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 July 29, 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 July 29, 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, July 29, 2000 (unaudited)
and January 29, 2000 (audited) ..............................................................3
Condensed consolidated statements of operations (unaudited) for the
three months and six months ended July 29, 2000, and July 31, 1999 ..........................4
Condensed consolidated statements of cash flows (unaudited) for the
three months and six months ended July 29, 2000, and July 31, 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
Exhibit 12 Statement Re: Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule (electronic copy only)
Exhibit 99 Important Factors Regarding Forward-Looking Statements
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QUALITY STORES, INC.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Data)
July 29, January 29,
2000 2000
----------- -----------
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 12,138 $ 11,029
Trade receivables, net 12,959 7,742
Inventory 442,960 365,383
Other 7,809 10,235
-------- --------
Total current assets 475,866 394,389
Property, improvements, and equipment, net 138,009 123,467
Goodwill, net 290,100 293,895
Other assets 11,576 10,712
-------- --------
Total assets $915,551 $822,463
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $186,658 $124,012
Accrued expenses and other liabilities 36,633 56,102
Current portion of long-term debt and capital lease obligations 21,836 22,371
-------- --------
Total current liabilities 245,127 202,485
Long-term debt, less current portion 434,204 388,554
Other long-term liabilities 6,661 6,797
-------- --------
Total liabilities 685,992 597,836
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 211,377 209,377
Retained earnings 18,182 15,250
-------- --------
Total stockholder's equity 229,559 224,627
-------- --------
Total liabilities and stockholder's equity $915,551 $822,463
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
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QUALITY STORES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Ratio)
Three Months Ended
----------------------------
July 29, July 31,
2000 1999
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Net sales $331,690 $330,830
Cost of sales 231,996 234,677
-------- --------
Gross profit 99,694 96,153
Selling, general, and administrative expense 70,967 69,320
Merger integration expenses 29 7,639
Amortization of intangibles 2,186 1,865
-------- --------
Operating income 26,512 17,329
Interest expense 11,508 9,079
-------- --------
Income before income taxes 15,004 8,250
Income taxes 7,061 3,874
-------- --------
Net income and comprehensive income $ 7,943 $ 4,376
======== ========
Ratio of earnings to fixed charges 2.1 x 1.8 x
======== ========
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Six Months Ended
----------------------------
July 29, July 31,
2000 1999
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Net sales $605,946 $489,966
Cost of sales 428,174 346,586
-------- --------
Gross profit 177,772 143,380
Selling, general, and administrative expense 141,684 107,665
Merger integration expenses 1,851 7,639
Amortization of intangibles 4,385 2,850
-------- --------
Operating income 29,852 25,226
Interest expense 22,230 14,554
-------- --------
Income before income taxes 7,622 10,672
Income taxes 4,690 5,299
-------- --------
Net income and comprehensive income $ 2,932 $ 5,373
======== ========
Ratio of earnings to fixed charges 1.3 x 1.6 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)
Six Months Ended
-----------------------------
July 29, July 31,
2000 1999
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Operating Activities
Net income $ 2,932 $ 5,373
Adjustments to reconcile net income to net cash used in operations:
Depreciation and amortization 14,739 8,833
Changes in operating assets and liabilities (37,191) (48,275)
--------- ---------
Net cash used in operating activities (19,520) (34,069)
Investing Activities
Purchases of property, improvements, and equipment (32,596) (8,342)
Acquisitions -- (117,369)
Other, net 7,200 278
--------- ---------
Net cash used in investing activities (25,396) (125,433)
Financing Activities
Dividend to parent -- (1,061)
Net borrowings under line of credit 48,450 37,650
Proceeds from issuance of long-term debt -- 220,000
Payments on long-term debt (3,335) (89,406)
Other, net 910 (10,684)
--------- ---------
Net cash provided by financing activities 46,025 156,499
Net increase (decrease) in cash and cash equivalents 1,109 (3,003)
Cash and cash equivalents at beginning of period 11,029 5,144
--------- ---------
Cash and cash equivalents at end of period $ 12,138 $ 2,141
========= =========
<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 determined to change
the Company's fiscal year. The Company's fiscal year will now end 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").
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.
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 amendment and restatement of the Company's Credit Agreement, dated May 7,
1999, with Fleet National Bank, as administrative agent for the banks, financial
institutions, and other institutional lenders party thereto (the "New Credit
Facility").
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The acquisition of Quality Stores has been accounted for as a purchase and the
results of operations of Quality Stores has 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 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.
