-----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, CWwFlQTcIaw1Z5R1wmfiQ6zxZJZEQPklZ25X4GwW4dPj6J5gEd6yJKwdxFPFZ9Mi a621P+Jj3xDXeI2GREJu2A== 0000912057-97-018424.txt : 19970521 0000912057-97-018424.hdr.sgml : 19970521 ACCESSION NUMBER: 0000912057-97-018424 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970322 FILED AS OF DATE: 19970520 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: 0322 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12741 FILM NUMBER: 97611973 BUSINESS ADDRESS: STREET 1: 10116 NE 8TH ST STREET 2: P O BOX 3967 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 2064622210 MAIL ADDRESS: STREET 1: 10116 NE 8TH ST STREET 2: P O BOX 3967 CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: QUALITY FOOD CENTER DATE OF NAME CHANGE: 19870726 10-Q/A 1 10Q/A United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) 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 MARCH 22, 1997 -------------------------------------- - --- 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 of (I.R.S. Employer incorporation or organization) Identification No.) 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 May 1, 1997: 20,918,333 1 PART I. FINANCIAL INFORMATION QUALITY FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (in thousands, except per share data) - -------------------------------------------------------------------------------- Twelve Weeks Ended March 22, March 23, 1997 1996 - -------------------------------------------------------------------------------- Sales $233,154 $176,627 Cost of sales and related occupancy expenses 174,913 133,313 Marketing, general and administrative expenses 45,374 33,486 - -------------------------------------------------------------------------------- OPERATING INCOME 12,867 9,828 Interest income 189 72 Interest expense (2,777) (2,588) - -------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 10,279 7,312 Taxes on income Current 3,559 2,223 Deferred 300 406 - -------------------------------------------------------------------------------- Total taxes on income 3,859 2,629 - -------------------------------------------------------------------------------- NET EARNINGS $ 6,420 $ 4,683 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EARNINGS PER SHARE $ .40 $ .32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Weighted average shares outstanding 16,017 14,554 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements 2 QUALITY FOOD CENTERS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) - -------------------------------------------------------------------------------- March 22, December 28, 1997 1996 - -------------------------------------------------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 66,349 $ 14,571 Accounts receivable 19,320 10,754 Notes receivable 5,375 - Inventories 121,324 36,954 Prepaid expenses 19,482 6,208 - -------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 231,850 68,487 PROPERTIES Land 53,343 15,025 Buildings, fixtures and equipment 276,381 155,038 Leasehold improvements 92,622 41,511 Property under capital leases 21,191 - Construction in progress 12,297 9,910 - -------------------------------------------------------------------------------- 455,834 221,484 Accumulated depreciation and amortization (64,965) (60,821) - -------------------------------------------------------------------------------- 390,869 160,663 LEASEHOLD INTEREST, net of accumulated amortization of $11,816 and $11,257 106,446 27,585 Real estate held for investment 6,423 6,048 GOODWILL, net of accumulated amortization of $2,374 and $2,084 234,528 33,691 OTHER ASSETS 34,059 7,543 - -------------------------------------------------------------------------------- $1,004,175 $ 304,017 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 88,651 $ 35,548 Accrued payroll and related benefits 37,899 15,884 Accrued business and sales taxes 9,361 5,413 Other accrued expenses 34,987 7,240 Federal income taxes payable 6,422 945 Notes payable 5,183 - Current portion of capital lease obligations 617 - - -------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 183,120 65,030 DEFERRED INCOME TAXES 63,601 12,142 OTHER LIABILITIES 18,702 5,047 LONG-TERM DEBT 400,278 145,000 CAPITAL LEASE OBLIGATIONS 26,774 - SHAREHOLDERS' EQUITY Common stock, at stated value - authorized 60,000,000 shares, issued and outstanding 20,827,000 shares and 14,646,000 shares 263,427 34,945 Retained earnings 48,273 41,853 - -------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 311,700 76,798 - -------------------------------------------------------------------------------- $1,004,175 $ 304,017 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 3 QUALITY FOOD CENTERS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY TWELVE WEEKS ENDED MARCH 22, 1997 (unaudited) (in thousands) - -------------------------------------------------------------------------------- Common Stock -------------------- Retained Shares Amount Earnings Total - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 28, 1996 14,646 $ 34,945 $ 41,853 $ 76,798 NET EARNINGS - - 6,420 6,420 COMMON STOCK ISSUED 6,181 228,482 - 228,482 - -------------------------------------------------------------------------------- BALANCE AT MARCH 22, 1997 20,827 $ 263,427 $ 48,273 $ 311,700 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 4 QUALITY FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands) ----------------------------------------------------------------------------- Twelve Weeks Ended March 22, March 23, 1997 1996 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 6,420 $ 4,683 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of properties 4,144 3,695 Amortization of leasehold interest and other 1,049 850 Amortization of debt issuance costs 49 43 Deferred income taxes 300 406 Other 100 - CHANGES IN OPERATING ASSETS AND LIABILITIES Accounts receivable 3,054 457 Inventories (3,342) 882 Prepaid expenses 963 (681) Accounts payable (106) 928 Accrued payroll and related benefits (2,236) (2,490) Accrued business and sales taxes 171 (1,837) Other accrued expenses 6,807 1,103 Federal income taxes payable 2,655 2,222 - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 20,028 10,261 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures, net (5,101) (8,482) Acquisition of KUI (34,087) - Acquisition of Hughes (346,023) - Increase in real estate held for investment (376) (18) Other (322) (704) - -------------------------------------------------------------------------------- Net Cash Used by Investing Activities (385,909) (9,204) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of common stock 324 156 Proceeds from March 19, 1997 financings- Issuance of common stock 192,199 - Issuance of senior subordinated notes 146,250 - Proceeds under credit facility 248,001 - Payment of outstanding credit facility (197,000) - Proceeds from (repayments of) long-term debt 27,885 (1,000) - -------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 417,659 (844) - -------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 51,778 213 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,571 10,933 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66,349 $ 11,146 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 5 QUALITY FOOD CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996 (unaudited) NOTE A - NATURE OF OPERATIONS Quality Food Centers, Inc. ("QFC") is a multi-regional operator of premium supermarkets, operating 146 stores and employing more than 10,000 people. The Company has been in operation since 1954 and currently operates 89 stores in the Puget Sound region of Washington State primarily under the names QFC and Stock Market and 57 stores in Southern California under the Hughes Family Market ("Hughes") name. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statement Preparation - The consolidated financial statements as of and for the twelve weeks ended March 22, 1997 and March 23, 1996 are unaudited, but in the opinion of management include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented. All significant intercompany transactions and account balances have been eliminated in consolidation. 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 conjuction with the annual audited financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K/A for the year ended December 28, 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 (except for Hughes' which ends on the last Sunday in December), and its reporting quarters consist of three 12-week quarters and a 16-week fourth quarter. Earnings Per Share - Earnings per share is based upon the weighted average number of common shares and common share equivalents outstanding during the period. NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION On March 19, 1997, the Company completed (i) the sale of 5,175,000 shares of the Company's common stock to the public for net proceeds of $192.2 million, (ii) the private placement of $150.0 million of 8.7% senior subordinated notes for net proceeds of $146.3 million, and (iii) entered into an agreement to amend and restate its existing credit facility resulting in net proceeds of $248.0 million. The Company utilized $359.8 million of the proceeds to finance the acquisition of Hughes and $197.0 million to refinance the Company's bank indebtedness outstanding at the time of the financings [including $59.1 million incurred in connection with the acquisition of Keith Uddenberg, Inc. ("KUI")], leaving approximately $29.7 million of cash for general corporate purposes. Cash paid for income taxes and interest expense was as follows (in thousands): Twelve Weeks Ended March 22, March 23, 1997 1996 - -------------------------------------------------------------------------------- Income taxes $ 900 $ - Interest (net of $212 and $177 of interest capitalized) $3,360 2,163 - -------------------------------------------------------------------------------- 6 QUALITY FOOD CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996 (unaudited) NOTE D - KEITH UDDENBERG, INC. ACQUISITION On February 14, 1997, the principal operations of KUI, including assets and liabilities related to 25 grocery stores in the western and southern Puget Sound region of Washington, were merged into a subsidiary of the Company. The merger, which has been accounted for under the purchase method of accounting, was effected through the acquisition of 100% of the outstanding voting securities of KUI for consideration consisting of $35.3 million cash, 904,646 shares of the Company's common