-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NcS36pG7FMKFBqjTMM4MepzU5ceizaGGPcXoKeBDg0cXeS8TcvkWqzcv5dZmaJAu oPEQE6llLBTTJN1tTc0NUg== 0000912057-96-015628.txt : 19960730 0000912057-96-015628.hdr.sgml : 19960730 ACCESSION NUMBER: 0000912057-96-015628 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960615 FILED AS OF DATE: 19960729 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALITY FOOD CENTERS INC CENTRAL INDEX KEY: 0000804333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 911330075 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15590 FILM NUMBER: 96599953 BUSINESS ADDRESS: STREET 1: 10112 NE 10TH STREET 2: P O BOX 3967 CITY: BELLEVUE STATE: WA ZIP: 98009 BUSINESS PHONE: 2064622178 MAIL ADDRESS: STREET 1: 10112 NE 10TH STREET 2: P O BOX 3967 CITY: BELLEVUE STATE: WA ZIP: 98009 FORMER COMPANY: FORMER CONFORMED NAME: QUALITY FOOD CENTER DATE OF NAME CHANGE: 19870726 10-Q 1 10-Q United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FOR THE 12 WEEKS ENDED JUNE 15, 1996 ____ 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: 0-15590 ------- QUALITY FOOD CENTERS, INC. ----------------------------- (Exact name of registrant as specified in its charter) WASHINGTON 91-1330075 - ---------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 10112 N.E. 10TH STREET, BELLEVUE, WASHINGTON 98004 - ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (206) 455-3761 --------------- (Registrant's telephone number, including area code) 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 ----- ----- Number of shares of Registrant's common stock, $.001 par value, outstanding at July 19, 1996: 14,577,252 1 PART I. FINANCIAL INFORMATION QUALITY FOOD CENTERS, INC. STATEMENTS OF EARNINGS (unaudited) (in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------- Twelve Weeks Ended 24 Weeks Ended June 15, June 17, June 15, June 17, 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------- Sales $ 184,397 $ 175,539 $ 361,024 $ 314,477 Cost of sales and related occupancy expenses 138,221 131,659 271,534 236,316 Marketing, general and administrative expenses 34,522 32,809 68,008 59,380 - ---------------------------------------------------------------------------------------------------------- OPERATING INCOME 11,654 11,071 21,482 18,781 Interest income 112 76 184 350 Interest expense (2,165) (2,875) (4,753) (2,947) Other expense - - - (1,400) - ---------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 9,601 8,272 16,913 14,784 Taxes on income Current 3,002 2,455 5,225 4,787 Deferred 432 540 838 940 - ---------------------------------------------------------------------------------------------------------- Total taxes on income 3,434 2,995 6,063 5,727 - ---------------------------------------------------------------------------------------------------------- NET EARNINGS $ 6,167 $ 5,277 $ 10,850 $ 9,057 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $ .42 $ .36 $ .74 $ .52 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 14,798 14,821 14,686 17,333 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Dividends per common share $ - $ - $ - $ .05 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 2 QUALITY FOOD CENTERS, INC. BALANCE SHEETS (dollars in thousands) - -------------------------------------------------------------------------------- June 15, December 30, 1996 1995 - -------------------------------------------------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,727 $ 10,933 Accounts receivable 8,887 9,031 Inventories 34,843 36,706 Prepaid expenses 6,526 5,524 - -------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 58,983 62,194 PROPERTIES Land 8,576 8,576 Buildings, fixtures and equipment 137,657 132,594 Leasehold improvements 41,633 38,767 Construction in progress 21,765 15,954 - -------------------------------------------------------------------------------- 209,631 195,891 Accumulated depreciation and amortization (56,256) (48,810) - -------------------------------------------------------------------------------- 153,375 147,081 LEASEHOLD INTEREST, net of accumulated amortization of $10,326 and $9,535 30,463 27,954 Real estate held for investment 5,837 5,622 GOODWILL, net of accumulated amortization of $1,503 and $1,009 34,105 34,599 OTHER ASSETS 5,821 5,428 - -------------------------------------------------------------------------------- $ 288,584 $ 282,878 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 36,577 $ 34,173 Accrued payroll and related benefits 12,340 12,556 Accrued business and sales taxes 5,047 5,037 Other accrued expenses 4,969 4,720 Federal income taxes payable 520 405 Current portion of long-term debt 12,600 - - -------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 72,053 56,891 DEFERRED INCOME TAXES 11,614 9,992 OTHER LIABILITIES 6,128 6,127 LONG-TERM DEBT 140,400 