SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 28, 2000: 100. All of the registrant's stock is held
by QSI Holdings, Inc., and is not publicly traded.
<PAGE>
<TABLE>
<CAPTION>
QUALITY STORES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 29, 2000
PAGE
<S> <C> <C>
PART I.
ITEM 1. Business ....................................................................................1
ITEM 2. Properties...................................................................................8
ITEM 3. Legal Proceedings............................................................................8
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................8
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................9
ITEM 6. Selected Financial Data.....................................................................10
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Financial Disclosure........................................................................11
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................16
ITEM 8. Financial Statements and Supplementary Data.................................................16
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................................16
PART III.
ITEM 10. Directors and Executive Officers of the Registrant..........................................17
ITEM 11. Executive Compensation......................................................................20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..............................23
ITEM 13. Certain Relationships and Related Transactions..............................................23
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................24
</TABLE>
-2-
<PAGE>
PART I
Note: Reference herein to fiscal 1999 are references to Quality Stores, Inc.'s,
fiscal year ended January 29, 2000. During fiscal 1999, Quality Stores, Inc.,
changed its fiscal year end from the Saturday nearest to October 31 to the
Saturday nearest to January 31. References herein to "fiscal years", other than
fiscal 1999, are references to Quality Stores, Inc.'s, 52 or 53-week fiscal year
which ended on the Saturday nearest to October 31 in that year.
ITEM 1. BUSINESS
Overview
Quality Stores, Inc., a Delaware corporation [formerly Central Tractor Farm &
Country, Inc. ("CT")], together with its primary subsidiaries, including Country
General, Inc., and the former Quality Stores, Inc. ("Quality"), (collectively
the "Company" or "QSI"), is the largest agricultural specialty retailer in the
United States with 361 stores in 31 states as of March 31, 2000. QSI serves the
agricultural, hardware, and related needs of rural consumers, especially
part-time and full-time farmers, hobby gardeners, skilled trades persons, and
do-it-yourself ("DIY") customers. The Company was founded in 1935 and has
established itself as a market leader in the agricultural specialty market,
having strong name recognition and a loyal customer base.
Acquisition of the Company by J.W. Childs
On November 27, 1996, the Board of Directors of the Company approved, and the
Company entered into, a merger agreement (the "Merger Agreement") with J.W.
Childs Equity Partners, L.P. and two of its affiliates (collectively "Childs")
that provided for the acquisition of the Company by Childs in a two-stage
transaction (the "Acquisition"). The Merger Agreement provided that following
the acquisition by Childs of all of the Company shares held by affiliates of
Butler Capital Corporation (collectively, "BCC"), an affiliate of Childs would
merge with and into the Company (the "Merger") and Childs would acquire the
remaining shares of the Company held by public shareholders ("Merger
Consideration") for $14.25 per share in cash. The Merger was completed on March
27, 1997.
Concurrent with the execution of the Merger Agreement, Childs entered into
agreements (the "Securities Purchase Agreements") with BCC and with certain
members of the Company's management (the "Management Shareholders") pursuant to
which Childs agreed to purchase at a price of $14.00 per share 100% of BCC's
shares and 36.4% of the Management Shareholders' shares representing
approximately 64.0% and 1.4% of the Company's outstanding common stock,
respectively (collectively the "Securities Purchases").
As of January 2, 1997, Childs had consummated the Securities Purchases and paid
related expenses utilizing (i) $65.4 million of cash equity and, (ii) $35.1
million of borrowings under an interim margin loan facility (the "Margin Loan
Facility"). In connection with the Securities Purchases, the Company entered
into a term loan and revolving credit facility (the "Credit Facility") and used
a portion of such facilities to refinance existing debt of the Company,
including a $16.0 million convertible note held by BCC. The Credit Facility has
since been amended. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
On March 27, 1997, the Company consummated a public offering of $105.0 million
aggregate principal amount of Senior Notes. The net proceeds from the offering
were used to repay borrowings under the Margin Loan Facility, pay the Merger
Consideration, repay a portion of the outstanding borrowings under the Credit
facility, and pay fees and expenses of the Acquisition.
The Acquisition was accounted for as a purchase. The total purchase price has
been allocated to the tangible and intangible assets and the liabilities of the
Company based upon their respective fair values. The cost of the Acquisition
over the allocated fair value of the underlying tangible net assets is as
follows (in thousands):
<PAGE>
Cost of acquiring the outstanding common stock of the Company
from predecessor shareholders $159,393
Fair value of underlying tangible net assets 72,050
--------
Excess of cost of acquisition over the allocated fair value
of the underlying tangible net assets $ 87,343
========
As a result of the Acquisition, the Company is a wholly owned subsidiary of QSI
Holding, Inc. [formerly CT Holdings, Inc. ("Holdings")], an affiliate of
Childs, and a new basis of accounting has been reflected in the Company's
financial statements reflecting the fair values for the Company's assets and
liabilities as of March 27, 1997. The financial statements of the Company for
periods prior to March 27, 1997, are presented on the historical cost basis of
accounting.
Acquisitions
Effective June 26, 1997, the Company acquired all of the outstanding capital
stock of Country General for approximately $138.6 million (including related
costs and expenses) in cash (the "Country General Acquisition"). Country General
operated a chain of 114 agricultural specialty retail stores. The Company funded
the acquisition price in part from a $49.8 million cash equity contribution from
Holdings, and the remainder from funds drawn under the amended and restated
Credit Facility (see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
The Country General Acquisition was accounted for as a purchase. The purchase
price was allocated to the tangible and intangible assets and the liabilities
based on fair values, as follows (in thousands):
Total purchase price $138,563
Fair value of underlying tangible net assets 86,788
--------
Excess of cost of acquisition over the allocated fair value
of the underlying tangible net assets $ 51,775
========
In January 1999, the Company acquired nine retail stores and certain net
operating assets from H.C. Shaw Co., a privately owned specialty retailer doing
business as Fisco Farm and Home, for approximately $7.1 million. The transaction
was accounted for as a purchase.
On May 7, 1999, the Company acquired Quality Stores, Inc. ("Quality") in a
transaction in which Quality 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 that had a value of $91.8 million. 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 transaction expenses, was approximately $208.0 million.
Quality, 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, Quality Farm & Fleet, Quality Farm & Country, Fisco
Farm & Home, and County Post names.
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"). Among other things, the amendment and restatement of the New Credit
Facility increased the
-2-
<PAGE>
aggregate principal amount of the facility from $150,000,000 to $320,000,000,
consisting of a $220,000,000 term loan facility and a $100,000,000 revolving
credit facility.
The acquisition of Quality Stores 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
========
Expansion Plan
Since the beginning of fiscal 1997(1), the Company has increased the number of
its retail stores from 111 to 350 as of January 29, 2000. In fiscal 1997, the
Company opened 3 new stores and acquired 118 stores primarily through the
Country General Acquisition. Five stores were closed in 1997. In fiscal 1998,
the Company opened 1 new store and closed 14 stores (including 12 stores
acquired from Country General, for which the closure was reserved in connection
with the acquisition). For the period from November 1998 through January 2000,
the Company opened 24 new stores, closed 10 stores, and acquired 122 stores.
The integration of the Country General stores into the Company's systems was
completed during fiscal 1998, and the integration of the Quality stores will be
completed in the first quarter of fiscal 2000. The Company plans to add an
additional 25 stores in fiscal 2000, and 40 to 50 per year thereafter, through
further penetration of the Northeastern and Midwestern United States markets and
through expansion into the Southeastern and Western United States. Management
intends to achieve this growth through new store openings and selective
acquisitions. On a preliminary basis, the Company has identified potential new
markets outside of its existing markets that management believes are attractive
candidates for one or more new QSI stores. The number of actual new QSI store
openings in the next two years may differ materially from the projections
outlined above if the Company makes a major acquisition or is unable to find
attractive store locations to rent at reasonable prices, negotiate acceptable
lease terms, or acquire small regional farm store chains at reasonable prices.
The Company seeks to locate stores in high-traffic shopping districts whenever
possible in order to attract customers who prefer to do much of their shopping
at one time and place. As with the majority of its existing stores, the Company
intends to lease its new stores. The estimated cash required to open a new,
leased store (approximately 25,000 to 30,000 square feet of selling space) is
$1,100,000, including inventory net of accounts payable and $130,000 in
pre-opening expenses. Of these estimated cash expenditures, approximately half
is used for initial inventory (net of accounts payable) and the balance is used
for capital expenditures, principally leasehold improvements, fixtures and
equipment, and pre-opening expenses.
The Company also intends to continue to opportunistically relocate existing
stores. These relocations reflect, in most cases, the expiration of an existing
lease coupled with an opportunity to move to a more demographically and/or
physically attractive site.
Retail Stores
QSI stores focus on agricultural and agricultural related products. The Company
segments its merchandising mix into seven key product categories: agricultural
products (including tractor parts and accessories), specialty hardware, lawn and
garden products, workwear products, rural automotive parts and accessories, pet
supplies, and general consumer products. Sale of agricultural and related
products represents approximately 50% of QSI's total net sales.
- -------------
(1) On August 17, 1999, the Company changed its fiscal year end from the
Saturday closest to October 31 to the Saturday closest to January 31, effective
as of January 29, 1999.
-3-
<PAGE>
The growth and percentage of total store sales for each retail product category
for fiscal 1999, fiscal 1998, and fiscal 1997, and a description of each product
category, are set forth below:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
January 29, October 31, November 1,
2000 (1) 1998 1997 (2)
--------------------------------------------
<S> <C> <C> <C>
Agricultural (including tractor parts and accessories) 21.7% 26.6% 26.8%
Specialty Hardware 18.0% 17.6% 17.7%
Lawn & Garden and Seasonal 19.6% 17.4% 18.4%
Workwear 10.9% 10.2% 9.3%
Rural Automotive Parts & Accessories 13.2% 14.3% 14.3%
Pet Supplies 8.6% 7.0% 6.6%
General Consumer 8.0% 6.9% 6.9%
--------------------------------------------
100.0% 100.0% 100.0%
============================================
<FN>
(1) Includes Quality from the date of the merger.
(2) Includes Country General from the date of acquisition.
</FN>
</TABLE>
Agricultural Products. QSI stores' agricultural product line consists of
approximately 6,000 stock keeping units (SKU's) supplying the needs of the
part-time and full-time farmer, including tractor parts, tillage and harvesting
parts, fencing materials, and animal health supplies. This product line consists
largely of consumable products and other items requiring replacements on a
regular basis. This product line accounted for $236.5 million, $156.3 million,
and $110.5 million of the Company's total revenue in fiscal years 1999, 1998,
and 1997, respectively. Agricultural product sales, as a percentage of total
sales, decreased to 21.7% in fiscal 1999, as compared to 26.6% in fiscal 1998.
This decrease resulted to the difference in product mix relating from the
Quality stores. QSI emphasizes consumable agricultural supplies that are
purchased frequently by its customers and does not sell heavy equipment such as
tractors or combines.
Specialty Hardware. QSI's specialty hardware line consists of approximately
9,000 SKU's with an emphasis on products with agricultural applications. These
products accounted for $196.4 million, $103.6 million, and $72.7 million of the
Company's total revenue in fiscal years 1999, 1998, and 1997, respectively. QSI
stores carry a broad range of high-quality hardware with an emphasis on
recognized branded professional products, including hand tools, power tools,
mechanical tools, electrical products, including outdoor lighting, security
lighting and motors, welders, air compressors, generators, paints (as well as a
competitively priced private-label brand), and plumbing supplies.
Lawn and Garden and Seasonal Products. QSI's lawn and garden products consist of
approximately 2,000 SKU's, including lawn and garden tools, nursery stock,
fertilizers, lawn fencing, and weed killers. These products accounted for $214.7
million, $102.1 million, and $75.8 million of the Company's total revenue in
fiscal years 1999, 1998, and 1997, respectively. To differentiate itself from
other retailers, QSI also stocks a selection of lawn mowers ranging from
competitively priced items to full-featured riding lawn mowers. QSI assembles
and tests the lawn mowers and sells a full assortment of parts for follow-up
service needs. QSI stores offer seasonal bedding plants, trees, and shrubs in
their garden centers. QSI stores also offer heating/energy equipment, including
stoves, space heaters, and fans.
Workwear. QSI's workwear products, including products sold under the Carhartt,
Walls, and Iron Age brand names, are targeted at the specialized needs of its
outdoor-oriented customers who require high quality functional apparel. This
product category consists of approximately 3,000 SKU's, including premium
quality insulated outerwear, overalls, flannel shirts, and work jeans. These
products accounted for $118.6 million, $59.8 million, and $38.1 million of the
Company's total revenue in fiscal years 1999, 1998, and 1997, respectively. The
Company has been expanding its workwear line in its stores to include quality
non-insulated workwear, bib overalls, twill pants, and hunting clothing.
Rural Automotive Parts and Accessories. QSI's rural automotive parts and
accessories consist of approximately 4,000 SKU's, including a core selection of
automotive parts, batteries, and accessories for rural vehicles, primarily for
pick-up trucks and tractors. The products accounted for $144.4 million, $83.9
million, and $58.6 million of the Company's total revenue in fiscal years 1999,
1998, and 1997, respectively. QSI also stocks a small assortment of general
automotive items as a convenience to its customers, including oil and
lubrication products and anti-freeze. In addition to brand name products,
certain of the Company's automotive products are offered under QSI's own private
label.
-4-
<PAGE>
Pet Supplies. QSI's pet supplies consist of approximately 1,000 SKU's, including
dog and cat foods, wild bird feed, and rabbit supplies. These products accounted
for $94.0 million, $40.9 million, and $27.2 million of the Company's total
revenue in fiscal years 1999, 1998, and 1997, respectively. The pet supplies
sold by QSI include economically priced large sizes, such as 50-pound bags of
dog food. Certain of these items are sold under QSI's private label. QSI has
been expanding its pet supplies product category.
