SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 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 April 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, April 29, 2000 (unaudited)
and January 29, 2000 (audited)...............................................................3
Condensed consolidated statements of operations (unaudited)
for the three months ended April 29, 2000 and the three
months ended May 1, 1999.....................................................................4
Condensed consolidated statements of cash flows (unaudited) for the
three months ended April 29, 2000 and May 1, 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...........................................................................12
ITEM 2. CHANGES IN SECURITIES.......................................................................12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................12
ITEM 5. OTHER INFORMATION...........................................................................12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................12
INDEX TO EXHIBITS ....................................................................................14
Exhibit 10.1 Second Amended and Restated Credit Agreement, dated as of May 7,
1999, as amended by Amendment No. 1, dated as of March 31, 2000
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)
April 29, January 29,
2000 2000
---------- -----------
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,915 $ 11,029
Trade receivables, net 9,575 7,742
Inventory 456,981 365,383
Other 14,360 10,235
-------- --------
Total current assets 485,831 394,389
Property, improvements, and equipment, net 129,751 123,467
Goodwill, net 291,410 293,895
Other assets 12,747 10,712
-------- --------
Total assets $919,739 $822,463
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $193,638 $124,012
Accrued expenses and other liabilities 38,326 56,102
Current portion of long-term debt and capital lease obligations 22,320 22,371
-------- --------
Total current liabilities 254,284 202,485
Long-term debt, less current portion 439,105 388,554
Other long-term liabilities 6,734 6,797
-------- --------
Total liabilities 700,123 597,836
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 209,377 209,377
Retained earnings 10,239 15,250
-------- --------
Total stockholder's equity 219,616 224,627
-------- --------
Total liabilities and stockholder's equity $919,739 $822,463
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<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
---------------------------
April 29, May 1,
2000 1999
----------- ----------
Net sales $ 274,256 $ 159,136
Cost of sales 196,178 111,909
--------- ---------
Gross profit 78,078 47,227
Selling, general, and administrative expense 70,717 38,345
Merger integration expenses 1,822 --
Amortization of intangibles 2,199 985
--------- ---------
Operating income 3,340 7,897
Interest expense 10,722 5,475
--------- ---------
Income (loss) before income taxes (7,382) 2,422
Income taxes (credit) (2,371) 1,425
--------- ---------
Net income (loss) and comprehensive income (loss) $ (5,011) $ 997
========= =========
Ratio (deficiency) of earnings to fixed charges $ (7,382) 1.4 x
========= =========
See accompanying notes to condensed consolidated financial statements.
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QUALITY STORES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Three Months Ended
---------------------------
April 29, May 1,
2000 1999
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Operating Activities
Net income (loss) $ (5,011) $ 997
Adjustments to reconcile net income to net cash used in operations:
Depreciation and amortization 7,309 2,705
Changes in operating assets and liabilities (45,706) (19,881)
-------- --------
Net cash used in operating activities (43,408) (16,179)
Investing Activities
Purchases of property, improvements, and equipment (19,094) (4,279)
Acquisitions -- (3,426)
Other, net 7,986 42
-------- --------
Net cash used in investing activities (11,108) (7,663)
Financing Activities
Net borrowings under line of credit 53,650 29,675
Payments on long-term debt (3,150) --
Other, net (2,098) (47)
-------- --------
Net cash provided by financing activities 48,402 29,628
Net increase (decrease) in cash and cash equivalents (6,114) 5,786
Cash and cash equivalents at beginning of period 11,029 5,144
-------- --------
Cash and cash equivalents at end of period $ 4,915 $ 10,930
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<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
May 1, 1999
-------------
Net Sales $ 289,018
Operating Income 8,667
Net (loss) income (1,305)
Ratio (deficiency) of earnings to fixed charges (811)
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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.
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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
First Quarter of Fiscal 2000 Compared to First Quarter of Fiscal 1999
Net sales for the first quarter of fiscal 2000 were $274.3 million, an increase
of $115.2 million, or 72.4%, as compared to net sales for the first quarter of
fiscal 1999 of $159.1 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 first 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 8.9% in the first quarter of fiscal 2000 as compared to
the first quarter of fiscal 1999. The decrease was primarily the result of cold,
wet weather conditions during the month of April 2000 in the Company's markets
as well as unusually high sales of generators during fiscal 1999 related to
preparations for potential "year 2000" problems.