164,500 SHAREHOLDERS' EQUITY Common stock, at stated value - authorized 60,000,000 shares, issued and outstanding 14,567,000 shares and 14,432,000 shares 31,103 28,932 Retained earnings 27,286 16,436 - -------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 58,389 45,368 - -------------------------------------------------------------------------------- $ 288,584 $ 282,878 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 3 QUALITY FOOD CENTERS, INC. STATEMENT OF SHAREHOLDERS' EQUITY TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 (unaudited) (in thousands) - -------------------------------------------------------------------------------- COMMON STOCK Retained --------------------- Shares Amount Earnings Total - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 30, 1995 14,432 $ 28,932 $ 16,436 $ 45,368 NET EARNINGS - - 10,850 10,850 COMMON STOCK ISSUED 135 2,171 - 2,171 - -------------------------------------------------------------------------------- BALANCE AT JUNE 15, 1996 14,567 $ 31,103 $ 27,286 $ 58,389 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 4 QUALITY FOOD CENTERS, INC. STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands) - -------------------------------------------------------------------------------- Twenty-Four Weeks Ended June 15, June 17, 1996 1995 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 10,850 $ 9,057 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of properties 7,437 5,568 Amortization of leasehold interest and other 1,691 1,126 Amortization of debt issuance costs 85 43 Deferred income taxes 838 940 CHANGES IN OPERATING ASSETS AND LIABILITIES Accounts receivable 144 1,691 Inventories 1,863 (777) Prepaid expenses (1,087) (3,749) Accounts payable 2,404 (5,050) Accrued payroll and related benefits (217) (209) Accrued business and sales taxes 10 676 Other accrued expenses 250 459 Federal income taxes payable 899 1,565 - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 25,167 11,340 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures, net (17,040) (13,596) Cash portion of Olson's merger - (17,815) Increase in real estate held for investment (215) (57) Other (789) (180) Proceeds from sale of real estate - 1,340 - -------------------------------------------------------------------------------- Net Cash Used by Investing Activities (18,044) (30,308) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of common stock 2,171 26,978 Common stock repurchased - (177,850) Proceeds from (repayments of) long-term debt (11,500) 143,100 Cash dividend paid - (974) - -------------------------------------------------------------------------------- Net Cash Used by Financing Activities (9,329) (8,746) - -------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,206) (27,714) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,933 35,163 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,727 $ 7,449 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 5 QUALITY FOOD CENTERS, INC. NOTES TO FINANCIAL STATEMENTS TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995 (unaudited) NOTE A - NATURE OF OPERATIONS Quality Food Centers, Inc.(QFC) is the second largest supermarket chain in the Seattle/Puget Sound region of Washington State, and the largest independent chain. The Company has been in operation since 1954 and currently operates 62 stores and employs over 4,200 people. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statement Preparation - The financial statements as of and for the twelve and twenty-four weeks ended June 15, 1996 and June 17, 1995 are unaudited, but in the opinion of management include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows for the periods presented. These statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K dated March 20, 1996 (File No. 0-15590) for the year ended December 30, 1995 filed with the SEC on March 29, 1996. Complying with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from the estimates. Certain prior years' balances have been reclassified to conform to classifications used in the current year. Fiscal Periods - The Company's fiscal year ends on the last Saturday in December, and its reporting quarters consist of three 12-week quarters and a 16- week fourth quarter. Earnings Per Share - Earnings per share are based upon the weighted average number of common shares and common share equivalents outstanding during the period. NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes and interest expense for the twenty-four weeks ended June 15, 1996 and June 17, 1995 was as follows (in thousands): Twenty-Four Weeks Ended June 15, June 17, 1996 1995 - -------------------------------------------------------------------------------- Income taxes $ 4,325 $ 3,392 Interest (net of $567 of interest capitalized) 4,278 - - -------------------------------------------------------------------------------- 6 QUALITY FOOD CENTERS, INC. NOTES TO FINANCIAL STATEMENTS TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995 (unaudited) NOTE C - continued During the first quarter of 1995, the Company acquired all of the outstanding shares of Olson's Food Stores, Inc. in a merger transaction for $60.1 million (Note D). In connection with the merger, liabilities assumed were as follows (in thousands): Fair value of assets acquired $ 69,246 Cash paid (18,000) Long-term debt assumed (24,000) Common stock issued (18,070) --------- Current liabilities assumed $ 9,176 --------- --------- During the first quarter of 1995, the Company recorded $4.0 million as an increase in goodwill and deferred income taxes to record deferred income taxes arising from the Olson's merger. Further, as part of the merger agreement, the Company agreed to remit the benefits, if any, of Olson's net operating loss carryforwards totaling approximately $12.0 million and certain other tax credit carryforwards totaling approximately $1.2 million to the former shareholders of Olson's when utilized. Accordingly, a deferred tax asset and corresponding liability of $5.4 million were recorded to reflect amounts due the former shareholders of Olson's when tax loss and tax credit carryforwards are utilized by the Company. The Company utilized $784,000 of the tax asset during the 12 weeks ended June 15, 1996 and $653,000 of the tax asset during the 12 weeks ended June 17, 1995. NOTE D - OLSON'S MERGER On March 2, 1995 the principal operations of Olson's Food Stores, Inc. were merged into the Company, including assets and liabilities related to 12 of its grocery stores and its interest in certain grocery stores in various stages of development, and its rights to several other future sites. The merger was effected through an acquisition of 100% of the outstanding voting securities of Olson's for $18.0 million cash, 752,941 shares of the Company's common stock, which as of March 2, 1995 had a value of $18.1 million, and the assumption by the Company of approximately $24.0 million of indebtedness of Olson's. The merger has been accounted for under the "purchase" method of accounting. Goodwill of $32.4 million is being amortized over a period of 35 years. Because the merger was a statutory merger, the Company has a carryover tax basis and amortization of the excess of the book value over the tax basis of the assets included in the merger is not deductible for federal income tax purposes. Following is a summary of the assets and liabilities recorded as a result of the Olson's merger (in thousands): Cash $ 182 Inventories 8,541 Other current assets 453 -------- Total current assets 9,176 Property plant and equipment (net) 18,087 Leasehold interest 12,829 Goodwill 32,367 Other assets 7,487 Current liabilities (9,176) Deferred income taxes (4,000) Other liabilities (6,700) -------- $ 60,070 -------- -------- 7 QUALITY FOOD CENTERS, INC. NOTES TO FINANCIAL STATEMENTS TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 AND JUNE 17, 1995 (unaudited) NOTE E - RECAPITALIZATION During the second quarter of 1995, the Company completed a recapitalization. The Company's self-tender offer that commenced on January 18, 1995, for up to 7.0 million shares of its common stock at a price of $25.00 per share payable in cash expired on March 17, 1995. On March 29, 1995, the Company purchased 7.0 million shares of its common stock and entered into a new $220.0 million credit facility to finance the tender offer, Olson's merger, and provide additional capital. Additionally, the Company sold 1.0 million newly issued shares of its common stock to Zell/Chilmark Fund LP (Zell/Chilmark) at $25.00 per share on March 29, 1995. Zell/Chilmark acquired 2,975,000 additional shares at $25.00 per share, plus an amount equal to a 5% annual return on such amount from March 17, 1995 through January 16, 1996, directly from the Company's chairman and chief executive officer in a separate transaction that closed on January 16, 1996. To reflect the net reduction in shareholders' equity resulting from the recapitalization, the Company reduced retained earnings to zero at the beginning of the second quarter of 1995 and allocated the remaining amount as a reduction to common stock. Fees paid in connection with the recapitalization aggregated approximately $4.3 million. During the first quarter of 1995, $1.4 million of these fees were recorded as a one-time expense, which is not deductible for federal income tax purposes. The remaining costs of $2.9 million were recorded as a direct reduction to shareholders' equity. 