General Consumer Products. QSI's general consumer products line consists of
approximately 2,000 SKU's, including farm replicas and collectible toys and
sporting goods, including guns and ammunition, hunting accessories, camping
items, and outdoor living needs. These products accounted for $87.4 million,
$40.6 million, and $28.3 million of the Company's total revenue in fiscal years
1999, 1998, and 1997, respectively. QSI stores also offer seasonal merchandise
such as charcoal grills and coolers in the summer.
Store Operations
QSI's stores are designed primarily to meet the needs of farmers operating small
to medium-sized farms (i.e., farms typically under 250 acres) as well as hobby
gardeners and DIY customers.
Quality operates under six store names: Quality Farm and Country, Quality Farm
and Fleet, CT Farm and Country, Country General, Fisco Farm and Home, and County
Post. The Company's stores average 21,086 square feet of indoor selling space,
ranging from 8,500 to 62,500 square feet. Average sales per store in fiscal 1999
was $3.5 million. In addition to indoor selling space, the Company looks for
store sites that have 15,000 to 20,000 square feet of available outdoor selling
space. The outdoor selling space is primarily used for displaying lawn and
garden products, fencing, tractor accessories, and livestock watering and feed
equipment.
QSI prototype stores are designed to provide customers with ease in locating
desired products and are clean and colorful in order to provide an overall
enjoyable shopping environment. The use of informative directional signing adds
to the ease of the customer's shopping experience. Plan-o-grams are utilized to
set merchandise assortments in the seven core product categories to ensure
uniformity of presentation, ease of shopping for the customer and to facilitate
inventory management, replenishment and restocking.
Each store is managed by a store manager who is responsible for all aspects of
the store's operations, including the hiring and training of store associates,
work scheduling, inventory control, expense control, and customer service.
Typically, the store manager is supported by an assistant manager and core
department heads, along with an average of 18 sales associates. Store operations
are coordinated through district managers, each of whom is currently responsible
for eleven to twenty retail stores. In addition, the Company has developed and
implemented consistent store standards, processes and best practices for the
chain.
The Company has established an internal store management-training program that
focuses training on store operations, systems, financial matters, human
resources and sales. To support the Company's planned expansion and its
management training programs, the Company has implemented a long-range personnel
plan that provides for internal promotions, coupled with recruitment of college
graduates and hiring of individuals with previous retail experience. Store
associates receive training that emphasizes customer service, sales, and product
knowledge and store procedures. All QSI store operations management, including
district managers, store managers, and assistant managers are compensated based
on job performance and participate in an incentive program based on the
store/district exceeding a targeted level of profitability. QSI has also
established an incentive program for all store associates that focuses on sales
and profitability.
Other Operations
In addition to QSI's retail stores, the Company also distributes an annual
catalog. The QSI catalog offers a broad assortment of new, used, and rebuilt
tractor parts and agricultural components, including approximately 25,000 SKU's.
In fiscal 1999, catalog sales were $7.5 million. The catalog was distributed
nationally to approximately 675,000 households in rural and agricultural
communities in fiscal 1999. The breadth of this distribution provides the
Company with name recognition among agricultural consumers in areas outside of
its core geographical markets. As a result of the catalog's broad distribution,
QSI anticipates that as it expands, customer familiarity will already have been
established. The Company also sells tractor parts and other items to other
agricultural retailers and
-7-
<PAGE>
distributors. In recent years, the Company has been reducing the number of
products offered and the number of customers served in this manner. In fiscal
1999, the Company generated sales of $2.5 million from such sales.
Purchasing and Distribution
The Company maintains a staff of 15 merchandise buyers, each of whom is
responsible for specific product categories, at its headquarters in Muskegon,
Michigan. The purchasing and inventory control process is controlled centrally
by the Company's point-of-sale ("POS") and automatic replenishment systems. The
Company purchases its merchandise from approximately 2,000 vendors, none of
which accounted for more than 10% of the Company's purchases during fiscal 1999.
The Company generally maintains multiple sources of supply for its products in
order to minimize the risk of supply disruption and to maximize its purchasing
power. The Company has no material long-term contractual commitments with any of
its vendors.
The Company operates two full-line distribution facilities: one in Fostoria,
Ohio, with 583,000 square feet, and one in Des Moines, Iowa, with 135,000 square
feet. In addition, the Company operates ten satellite distribution facilities,
ranging in size from 25,000 to 300,000 square feet, on a hub and spoke network
in various regional geographic regions of the country.
Corporate Offices and Management Information Systems
To facilitate the Company's expansion plan and to maintain consistent store
operations, QSI has centralized specific functions of its operations, including
accounting, the development of policies and procedures, store layouts, visual
merchandise presentation, inventory management, merchandise procurement and
allocations, marketing and advertising, human resources and real estate. This
centralization effectively utilizes the experience and resources of the
Company's senior management and provides a high level of consistency throughout
the chain.
The Company has invested considerable resources in management information and
control systems to ensure world-class customer service and to improve operating
efficiencies. These systems provide support for the purchase and distribution of
merchandise and help to improve the manner in which QSI stores, the corporate
offices, and distribution centers are operated. All QSI stores use the Company's
POS system to capture sales information at the SKU level. Through the POS
system, the Company can monitor customer purchases and inventory levels with
respect to every item of merchandise in each store daily.
The Company also has an automated inventory replenishment system which uses POS
information, and facilitates the timely replenishment of both the stores and the
warehouses. The sales and inventory information used in this system is updated
on a daily basis. This system also provides for minimum stocking levels for
lower volume items enabling QSI to carry a large number of SKU's at a minimum of
inventory carrying expense.
Competition
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers and from mass merchandisers. Some of these
competitors have substantially greater financial and other resources than the
Company.
Currently, most of the Company's stores do not compete directly in the markets
of other agricultural specialty retail chains. However, the Company's expansion
plans will likely result in some new stores being located in markets currently
serviced by one or more of these chains; and there can be no assurance that
these chains, certain of which have announced expansion plans, will not expand
into the Company's markets.
In addition, the Company competes in over half of its markets with mass
merchandisers. The Company believes that its merchandise mix and level of
customer service currently successfully differentiate it from mass merchandisers
and that as a result, the Company has to date not been significantly impacted by
competition from mass merchandisers. However, in the past, certain mass
merchandisers have modified their product mix and marketing strategies in an
effort apparently intended to permit them to compete more effectively in the
Company's markets; and it is likely that these efforts will continue.
-6-
<PAGE>
Advertising and Promotions
QSI's advertising is focused on its commitment to guaranteeing customer
satisfaction. QSI's primary advertising occurs through the weekly distribution
of color circulars, the creation and management of customer loyalty programs and
local TV advertising. In connection with the company's target marketing and
customer loyalty programs, QSI developed the "Thank Q" program to build loyalty
in all of its customer segments. The benefits to customers include guaranteed
lowest farm prices plus a year-end rebate on everything the customer has
purchased during the year, a year-end itemized statement of every purchase made,
and bulk discounts. The program also tracks customer purchases, thereby
providing a database of the members' purchasing patterns for marketing
initiatives.
Seasonality
Unlike many specialty retailers, the Company has historically 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 (May through July) 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 (February through
April). The Company expects these trends to continue for the foreseeable future.
Employees
As of March 31, 2000, QSI had approximately 9,343 employees (approximately 4,563
in full-time and approximately 4,780 in part-time positions). The Company
believes its relations with its employees are good.
-7-
<PAGE>
ITEM 2. PROPERTIES
As of March 31, 2000, the Company had 361 stores in 31 states as described in
the chart below.
# of # of
State Stores State Stores
- ------------------------------------------------------------------------
Alabama 1 North Dakota 5
California 11 Nebraska 46
Colorado 15 New Jersey 3
Delaware 2 New York 26
Georgia 10 Ohio 44
Indiana 19 Oklahoma 2
Iowa 25 Pennsylvania 25
Kansas 8 South Carolina 6
Kentucky 9 South Dakota 11
Maryland 4 Tennessee 3
Massachusetts 1 Virginia 13
Michigan 38 Vermont 1
Minnesota 10 West Virginia 10
Missouri 1 Wisconsin 3
Montana 2 Wyoming 4
North Carolina 3 -----
TOTAL: 361
The Company owns 79 of the stores and leases the remaining 282 stores. The
Company owns the distribution center in Fostoria, Ohio, leases the remaining
distribution facilities described in Item 1, and leases its corporate
headquarters in Muskegon, Michigan. The Company generally negotiates retail
store leases with an initial term between five and seven years, with two or
three renewal periods of five years each, exercisable at the Company's option.
Through January, 2000, the Company paid an average of $4.83 per square foot in
retail store occupancy expenses, including rent, taxes, common area charges,
repairs and maintenance. Rent expenses generally do not vary based on sales and
generally increase 10-15% at the beginning of each option period. Management
believes that the Company's properties are generally in good condition and are
adequate for their intended uses.
ITEM 3. LEGAL PROCEEDINGS
The Company has been notified by the U.S. Environmental Protection Agency that
it may have potential liability for cleanup costs associated with the cleanup of
a dumpsite near Owensburg, Kentucky. To date, the only articles of waste
identified as possibly once belonging to the Company are certain empty battery
acid containers. The Company believes that any liability it might have as a
result of this action would be as a de minimis contributor and will not have a
material effect on the Company's financial position, liquidity or results of
operations.
The Company is not a party to any other legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business. Compliance with
federal, state and local laws and regulations pertaining to the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has not had, and is not anticipated to have, a material effect upon
the capital expenditures, earnings or competitive position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-8-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quality Stores, Inc., Common Stock is held entirely by Holdings. See "Item 1.
Business - Acquisition of the Company by J.W. Childs".
In fiscal 1999, the Company paid cash dividends of $1,542,000 to Holdings. The
Company has not previously paid any cash dividends on its common stock. Although
the Company may pay limited cash dividends on its common stock, the Company's
ability to pay cash dividends is restricted by the New Credit Facility and
Senior Notes.
-9-
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Successor | Predecessor
---------------------------------------------- | -----------------------------------------
Seven |
Fiscal Year Fiscal Year Months | Five Months Fiscal Year
Ended Ended Ended | Ended -------------------------
January 29, October 31, November 1, | March 26, November 2, October 28,
2000(5)(7) 1998 1997 | 1997 1996 1995
---------------------------------------------|-------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
|
Net sales (000's) $1,092,021 $ 587,195 $ 305,122 | $ 106,048 $ 293,020 $ 251,703
Income (loss) from continuing 3,163 9,975 1,365 | (1,247) 8,744 8,185
Operations (000's) |
Ratio (deficiency) of earnings to |
fixed charges (1) 1.2x 1.8x 1.3x | (1,881) 5.3x 5.8x
Number of stores at end of period (2) 350 214 227 | 112 111 66
Comparable store sales per square |
foot of indoor selling space (3) 163 180 191(8) | 222 224
Comparable store sales increases |
(decreases) (4) 0.8% 4.6% (4.7%)(8) | 1.0% (1.6%)
Balance sheet data (at end of period): |
(000's) (5) |
Working capital $ 191,904 $ 130,484 $ 85,639 | $ 63,803 $ 62,496
Total assets 822,463 418,845 434,235 | 159,238 149,977
Long-term debt, less current portion (6) 388,554 181,075 153,171 | 17,341 16,862
Stockholders' equity 224,627 129,757 119,547 | 90,063 81,277
|
|
<CAPTION>
|
Three Months Ended |
---------------------------------------- |
January 31, 1998 |
January 30, 1999 (Unaudited) |
---------------------------------------- |
<S> <C> <C>
Net sales (000's) $146,147 $144,393 |
Income (loss) from continuing $1,485 $590 |
Operations (000's) |
Ratio (deficiency) of earnings to |
fixed charges (1) 1.5x 1.2x |
Number of stores at end of period 224 227 |
Comparable store sales per square foot |
of indoor selling space (3) |
Comparable store sales increases |
(decreases) (4) 6.1% 2.3% |
Balance sheet data (at end of period) |
(000's): |
Working capital $136,310 $85,501 |
Total assets $439,606 $425,210 |
Long-term debt, less current portion $190,843 $150,500 |
Stockholders' equity $131,242 $120,137 |
<FN>
(1) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and 20.0% of the rent expense from operating leases,
which the Company believes is a reasonable approximation of the interest factor included in the rent. For the five-month
period ended March 26, 1997 earnings were insufficient to cover fixed charges by $1,881.
(2) Net of 5 store closings in fiscal 1997, 14 store closings in fiscal 1998 , and 10 store closings in fiscal 1999.
(3) Comparable sales per square foot of indoor selling space and calculated by dividing store sales by total indoor selling
square footage for stores open and operated by QSI at least twelve months in each fiscal year.
(4) Percentage change in store sales as compared to sales for the same stores for the prior year for stores open and operated by
QSI for at least twelve months in each year. The 1.0% increase in comparable store sales in 1996 has been adjusted to reflect
a comparable 52-week year. Comparable store sales grew 2.9% without such adjustment. The 4.7% decrease in comparable store
sales in 1997 has been adjusted to reflect that fiscal year 1996 was a 53 week year. Comparable store sales declined 6.5%
without such adjustment.
-10-
<PAGE>
(5) During the fiscal year ended January 29, 2000, the Company acquired Quality in a transaction in which Quality was merged with
and into the Company.
(6) Excluding, in fiscal 1995, long-term debt from discontinued operations.
(7) During fiscal 1999, the Company changed its fiscal year end from the Saturday nearest to October 31 to the Saturday nearest
to January 31.
(8) Calculations are for the fiscal year ended November 1, 1997.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected consolidated
financial data and the consolidated financial statements of the Company and
related notes thereto.