stock, (which as of February 14, 1997 had a value of $36.0 million) and the assumption by the Company of approximately $23.8 million of indebtedness of KUI. For financial reporting purposes, the consideration paid for the operations of KUI has been allocated to the fair value of assets acquired and liabilities assumed. Goodwill of $57.6 million has been recorded as a result of the merger and is being amortized over 40 years. Because the transaction 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 KUI merger (in thousands): Cash $ 1,262 Inventories 15,985 Other current assets 4,749 -------- Total current assets 21,996 Property, plant and equipment 25,047 Leasehold interest 20,000 Goodwill 53,481 Other assets 12,330 Current liabilities (16,507) Deferred income taxes (17,431) Other liabilities (3,839) Long-term debt (23,768) -------- $ 71,309 -------- -------- Long-term debt of $23.8 million assumed in connection with the merger was subsequently repaid. NOTE E - HUGHES MARKETS, INC. ACQUISITION On March 19, 1997, the Company acquired the principal operations of Hughes, including the assets and liabilities related to 57 grocery stores located in Southern California and a 50% interest in Santee Dairies, Inc., one of the largest dairy plants in California. The acquisition, which has been accounted for under the purchase method of accounting, was effected through the acquisition of 100% of the outstanding voting securities of Hughes, for cash consideration of approximately $359.8 million, and the assumption by the Company of approximately $33.2 million of indebtedness (including $6.1 million of current indebtedness) of Hughes, consisting primarily of capitalized store leases. 7 QUALITY FOOD CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TWELVE WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996 (unaudited) NOTE E - continued For financial reporting purposes, the consideration paid for Hughes has been allocated to the fair value of assets acquired and liabilities assumed. Goodwill of $147.7 million has been recorded as a result of the acquisition and is being amortized over 40 years. Because the transaction 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 Hughes merger (in thousands): Cash $ 13,767 Inventories 65,042 Other current assets 20,782 ------------ Total current assets 99,591 Property, plant and equipment 182,999 Property under capital leases 21,191 Leasehold interest 59,353 Goodwill 147,729 Other assets 14,178 Current liabilities (94,935) Deferred income taxes (33,584) Other liabilities (9,680) Long-term debt (278) Capital lease obligation (26,774) ------------ $ 359,790 ----------- ----------- NOTE F - PRO FORMA FINANCIAL INFORMATION The following pro forma financial information assumes that the acquisitions of KUI and Hughes and the related financings each occurred as of the beginning of each period presented (in thousands, except per share data): Twelve Weeks Twelve Weeks Ended Ended March 22, 1997 March 23, 1996 -------------- -------------- Sales $475,894 $479,534 Net earnings 6,563 5,691 Earnings per share .31 .28 NOTE G - ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" was recently issued and is effective for the Company's fiscal year ending December 27, 1997. This Statement requires a change in the presentation of earnings per share. Early adoption of this Statement is not permitted. Management believes that the impact of the adoption of this Statement on the financial statements, taken as a whole, will not be material. 8 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION The information contained herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the supermarket industry in general and in the Company's specific market areas, changes in prevailing interest rates and the availability of financing, inflation, changes in costs of goods and services, economic conditions in general and in the Company's specific market areas, labor disturbances, demands placed on management by the substantial increase in the size of the Company because of the acquisitions described below, and changes in the Company's acquisition plans. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. TWELVE WEEKS ENDED MARCH 22, 1997 COMPARED TO THE TWELVE WEEKS ENDED MARCH 23, 1996 During the twelve weeks ended March 22, 1997, the Company acquired 82 stores from Hughes Markets, Inc. ("Hughes") and Keith Uddenberg, Inc. ("KUI") operating under the "Hughes Market" "Stock Market" and "Thriftway" names. (See Notes D and E to the Company's consolidated financial statements for the twelve weeks ended March 22, 1997.) The acquisitions more than doubled the size of the Company and managing the Company and integrating the acquired businesses will present new challenges to management. In order to facilitate this phase of the Company's development, the Company has hired a new chief executive officer, a senior vice president of corporate development and a senior vice president of marketing and public affairs to pursue and integrate acquisitions at a holding company level, thus allowing current senior management to remain focused on existing operations. Because of the magnitude of the acquisitions, the Company's operations are not comparable to QFC's or Hughes' historical operations. The Company's capitalization