Amended Credit Facility, will be adequate to meet its anticipated
requirements for working capital, and debt service through fiscal 2001.
Seasonality
Unlike many specialty retailers, historically the Company has generally
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 second 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 first 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.
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<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) Reports on Form 8-K
The Company filed a current report on Form 8-K dated
November 13, 2000, reporting that Jerry D. Horn had been
named as its Chairman, President, and Chief Executive
Officer.
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<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: December 12, 2000 QUALITY STORES, INC.
/s/ Thomas J. Reinebach
Thomas J. Reinebach
Senior Vice-President, Finance
and Chief Financial Officer
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<PAGE>
QUALITY STORES, INC.
INDEX TO EXHIBITS
EXHIBIT 10.1 Amendment No. 2 and Waiver to the Second Amended and Restated
Credit Agreement
EXHIBIT 10.2 Amendment No. 3 to the Second Amended and Restated Credit
Agreement
EXHIBIT 10.3 Amendment No. 4 to the Second Amended and Restated Credit
Agreement
EXHIBIT 12 Statement Re: Computation of Ratio (Deficiency) 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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