Results of Operations
The following table sets forth, for the periods indicated, certain items in the
Company's Statements of Income expressed as a percentage of net sales. All
amounts and percentages for the fiscal year ended November 1, 1997, include the
activity for the periods of the seven months ended November 1, 1997, and the
five months ended March 26, 1997, on a combined basis.
<TABLE>
<CAPTION>
-----------------------------------------------
Fiscal Year Ended
-----------------------------------------------
January 29, October 31, November 1,
2000 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 70.9% 69.9% 70.9%
-----------------------------------------------
Gross profit 29.1% 30.1% 29.1%
Selling, general, and administrative expense 23.0% 22.9% 24.6%
Merger integration expenses 1.5% 0.0% 0.0%
Amortization of intangibles 0.6% 0.6% 0.6%
-----------------------------------------------
Operating income 4.0% 6.6% 3.9%
Interest expense 3.2% 3.5% 3.5%
-----------------------------------------------
Income before income taxes 0.9% 3.1% 0.4%
Income taxes 0.6% 1.4% 0.4%
-----------------------------------------------
Net income 0.3% 1.7% 0.0%
===============================================
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net sales for the fiscal year ended January 29, 2000,(2) were $1,092.0 million,
an increase of $504.8 million, or 86.0%, as compared to net sales for the fiscal
year ended October 31, 1998, of $587.2 million. The increase was due principally
to the acquisition of 122 stores, primarily through the Quality merger. Net
sales include $445.5 million of Quality sales since the date of acquisition. In
addition, the Company opened 24 new stores subsequent to October 31, 1998, and
had an increase in comparable store sales of $4.4 million, or 0.8%.
Gross profit for fiscal 1999 was $317.6 million, an increase of $140.6 million,
or 79.4%, as compared to $177.0 million for fiscal 1998, principally as a result
of the increase in net sales. Gross profit as a percentage of sales decreased to
29.1% for fiscal 1999, as compared to 30.1% for fiscal 1998. The decrease in
gross profit percentage was primarily the result of the Quality merger. Quality
historically had a lower gross profit percentage than CT.
Selling, general, and administrative expenses for fiscal 1999 were $251.4
million, an increase of $116.8 million, or 86.7% over fiscal 1998. This increase
was due primarily to costs related to the acquisition and operation of the
- ------
(2) Effective for the year ended January 29, 2000, the Company's fiscal year end
was changed from the Saturday closest to October 31 to the Saturday closest to
January 31.
-11-
<PAGE>
Quality stores and costs related to new store openings. Selling, general, and
administrative expenses as a percentage of sales increased to 23.0% in fiscal
1999 as compared to 22.9% in fiscal 1998. This increase is primarily
attributable to costs related to new store openings in fiscal 1999.
Merger integration expenses for fiscal 1999 were $15.8 million (none in fiscal
1998). The merger integration expenses are attributable to costs related to
closing the QSI corporate headquarters in Des Moines, Iowa, and expenses
incurred to integrate the CT and Quality operations. These costs include
severance and retention costs for employees, costs associated with leased
facilities to be closed, and costs to facilitate the integration process.
Amortization of intangibles was $6.3 million for fiscal 1999 and $3.6 million in
fiscal 1998. The increase is due to amortization of the additional goodwill
acquired in the Quality merger.
Operating income for fiscal 1999 was $44.0 million, an increase of $5.2 million,
or 13.4%, as compared to fiscal 1998. Operating income as a percentage of sales
decreased to 4.0% in fiscal 1999 from 6.6% in fiscal 1998. The decrease resulted
from the factors affecting net sales, gross profit, selling, general, and
administration expenses, merger and integration expenses, and amortization of
intangibles discussed above.
Interest expense for fiscal 1999 was $34.6 million, an increase of $14.1
million, as compared to $20.5 million for fiscal 1998. This increase was
primarily due to the interest expense on the additional debt incurred to fund
the Quality merger.
Income tax expense for fiscal 1999 was $6.2 million, a decrease of $2.2 million,
or 25.8% as compared to $8.4 million for fiscal 1998. Income taxes as a
percentage of pretax earnings were 66.3% in fiscal 1999 as compared to 45.7% in
fiscal 1998. The increase is due primarily to amortization of goodwill related
to the Quality merger, which is not deductible for income tax purposes.
Three-Month Period Ended January 30, 1999, Compared to the Unaudited Results for
the Quarter Ended January 31, 1998
Net sales for the three-month period ended January 30, 1999, were $146.1
million, an increase of $1.7 million, or 1.2%, as compared to net sales for the
quarter ended January 31, 1998, of $144.4 million. This increase was due
principally to a comparable store sales increase of 6.1% and to sales derived in
1999 from new stores opened in fiscal 1999 to date, partially offset by $8.1
million of sales derived in 1998 from stores closed in fiscal 1998.
Gross profit for the three-month period ended January 30, 1999, was $42.6
million, an increase of $1.0 million or 2.4%, as compared to $41.6 million for
the quarter ended January 31, 1998, as a result of the increase in net sales
discussed above and an increase in gross profit percentage. Gross profit as a
percentage of net sales increased to 29.2% for the three-month period ended
January 30, 1999, as compared to 28.8% for the quarter ended January 31, 1998.
The increase in the gross profit percentage is attributable to the fuller
realization of the increased purchasing power of the company resulting from the
acquisition of Country General during fiscal 1997.
Selling, general, and administrative (SGA) expenses for the three-month period
ended January 30, 1999, were $33.7 million, a decrease of $0.4 million, or 1.2%,
as compared to the quarter ended January 31, 1998. SGA expenses as a percentage
of net sales improved to 23.1% for the three-month period ended January 30,
1999, as compared to 23.6% for the quarter ended January 31, 1998. This decrease
is attributable to completion of the integration of the Country General stores.
Amortization of intangibles remained relatively constant at $1.0 million for the
three-month period ended January 30, 1999, as compared to $0.9 million for the
quarter ended January 31, 1998.
Operating income for the three-month period ended January 30, 1999, was $7.9
million, an increase of $1.2 million, or 17.9%, as compared to $6.7 million for
the quarter ended January 31, 1998. Operating income as a percentage of net
sales increased to 5.4% for the three-month period ended January 30, 1999, from
4.6% for the quarter ended January 31, 1998. The increase was the result of the
factors affecting net sales, gross profit, and SGA expenses discussed above.
-12-
<PAGE>
Interest expense was $5.0 million for the three-month period ended January 30,
1999, as compared to $5.3 million for the quarter ended January 31, 1998. The
decrease in interest expense is attributable to a lower average debt balance and
a decrease in interest rates on the Company's variable rate borrowings.
Income taxes for the three-month period ended January 30, 1999, were $1.5
million, an increase of $0.7 million as compared to the quarter ended January
31, 1998. Income tax as a percentage of pretax earnings was 49.7% in 1999,
compared to 57.1% in 1998. This decrease is due primarily to amortization of
goodwill related to the acquisition of the Company by Childs, which is not
deductible for income tax purposes, being spread over a larger pre-tax income
base.
Net income for the three-month period ended January 30, 1999, was $1.5 million,
as compared to $0.6 million for the quarter ended January 31, 1998, as a result
of the factors discussed above.
Fiscal 1998 Compared to Fiscal 1997
Net sales for the fiscal year ended October 31, 1998 were $587.2 million, an
increase of $176.0 million, or 42.8%, as compared to net sales for the fiscal
year ended November 1, 1997 of $411.2 million. The increase was due principally
to the fact that the Country General stores had a full year of sales in fiscal
1998 compared to four months in fiscal 1997. Net sales includes $257.3 million
and $99.4 million of Country General sales in fiscal 1998 and fiscal 1997,
respectively. In addition, the Company had an increase in comparable store sales
of $13.2 million or 4.6% and had a full year of operations for the 4 stores
acquired from Walsh and the 3 stores opened in 1997. The increase in comparable
store sales was due primarily to the fact that fiscal year 1998 had warm early
spring weather conditions while fiscal year 1997 had a mild winter followed by a
cool spring and dry summer in the Northeast where most of the comparable stores
are located.
Gross profit for fiscal 1998 was $177.0 million, an increase of $57.5 million,
or 48.1%, as compared to $119.5 million for fiscal 1997, principally as a result
of the increase in net sales. Gross profit as a percentage of sales increased to
30.1% for fiscal 1998, as compared to 29.1% for fiscal 1997. The increase in
gross profit percentage is a result of the increased purchasing power obtained
as a result of the Country General Acquisition.
Selling, general, and administrative expenses for fiscal 1998 were $134.6
million, an increase of $33.4 million, or 33.0%, over fiscal 1997. This increase
was due primarily to costs related to the operation of the Country General
stores and new stores opened in fiscal 1997 for a full year in fiscal 1998.
Selling, general, and administrative expenses as a percentage of sales decreased
to 22.9% in fiscal 1998 as compared to 24.6% in fiscal 1997. This decrease is
attributable to completion of the integration of the Country General stores and
increased sales volume.
Amortization of intangibles was $3.6 million for fiscal 1998 and $2.2 million in
fiscal 1997. The increase is due to a full year of amortization of the
additional goodwill incurred in the Acquisition and the Country General
Acquisition.
Operating income for fiscal 1998, was $38.8 million, an increase of $22.6
million, or 139.9%, as compared to fiscal 1997. Operating income as a percentage
of sales increased to 6.6% in fiscal 1998 from 3.9% in fiscal 1997. The increase
resulted from the factors affecting net sales, gross profit, selling, general
and administrative expenses and amortization of intangibles discussed above.
Interest expense for fiscal 1998 was $20.5 million, an increase of $5.8 million,
as compared to $14.7 million for fiscal 1997. This increase was primarily due to
a full year of interest expense on the additional debt incurred to fund the
Acquisition and the Country General Acquisition.
Income tax expense for fiscal 1998, was $8.4 million, an increase of $7.0
million, or 490.3% as compared to $1.4 million for fiscal 1997. Income taxes as
a percentage of pretax earnings were 45.7% in fiscal 1998 as compared to 92.3%
in fiscal 1997. The decrease is due primarily to amortization of goodwill
related to the Acquisition, which is not deductible for income tax purposes,
being spread over a larger income base in fiscal 1998.
-13-
<PAGE>
Liquidity and Capital Resources
In addition to cash to fund operations, QSI's primary ongoing cash requirements
are those necessary for the Company's expansion and relocation programs,
including inventory purchases and capital expenditures and debt service. The
Company's primary sources of liquidity have been funds provided from operations,
borrowings pursuant to the Company's revolving and term credit facilities,
short-term trade credit, and additional equity investments.
On January 29, 2000, the Company had working capital of $191.9 million, an
increase of $61.4 million, as compared to working capital of $130.5 million on
October 31, 1998. This increase resulted primarily from the working capital
acquired as a result of the Quality merger. On January 29, 2000, the Company's
inventories were $365.4 million, an increase of $148.3 million, as compared to
$217.1 million at October 31, 1998. On January 29, 2000, the Company's accounts
payable were $124.0 million, an increase of $45.7 million, as compared to $78.3
million at October 31, 1998. The increase in the Company's inventory and
accounts payable is attributable to the Quality merger.
Operating activities of the Company utilized $19.0 million and provided $37.2
million of net cash in fiscal 1999 and 1998, respectively, and used $0.5 million
of net cash in fiscal 1997. The decrease in net cash generated in fiscal 1999,
as compared to fiscal 1998, resulted primarily from a decrease in accounts
payable. The increase in net cash generated in fiscal 1998, as compared to
fiscal 1997, resulted primarily from an increase in net income, a larger
increase in accounts payable, and a net decrease in inventory compared to a net
increase in 1997.
The Company's capital expenditures were $35.7 million and $4.8 million for
fiscal 1999 and 1998, respectively. The majority of capital expenditures were
for store fixtures, equipment and leasehold improvements for new and existing
stores. The Company presently expects its capital expenditures for new store
openings and for renewal and replacement costs at existing stores and
distribution centers in fiscal 2000 to be approximately $43.0 million.
During fiscal 1997, the Company was acquired by an affiliate of J.W. Childs
Equity Partners, L.P. and thereafter became a wholly owned subsidiary of
Holdings. See "--Item 1. Business - Acquisition of the Company by J.W. Childs"
and Notes to Consolidated Financial Statements. In connection with the
Acquisition, on March 27, 1997, the Company consummated a public offering of
$105.0 million aggregate principal amount of 10-5/8% Senior Notes (the "Senior
Notes"). The net proceeds of the offering were used to repay borrowings of $35.9
million under the Margin Loan Facility, pay the Merger Consideration of $51.8
million, pay fees and expenses of the Acquisition, and reduce outstanding
short-term borrowings. The Senior Notes mature on April 1, 2007, with interest
payable semiannually in arrears on April 1 and October 1. The Senior Notes may
be redeemed beginning April 1, 2002, at a price of 105.3125% of the principal
amount decreasing approximately 1.77% annually thereafter until April 1, 2005,
at which time they are redeemable at face value. Furthermore, notwithstanding
the foregoing, the Company may redeem up to 35% of the original aggregate
principal amount of the Senior Notes at a price of 110% of the principal amount
with the net cash proceeds of a public equity offering within 60 days of closing
such offering.
In addition, effective June 26, 1997, the Company acquired all of the
outstanding capital stock of Country General. The acquisition was accounted for
as a purchase, and the Company elected to treat the purchase as a purchase of
all of the assets of Country General for Federal income tax purposes. See "Item
1. Business - Acquisitions" and Notes to the Consolidated Financial Statements.
The Company funded the acquisition price in part from a $49.75 million cash
equity contribution from Holdings and the remainder from funds drawn under the
amended and restated Credit Facility described below.