Pro Forma Results of Operations
-------------------------------
(In Thousands)
Three Months Ended Six Months Ended
July 31, 1999 July 31, 1999
------------------ ----------------
Net Sales $ 344,351 $ 633,369
Operating Income 18,650 27,317
Net income 5,027 3,722
Ratio of earnings to fixed charges 1.9 x 1.4 x
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NOTE 4. 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 further amended to
increase total available borrowings to $374.6 million, including $214.6 million
under the term loan facilities and $160.0 million of revolving credit debt
(collectively, the Amended Credit Facility). The amendment also added provisions
for seasonal "clean down" periods for the revolving credit facility and amended
certain covenants.
The Tranche A term loan under the Amended Credit Facility is payable in
quarterly installments of $5.0 million through October 31, 2004, while the
Tranche B term loan has quarterly principal installments of $0.4 million through
January 31, 2004, that increase to $9.6 million through January 31, 2005, and
then to $15.1 million through April 30, 2006. The revolving credit debt is due
in full on October 30, 2006. The Company is also required to make mandatory
prepayments on the term loan facilities based on 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.
The Company failed to comply with certain financial covenants under its Amended
Credit Facility at or for periods ending July 29, 2000, and August 15, 2000.
These covenants concerned (1) the fixed charge coverage ratio, (2) the interest
coverage ratio, (3) the ratio of debt to EBITDA, and (4) the seasonal
"clean-down" period. Such failures caused events of default to occur under the
Amended Credit Facility. The Company has reached an agreement in principle with
the administrative agent for the Amended Credit Facility to waive these events
of default and, in connection therewith, to amend certain provisions of the
Amended Credit Facility. A definitive written agreement containing such waivers
and amendments is being negotiated, but has not yet been executed. While the
Company has reached agreement with the administrative agent and has received
support from several key members of the bank syndicate, no assurances may be
given that such a definitive agreement will be executed or become effective. The
Company presently expects a definitive agreement to be executed and become
effective in September 2000 and, accordingly, has elected to continue to present
amounts due under the Amended Credit Facility as long-term debt. The conditions
to the effectiveness of any definitive agreement are expected to include (i) the
consent of a majority in interest of the lenders under the Amended Credit
Facility and (ii) the investment in Holdings of at least $15,000,000 cash by
certain existing equity investors of Holdings. The Company has received
commitments from certain existing equity investors of Holdings for the
investment of the $15 million.
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QUALITY STORES, INC.
Certain statements in this Report may contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). All
forward-looking statements involve uncertainty, and actual future results and
trends may differ materially depending on a variety of factors. For a discussion
identifying some important factors that could cause actual results or trends to
differ materially from those anticipated in the forward-looking statements
contained herein, please see Exhibit 99 to this Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999
Net sales for the second quarter of fiscal 2000 were $331.7 million, an increase
of $0.9 million, or 0.3%, as compared to net sales for the second quarter of
fiscal 1999 of $330.8 million. This 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 second quarter of fiscal 1999, 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 8.6% in the second quarter of fiscal 2000 as compared to
the second quarter of fiscal 1999. The decrease was primarily the result of
cold, wet spring weather conditions in the Company's northeast markets, dry and
drought conditions in Colorado and Nebraska, and unusually high sales of
generators during fiscal 1999 related to preparation for "year 2000" problems.
Gross profit for the second quarter of fiscal 2000 was $99.7 million, an
increase of $3.5 million, or 3.7%, as compared to $96.2 million for the second
quarter of fiscal 1999, principally as a result of the increase in gross profit
as a percentage of sales. Gross profit as a percentage of net sales increased to
30.1% for the second quarter of fiscal 2000, as compared to 29.1% for the second
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 second quarter of
fiscal 2000 were $71.0 million, an increase of $1.7 million, or 2.5%, as
compared to the second quarter of fiscal 1999. This increase is due to the
expenses related to the stores acquired from Quality Stores during fiscal 1999
and the expenses related to the new stores opened since the end of the second
quarter of fiscal 1999. SGA expenses as a percentage of net sales were 21.4% for
the second quarter of fiscal 2000 as compared to 21.0% for the second quarter of
fiscal 1999.
Merger and integration expenses were $29,000 during the second quarter of fiscal
2000, a decrease of $7.6 million, or 99.6%, compared to the second quarter of
fiscal 1999. The merger and integration expenses related to the costs associated
with the merger of Quality Stores into the Company. The integration of Quality
Stores into the Company was substantially complete at the end of the first
quarter of fiscal 2000.