has also changed, reflecting the issuance of shares as well as a significant increase in long-term debt and a related increase in interest expense. The results of operations for the twelve weeks ended March 22, 1997 include the results of operations of the acquired KUI stores for five weeks and Hughes stores for five days and the effects of the related financings for four days. The table below sets forth items in the Company's statements of earnings as a percentage of sales: 12 Weeks Ended -------------------------------- March 22, March 23, 1997 1996 ----------- ---------- Sales 100.0% 100.0% Cost of sales & related occupancy expenses 75.0 75.4 Marketing, general & administrative expenses 19.5 19.0 --------- --------- Operating income 5.5 5.6 Interest income .1 .1 Interest expense (1.2) (1.5) ---------- ---------- Earnings before income taxes 4.4 4.2 Taxes on income 1.6 1.5 ---------- ---------- Net earnings 2.8% 2.7% ---------- ---------- ---------- ---------- SALES Sales for the 12 weeks ended March 22, 1997 increased approximately $56.5 million, or 32.0%, compared with the same period in 1996. The increase in total sales reflects the acquisition of the 25 KUI stores for five weeks, the 57 Hughes stores for five days, sales from the two Food Giant stores acquired in October 1996 and an increase in same store sales (same store sales exclude sales in stores opened or acquired during the previous 12 months) of approximately 4.2% for the quarter. The increase in same store sales is due to improved merchandising and strong sales in remodeled and replacement stores while the Company experienced 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 and acquiring 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 same store sales should remain positive in 1997. Further, modest or no inflation is anticipated for the remainder of 1997 and the regional economies are projected to remain healthy. 9 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING INCOME The Company's cost of sales and related occupancy expenses improved to 75.0% of sales for the first quarter of 1997 from 75.4% for the first quarter of 1996 due to improved buying and merchandising, a greater mix of sales in higher margin service departments in the QFC stores and lower occupancy expenses as a percentage of sales offset, in part, by lower margins in the stores acquired during the quarter. Marketing, general and administrative expenses increased to 19.5% of sales for the first quarter of 1997 from 19.0% of sales for the first quarter of 1996 attributable to contractual rate increases from union contracts effective in May and August of 1996 and a 10% increase in the union benefit contributions rate effective in July 1996 as well as additional expenses associated with the initial integration of the acquired stores.. As a result of the above factors, operating margins declined slightly to 5.5% of sales for the first quarter of 1997 compared to 5.6% of sales for the comparable period in 1996 which, combined with the 32.0% increase in sales, produced a 30.9% increase in operating income for the quarter. INTEREST Interest income increased to $189,000 in the first quarter of 1997, compared to $72,000 in the same period in 1996, reflecting the increase in the Company's cash balances and higher interest rates. The $189,000 increase in interest expense for the first quarter of 1997 reflects four days interest on the additional debt incurred in connection with the acquisitions offset by lower debt balances than in the comparable year prior to such borrowings. Interest expense is net of approximately $212,000 and $177,000 of interest capitalized in connection with store construction and remodeling costs incurred during the 12 weeks ended March 22, 1997 and March 23, 1996, respectively. INCOME TAXES The Company's effective federal income tax rate increased from 36.0% in 1996 to 37.5% in 1997 due to an increase in non-deductible goodwill resulting from the KUI and Hughes acquisitions. The difference between the Company's effective income tax rate and the federal statutory rate for the first quarter of 1997 is primarily due to non-deductible amortization of goodwill that was acquired through various acquisitions by the Company, including the KUI and Hughes acquisitions. As a result of these acquisitions, a portion of the Company's income will be taxable in the state of California, which, combined with the non-deductible goodwill amortization, will result in an estimated effective tax rate of approximately 43%. NET EARNINGS The increase in operating income offset by the increase in the effective tax rate resulted in an increase in net earnings for the 12 weeks ended March 22, 1997 to $6.4 million compared with $4.7 million in the first quarter of 1996. Earnings per share were 40 cents on 16,017,000 weighted average shares outstanding, compared with 32 cents on 14,554,000 weighted average shares outstanding for the first quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principle source of liquidity has been cash generated from operations and its revolving credit facility. On March 19, 1997, the Company completed (i) the sale of 5,175,000 shares of the Company's common stock to the public for net proceeds of $192.2 million, (ii) the private placement