At January 29, 2000, the Company had a bank credit facility that allowed for
borrowings up to $320.0 million, consisting of $220.0 million under two term
loan facilities (Tranche A and B) of which $216.9 million was outstanding and a
$100.0 million revolving credit facility under which $87.5 million was
outstanding. On March 31, 2000, this credit facility was 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 Tranche A term loan ($95.6 million) under the Amended Credit Facility is
payable in quarterly installments of $5.0 million through October 31, 2004,
while the Tranche B term loan ($119.0 million) 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.
-14-
<PAGE>
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 (8.6%
to 10% at January 29, 2000). The revolving credit debt is also subject to a 0.5%
commitment fee on its unused portion.
The Company's long-term borrowing agreements contain 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.
Commercial and standby letters of credit outstanding at January 29, 2000,
January 30, 1999 and October 31, 1998, totaled $9.9 million, $6.3 million, and
$6.7 million, respectively.
In May and June of 1999, the Company entered into interest rate cap transactions
(the "Cap Transactions") with a bank to reduce the impact of changes in interest
rates on its floating term loan debt. The Cap Transactions had an initial
notional amount totaling $105.0 million. The Cap Transactions cap the interest
rate on $105.0 million of the Credit Facility at a three-month Libor rate of
7.0%, plus the applicable margin. The Company is exposed to interest rate risk
in the event of nonperformance by the counter party to the Cap Transactions.
However, the Company does not anticipate nonperformance by the bank.
The Company anticipates that its principal uses of cash in the foreseeable
future will be working capital requirements, debt service requirements and
capital expenditures, as well as expenditures relating to acquisitions. Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from operations, together with amounts available under the Credit
Facility, will be adequate to meet its anticipated requirements in the
foreseeable future for working capital, capital expenditures and interest
payments. The Company expects that if it were to pursue a significant
acquisition, it would arrange prior to the acquisition any additional debt or
equity financing required to fund the acquisition.
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, the Company has historically 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 (May through July) 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 (February through
April). The Company expects these trends to continue for the foreseeable future.
Inflation
Management does not believe its operations have been materially affected by
inflation.
Year 2000
In prior years, he Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout the fiscal 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly. Year 2000
remediation costs were not significant.
-15-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in the Company's financial instruments subject to such
risks, is the potential market value loss arising from adverse changes in
interest rates. The Company's financial instruments subject to market risk are
held for purposes other than trading.
Interest Rate Cap Agreements
The Company uses interest rate cap agreements to reduce exposure to interest
rate fluctuations on its term debt. At January 29, 2000, the Company had
interest rate cap agreements that provided for an interest rate cap of 7.0
percent, based on the three-month LIBOR rate, which was 5.97 at January 29,
2000, plus the applicable margin. These agreements cover $105.0 million notional
amount of debt. At January 29, 2000, $216.9 million of term debt was
outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included at pages F-1 through F-28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-16-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
Company's directors, executive officers, and other significant employees. All of
the Company's officers are elected annually and serve at the discretion of the
Board of Directors.
Name Age Position(s)
- ----------------------------------------------------------------------------
James T. McKitrick 54 President, Chief Executive Officer, Director
Alan L. Fansler 49 Executive Vice-President, Chief Operating
Officer, Director
John W. Childs 58 Director
Steven G. Segal 39 Vice-President, Director
Adam L. Suttin 32 Vice-President, Director
David C. Bliss 62 Chairman of the Board, Director
Jerry D. Horn 62 Director
Jeffrey B. Swartz 38 Director
William E. Watts 45 Director
Habib Y. Gorgi 43 Director
Peter Lamm 48 Director
Richard C. Dresdale 44 Director
John L. Hilt 54 Director
G. Dean Longnecker 51 Executive Vice-President, Integration, Director
Denny L. Starr 46 Senior Vice-President of Finance, CFO, Secretary
Jeffery A. Stanton 49 Senior Vice-President, Merchandising & Marketing
James T. McKitrick, President and Chief Executive Officer, joined the Company in
July 1992. He has over 30 years experience in retailing, including 20 years at
Kmart Corporation. Prior to joining QSI, Mr. McKitrick was President and Chief
Executive Officer of Builder's Emporium, a California-based home improvement
center chain. Previously, he was with Ames Department Stores from 1987 through
1990, where he held the positions of Executive Vice President, Chairman of Zayre
Discount Store Division, and President and Chief Executive Officer of G.C.
Murphy Division, a $900 million variety store chain. Mr. McKitrick also served
as President and Chief Executive Officer of Warehouse Club, Inc. from 1986
through 1987 and Executive Vice President of Merchandising for T.G.&Y. Stores
Company from 1984 through 1986. From 1963 through 1984, Mr. McKitrick was with
the Kmart Corporation.
Alan L. Fansler, Executive Vice-President and Chief Operating Officer, joined
the Company in May, 1999. Prior to May, 1999, Mr. Fansler was employed by
Quality for 27 years, where he held several management positions in Store
Operations, Marketing, and Human Resources, including Vice-President of Human
Resources, Vice-President of Store Operations, Senior Vice-President of
Operations, and President and Chief Executive Officer. Mr. Fansler received his
B.S. degree from Purdue University in 1972.
John W. Childs has been President of J.W. Childs Associates since July, 1995.
Prior to that time, he was an executive at Thomas H. Lee Company from May, 1987,
most recently holding the position of Senior Managing Director. He is a director
of Big V Supermarkets, Inc., Edison Schools, Inc., Chevys, Inc., DESA
International, Inc., Pan Am International Flight Academy, Inc., and Beltone
Electronics, Inc.
Steven G. Segal is Senior Managing Director of J.W. Childs Associates and has
been an executive of J.W. Childs Associates since July, 1995. Prior to that
time, he was an executive at Thomas H. Lee Company from August, 1987, most
recently holding the position of Managing Director. He is a director of
Universal Hospital Services, Inc., National Nephrology Associates, Inc.,
International DiverseFoods, Inc., Big V Supermarkets, Inc., and Jillian's
Entertainment Holdings, Inc. and is Chairman of the Board of Empire Kosher
Poultry, Inc.
-17-
<PAGE>
Adam L. Suttin is a Managing Director of J.W. Childs Associates and has been an
executive of J.W. Childs Associates since July 1995. Prior to that time, he was
an executive at Thomas H. Lee Company from August 1989, most recently holding
the position of Associate. He is a director of American Safety Razor Company,
Empire Kosher Poultry, Inc. and DESA International, Inc.
David C. Bliss, Chairman of the Board, joined the Company in May, 1999. Prior to
May, 1999, Mr. Bliss was employed by Quality and served as Vice-President and
Secretary/Treasurer in 1976 and was appointed to the Board of Directors of
Quality at that time. He was promoted to President in 1986, to Chief Executive
Officer in 1992, and to Chairman of the Board in 1995. Mr. Bliss is a 1960
graduate of Western Michigan University.
Jerry D. Horn was CEO from 1985 to 1991, then Chairman from 1991 to 1999 of
General Nutrition Companies, Inc., a 4,500-store vitamin and nutritional
supplement retail chain operating under the GNC name. Mr. Horn was President and
CEO of Recreational Equipment, Inc., from 1979 to 1984 and has been a Managing
Director of J. W. Childs Associates since July, 1995.
Jeffrey B. Swartz has been Chief Executive Officer of Timberland Co., a
manufacturer and marketer of branded footwear and apparel, since 1998, and has
worked for that company in various positions since June, 1986.
William E. Watts has been President, Chief Executive Officer, and a Director of
General Nutrition Companies, Inc., since October, 1991 and, prior to that, held
various positions with its predecessor since 1984.
Habib Y. Gorgi is President of the general partners of Fleet Equity Partners
VII, L.P., and the general partner of Silverado III, L.P., which is the general
partner of Chisholm Partners, and has worked at Fleet Equity Partners since
1986. He is a director of Skyline Chili, Roadrunner Freight Systems, Savage
Sports Corporation, Simonds Industries, and FTD Corporation. Mr. Gorgi received
a bachelor's degree from Brown University and a master's degree from Columbia
University.
Peter Lamm is Chairman and Chief Executive Officer of Fenway Partners, Inc., and
was a founding partner. Fenway is a New York-based private equity firm for
institutional investors with the primary objective of acquiring leading
middle-market companies. Prior to founding Fenway, Mr. Lamm was previously
Managing Director of Butler Capital Corporation and General Partner of each of
the BCC funds. Mr. Lamm serves as a director of a number of Fenway's portfolio
companies, including Aurora Foods, Inc., Simmons Company, Delimex Holdings,
Inc., Blue Capital Management, LLC, and Iron Age Corporation.
Richard C. Dresdale is President of Fenway Partners, Inc., and was a founding
partner. Prior to founding Fenway, Mr. Dresdale was employed by Clayton,
Dubilier and Rice, Inc., most recently as Principal. Mr. Dresdale serves as a
director of a number of Fenway's portfolio companies, including Aurora Foods,
Inc., Simmons Company, Delimex Holdings, Inc., and Blue Capital Management, LLC.
John L. Hilt is retired from Quality. Prior to his retirement, he held the
position of Chairman Emeritus of the Board of Directors. John joined Quality in
1967 and held several positions during his full-time career with the Company. He
became President in 1974, was promoted to Chairman of the Board in 1986, and
became Chairman Emeritus in December of 1995. Mr. Hilt is a 1967 graduate of
Purdue University.
G. Dean Longnecker, Executive Vice-President of Integration, joined QSI in 1980
as Controller. Mr. Longnecker was promoted to Executive Vice-President of
Finance in 1985, Executive Vice-President, Chief Operating Officer in 1997, and
Executive Vice-President of Integration in 1999. Mr. Longnecker was employed at
Payless Cashways from 1973 until 1980, most recently as Treasurer. He received a
B.S. from Iowa State University in 1970 and C.P.A. in 1972.
Denny L. Starr, Senior Vice-President of Finance and Chief Financial Officer,
joined the Company in October, 1989 as Assistant Controller. Mr. Starr was
promoted to Vice-President and Controller in 1993, Senior Vice-President of
Finance in 1996, and Senior Vice-President of Finance and Chief Financial
Officer in 1998. In 1999, Mr. Starr terminated his employment and became an
independent consultant to the Company. Effective February 1, 2000, Mr. Starr
rejoined the Company and was reelected Senior Vice President of Finance and
Chief Executive Officer. He previously served as Assistant Controller of The
Witten Group, a holding company with operations in manufacturing, real estate,
and finance, from 1986 through 1989. He was an Audit Manager with McGladrey &
Pullen from 1982 until 1986. Mr. Starr received his B.A. from the University of
Iowa in 1982 and C.P.A. in 1982.
-18-
<PAGE>
Jeffery A. Stanton, Senior Vice-President, Merchandising & Marketing, joined the
Company in June, 1992. Previously, he was employed by R.R. Donnelly & Sons and
Meredith/Burda Corporation from 1985 through 1992, as well as Reichardt's, Inc.,
a specialty retailer, from 1972 through 1985. Mr. Stanton received a B.B.A.
degree from the University of Iowa in 1972.
-19-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation earned for all services rendered to
the Company during fiscal 1999, fiscal 1998, and fiscal 1997, as applicable, by
the Company's Chief Executive Officer and four other executive officers who were
employed by the Company as such during fiscal 1999 (collectively, the "Named
Executives").
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------
All Other
Fiscal Salary (1) Bonus Compensation (2)
Name and Principal Position Year ($) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James T. McKitrick 1999 535,000 286,318 6,742
President, Chief Executive Officer, Director 1998 435,000 224,743 5,000
1997 399,423 -- 9,586
Alan L. Fansler (3) 1999 198,654 147,173 4,520
Executive Vice-President, Chief Operating Officer, Director
G. Dean Longnecker 1999 273,000 146,103 1,890
Executive Vice-President, Integration, Director 1998 265,000 136,912 4,587
1997 254,327 -- 2,043
James F. Hurley (3) 1999 146,038 75,995 4,446
Senior Vice-President, Finance, Chief Financial Officer
Jeffery A. Stanton 1999 200,000 85,835 3,002
Senior Vice-President, Merchandising & Marketing 1998 145,385 61,998 5,000
1997 108,692 20,300 9,465
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes compensation deferred at the Named Executive's election under the Company's 401(k) Plan.
(2) Represents amounts contributed by the Company during each fiscal year, as applicable, to the Named Executive's 401(k) Plan.
(3) Mr. Fansler, and Mr. Hurley joined the Company as of May 7, 1999, in connection with the merger of CT and Quality. Mr. Hurley's
employment with the Company terminated on January 31, 2000.
</FN>
</TABLE>
Employment Arrangements with Executive Officers
Mr. McKitrick's Employment Agreement provides for a base salary of $535,000
subject to the annual increases as determined by the Board of Directors (which
increases must at least equal increases in the consumer price index). Mr.
McKitrick is eligible for a cash bonus if the Company achieves certain operation
cash flow targets, which bonuses are not subject to any ceilings contained in
the Employment Agreement. Mr. McKitrick's Employment Agreement provides for a
severance payment equal to his base salary for 18 months if his employment is
terminated (other than in the case of death, disability, or for cause) or if he
is not reelected as President and Chief Executive Officer or Chairman, not
subject, however, to reduction for any compensation earned from during such
18-month period from other businesses.
Mr. Fansler's Employment Agreement provides for a base salary of $275,000
subject to the annual increases as determined by the Board of Directors (which
increases must at least equal increases in the consumer price index). Mr.
Fansler is eligible for a cash bonus if the Company achieves certain operation
cash flow targets, which bonuses are not subject to any ceilings contained in
the Employment Agreement. Mr. Fansler's Employment Agreement
-20-
<PAGE>
provides for a severance payment equal to his base salary for 12 months if his
employment is terminated (other than in the case of death, disability, or for
cause) or if he is not reelected as Executive Vice-President and Chief Operating
Officer.