Amortization of intangibles increased to $2.2 million for the second quarter of
fiscal 2000, as compared to $1.9 million for the second quarter of fiscal 1999.
The increase is due to the amortization of goodwill recognized as part of the
Quality Stores acquisition.
Operating income for the second quarter of fiscal 2000 was $26.5 million, an
increase of $9.2 million, or 53.2%, as compared to $17.3 million for the second
quarter of fiscal 1999. Operating income as a percentage of net sales increased
to 8.0% for the second quarter of fiscal 2000 from 5.2% for the second quarter
of fiscal 1999. The increases were the result of the factors discussed above.
Interest expense increased to $11.5 million for the second quarter of fiscal
2000, as compared to $9.1 million for the second 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, and an increase in average interest rates between years.
Income taxes for the second quarter of fiscal 2000 were $7.1 million, compared
to a $3.9 million for the second quarter of fiscal 1999. Second quarter income
taxes as a percentage of pretax earnings were 47.1% in 2000,
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compared to 47.0% 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 income for the second quarter of fiscal 2000 was $7.9 million, as compared
to net income of $4.4 million for the second quarter of fiscal 1999, as a result
of the factors discussed above.
Six Months Ended July 29, 2000, Compared to Six Months Ended July 31, 1999
Net sales for the six months ended July 29, 2000, were $605.9 million, an
increase of $116.0 million, or 23.7%, as compared to net sales for the six
months ended July 31, 1999. 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 second 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 8.7%. 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, and unusually high sales of
generators during fiscal 1999 related to preparation for "year 2000" problems.
Gross profit for the six months ended July 29, 2000, was $177.8 million, an
increase of $34.4 million, or 24.0%, as compared to $143.4 million for the six
months ended July 31, 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% for the six months ended July 29, 2000, and July 31, 1999.
Selling, general, and administrative (SGA) expenses for the six months ended
July 29, 2000, were $141.7, an increase of $34.0 million, or 31.6%, as compared
to the six months ended July 31, 1999. The increase is due to the expenses
related to the stores acquired from Quality Stores during fiscal 1999 and the
expenses related to the new stores opened since the second quarter of fiscal
1999. SGA expenses as a percentage of net sales were 23.4% for the six months
ended July 29, 2000, as compared to 22.0% for the six months ended July 31,
1999. The increase 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 second quarter of fiscal 1999.
Merger and integration expenses for the six months ended July 29, 2000, were
$1.8 million, a decrease of $5.8 million, or 75.8%, as compared to the six
months ended July 31, 1999. The integration of Quality Stores into the Company
was substantially complete at the end of the first quarter of fiscal 2000.
Amortization of intangibles increased to $4.4 million for the six months ended
July 29, 2000, as compared to $2.8 million for the six months ended July 31,
1999. The increase is due to the amortization of goodwill recognized as part of
the Quality Stores acquisition.
Operating income for the six months ended July 29, 2000, was $29.9 million, an
increase of $4.8 million, or 18.7%, as compared to $25.2 million for the six
months ended July 31, 1999. Operating income as a percentage of net sales was
4.9% for the six months ended July 29, 2000, as compared to 5.2% for the six
months ended July 31, 1999. The decrease was the result of the factors discussed
above.
Interest expense increased to $22.2 million for the six months ended July 29,
2000, as compared to $14.6 million for the six months ended July 31, 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, and an increase in average interest rates between years.
Income taxes for the six months ended July 29, 2000, were $4.7 million, a
decrease of $0.6 million as compared to the six months ended July 31, 1999.
Income taxes as a percentage of pretax earnings was 61.5% in 2000, compared to
49.7% 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 income for the six ended July 29, 2000, was $2.9 million, as compared to
$5.4 million for the six months ended July 31, 1999, as a result of the factors
discussed above.
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Amended Credit Facility
The Company failed to comply with certain financial covenants under its Amended
Credit Facility at or for periods ending July 29, 2000, and August 15, 2000.