8 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TWELVE AND TWENTY-FOUR WEEKS ENDED JUNE 15, 1996 COMPARED TO THE TWELVE AND TWENTY-FOUR WEEKS ENDED JUNE 17, 1995 The table below sets forth items in the Company's statements of earnings as a percentage of sales: 12 Weeks Ended 24 Weeks Ended ------------------ ------------------ June 15, June 17, June 15, June 17, 1996 1995 1996 1995 % % % % -------- -------- -------- -------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales & related occupancy expenses 75.0 75.0 75.2 75.1 Marketing, general & administrative expenses 18.7 18.7 18.9 18.9 -------- -------- -------- -------- Operating income 6.3 6.3 5.9 6.0 Interest income .1 .1 .1 .1 Interest expense (1.2) (1.7) (1.3) (1.0) Other expense - - - (.4) -------- -------- -------- -------- Earnings before income taxes 5.2 4.7 4.7 4.7 Taxes on income (1.9) (1.7) (1.7) (1.8) -------- -------- -------- -------- Net earnings 3.3% 3.0% 3.0% 2.9% -------- -------- -------- -------- -------- -------- -------- -------- SALES Sales for the 12 weeks ended June 15, 1996 increased approximately $8.9 million, or 5.0%, compared with the same period in 1995. This increase reflects the addition of two new stores since June 17, 1995, higher sales in remodeled stores and an increase in same store sales of approximately 1.7% with no inflation in retail food prices. Sales for the 24 weeks ended June 15, 1996 increased approximately $46.5 million, or 14.8%, compared with the same period in 1995. The increase for the 24 weeks reflects the addition of 17 stores (12 of which were acquired from Olson's on March 2, 1995, 3 of which were acquired on March 29, 1995 from another independent operator, one acquired store that opened in August 1995 and a new store that opened in November 1995), higher sales in remodeled stores, and an increase in same store sales of approximately 1.4% with no food price inflation. These factors were offset in part by lower sales in certain existing stores due to the opening and remodeling of competitors' stores located near QFC stores. In addition, sales growth has been impacted by new and acquired stores, which have lower sales volumes, becoming a more significant part of the Company's sales, the maturing of older stores to a level where substantial sales growth is more difficult, and the Company's strategy of opening stores in certain locations that enhance the Company's competitive position and protect its market share but reduce sales in nearby existing stores. Additionally, the supermarket industry continues to be highly competitive. Management believes that this trend in same store sales will continue in the second half of the year as the Company laps the dates of many of the store openings and remodelings which impacted the Company's stores in 1995. Further, modest inflation is anticipated for 1996 and the regional economy is projected to be healthier than in recent years. 9 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING INCOME Operating income increased 5% for the 12 weeks ended June 15, 1996 as compared to the same period in 1995, reflecting the 5% increase in sales and flat operating margins of 6.3% as discussed below. Operating income increased 14% for the 24 weeks ended June 15, 1996 as compared to the same period in 1995, reflecting the 14.8% increase in sales offset by a slight decrease in operating margins to 5.9% of sales from 6.0% of sales in 1995 as discussed below. The Company's cost of sales and related occupancy expenses for the 12 weeks ended June 15, 1996, remained unchanged as a percent of sales at 75.0% and increased slightly to 75.2% of sales for the 24 weeks ended June 15, 1996 compared to 75.1% in the same period in 1995. The slight increase in the 24 weeks ended June 15, 1996 is due to higher occupancy expenses resulting from the 1995 acquisitions and new stores and a $165,000 LIFO charge in 1996 compared to no charge in 1995. Marketing, general and administrative expenses remained unchanged at 18.7% of sales for the 12 weeks ended June 15, 1996 and 18.9% for the 24 weeks ended June 15, 1996 as compared to the same periods in 1995, due to the Company's continued focus on expense controls. INTEREST INCOME Interest income increased $36,000 for the 12 weeks ended June 15, 1996 compared to the same period in 1995 as the Company's increased cash flows from operations resulted in increased cash balances during the 12 weeks ended June 15, 1996 as compared to the same period in 1995. Interest income decreased by $166,000 for the 24 weeks ended June 15, 1996 compared to the same period in 1995, reflecting lower average cash balances due to the recapitalization completed on March 29, 1995, offset by higher interest rates in 1996 than in 1995. INTEREST EXPENSE Interest expense reflects interest on the debt assumed (and refinanced) in the March 2, 1995 Olson's merger and debt incurred in connection with the recapitalization completed on March 25, 1995. Interest expense is reported net of interest