Mr. Longnecker's Employment Agreement provides for a base salary of $273,000
subject to the annual increases as determined by the Board of Directors (which
increases must at least equal increases in the consumer price index). Mr.
Longnecker is eligible for a cash bonus if the Company achieves certain
operation cash flow targets, which bonuses are not subject to any ceilings
contained in the Employment Agreement. Mr. Longnecker's Employment Agreement
provides for a severance payment equal to his base salary for 12 months if his
employment is terminated (other than in the case of death, disability, or for
cause).
Mr. Hurley's Employment Agreement provided for a base salary of $200,000 subject
to the annual increases as determined by the Board of Directors (which increases
must at least equal increases in the consumer price index). Mr. Hurley was
eligible for a cash bonus if the Company achieves certain operation cash flow
targets, which bonuses are not subject to any ceilings contained in the
Employment Agreement. Mr. Hurley's Employment Agreement provided for a severance
payment equal to his base salary for 12 months if his employment was terminated
(other than in the case of death, disability, or for cause) or if he was not
reelected as Senior Vice-President of Finance, Chief Financial Officer.
Mr. Stanton's Employment Agreement provides for a base salary of $200,000
subject to the annual increases as determined by the Board of Directors (which
increases must at least equal increases in the consumer price index). Mr.
Stanton is eligible for a cash bonus if the Company achieves certain operation
cash flow targets, which bonuses are not subject to any ceilings contained in
the Employment Agreement. Mr. Stanton's Employment Agreement provides for a
severance payment equal to his base salary for 12 months if his employment is
terminated (other than in the case of death, disability, or for cause) or if he
is not reelected as Senior Vice-President.
The Employment Agreements also contemplate that certain members of management
will participate in stock option plans of Holdings. Allocations of options among
the management group are to be made in the first instance by the Chief Executive
Officer of the Company, subject to ratification by Holdings' Board of Directors.
A portion of such allocations was made during fiscal years 1999 and 1998. The
management stock options are subject to accelerated vesting based on the
Company's achievement of certain operating cash flow targets. The following
table provides certain information concerning options to purchase Holdings
common stock during fiscal 1999 to each Named Executive Officer of the Company.
-21-
<PAGE>
<TABLE>
<CAPTION>
Options Granted in Last Fiscal Year
Potential Realizable Value At
Assumed Annual Rates Of
Stock Price Appreciation For
Individual Grants Option Term
----------------------------------------------------------------------------------------
Number of Percent Of Exercise
Shares Total Options or Expiration
Name Granted Granted Base Price Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James T. McKitrick 7,185 12.35% $115.80 June 7, 2009 $523,255 $1,326,030
Alan L. Fansler 8,636 14.85% $115.80 June 7, 2009 $628,925 $1,593,821
Jeffery A. Stanton 2,297 3.95% $115.80 June 7, 2009 $167,282 $423,924
James F. Hurley 4,318 7.42% $115.80 June 7, 2009 $314,462 $796,909
</TABLE>
Additionally, the Employment Agreements contemplate that Messrs. McKitrick and
Longnecker will receive additional stock options which vest if the Company is
sold within six years after the effective time of the Merger and the realized
value of the common equity of the original investment group in Holdings should
equal or exceed ten times the value thereof at the time of the Merger. Mr.
McKitrick's and Mr. Longnecker's options under this program are to acquire
12,750 and 7,650 shares of common stock of Holdings.
In addition various other executives of the Company have employment agreements
that contain, among other items, one-year severance provisions under certain
circumstances as well as various bonus provisions.
-22-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 29, 2000, Holdings holds 100% of the outstanding stock of the
Company. All outstanding options were repurchased in connection with the
Acquisition or exchanged for options to acquire shares of Holdings common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two of the Company's suppliers, Iron Age Corporation ("Iron Age") and DESA
International, Inc. ("DESA"), are controlled by certain stockholders of
Holdings. Iron Age is a manufacturer and distributor of work boots and
protective footwear. DESA is a manufacturer and marketer of zone heating/home
comfort products and specialty tools. The Company believes that the terms of its
purchases from Iron Age and DESA are at least as favorable to the Company as
could be obtained from other suppliers. In fiscal 1999, the Company's purchases
from Iron Age and DESA totaled $21.6 million.
For fiscal 1999, the three-month period ended January 30, 1999, and fiscal 1998,
Childs was paid an annual management and consulting services fee of
approximately $240,000 $60,000, and $240,000 respectively, under a five-year
agreement, annually renewable thereafter, requiring annual payments of $240,000,
subject to limitations of the Company's debt agreements. In addition, during
fiscal 1999, the three-month period ended January 30, 1999, and 1998, Fenway
Partners, a stockholder of Holdings, was paid an annual management fee of
$120,000, $30,000, and $120,000 respectively.
In connection with the consummation of the Acquisition and subsequent employee
stock purchases, Holdings loaned amounts to certain employees of the Company to
partially fund their investment in Holdings common stock. The loans, which
totaled $362,000 at January 29, 2000, are due in ten years and bear interest at
an interest rate of 8.5%.
Additionally, Messrs. Bliss, McKitrick, Fansler, Hurley, Stanton, and Longnecker
are parties to a Stockholders Agreement dated as of May 7, 2000, applicable to
all shares of Holdings common stock or vested options to acquire such common
stock held now or hereafter acquired by them. The Stockholders Agreement, among
other terms, permits Holdings to "call" their shares and vested options on their
termination of employment for any reason. Additionally, if either Mr. McKitrick,
Mr. Bliss, Mr. Fansler, Mr. Hurley, Mr. Stanton, or Mr. Longnecker is terminated
for any reason other than for cause or without good reason (as those terms are
defined in the Stockholders Agreement), he has the right to "put" his shares or
vested options to Holdings. Depending on the circumstances, the price for shares
of Holdings common stock purchased in connection with a call or put under the
Stockholders Agreement will range from cost to seven times EBITDA. The put and
call features of the Stockholders Agreement terminate on completion of a public
offering of Holdings common stock with aggregate net proceeds of $50.0 million
or more.
In February 2000, the Company sold the land, buildings, and certain fixtures and
equipment for three stores to be opened in fiscal 2000 to a limited liability
company whose principal members are Messrs. McKitrick and Fansler. The sales
price of $7.0 million was equal to the Company's cost for the assets. The
Company then entered into a twelve-year lease agreement with this same company
for the use of these stores. The total minimum lease payments under the lease
agreements range from $0.8 million in fiscal 2000 to $1.0 million in fiscal
2011. The Company believes the terms of the lease agreements to be as favorable
to the Company as could be obtained from other sources.
-23-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. See the Index to Financial Statements
appearing at page F-1.
2. Financial Statement Schedules. The following Consolidated
Financial Statement Schedule is included at page F-28:
Schedule II - Valuation and Qualifying Accounts
No other Financial Statement Schedules have been presented since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
3. Exhibits.
The following exhibits are filed with this Annual Report on Form
10-K or incorporated herein by reference.
3(i) Certificate of Incorporation, as amended, filed as exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
May 1, 1999, and incorporated herein by reference.
3(ii) Bylaws of the Company, filed as exhibit 3(ii) to the Company's
Registration Statement on Form S-1 (File #33-82620) originally
filed on August 9, 1994 and incorporated herein by reference.
4.1 Form of Common Stock Certificate of the Company, filed as exhibit
4.1 to the Company's Registration Statement on Form S-1 (File
#33-82620) originally filed on August 9, 1994 and incorporated
herein by reference.
4.2 Indenture relating to the Senior Notes, the form of which was
filed as exhibit 4.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-19613)
originally filed on March 19, 1997 and incorporated herein by
reference.
10.1 Employment Agreement between the Company and James T. McKitrick
dated as of September 16, 1994, filed as exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File #33-82620)
originally filed on August 9, 1994 and incorporated herein by
reference.
10.2 Employment Agreement between the Company and Dean Longnecker
dated as of September 16, 1994, filed as exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File #33-82620)
originally filed on August 9, 1994 and incorporated herein by
reference.
10.3 Asset Purchase Agreement By and Between Central Tractor Farm &
Country, Inc., (the "Buyers") and Big Bear Farm Stores, Inc. (the
"Sellers") dated May 22, 1996, filed as exhibit 10.15 to the
Company's 10-Q originally filed on September 9, 1996 and
incorporated herein by reference.
10.4 Agreement Plan of Merger dated November 27, 1996 by and among
Central Tractor Farm & Country, Inc., J.W. Childs Equity
Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition I,
Inc., filed as an exhibit to the Company's 8-K originally filed
on December 3, 1996 and incorporated herein by reference.
10.5 Securities Purchase Agreement dated as of November 27, 1996 by
and among Central Tractor Farm & Country, Inc., J.W. Childs
Equity Partners, L.P., JWC Holdings I, Inc., and JWC Acquisition
I, Inc., filed as an exhibit to the Company's 8-K originally
filed on December 3, 1996 and incorporated herein by reference.
10.6 Securities Purchase Agreement, dated as of November 6, 1996, by
and among Mezzanine Lending Associates I, L.P., Mezzanine Lending
Associates II, L.P., Mezzanine Lending Associates III, L.P.,
Senior Lending Associates I, L.P., BCC Industrial Services, JWC
Acquisition I, Inc., J.W. Childs Equity Partners, L.P., Central
Tractor Farm & Country, Inc. filed as an exhibit to JWCAC's
Schedule 13D originally filed on December 9, 1996 and
incorporated herein by reference.
-24-
<PAGE>
10.7 Letter Agreement, dated as of November 27, 1996 between JWC
Acquisition I, Inc. and Mr. James T. McKitrick, filed as an
exhibit to JWCAC's Schedule 13D originally filed on December 9,
1996 and incorporated herein by reference.
10.8 Letter Agreement, dated as of November 27, 1996 between JWC
Acquisition I, Inc. and Mr. G. Dean Longnecker, filed as an
exhibit to JWCAC's Schedule 13D originally filed on December 9,
1996 and incorporated herein by reference.
10.9 Credit Agreement dated as of December 23, 1996 among the Company,
Holdings, JWCAC, certain banks, financial institutions and other
institutional lenders listed therein, Fleet, as administrative
agent, and NationsBank, as co-agent, filed as exhibit 10.22 to
the Company's 10-K originally filed on January 31, 1997 and
incorporated herein by reference.
10.10 Stock Purchase Agreement, dated June 26, 1997 by and between the
Company and ConAgra, Inc. and the Amended and Restated Credit
Agreement, dated as of July 3, 1997, filed as exhibits to the
Company's 8-K filed on July 3, 1997 and incorporated herein by
reference.
10.11 Letter Amendment, dated as of February 18, 1998, to Amended and
Restated Credit Agreement, filed as exhibit 10.1 to the Company's
10-Q originally filed on September 15, 1998 and incorporated
herein by reference.
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges
21 Subsidiaries of the Company
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements
(b) Reports on Form 8-K Filed During the Last Quarter of Fiscal 1999
None
(c) See Item 14(a)(3) of this report.
(d) See Item 14(a)(2) of this report.
-25-
<PAGE>
Quality Stores, Inc. and Predecessor
Consolidated Financial Statements
Fiscal year ended January 29, 2000, period of three months
ended January 30, 1999, fiscal year ended October 31, 1998,
periods of seven months ended November 1, 1997 and
five months ended March 26, 1997
Contents
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets .............................................F-3
Consolidated Statements of Income ........................................F-5
Consolidated Statements of Changes in Stockholder's Equity ...............F-6
Consolidated Statements of Cash Flows.....................................F-7
Notes to Consolidated Financial Statements................................F-9
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Quality Stores, Inc.
We have audited the accompanying consolidated balance sheets of Quality Stores,
Inc. (Successor), a wholly owned subsidiary of QSI Holdings, Inc., as of January
29, 2000, January 30, 1999, and October 31, 1998, and the related consolidated
statements of income, changes in stockholder's equity, and cash flows of the
Successor for the fiscal year ended January 29, 2000, the three-month period
ended January 30, 1999, the fiscal year ended October 31, 1998 and the
seven-month period ended November 1, 1997, and its Predecessor for the
five-month period ended March 26, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14a. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quality Stores,
Inc. at January 29, 2000, January 30, 1999, and October 31, 1998, and the
consolidated results of operations and cash flows of the Successor for the
fiscal year ended January 29, 2000, the three-month period ended January 30,
1999, the fiscal year ended October 31, 1998 and the seven-month period ended
November 1, 1997, and the Predecessor for the five-month period ended March 26,
1997, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therin.
ERNST & YOUNG LLP
Chicago, Illinois
April 11, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
Quality Stores, Inc.