of $150.0 million of 8.7% senior subordinated notes for net proceeds of $146.3 million, and (iii) entered into an agreement to amend and restate its existing credit facility resulting in net proceeds of $248.0 million. The Company utilized $359.8 million of the proceeds to finance the acquisition of Hughes and $197.0 million to refinance the Company's bank indebtedness outstanding at the time of the financings (including $59.1 million incurred in connection with the acquisition of KUI), leaving approximately $29.7 million of cash for general corporate purposes. This amount, together with cash provided by operations of $20.0 million, more than offset capital expenditures and other investing activities during the 12 weeks ended March 22, 1997, and resulted in an increase in cash and cash equivalents of $51.8 million during the quarter to $66.3 million. The ratio of current assets to current liabilities at March 22, 1997 improved to 1.27 to 1, compared with 1.05 to 1 at December 28, 1996. 10 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company's expansion and remodeling and new store activities for the period from 1987 through March 22, 1997 are summarized below (dollars in thousands): NEW OR SQUARE MAJOR(1) ACQUIRED FEET CAPITAL REMODELS STORES ADDED EXPENDITURES(2) -------- ------ ----- --------------- 1987 2 - 8,000 $ 5,700 1988 5 - 16,000 7,600 1989 2 2 85,000 9,900 1990 3 3 107,000 16,600 1991 3 3 127,000 25,900 1992 6 3 137,000 26,800 1993 3 5 173,000 43,000 1994 4 7 239,000 28,200 1995 7 17 609,000 89,100 1996 13 2 111,000 33,000 1997 1 82 3,039,000 436,600 -- --- --------- --------- TOTAL 49 124 4,651,000 $ 722,400 -- --- --------- --------- -- --- --------- --------- (1) Includes replacement stores. (2) Includes $71.3 million for the acquisition of KUI, $359.8 million for the acquisition of Hughes and expenditures for the purchase of real estate held for investment. With the acquisition of Hughes and KUI, 1997 was the Company's most active year to date in terms of growth. In addition, on April 30, 1997, the Company opened its 45,000 square foot Harvard Market QFC store located in Seattle, Washington. QFC also continues to invest in its existing stores to keep them up-to-date. In addition to the remodeling of one of the two Food Giant stores the Company acquired in 1996, the Company's fiscal 1997 remodel plans currently include 12 of its QFC stores and 13 of the stores it acquired in the KUI acquisition. 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 has sold one of the stores it acquired from KUI and is actively marketing four other KUI stores. In addition, the Company has signed an agreement to acquire a store in Port Hadlock, located in the Western Puget Sound region of Washington state from a local independent retailer. The Company has also entered into lease agreements for two QFC stores to be built in the Portland, Oregon area, which are expected to be opened in early 1998 and has entered into agreements for two sites in the Olympia, Washington area. The Company will own its store pads and plans to open the Olympia QFC stores in 1998 as well. The Company's plans for the remainder of 1997 in southern California currently include one new store, two replacement stores and two major store remodels. The Company owns the real estate at 11 of its 146 store facilities currently in operation. The Company owns the strip shopping centers where two of these stores are located; however, the real estate operations of these centers are currently insignificant to the Company's results of operations. The shopping centers 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. The Company, through Hughes, also owns a 600,000 square foot distribution facility in Irwindale, California. As part of the Hughes acquisition, the Company acquired a 50% interest in Santee Dairies, Inc. ("Santee"),one of the largest dairy plants in California. Santee has begun construction of a new dairy plant in order to provide a consistent source of milk, accommodate expected expansion and contain operating costs. The estimated cost of construction is approximately $100.0 million (including production equipment and capitalized interest and other costs). The new dairy is scheduled to be completed in December 1997 and be operational by March 1998. Approximately 50% of the aggregate budgeted capital expenditures have been made. Negotiations are currently under way with certain parties to provide Santee with approximately $80.0 million of senior secured notes to finance construction costs. The prospective lenders have orally agreed in principle to certain primary terms of such long-term financing, including the applicable interest rate and have been paid a non-refundable fee in connection therewith. There is no assurance, however, that Santee will be able to obtain this long-term financing on acceptable terms, or at all. In that regard, the Company, and the other 50% partner, may be required to provide certain credit support for any long-term financing which Santee may arrange or otherwise enter into agreements intended to assure repayment of such indebtedness. Santee is currently in default under certain of the financial covenants relating to its existing credit facilities, 11 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and