capitalized in connection with store construction and remodeling costs. Interest expense decreased $0.7 million to $2.2 million (net of $0.4 million of capitalized interest) for the 12 weeks ended June 15, 1996 compared to the same period in 1995 as the Company's increased cash flows from operations enabled it to reduce its average outstanding debt during the 12 weeks ended June 15, 1996 as compared to the same period in 1995, coupled with lower borrowing rates in 1996 than in 1995. Interest expense increased $1.8 million to $4.8 million (net of $0.6 million of capitalized interest) for the 24 weeks ended June 15, 1996 compared to the same period in 1995 as all 24 weeks in 1996 reflect interest associated with the Company's debt incurred in March 1995 as compared to only 11 weeks in the same period in the prior year. OTHER EXPENSE The Company incurred a one-time charge of $1.4 million in the first quarter of 1995 for fees paid in connection with its recapitalization. This charge is not deductible for federal income tax purposes. The remaining costs of approximately $2.9 million incurred in connection with the recapitalization were recorded as a reduction in shareholders' equity (see Note E to the financial statements). INCOME TAXES The Company's effective federal income tax rate decreased to 35.8% for the 12 and 24 week periods ended June 15, 1996 as compared to 36.2% for the 12 weeks ended June 17, 1995 and 38.7% during the 24 weeks ended June 17, 1995 due to the non-deductible one-time charge of $1.4 million recorded in the first quarter of 1995. The difference between the Company's effective income tax rate and the federal statutory rate for 1996 is primarily due to the non-deductible amortization of goodwill and certain other assets that were included in the Olson's merger. 10 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NET EARNINGS The 5% increase in operating income for the 12 weeks ended June 15, 1996 combined with a reduction in interest expense and a lower effective tax rate than the same period in 1995, resulted in a 16.9% increase in net earnings to $6.2 million compared to $5.3 million in the same period in 1995. Earnings per share increased to 42 cents per share on 14,798,000 weighted average shares outstanding, compared to 36 cents per share on 14,821,000 weighted average shares outstanding in the same period in 1995. The 14% increase in operating income, the $1.4 million decrease in other expense and the decrease in the effective tax rate offset by higher interest expense, resulted in a 19.8% increase in net earnings for the 24 weeks ended June 15, 1996 to $10.9 million compared with $9.1 million for the same period in 1995. Earnings per share were 74 cents per share on 14,686,000 weighted average shares outstanding, compared with 52 cents per share on 17,333,000 weighted average shares outstanding for 1995. Excluding the one-time charge of $1.4 million in other expense, net earnings for 1995 would have been $10.5 million, or 60 cents per share. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity has been cash generated from operations. The Company's cash and cash equivalents decreased $2.2 million during the 24 weeks ended June 15, 1996 to $8.7 million as cash provided by operations of $25.2 million was more than offset by capital expenditures of $17.3 million and the repayment of $11.5 million of long-term debt. The ratio of current assets to current liabilities at June 15, 1996 decreased to .82 to 1, compared with 1.09 to 1 at December 30, 1995, due primarily to $12.6 million of the Company's long term debt being classified as a current liability at June 15, 1996, while none of the long-term debt was repayable within 12 months as of December 30, 1995. The Company believes it can service these debt payments with cash generated from operations or through usage of a portion of the $67.0 million of borrowings available at June 15, 1996 in the Company's credit facility (discussed below). The Company's expansion and remodeling and new store activities for the period from 1986 through June 15, 1996 are summarized below (dollars in thousands): NEW OR SQUARE MAJOR ACQUIRED FEET CAPITAL REMODELS RE-REMODELS STORES ADDED EXPENDITURES* -------- ----------- ------ ----- ------------ 1986 3 - 1 58,000 $ 3,500 1987 2 - - 8,000 5,700 1988 5 - - 16,000 7,600 1989 2 - 2 85,000 9,900 1990 1 2 3 107,000 16,600 1991 2 1 3 127,000 25,900 1992 5 1 3 137,000 26,800 1993 3 - 5 173,000 43,000 1994 2 2 7 239,000 28,200 1995 5 2 17 609,000 89,100 1996 1 3 - 27,000 17,300 -- -- -- --------- --------- TOTAL 31 11 41 1,586,000 $273,600 -- -- -- --------- --------- -- -- -- --------- --------- * Includes purchase of real estate held for investment. 