Consolidated Balance Sheets
(In Thousands of Dollars, Except Share and Par Value)
January 29 January 30 October 31
2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,029 $ 5,144 $ 6,971
Trade and other receivables, less
allowances of $1,275 in 2000
and $386 in 1999 and 1998 7,742 4,597 4,648
Recoverable income taxes from parent 4,827 2,345 3,134
Inventory 365,383 234,868 217,064
Other current assets 5,408 2,876 3,010
--------------------------------------------
Total current assets 394,389 249,830 234,827
Property, improvements, and equipment:
Land 4,242 1,821 1,821
Buildings and improvements 75,696 21,111 19,461
Furniture and fixtures 65,410 31,121 27,590
Automobiles and trucks 2,332 701 703
--------------------------------------------
147,680 54,754 49,575
Less accumulated depreciation and
amortization 24,213 9,140 7,948
--------------------------------------------
123,467 45,614 41,627
Goodwill, net of amortization of $12,430 in
2000, $5,974 in 1999 and $5,080 in 1998 293,895 135,605 134,037
Other intangibles, net of amortization
of $3,886 in 2000, $1,853 in 1999
and $1,537 in 1998 10,712 8,557 8,354
--------------------------------------------
Total assets $822,463 $439,606 $418,845
============================================
F-3
<PAGE>
<CAPTION>
January 29 January 30 October 31
2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $124,012 $ 85,359 $ 78,322
Accrued payroll and bonuses 10,937 4,728 8,272
Other accrued expenses 43,880 16,664 14,084
Deferred income taxes 1,285 1,768 506
Current portion of long-term debt and
capital lease obligations 22,371 5,001 3,159
----------------------------------------------
Total current liabilities 202,485 113,520 104,343
Long-term debt, less current portion 388,554 190,843 181,075
Capital lease obligations, less current portion 1,103 1,370 1,011
Deferred income taxes 5,694 2,631 2,659
Stockholder's equity:
Common stock, $.01 par value: 3,000
authorized shares; 100 shares issued
and outstanding -- -- --
Additional paid-in capital 209,377 119,155 119,155
Retained earnings 15,250 12,087 10,602
----------------------------------------------
Total stockholder's equity 224,627 131,242 129,757
----------------------------------------------
Total liabilities and stockholder's equity $822,463 $439,606 $418,845
==============================================
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Quality Stores, Inc. and Predecessor
Consolidated Statements of Income
(In Thousands of Dollars, Except Share and Par Value)
Successor | Predecessor
--------------------------------------------------------------- | ---------------
Period of Period of | Period of
Fiscal year three months Fiscal year seven months | five months
ended ended ended ended | ended
January 29 January 30 October 31 November 1 | March 26
2000 1999 1998 1997 | 1997
--------------------------------------------------------------- | ---------------
|
<S> <C> <C> <C> <C> <C>
Net sales $1,092,021 $ 146,147 $ 587,195 $ 305,122 | $ 106,048
Cost of sales 774,455 103,521 410,179 216,342 | 75,281
--------------------------------------------------------------- | ---------------
Gross profit 317,566 42,626 177,016 88,780 | 30,767
|
Selling, general, and |
administrative expenses 251,385 33,742 134,623 72,142 | 29,045
Merger integration expenses 15,820 -- -- -- | --
Amortization of intangibles 6,327 972 3,552 1,753 | 415
--------------------------------------------------------------- | ---------------
Operating income 44,034 7,912 38,841 14,885 | 1,307
|
Interest expense 34,637 4,959 20,466 11,463 | 3,188
--------------------------------------------------------------- | ---------------
Income (loss) before income taxes 9,397 2,953 18,375 3,422 | (1,881)
|
Income taxes (credit) 6,234 1,468 8,400 2,057 | (634)
--------------------------------------------------------------- | ---------------
Net income (loss) $ 3,163 $ 1,485 $ 9,975 $ 1,365 | $ (1,247)
=============================================================== | ===============
|
Ratio (deficiency) of earnings to |
fixed charges 1.2x 1.5x 1.8x 1.3x | $ (1,881)
=============================================================== | ===============
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Quality Stores, Inc. and Predecessor
Consolidated Statements of Changes in Stockholder's Equity
(In Thousands of Dollars)
Stock Additional Retained Total
Common Warrant Paid-In Earnings Stockholder's
Stock Outstanding Capital (Deficit) Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Predecessor
Balances at November 2, 1996 $106 $665 $ 69,709 $19,583 $ 90,063
Exercise of stock options -- -- 252 -- 252
Net loss -- -- -- (1,247) (1,247)
-------------------------------------------------------------------------------
Balances at March 26, 1997 $106 $665 $ 69,961 $18,336 $ 89,068
===============================================================================
Successor
Initial capitalization of the Company
after the Merger on March 27, 1997 $ -- $ 69,170 $ (738) $ 68,432
Net income -- -- 1,365 1,365
Capital contribution from parent -- 49,750 -- 49,750
----------------- ------------------------------------------------
Balances at November 1, 1997 -- 118,920 627 119,547
Net income -- -- 9,975 9,975
Capital contribution from parent -- 235 -- 235
----------------- ------------------------------------------------
Balances at October 31, 1998 -- 119,155 10,602 129,757
Net income -- -- 1,485 1,485
------------------------------------------------
----------------
Balances at January 30, 1999 -- 119,155 12,087 131,242
Net income -- -- 3,163 3,163
Capital contribution from parent -- 91,764 -- 91,764
Dividend to parent -- (1,542) -- (1,542)
---------------- ------------------------------------------------
Balances at January 29, 2000 $ -- $209,377 $15,250 $224,627
================ ================================================
See accompanying notes.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Quality Stores, Inc. and Predecessor
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
Successor | Predecessor
----------------------------------------------------------- | -------------
Period of Period of | Period of
Fiscal year three months Fiscal year seven months | five months
ended ended ended ended | ended
January 29 January 30 October 31 November 1 | March 26
2000 1999 1998 1997 | 1997
----------------------------------------------------------- | -------------
|
<S> <C> <C> <C> <C> | <C>
Operating activities |
Net income (loss) $ 3,163 $ 1,485 $ 9,975 $ 1,365 | $ (1,247)
Adjustments to reconcile net income |
(loss) to net cash provided by (used |
in) operating activities: |
Depreciation and amortization 13,713 1,317 5,221 2,716 | 1,490
Amortization of intangibles 6,327 1,229 4,604 2,253 | 414
Deferred income taxes 4,397 1,234 6,417 1,871 | 1,328
Changes in operating assets and |
liabilities: |
Trade and other receivables 1,271 839 2,616 (871) | 144
Recoverable income taxes |
from parent (3,678) 789 (621) (1,119) | (1,885)
Inventory 5,177 (9,609) 5,053 1,957 | (11,894)
Other current assets 788 665 126 946 | (924)
Accounts payable (50,115) 2,065 10,307 1,895 | 1,468
Other current liabilities (21) (1,666) (6,478) 1,139 | (1,524)
----------------------------------------------------------- | -------------
Net cash provided by (used in) |
operating activities (18,978) (1,652) 37,220 12,152 | (12,630)
|
Investing activities |
Purchases of property, improvements, |
and equipment (35,681) (3,997) (4,842) (3,816) | (2,419)
Acquisition of Central Tractor Farm |
& Country, Inc. (Predecessor) -- -- -- (155,963) | --
Other business acquisitions, net of |
cash acquired (111,502) (6,020) (1,568) (136,995) | --
Other 2,200 (538) 394 206 | (1,348)
----------------------------------------------------------- | -------------
Net cash used in investing activities (144,983) (10,555) (6,016) (296,568) | (3,767)
F-7
<PAGE>
<CAPTION>
Successor | Predecessor
----------------------------------------------------------- | -------------
Period of Period of | Period of
Fiscal year three months Fiscal year seven months | five months
ended ended ended ended | ended
January 29 January 30 October 31 November 1 | March 26
2000 1999 1998 1997 | 1997
----------------------------------------------------------- | -------------
|
<S> <C> <C> <C> <C> | <C>
Financing activities |
Borrowings under revolving line of |
credit $ 401,696 $ 91,180 $ 273,645 $ 206,106 | $ 113,119
Repayments on revolving line of credit (358,196) (79,255) (302,320) (170,650) | (91,494)
Proceeds from issuance of long-term |
debt 221,309 -- -- 155,000 | 8,000
Payments on long-term debt (88,147) (1,500) (3,000) (8,000) | (16,000)
Payments on capitalized lease |
obligations (284) (45) (171) (101) | (69)
Proceeds from issuance of |
common stock and capital |
contributions -- -- 235 115,489 | 252
Cash of Central Tractor Farm & |
Country, Inc. at date of acquisition -- -- -- 1,220 | --
Payment of dividend (1,542) -- -- -- | --
Deferred financing costs (4,990) -- -- (8,764) | --
Other -- -- -- 1,494 | --
----------------------------------------------------------- | -------------
Net cash provided by (used in) |
financing activities 169,846 10,380 (31,611) 291,794 | 13,808
----------------------------------------------------------- | -------------
Net increase (decrease) in cash and cash |
equivalents 5,885 (1,827) (407) 7,378 | (2,589)
|
Cash and cash equivalents at beginning |
of period 5,144 6,971 7,378 -- | 3,809
----------------------------------------------------------- | -------------
Cash and cash equivalents at end of |
period $ 11,029 $ 5,144 $ 6,971 $ 7,378 | $ 1,220
=========================================================== | =============
|
Supplemental cash flow information |
Interest payments $ 28,124 $ 1,941 $ 19,838 $ 10,294 | $ 1,746
Net income taxes paid 4,504 225 355 327 | 412
Note payable issued in acquisition of |
Fisco Farm and Home -- 1,084 -- -- | --
Capital contribution of common stock |
received from parent used to |
consummate Quality Stores, Inc. |
acquisition 91,764 -- -- -- | --
See accompanying notes
</TABLE>
F-8
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements
Fiscal year ended January 29, 2000, period
of three months ended January 30, 1999,
fiscal year ended October 31, 1998, periods
of seven months ended November 1, 1997
and five months ended March 26, 1997
(In Thousands of Dollars, Except Share and Par Value)
1. Basis of Presentation and Acquisition of the Company
Quality Stores, Inc. (the Company), formerly known as Central Tractor Farm &
Country, Inc., is a wholly-owned subsidiary of QSI Holdings, Inc. (QSI
Holdings), formerly known as CT Holding, Inc., an affiliate of J. W. Childs
Equity Partners, L.P. (Childs).
As a result of the acquisition of the Company discussed below, effective March
27, 1997, a new basis of accounting has been reflected in the Company's
consolidated financial statements reflecting the fair values for the Company's
assets and liabilities at that date (Successor). The consolidated financial
statements of the Company for periods prior to March 27, 1997, are presented on
the historical cost basis of accounting (Predecessor). A line has been placed in
the financial statements to distinguish between the different basis of
accounting used for the Predecessor and Successor periods.
On November 27, 1996, the Board of Directors of the Company approved, and the
Company entered into, a merger agreement (the Merger Agreement) with Childs, QSI
Holdings and its subsidiary, JWC Acquisition I, Inc., that provided for the
acquisition of the Company by QSI Holdings in a two-stage transaction. The
Merger Agreement provided that following the acquisition of all of the Company's
common stock held by affiliates of Butler Capital Corporation (collectively
BCC), QSI Holdings' subsidiary would merge with and into the Company (the
Merger) and QSI Holdings would acquire the remaining shares of common stock of
the Company held by public shareholders. The Merger was completed on March 27,
1997.
Concurrent with the Merger closing, the Company consummated a public offering of
$105.0 million aggregate principal amount of Senior Notes. The net proceeds from
the offering and proceeds from common stock issued by QSI Holdings were used to
pay the Merger consideration, repay certain outstanding borrowings, and pay fees
and expenses of the acquisition.
F-9
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
1. Basis of Presentation and Acquisition of the Company (continued)
The acquisition of the Company was accounted for as a purchase. The purchase
price for the common stock was $159.4 million, including related costs and
expenses, of which $156.0 million was paid in cash and $3.4 million in common
stock and stock options of QSI Holdings was issued. Transaction costs included
$1.7 million paid to Childs in consideration for services regarding the
planning, structuring and negotiation of the acquisition and related financings.
The purchase price was allocated to the tangible and intangible assets and the
liabilities of the Company based on fair values as follows:
Accounts receivable and other assets $ 9,990
Inventory 124,284
Property, improvements, and equipment 25,387
Goodwill 87,343
Bank line of credit (23,554)
Accounts payable and accrued expenses (51,809)
Long-term debt and capitalized lease obligations (9,442)
Deferred income taxes (2,806)
----------------
$159,393
================
2. Summary of Significant Accounting Policies
Principles of Consolidation and Business
The consolidated financial statements include the Company and its wholly owned
subsidiaries. All intercompany transactions are eliminated in consolidation.
The Company operates nationally in a single business segment consisting of
agricultural specialty retail stores located primarily in the Midwest,
Northeast, and Southeast United States.
F-10
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
2. Summary of Significant Accounting Policies (continued)
Fiscal Year End
The Company currently operates on a 52 or 53-week fiscal year ending on the
Saturday nearest to January 31. Prior to the fiscal year ended January 29, 2000,
the Company operated on a 52 or 53-week fiscal year ending on the Saturday
nearest to October 31. The three month transition period ended January 30, 1999
presented herein results from this change in fiscal years.
Use of Estimates
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Trade Receivables
The majority of the Company's sales are cash or credit card sales. Limited sales
are made on account and the Company generally does not require collateral on
such sales. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of the Company's customers and their geographic
dispersion. The allowance for doubtful accounts is based on a current analysis
of receivable delinquencies and historical loss experience.
F-11
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
2. Summary of Significant Accounting Policies (continued)
Inventory
Substantially all inventory is recorded at the lower of cost or market using the
last in, first out (LIFO) method. The Company reviews its inventory for
slow-moving, obsolete or otherwise unsalable items and records any estimated
losses to be incurred as such inventory is identified. If the first in, first
out method of inventory valuation had been used, inventories would have been
approximately $6.0 million lower than reported at January 29, 2000, January 30,
1999, and October 31, 1998.
Property, Improvements, and Equipment
Property, improvements, and equipment are recorded on the basis of cost.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the respective assets as follows: buildings and
improvements from 10 to 39 years; leasehold improvements (not in excess of
underlying lease terms) from 5 to 20 years; furniture and fixtures from 5 to 15
years; and automobiles and trucks from 3 to 10 years.
Certain long-term lease transactions have been accounted for as capital leases.
The related assets are amortized on a straight-line basis over the lesser of
their estimated useful life or the respective terms of the leases.
Goodwill and Other Intangibles
Goodwill is being amortized utilizing the straight-line method over 40 years.