is negotiating with its lender to extend its existing credit facilities and to obtain the appropriate waivers. Notwithstanding such default, its lender has allowed Santee to continue to borrow under its existing credit facility without a formal waiver. Excluding the KUI and Hughes acquisitions, 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 $75.0 million in 1997 in order to remodel existing stores and to acquire and open new stores in the Pacific Northwest and Southern California. However, the Company will continue to seek attractive acquisitions of other regional supermarkets and supermarket chains, as well as additional stores and store sites and actual capital expenditures may increase significantly to the extent that these opportunities arise and the Company is able to obtain financing for these acquisitions. Accordingly, the Company is unable to predict with certainty its capital expenditure budget for 1997 or any future period. The Company has discontinued the payment of cash dividends on its common stock and presently intends to retain available funds to finance the growth and operations of its businesses. On March 19, 1997, in connection with the Hughes merger, the Company entered into a new credit facility which replaced the credit facility it entered into in connection with its 1995 recapitalization. The new credit facility consists of (i) a $250 million term loan facility (the "Term Loan Facility"), (ii) a $125 million revolving credit facility (the "Revolving Credit Facility") and (iii) a $225 million reducing revolving credit facility (the "Acquisition Facility"). Principal repayments under the Term Loan Facility are due in quarterly installments from June 30, 1998 through the final maturity of the new credit facility in March of 2004 and the Company will be required to repay borrowings under the Term Loan Facility with the proceeds from certain asset sales and, under certain circumstances, with cash flow in excess of certain specified amounts. The Revolving Credit Facility is available for working capital and other general corporate purposes, including permitted acquisitions, and any outstanding amounts thereunder will become due on March 31, 2004. The Acquisition Facility is to be used to consummate permitted acquisitions and will become due on March 31, 2004. In addition, the maximum amount of available borrowings under the Acquisition Facility will decline by $25 million each year (subject to certain possible adjustments) commencing March 31, 2000, and the borrower thereunder will be required to repay borrowings thereunder to the extent that they exceed the reduced amount of the Acquisition Facility. Additionally, the Revolving Credit Facility and the Acquisition Facility may be used to make investments in Santee in an amount not to exceed $80.0 million to finance construction of Santee's new dairy. On the date the new credit facility became effective, the Company borrowed $250.0 million under the Term Loan Facility. At the Company's option, the interest rate per annum applicable to the new credit facility will either be (1) the greater of one of the bank agents' reference rate or 0.5% above the federal funds rate in each case, plus a margin (0% initially) or (2) IBOR plus a margin (0.875% initially), in each case with margin adjustments dependent on the borrower's senior funded debt to EBITDA ratio from time to time. The new credit facility contains a number of significant covenants that among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness and incur liens on their assets, in each case subject to specified exceptions, impose specified financial tests as a precondition to the Company and its subsidiaries' acquisition of other businesses, and limit the Company and its subsidiaries from making certain restricted payments (including dividends and repurchases of stock), subject in certain circumstances to specified financial tests. The obligations of the Company under the new credit facility have been guaranteed by certain existing subsidiaries. In addition, the Company has pledged the outstanding shares of certain subsidiaries as security under the facility. In addition, the Company and its subsidiaries will be required to comply with specified financial ratios and tests, including an interest and rental expense coverage ratio, a total funded debt to EBITDA ratio, a senior funded debt to EBITDA ratio and a minimum net worth test. The covenants and ratios under the new credit facility and the Notes described below were negotiated to provide appropriate flexibility to facilitate the Company's growth strategies. 