11 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 1995 was the Company's most active year to date in terms of growth with an increase in square footage of 46% from the 17 stores added. The Company opened a new 41,000 square foot store in the Northgate area on March 20, 1996, which replaced a 14,000 square foot store in the same area. Construction of a 66,000 square foot store that will replace the 31,000 square foot University Village store, and the new 45,000 square foot Harvard market store are underway. Additionally, several store remodels and re-remodels are underway or on the drawing table. The Company has secured a number of other sites that are still in the entitlement process or subject to other contingencies and is actively pursuing other new store locations and acquisition opportunities. The Company owns the real estate at five of its 62 store facilities in operation. The Company owns the strip shopping centers where three of these stores are located; however, the real estate operations of these centers are currently insignificant to the Company's results of operations. Another shopping center owned by the Company was sold during the first quarter of 1995 and the others are for sale; however, the Company plans to retain ownership of its store buildings and pads. The remaining stores are leased under long-term operating leases. Capital expenditures, which include the purchase of land, fixtures, equipment and leasehold improvements, as well as the purchase of leasehold interests, other property rights, goodwill and covenants not to compete, are projected to be approximately $30.0 million in 1996 based on the Company's announced plans, and to remain substantial in subsequent years as the Company continues to expand and remodel existing stores and acquire and open new stores. The Company paid a cash dividend of $.05 per share in February 1995. The payment of dividends has been discontinued because the credit facility described below restricts payment of dividends prior to 1997. The $220.0 million credit facility entered into in connection with the recapitalization discussed in Note E to the financial statements consists of a term loan of $140.0 million and revolving credit loans of up to $80.0 million. Principal repayments of the term loan are due in quarterly installments from March 1997 through September 2001. The revolving loans are available for general corporate purposes and any outstanding amounts would become due in September 2001. At the Company's option, the interest rate per annum applicable to the credit facility is either (1) the greater of the bank agent's reference rate or .5% above the federal funds rate or (2) IBOR plus a margin of 1.25% initially, with margin reductions if the Company meets specified financial ratios. The credit facility contains a number of significant covenants that, among other things, restrict the ability of the Company to incur additional indebtedness or incur liens on its assets, in each case subject to specified exceptions, impose specified financial tests as a precondition to the Company's acquisition of other businesses, prohibit the Company from making certain restricted payments (including dividends) and restrict the Company from making share repurchases above certain amounts before January 1, 1997 and, subject to specified financial tests, restrict its ability to make such payments and repurchases thereafter. In addition, the Company is required to comply with specified financial ratios and tests, including a maximum debt to cash flow ratio, minimum ratios of cash flow to fixed charges, a minimum accounts payable to inventory ratio and a minimum net worth test. The credit facility is secured by a lien on all of the Company's receivables and intangible assets. The Company had $153.0 million of borrowings under the facility, with an interest rate of 1.25% over IBOR, or 6.63%, at June 15, 1996. The Company is currently in compliance with all financial covenants contained in the credit facility. The amount of the credit facility is significantly higher than the Company's planned current financing needs, which will help to accommodate other future growth opportunities. While the Company believes the credit facility and existing cash and cash generated from operations will be adequate to fund planned expansion, the Company believes it can readily obtain additional capital, if needed for additional growth opportunities, through other institutional financing or further issuance of debt or equity securities. ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," was recently issued and is effective for the Company's fiscal year ending December 28, 1996. The Company, as allowed, intends to continue to measure stock-based compensation using its current method of accounting prescribed by Accounting Principle Board (APB) Opinion No. 25. The Company will be required to disclose certain additional information related to its stock options and Employee Stock Purchase Plan; however, management believes the impact to the financial statements, taken as a whole, will not be material. 