Other intangibles consist primarily of deferred financing costs that are
amortized over the term of the related debt. The Company reviews the
recoverability of unamortized amounts of intangibles annually and evaluates any
related impairment based on an analysis of estimated undiscounted cash flows.
Management has determined that no impairment of intangibles currently exists.
F-12
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
2. Summary of Significant Accounting Policies (continued)
Deferred Income Taxes
Deferred income tax assets and liabilities are determined by applying currently
enacted tax laws and rates to the cumulative temporary differences between the
carrying value of assets and liabilities for financial reporting and income tax
purposes. Deferred income tax expense or credit is based on the net change in
deferred income tax assets and liabilities during the period.
Financial Instruments and Risk Management
The Company's financial instruments consist of cash and cash equivalents, trade
and other receivables, accounts payable, and long-term debt. The Company's
estimate of the fair value of these financial instruments approximates their
carrying amounts at the respective consolidated balance sheet dates, except for
long-term debt which has an estimated fair value that is $8.4 million lower than
its carrying value at January 29, 2000. Fair value was determined using quoted
market prices for the Company's long-term debt and discounted cash flow analyses
for all other instruments. The Company does not hold or issue financial
instruments for trading purposes.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting 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 changes 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.
F-13
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
2. Summary of Significant Accounting Policies (continued)
Interest Rate Cap Agreements
The fee paid in connection with interest rate cap agreements is being amortized
over the term of the agreements. Any amounts to be received by the Company under
the agreements are recognized in the period that they become known.
Revenue Recognition
Revenue is recognized at the point of purchase and payment by the customer for
cash and credit card sales. Revenue associated with layaway merchandise is
deferred until such time as full payment is received. Sales on account result in
revenue at the time the related goods are released or shipped to the customer.
Catalogs, Sale Flyers, and Advertising Costs
The direct cost of printing and mailing the Company's annual mail order catalog
is deferred and amortized against mail order revenues over the year the catalog
is in use. The direct cost of printing and distributing sale flyers is deferred
and amortized over the life of the flyer which is generally two weeks or less.
Other advertising costs are expensed as incurred. Unamortized amounts relating
to the costs of the annual catalog and periodic sale flyers were not significant
at January 29, 2000, January 30, 1999, and October 31, 1998, respectively.
Advertising expenses were $29.1 million, $3.9 million, $15.1 million, $7.8
million, and $3.3 million for fiscal 1999, the three-month period of 1999,
fiscal 1998, and the seven-month and five-month periods of 1997, respectively.
Store Opening Costs
Direct costs incurred in setting up and opening new stores are expensed as
incurred.
Reclassifications
Certain amounts previously reported in prior periods have been reclassified to
conform with the presentation used in fiscal 1999.
F-14
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
3. Business Acquisitions
Quality Stores, Inc.
On May 7, 1999, Central Tractor Farm & Country, Inc. (CT) acquired Quality
Stores, Inc. (Quality) in a transaction in which Quality was merged with and
into CT. At the completion of the acquisition, the name of the surviving
corporation was changed to Quality Stores, Inc. (the Company). In connection
with the acquisition, the former shareholders and option holders of Quality
received, in the aggregate, $111.5 million in cash and 792,430 shares of common
stock of CT's parent company that was contributed to CT and had a value of $91.8
million. In addition, CT repaid $42.1 million in debt owed by Quality. The total
purchase price for Quality, including $4.7 million of transaction expenses, was
$208.0 million.
Quality, based in Muskegon, Michigan, has a strong retail presence in Michigan
and Ohio and, at the time of the acquisition, operated 114 stores offering
merchandise oriented to farm and country living, including animal care products,
farm and ranch supplies, workwear, and lawn and garden products.
The acquisition of Quality was accounted for as a purchase. The purchase price
has been allocated to the tangible and intangible assets and the liabilities
based on fair values as follows:
Accounts receivable and other assets $ 12,693
Inventory 135,692
Property, leaseholds and equipment 57,485
Deferred income taxes 1,817
Goodwill 163,969
Accounts payable and accrued expenses (121,504)
Long-term debt (42,109)
------------------
$208,043
==================
In connection with the acquisition of Quality, the Company initiated a plan to
relocate its corporate headquarters to Muskegon, Michigan. This plan included
the closing of the CT headquarters in Des Moines, Iowa and the termination of
certain CT employees. Liabilities of $4.0 million for estimated exit costs and
$3.6 million for the cost of severance payments to terminated employees were
recorded as of the plan's approval date. At January 29, 2000, $2.9 million of
exit costs and $1.1 million of severance
F-15
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
3. Business Acquisitions (continued)
payments had been incurred and charged against the respective liabilities. Other
merger integration costs of $8.2 million (primarily store and computer system
conversion costs) that were attributable to fiscal 1999 were expensed as
incurred. The exit plan is expected to be completed during the first quarter of
fiscal 2000.
Fisco Farm and Home
Effective December 31, 1998, the Company acquired substantially all assets and
assumed certain liabilities of The H. C. Shaw Company, doing business as Fisco
Farm and Home (Fisco), a chain of nine agricultural specialty retail stores, for
$6.0 million in cash and a $1.1 million note payable over a four-year period.
The acquisition of Fisco was accounted for as a purchase. The purchase price was
allocated to the tangible and intangible assets and the liabilities based on
fair values as follows:
Accounts receivable and other assets $1,319
Inventory 8,195
Leaseholds and equipment 756
Goodwill 3,245
Accounts payable and accrued expenses (6,411)
------------------
$7,104
==================
Country General, Inc.
Effective June 26, 1997, the Company acquired all of the outstanding capital
stock of Country General, Inc. (Country General) for $138.6 million in cash,
including $1.6 million related to post closing adjustments finalized during
fiscal 1998. Country General operates a chain of 114 agricultural specialty
retail stores. The Company funded the acquisition price in part from a $49.8
million cash equity contribution from its parent and bank debt.
F-16
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
3. Business Acquisitions (continued)
The acquisition of Country General was accounted for as a purchase. The final
purchase price was allocated to the tangible and intangible assets and the
liabilities based on fair value as follows:
Accounts receivable and other assets $ 5,824
Inventory 99,790
Property, leaseholds, and equipment 17,174
Goodwill 51,775
Deferred income taxes 9,229
Accounts payable and accrued expenses (45,229)
------------------
$138,563
==================
The final purchase price allocation included reserves of $4.9 million for the
estimated cost to close twelve acquired stores and $2.2 million for the cost of
severance payments to identified employees in connection with the closing of
Country General's corporate headquarters. As of October 31, 1998, the store
closing process and the termination of employees at Country General's closed
corporate headquarters had been completed. At January 29, 2000, January 30,
1999, and October 31, 1998, the remaining reserve for lease costs pertaining to
closed stores was $2.2 million, $3.0 million, and $3.4 million, respectively.
The results of operations of Quality, Fisco, and Country General are included in
the accompanying consolidated statements of income from the respective dates of
purchase.
F-17
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
3. Business Acquisitions (continued)
Pro Forma Results of Operations
Pro forma results of operations presented below are based on the historical
results of operations of the Company, adjusted to give effect to the acquisition
of Quality described above and the debt financing arrangements relating to the
acquisitions, as though this acquisition had occurred at the beginning of the
periods presented. The acquisition of Fisco has not been included in the
three-month period of 1999 and fiscal 1998 amounts below because its operating
results would not materially affect the pro forma calculations.
Fiscal year Period of three Fiscal year
ended months ended ended
January 29 January 30 October 31
2000 1999 1998
------------------------------------------------------
Net sales $1,235,423 $285,282 $1,093,896
Operating income 46,375 15,303 49,711
Net income 1,477 1,087 5,051
4. Long-Term Debt
Long-term debt consists of the following obligations:
January 29 January 30 October 31
2000 1999 1998
--------------------------------------------
10.625% Senior Notes $ 105,000 $105,000 $ 105,000
Term loans 216,900 45,500 47,000
Revolving credit obligations 87,500 44,000 32,075
Other notes payable 1,281 843 --
--------------------------------------------
410,681 195,343 184,075
Less current portion 22,127 4,500 3,000
--------------------------------------------
$ 388,554 $190,843 $ 181,075
============================================
F-18
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
4. Long-Term Debt (continued)
The Senior Notes mature on April 1, 2007, and may be redeemed beginning April 1,
2002 at a price of 105.3125% of the principal amount decreasing 1.77% annually
thereafter until April 1, 2005 at which time they are redeemable at face value.
Furthermore, notwithstanding the foregoing, the Company may redeem up to 35% of
the original aggregate principal amount of the Senior Notes at a price of 110%
of the principal amount with the net cash proceeds of a public equity offering
within 60 days of closing such an offering.
At January 29, 2000, the Company had a bank credit facility that allowed for
borrowings up to $320.0 million, consisting of $220.0 million under two term
loan facilities (Tranche A and B) of which $216.9 million was outstanding and a
$100.0 million revolving credit facility under which $87.5 million was
outstanding. On March 31, 2000, this credit facility was 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 Tranche A term loan ($95.6 million) under the Amended Credit Facility is
payable in quarterly installments of $5.0 million through October 31, 2004,
while the Tranche B term loan ($119.0 million) 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 (8.6%
to 10% at January 29, 2000). The revolving credit debt is also subject to a 0.5%
commitment fee on its unused portion.
The Company's long-term borrowing agreements contain 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.
F-19
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
4. Long-Term Debt (continued)
Commercial and standby letters of credit outstanding at January 29, 2000,
January 30, 1999 and October 31, 1998, totaled $9.9 million, $6.3 million, and
$6.7 million, respectively.
In fiscal 1999, the Company entered into interest rate cap agreements (the Cap
Agreements) with a bank to reduce the impact of changes in interest rates on its
floating term loan debt. The Cap Agreements have a notional amount of $105.0
million, mature in 2001 and cap the Eurodollar rate on the notional amount at
7%, plus the applicable margin. The Company is exposed to interest rate risk in
the event of nonperformance by the counterparty to the Cap Agreements; however,
the Company does not anticipate nonperformance by the bank.
5. Leases
The Company has entered into certain long-term capital lease agreements for the
use of warehouses, certain retail store facilities and computer equipment. The
net carrying value of the assets recorded under capital leases was $0.8 million,
$1.0 million, and $0.6 million at January 29, 2000, January 30, 1999, and
October 31, 1998, respectively.
The Company also has entered into certain noncancelable operating leases for the
use of real estate, automobiles and trucks, and office equipment. Aggregate
rental expense for operating leases amounted to $23.6 million, $3.9 million,
$16.2 million, $9.3 million, and $4.1 million for fiscal 1999, the three-month
period of 1999, fiscal 1998, and the seven-month and five-month periods of 1997,
respectively.
F-20
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
5. Leases (continued)
At January 29, 2000, future minimum rental payments due under all noncancelable
leases with a term greater than one year are as follows:
Capital Operating
Leases Leases
-----------------------------
Fiscal 2000 $ 442 $ 28,606
Fiscal 2001 442 21,658
Fiscal 2002 442 16,887
Fiscal 2003 243 13,864
Fiscal 2004 93 9,435
Thereafter 45 14,766
-----------------------------
Total minimum lease payments 1,707 $105,216
============
Less amount representing interest 360
--------------
Present value of minimum lease payments 1,347
Less current portion 244
--------------
$1,103
==============
6. Stock Options
QSI Holdings has stock option arrangements with various officers and other
members of Company management which are accounted for under the provisions of
APB Opinion No. 25 and related interpretations. No compensation expense has been
recognized by QSI Holdings or the Company in connection with these stock option
arrangements because the fair market value of the underlying stock award on the
measurement date equals the exercise price of the related options.
Under SFAS No. 123, certain pro forma information is required as if QSI Holdings
had accounted for stock options under the alternative fair value method and the
resulting compensation expense was recorded by the Company. Pro forma net income
of the Company under the alternative fair value method for fiscal 1999, the
three-month period of 1999, and fiscal 1998 is $2.9 million, $1.4 million, and
$9.7 million, respectively. Pro forma results for the seven-month period of 1997
would not have differed from amounts reported because no stock option
compensation expense would have been recognized during that period.
F-21
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
7. Income Taxes
The Company's results of operations are included in the consolidated income tax
returns of its parent. Income tax expense (credit) included in the consolidated
statements of income have been calculated as if the Company filed a separate
return.