12 QUALITY FOOD CENTERS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As discussed above, on March 19, 1997, the Company issued $150 million aggregate principal amount of Senior Subordinated Notes in a private offering. The Notes will mature on March 15, 2007. The Notes bear interest at 8.70% per annum with interest payable in cash semi-annually on March 15 and September 15 of each year, commencing September 15, 1997. The Notes are redeemable, in whole or in part, at the option of the Company beginning March 15, 2002, at redemption prices declining over time from 104.35% of the principal amount in the year 2002 to 100% of the principal amount in the year 2005 and thereafter, in each case plus accrued and unpaid interest to the redemption date. In addition, at any time prior to March 15, 2000, the Company may redeem up to 20% of the aggregate principal amount of the Notes originally issued at a redemption price of 108% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more public offerings of common stock of the Company, provided that at least 80% of the aggregate principal amount of the Notes originally issued remains outstanding immediately after the occurrence of such redemption. The obligations of the Company pursuant to the Notes are guaranteed by certain of QFC's existing subsidiaries (the "Guarantors"). The Notes are general unsecured obligations of the Company and the Guarantors, respectively, subordinated in right of payment to all existing and future senior debt of the Company and the Guarantors, as applicable, including borrowings and guarantees under the new credit facility. Upon a change of control, the Company will be required to offer to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. The Company will also be obligated in certain circumstances to offer to repurchase Notes at a purchase price of 100% of the principal amount thereof, plus accrued interest, with the net cash proceeds of certain sales or other dispositions of assets. The Indenture relating to the Notes contains certain covenants that limit, subject to certain significant exceptions, the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness and issue disqualified stock; pay dividends or make certain other distributions; cause or permit to exist any consensual restriction on the ability of certain parties to pay dividends or make certain other distributions; layer indebtedness; create certain liens securing indebtedness other than senior debt; enter into certain transactions with affiliates; enter into certain mergers and consolidations or engage in new lines of business. The Company is currently in compliance with all financial covenants contained in both the new credit facility and the Senior Subordinated Notes. The Company anticipates that cash on hand, cash flow from operations and borrowings under the new credit facility will be sufficient to provide financing for the $62 million of capital expenditures which is currently budgeted through the end of fiscal 1997. However, to the extent that the Company pursues additional acquisitions or seeks to make additional expenditures or to the extent that Santee is unable to obtain the required financing for its new dairy, the Company may be required to seek additional sources of financing, which may include additional borrowings or sales of its common stock and there can be no assurance that the Company will be able to obtain such additional financing on acceptable terms or at all. In December 1996, the Company filed a universal shelf registration statement with the Securities and Exchange Commission registering for sale to the public, an aggregate of $500.0 million of securities, under which, after the secondary common stock offering described above, $298.2 million of common stock, preferred stock and certain debt securities may be sold. The Company has from time to time issued shares of common stock for all or a portion of the purchase price of acquisitions (as it did for a portion of the Olson's Merger in 1995 and as it did in the KUI acquisition) and may do so again in the future. Accounting Pronouncements Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." was recently issued and is effective for the Company's fiscal year ending December 27, 1997. This Statement requires a change in the presentation of earnings per share. Early adoption of this Statement is not permitted. Management believes that the impact of the adoption of this Statement on the financial statements, taken as a whole, will not be material. Inflation The Company's sales for the first quarter of 1997 and 1996 reflect no food price inflation or deflation. 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 Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 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. The Company filed a current report on Form 8-K/A on February 18, 1997. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. QUALITY FOOD CENTERS, INC. (Registrant) Date: May 20, 1997 /s/ Marc W. Evanger ----------------------------- Marc W. Evanger Vice President Chief Financial Officer 15 EXHIBIT INDEX Exhibit Number Exhibit 11.0 Statement regarding computation of per share earnings 27.0 Financial Data Schedule 16 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 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 are based on the following: Twelve Weeks Ended March 22, 1997 March 23, 1996 -------------- -------------- Weighted average shares outstanding 15,295,000 14,436,000 Dilutive effect of stock options 722,000 118,000 ---------- ---------- Weighted average number of shares 16,017,000 14,554,000 ---------- ---------- ---------- ---------- 17 EX-27 3 EXHIBIT 27
5 3-MOS DEC-27-1997 DEC-29-1996 MAR-22-1997 66,349 0 24,695 0 121,324 231,850 455,834 (64,965) 1,004,175 183,120 0 0 0 263,427 48,273 311,700 233,154 233,154 174,913 220,287 0 0 (2,777) 10,279 3,859 6,420 0 0 0 6,420 .40 0
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