Gross profit for the first quarter of fiscal 2000 was $78.1 million, an increase
of $30.9 million or 65.5%, as compared to $47.2 million for the first quarter of
fiscal 1999, principally as a result of the margin on the increase in net sales
discussed above. Gross profit as a percentage of net sales decreased to 28.5%
for the first quarter of fiscal 2000, as compared to 29.7% for the first quarter
of fiscal 1999. The decrease in gross profit percentage is attributable to sales
derived from Quality Stores, which historically operated at a lower margin than
those experienced by the Company prior to the acquisition. These margins are
expected to improve with the completion of the integration of the acquisition.
Selling, general and administrative (SGA) expenses for the first quarter of
fiscal 2000 were $70.7 million, an increase of $32.4 million, or 84.6%, as
compared to the first 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 first
quarter of fiscal 1999. SGA expenses as a percentage of net sales were 25.8% for
the first quarter of fiscal 2000 as compared to 24.1% for the first quarter of
fiscal 1999, due principally 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 first quarter of fiscal 1999.
Merger and integration expenses were $1.8 million during the first quarter of
fiscal 2000. The merger integration expenses relate to the costs associated with
the merger of Quality Stores into the Company. The merger of Quality Stores into
the Company was substantially complete at the end of the first quarter of fiscal
2000, and management expects any additional merger integration expenses will be
minimal.
Amortization of intangibles increased to $2.2 million for the first quarter of
fiscal 2000, as compared to $1.0 million for the first 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 first quarter of fiscal 2000 was $3.3 million, a
decrease of $4.6 million, or 58.2%, as compared to $7.9 million for the first
quarter of fiscal 1999. Operating income as a percentage of net sales decreased
to 1.2% for the first quarter of fiscal 2000 from 5.0% for the first quarter of
fiscal 1999. The decrease was the result of the factors discussed above.
Interest expense increased to $10.7 million for the first quarter of fiscal
2000, as compared to $5.5 million for the first quarter of fiscal 1999. The
increase is due principally to additional borrowings used to finance the
acquisition of Quality Stores as well as an increase in average interest rates
between years.
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Income taxes for the first quarter of fiscal 2000 were a credit of $2.4 million,
compared to a $1.4 million provision for the first quarter of fiscal 1999. First
quarter income taxes as a percentage of pretax earnings (loss) were 32.1% in
2000, compared to 58.8% 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 first quarter of fiscal 2000 was $5.0 million, as compared net
income of $1.0 million for the first quarter of fiscal 1999, as a result of the
factors discussed above.
Amended Credit Facility
On March 31, 2000, the Company's Amended 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. The
amendment also added provisions for seasonal "clean down" periods for the
revolving credit facility and amended certain covenants.
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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 April 29, 2000, the Company had working capital of $231.5 million, a $39.6
million increase from working capital of $191.9 million on January 29, 2000.
This increase resulted primarily from a $91.6 million aggregate increase in the
Company's inventory, partially offset by a $51.9 million increase in accounts
payable and accrued expenses. The increases in the Company's accounts payable
and inventory are due primarily to the Company's new store expansion program for
fiscal 2000 and the normal seasonal inventory increase in anticipation of its
spring selling season.
Net cash used in operating activities was $43.4 million for the three months
ended April 29, 2000. This was a increase of $27.2 million from the three months
ended May 1, 1999, during which $16.2 million of cash was used in operating
activities. This increase resulted primarily from an increase in inventory
during the first three months of fiscal 2000 as compared to a smaller increase
during the same period in the prior year. The Company's capital expenditures
were $19.1 million and $4.3 million for the three months ended April 29, 2000,
and May 1, 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 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
2000. The Company expects that if it were to pursue further significant
acquisitions, it would arrange prior to the acquisitions any additional debt or
equity financing required to fund the acquisitions. There can be no assurance,
however, that the Company's business will continue to generate sufficient cash
flow from operations in the future to service its debt, and the Company may be
required to refinance all or a portion of its existing debt or to obtain
additional financing or to reduce its capital spending. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained. The inability to obtain additional financing could
have a material adverse effect on the Company.
Seasonality
Unlike many specialty retailers, historically the Company has generated positive
operating income in each of its four fiscal quarters. However, because the
Company is an agricultural specialty retailer, its sales necessarily fluctuate
with the seasonal needs of the agricultural community. The Company responds to
this seasonality by attempting to manage inventory levels (and the associated
working capital requirements) to meet expected demand and by varying its use of
part-time employees. Historically, the Company's sales and operating income have
been highest in the 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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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
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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: 6-13-00 QUALITY STORES, INC.
/s/ Denny L. Starr
Denny L. Starr
Senior Vice-President, Finance and
Chief Financial Officer
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QUALITY STORES, INC.
INDEX TO EXHIBITS
EXHIBIT 10.1 Second Amended and Restated Credit Agreement, dated as of May 7,
1999, as amended by Amendment No. 1, dated as of March 31, 2000
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