The components of income tax expense (credit) are as follows:
<TABLE>
<CAPTION>
Successor | Predecessor
---------------------------------------------------------------------- | ----------------
Fiscal year Period of three Fiscal year Period of seven | Period of five
ended months ended ended months ended | months ended
January 29 January 30 October 31 November 1 | March 26
2000 1999 1998 1997 | 1997
---------------------------------------------------------------------- | ----------------
<S> <C> <C> <C> <C> <C>
Current: |
Federal $ 1,082 $ 234 $ -- $ 148 | $(1,541)
State 755 -- 200 38 | (421)
---------------------------------------------------------------------- | ----------------
1,837 234 200 186 | (1,962)
Deferred 4,397 1,234 8,200 1,871 | 1,328
---------------------------------------------------------------------- | ----------------
$ 6,234 $ 1,468 $ 8,400 $ 2,057 | $ (634)
====================================================================== | ================
</TABLE>
A reconciliation of the Company's income tax expense (credit) to the amount
computed by applying the statutory federal income tax rate to income (loss)
before income taxes is as follows:
<TABLE>
<CAPTION>
Successor | Predecessor
---------------------------------------------------------------------- | ----------------
Fiscal year Period of three Fiscal year Period of seven | Period of five
ended months ended ended months ended | months ended
January 29 January 30 October 31 November 1 | March 26
2000 1999 1998 1997 | 1997
---------------------------------------------------------------------- | ----------------
<S> <C> <C> <C> <C> <C>
Income tax at federal |
statutory rate $ 3,195 $ 1,004 $ 6,248 $ 1,163 | $ (639)
|
State income taxes, |
net of federal 873 194 1,214 306 | (79)
income tax effect |
Nondeductible |
goodwill 1,742 192 766 391 | 72
amortization |
Other, net 424 78 172 197 | 12
---------------------------------------------------------------------- | ----------------
$ 6,234 $ 1,468 $ 8,400 $ 2,057 | $ (634)
====================================================================== | ================
</TABLE>
F-22
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
7. Income Taxes (continued)
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
January 29 January 30 October 31
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation $ (5,732) $ (3,457) $ (3,392)
Cost basis differences in inventory due
to LIFO and uniform capitalization (14,123) (6,411) (5,623)
Other (1,271) (1,128) (742)
-----------------------------------------
Total deferred income tax liabilities (21,126) (10,996) (9,757)
Deferred income tax assets:
Net operating loss carryforward 372 1,325 1,105
Capital loss carryforward -- 920 920
Alternative minimum tax credit
carryforward 750 -- --
Accounts receivable and inventory
valuation allowances 2,667 2,232 2,274
Compensation and employee benefit
accruals 2,259 1,320 1,319
Accrued store closing costs 2,551 1,209 1,374
Insurance and other reserves 4,439 -- --
Other 1,109 511 520
-----------------------------------------
14,147 7,517 7,512
Less valuation allowance for capital loss
carryforward -- (920) (920)
-----------------------------------------
Total deferred income tax assets 14,147 6,597 6,592
-----------------------------------------
Net deferred income tax liabilities $ (6,979) $ (4,399) $ (3,165)
=========================================
</TABLE>
The Company has a net operating loss carryforward of $0.9 million that will
expire in 2011. The alternative minimum tax credit carryforward is available
indefinitely to offset future income taxes payable. The capital loss
carryforward expired in fiscal 1999.
F-23
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
8. Profit Sharing Plan
The Company has a profit sharing plan covering all employees who meet certain
eligibility requirements. The plan provides for discretionary employer
contributions and allows voluntary participant contributions. The Company
recognized expense in connection with this plan of $1.0 million, $0.2 million,
$0.7 million, and $0.1 million for fiscal 1999, the three-month period of 1999,
and the seven-month and five-month periods of 1997, respectively. No profit
sharing expense was recognized in fiscal 1998.
9. Transactions with Related Parties
For fiscal 1999, the three-month period of 1999, fiscal 1998, and the
seven-month period of 1997, Childs was paid a management and consulting services
fee of $0.2 million, $0.1 million, $0.2 million and $0.1 million, respectively,
under a five-year agreement that is renewable annually thereafter. In addition,
during fiscal 1999, the three-month period of 1999 and fiscal 1998, Fenway
Partners, a stockholder of QSI Holdings, was paid a quarterly management fee of
$0.03 million.
The Company purchases inventory from two suppliers that are controlled by
stockholders of QSI Holdings. Purchases from these suppliers aggregated
approximately $21.6 million, $1.4 million, $5.0 million and $6.1 million for
fiscal 1999, the three-month period of 1999, fiscal 1998, and the combined
seven-month and five-month periods of 1997, respectively.
In February 2000, the Company sold the land, buildings, and certain fixtures and
equipment for three stores to be opened in fiscal 2000 to a company owned and
managed by certain of the Company's executive officers. The sales price of $7.0
million was equal to the Company's cost for the assets. The Company then entered
into a twelve-year lease agreement with this same company for the use of these
stores. The total minimum lease payments under the lease agreements range from
$0.8 million in fiscal 2000 to $1.0 million in fiscal 2011.
F-24
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
10. Guarantee of Senior Notes
The Senior Notes described in Note 4 are guaranteed jointly and severally,
fully, and unconditionally by each of the Company's wholly owned subsidiaries.
Summarized financial information for the Company's wholly owned subsidiaries
that guarantee the Senior Notes is as follows:
<TABLE>
<CAPTION>
January 29 January 30 October 31
2000 1999 1998
--------------------------------------------
<S> <C> <C> <C>
Balance sheet data
Current assets:
Trade and other receivables $ 6,654 $ 2,742 $ 3,437
Inventory 233,771 106,674 104,777
Other current assets 14,674 2,257 3,569
--------------------------------------------
Total current assets 255,099 111,673 111,783
Property, improvements, and equipment, net 94,988 15,390 15,598
Other noncurrent assets, principally
goodwill and other intangibles 211,094 51,735 52,170
--------------------------------------------
$561,181 $178,798 $179,551
============================================
Current liabilities, principally accounts
payable accrued expenses $122,848 $ 26,912 $ 28,159
Noncurrent liabilities, principally
amounts due to affiliates 275,019 6,613 5,262
Stockholder's equity 163,314 145,273 146,130
--------------------------------------------
$561,181 $178,798 $179,551
============================================
</TABLE>
F-25
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
10. Guarantee of Senior Notes (continued)
<TABLE>
<CAPTION>
Period of
Fiscal Year three months Fiscal year
ended ended ended
January 29 January 30 October 31
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Income statement data
Net sales $ 694,418 $ 63,914 $ 257,342
Cost of sales 491,579 45,469 178,918
---------------------------------------------------
Gross profit 202,839 18,445 78,424
Selling, general, and administrative
and other expenses 175,399 13,961 53,151
---------------------------------------------------
Operating income 27,440 4,484 25,273
Interest expense 20,083 2,167 9,167
---------------------------------------------------
Income before income taxes 7,357 2,317 16,106
Income taxes 5,418 972 6,488
---------------------------------------------------
Net income $ 1,939 $ 1,345 $ 9,618
===================================================
Cash flow data
Net cash flows provided by (used in):
Operating activities $ (9,598) $ (743) $ 2,586
Investing activities, principally
capital expenditures (23,713) (112) (3,575)
Financing activities, principally
change in amounts due to affiliates 39,465 1,355 (5,192)
</TABLE>
F-26
<PAGE>
Quality Stores, Inc. and Predecessor
Notes to Consolidated Financial Statements (continued)
(In Thousands of Dollars, Except Share and Par Value)
11. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the Company's unaudited quarterly results of
operations for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended January 29, 2000
Net sales $ 159,136 $ 330,830 $ 287,085 $ 314,970
Gross profit 47,227 96,153 84,336 89,850
Operating income 7,897 17,329 6,982 11,826
Net income (loss) 997 4,376 (2,400) 190
Ratio of earnings to fixed charges 1.4x 1.8x 0.8x 1.1x
Fiscal year ended October 31, 1998
Net sales $ 144,393 $ 143,717 $ 167,859 $ 131,226
Gross profit 41,619 42,501 51,146 41,750
Operating income 6,659 8,168 15,696 8,318
Net income 590 1,375 6,597 1,413
Ratio of earnings to fixed charges 1.2x 1.4x 3.1x 1.6x
</TABLE>
F-27
<PAGE>
SCHEDULE II
QUALITY STORES, INC.
Valuation and Qualifying Accounts
Allowance For
Trade Receivables
-------------------
Balance at November 2, 1996 $ (50,000)
Credited to expense 4,700
-----------
Balance at March 26, 1997 (45,300)
Debited to expense (54,436)
Write-off of uncollectible accounts 49,736
Acquired from Country General, Inc. (336,000)
-----------
Balance at November 1, 1997 (386,000)
Debited to expense (174,279)
Write-off of uncollectible accounts 174,279
-----------
Balance at October 31, 1998 (386,000)
Debited to expense (24,365)
Write-off of uncollectible accounts 24,365
-----------
Balance at January 30, 1999 (386,000)
Debited to expense (585,954)
Write-off of uncollectible accounts 272,407
Acquired from Quality Stores, Inc. (575,453)
-----------
Balance at January 29, 2000 $(1,275,000)
===========
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUALITY STORES, INC.
DATED: April 28, 2000 By: /s/ James T. McKitrick
James T. McKitrick, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
DATED: April 28, 2000
/s/ James T. McKitrick President and Chief Executive Officer, Director
James T. McKitrick (Principal Executive Officer)
/s/ Denny L. Starr Senior Vice-President, Finance and Chief
Denny L. Starr Financial Officer (Principal Financial and
Accounting Officer)
/s/ Alan L. Fansler Executive Vice-President and Chief Operating
Alan L. Fansler Officer, Director
______________________ Director
John W. Childs
/s/ Steven G. Segal Director
Steven G. Segal
______________________ Director
Adam L. Suttin
/s/ David C. Bliss Chairman of the Board, Director
David C. Bliss
/s/ Jerry D. Horn Director
Jerry D. Horn
______________________ Director
Jeffrey B. Swartz
/s/ William E. Watts Director
William E. Watts
/s/ Habib Y. Gorgi Director
Habib Y. Gorgi
/s/ Peter Lamm Director
Peter Lamm
/s/ Richard C. Dresdale Director
Richard C. Dresdale
______________________ Director
John L. Hilt
/s/ G. Dean Longnecker Executive Vice-President, Integration, Director
G. Dean Longnecker
<TABLE>
<CAPTION>
EXHIBIT 12
QUALITY STORES, INC.
SCHEDULE REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
Successor | Predecessor
------------------------------------------------------------|-------------
Fiscal Year Three Months Fiscal Year Seven Months | Five Months
Ended Ended Ended Ended | Ended
January 29, January 30, October 31, November 1, | March 26,
2000 1999 1998 1997 | 1997
------------------------------------------------------------|-------------
|
|
<S> <C> <C> <C> <C> | <C>
Income before income taxes $9,397 $2,953 $18,375 $3,422 | $(1,881)
===========================================================|==============
Fixed charges: |
Interest expense $34,637 $4,959 $20,466 $11,463 | $3,188
Portion of rent expense representing interest 4,730 715 2,920 1,860 | 814
-----------------------------------------------------------|--------------
|
Total fixed charges $39,367 $5,674 $23,386 $13,323 | $4,002
===========================================================|==============
|
Earnings before income taxes and fixed charges $48,764 $8,627 $41,761 $16,745 | $2,121
===========================================================|==============
|
Ratio (deficiency of earnings to fixed charges) 1.2x 1.5x 1.8x 1.3x | $(1,881)
===========================================================|==============
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Entity State of Organization
-----------------------------------------------------------
Country General, Inc. Delaware
Quality Stores Services, Inc. Michigan
QSI Transportation, Inc. Michigan
Quality Farm & Fleet, Inc. Michigan
Quality Investments, Inc. Michigan
Vision Transportation, Inc. Ohio
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of Quality Stores, Inc. at and for the period ended
January 29, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jan-29-2000
<PERIOD-START> Jan-31-1999
<PERIOD-END> Jan-29-2000
<CASH> 11,029
<SECURITIES> 0
<RECEIVABLES> 9,017
<ALLOWANCES> 1,275
<INVENTORY> 365,383
<CURRENT-ASSETS> 394,389
<PP&E> 147,680
<DEPRECIATION> 24,213
<TOTAL-ASSETS> 822,463
<CURRENT-LIABILITIES> 202,485
<BONDS> 389,657
0
0
<COMMON> 0
<OTHER-SE> 224,627
<TOTAL-LIABILITY-AND-EQUITY> 822,463
<SALES> 1,092,021
<TOTAL-REVENUES> 1,092,021
<CGS> 774,455
<TOTAL-COSTS> 774,455
<OTHER-EXPENSES> 273,532
<LOSS-PROVISION> 586
<INTEREST-EXPENSE> 34,637
<INCOME-PRETAX> 9,397
<INCOME-TAX> 6,234
<INCOME-CONTINUING> 3,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,163
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual results
and performance to differ materially from those contained in forward-looking
statements made in this report and presented elsewhere by or on behalf of the
Company from time to time.
Ability to Achieve Future Growth
The Company's ability to profitably open stores in accordance with its expansion
plan and to increase the financial performance of its existing stores will be a
significant factor in achieving future growth. The Company's ability to
profitably open stores will depend, in part, on matters not completely within
the Company's control including, among other things, locating and obtaining
store sites that meet the Company's economic, demographic, competitive and
financial criteria, and the availability of capital on acceptable terms.
Further, increases in comparable store sales will depend, in part, on the
soundness and successful execution of the Company's merchandising strategy.
Seasonality
The Company is an agricultural specialty retailer, and consequently its sales
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
to a degree its use of part-time employees. Historically, the Company's sales
and operating income have been highest in the third quarter of each fiscal year
due to the farming industry's planting season and the sale of seasonal products.
Weather, Business Conditions and Government Policy
Unseasonable weather and excessive rain, drought, or early or late frosts may
affect the Company's sales and operating income. In addition, the Company's
sales volume and income from operations depend significantly upon expectations
and economic conditions relevant to consumer spending and the farm economy.
Regional Economy
The majority of the Company's existing stores are located in the Northeastern
United States, the Midwestern United States and the Southeastern United States.
As a result, the Company's sales and profitability are largely dependent on the
general strength of the economy in these regions.
Competition
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers, and from mass merchandisers. Some of these
competitors have substantially greater financial and other resources than the
Company.
Currently, most of the Company's stores do not compete directly in the markets
of other agricultural specialty retail chains. However, the Company's expansion
plans will likely result in new stores being located in markets currently
serviced by one or more of these chains, and there can be no assurance that
these chains, certain of which have announced expansion plans, will not expand
into the Company's markets.
In addition, the Company competes in over half of its markets with mass
merchandisers. The Company believes that its merchandise mix and level of
customer service currently successfully differentiate it from mass merchandisers
and that as a result, the Company has to date not been significantly impacted by
competition from mass merchandisers. However, in the past certain mass
merchandisers have modified their product mix and marketing strategies in an
effort apparently intended to permit them to compete more effectively in the
Company's markets; and it is likely that these efforts will continue.