These covenants concerned (1) the fixed charge coverage ratio, (2) the interest
coverage ratio, (3) the ratio of debt to EBITDA, and (4) the seasonal
"clean-down" period. Such failures caused events of default to occur under the
Amended Credit Facility. The Company has reached an agreement in principle with
the administrative agent for the Amended Credit Facility to waive these events
of default and, in connection therewith, to amend certain provisions of the
Amended Credit Facility. A definitive written agreement containing such waivers
and amendments is being negotiated, but has not yet been executed. While the
Company has reached agreement with the administrative agent and has received
support from several key members of the bank syndicate, no assurances may be
given that such a definitive agreement will be executed or become effective. The
Company presently expects a definitive agreement to be executed and become
effective in September 2000 and, accordingly, has elected to continue to present
amounts due under the Amended Credit Facility as long-term debt. The conditions
to the effectiveness of any definitive agreement are expected to include (i) the
consent of a majority in interest of the lenders under the Amended Credit
Facility and (ii) the investment in Holdings of at least $15 million cash by
certain existing equity investors of Holdings. The Company has received
commitments from certain existing equity investors of Holdings for the
investment of the $15 million.
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 July 29, 2000, the Company had working capital of $230.7 million, a $38.8
million increase from working capital of $191.9 million on April 29, 2000. This
increase resulted primarily from a $77.6 million aggregate increase in the
Company's inventory, partially offset by a $43.2 million increase in accounts
payable and accrued expenses. The increases in the Company's accounts payable
and inventory are due primarily to seasonal increases in working capital and the
Company's new store expansion program for fiscal 2000.
Net cash used in operating activities was $19.5 million for the six months ended
July 29, 2000. This was a decrease of $14.6 million from the six months ended
July 31, 1999, during which $34.1 million of cash was used in operating
activities. This decrease resulted primarily from an increase in earnings and a
smaller investment in net working capital during the first six months of fiscal
2000 as compared to the same period in the prior year. The Company's capital
expenditures were $32.6 million and $8.3 million for the six months ended July
29, 2000, and July 31, 1999, respectively. The increase is primarily
attributable to the Company's new store expansion program and merger-related
capital expenditures in fiscal 2000.
The Company has reached an agreement in principle to amend certain provisions of
the Amended Credit Facility (see "Amended Credit Facility"). In connection with
the agreement to amend the Amended Credit Facility, the Company expects to
receive the proceeds of an investment of at least $15 million cash by certain
existing equity investors of Holdings. The Company also intends to close a
number of underperforming stores during the remainder of fiscal 2000 and seek to
complete the sale leaseback of certain owned real property. The Company intends
to use the proceeds of the items discussed above, together with its cash flow
from operations, to reduce short-term trade credit and borrowings under the
revolving and term credit facilities during the remainder of fiscal 2000.
The Company anticipates that its principal uses of cash in the foreseeable
future will be working capital requirements, debt service requirements, and
capital expenditures. 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 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.
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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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QUALITY STORES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................None
ITEM 2. CHANGES IN SECURITIES.............................................None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company failed to comply with certain financial covenants under its
Amended Credit Facility at or for periods ending July 29, 2000, and
August 15, 2000. These covenants concerned (1) the fixed charge
coverage ratio, (2) the interest coverage ratio, (3) the ratio of debt
to EBITDA, and (4) the seasonal "clean-down" period. Such failures
caused events of default to occur under the Amended Credit Facility.
The Company has reached an agreement in principle with the
administrative agent for the Amended Credit Facility to waive these
events of default and, in connection therewith, to amend certain
provisions of the Amended Credit Facility. A definitive written
agreement containing such waivers and amendments is being negotiated,
but has not yet been executed. While the Company has reached agreement
with the administrative agent and has received support from several key
members of the bank syndicate, no assurances may be given that such a
definitive agreement will be executed or become effective. The Company
presently expects a definitive agreement to be executed and become
effective in September 2000 and, accordingly, has elected to continue
to present amounts due under the Amended Credit Facility as long-term
debt. The conditions to the effectiveness of any definitive agreement
are expected to include (i) the consent of a majority in interest of
the lenders under the Amended Credit Facility and (ii) the investment
in Holdings of at least $15 million cash by certain existing equity
investors of Holdings. The Company has received commitments from
certain existing equity investors of Holdings for the investment of the
$15 million.
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
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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: September 12, 2000 QUALITY STORES, INC.
/s/ Denny L. Starr
Denny L. Starr
Senior Vice-President, Finance
and Chief Financial Officer
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<PAGE>
QUALITY STORES, INC.
INDEX TO EXHIBITS
EXHIBIT 12 Statement Re: Computation of Ratio of Earnings of Fixed Charges
EXHIBIT 27 Financial Data Schedule (electronic copy only)
EXHIBIT 99 Important Factors Regarding Forward-Looking Statements
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