12 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) INFLATION The Company's sales for the 12 and 24 weeks ended June 15, 1996 reflect no food price inflation or deflation, while sales for the same periods in 1995 reflect food price deflation of approximately 1%. FORWARD LOOKING INFORMATION The above discussion contains forward-looking statements that involve a number of risks and uncertainties. There are certain important factors that could cause results to differ materially from those anticipated by such statements. These include, but are not limited to, the competitive environment in the supermarket industry generally and specifically in the Company's market areas, economic conditions, inflation, cost changes, and changes in the Company's expansion plans. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No material legal proceedings were commenced during the quarter. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A. The Annual Meeting of Shareholders of Quality Food Centers, Inc. was held on April 30, 1996. B. Dan Kourkoumelis, Sheli Z. Rosenberg and Ronald A. Weinstein were elected as Class III directors to serve terms of three years. The board is comprised of those elected this year and the following directors completing their terms: John W. Creighton, Jr., Fred B. McLaren, and Samuel Zell, Class I directors whose terms expire in one year and Maurice F. Olson and Stuart M. Sloan, Class II directors whose terms expire in two years. C. The following matters were voted upon at the meeting: 1. For the election of directors: FOR WITHHELD --- -------- Class III Directors: Dan Kourkoumelis 13,140,791 180,247 Sheli Z. Rosenberg 13,138,532 182,506 Ronald A. Weinstein 13,138,807 182,231 2. Proposal to amend the Company's 1987 Incentive Stock Option Plan to reserve an additional 200,000 shares of the Company's common stock for issuance upon the exercise of options granted under the plan. BROKER FOR AGAINST ABSTAIN NON-VOTE --- ------- ------- -------- 12,233,268 903,784 37,251 146,735 14 PART II. OTHER INFORMATION (continued) 3. Proposal to amend the Company's 1990 Employee Stock Purchase Plan to reserve an additional 300,000 shares of the Company's common stock for issuance upon purchase of shares under the plan and to increase the number of shares of common stock issuable in any given payment period to 150,000. BROKER FOR AGAINST ABSTAIN NON-VOTE --- ------- ------- -------- 12,992,558 147,886 33,859 146,735 4. Ratification of selection of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending December 28, 1996. BROKER FOR AGAINST ABSTAIN NON-VOTE --- ------- ------- -------- 13,297,279 10,459 13,300 - 0 - ITEM 5. OTHER INFORMATION On June 3, 1996 the Company announced the appointment of Marc Rapaport to its board of directors, replacing Fred McLaren who has resigned.. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. The following documents are filed as part of this report: Exhibit 11.0 - Statement regarding computation of earnings per share. Exhibit 27.0 - Financial Data Schedule. B. There were no reports on Form 8-K filed during this quarter. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUALITY FOOD CENTERS, INC. (Registrant) Date: July 19, 1996 /s/ STUART M. SLOAN ----------------------------- Stuart M. Sloan Chairman Chief Executive Officer Date: July 19, 1996 /s/ MARC W. EVANGER ----------------------------- Marc W. Evanger Vice President Chief Financial Officer 16 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT - -------------- ------- 11.0 Statement regarding computation of per share earnings 27.0 Financial Data Schedule 17 EX-11 2 EXHIBIT 11 QUALITY FOOD CENTERS, INC. EXHIBIT 11.0 COMPUTATION OF PER SHARE EARNINGS Calculations of per share earnings reported in this report on Form 10-Q for the 12 and 24 week periods ended June 15, 1996 and June 17, 1995 are based on the following: Twelve Weeks Ended Twenty-Four Weeks Ended June 15, 1996 June 17, 1995 June 15, 1996 June 17, 1995 ------------- ------------- ------------- ------------- Weighted average shares outstanding 14,543,000 14,698,000 14,489,000 17,198,000 Dilutive effect of stock options 255,000 123,000 197,000 135,000 ----------- ----------- ----------- ---------- Weighted average number of shares 14,798,000 14,821,000 14,686,000 17,333,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- 18 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. 6-MOS DEC-28-1996 DEC-31-1995 JUN-15-1996 1 8,727 0 8,887 0 34,843 58,983 209,631 (56,256) 288,584 72,053 0 0 0 31,103 27,286 288,584 361,024 361,024 271,534 339,542 0 0 (4,753) 16,913 6,063 10,850 0 0 0 10,850 .74 .74
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