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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1994
[ ] 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 Identification No.)
incorporation or organization)
10112 N.E. 10th Street, Bellevue, Washington 98004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 455-3761
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
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
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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]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the price at which the stock was sold as of
the close of business on March 27, 1995: $231,362,413
Number of shares of Registrant's common stock, $.001 par value, outstanding as
of March 27, 1995: 20,240,410
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1994 are incorporated by reference into Part II and Part IV of this Form 10-
K.
The Proxy Statement relating to the 1995 Annual Meeting of Shareholders is
incorporated by reference into Part III of this Form 10-K.
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CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA (INCORPORATED BY
REFERENCE FROM THE COMPANY'S 1994 ANNUAL
REPORT TO SHAREHOLDERS) 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INCORPORATED BY REFERENCE FROM THE COMPANY'S
1994 ANNUAL REPORT TO SHAREHOLDERS) 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(INCORPORATED BY REFERENCE FROM THE COMPANY'S
1994 ANNUAL REPORT TO SHAREHOLDERS) 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY (INCORPORATED BY REFERENCE FROM
THE COMPANY'S PROXY STATEMENT, EXCEPT FOR
INFORMATION REGARDING EXECUTIVE OFFICERS) 13
ITEM 11. EXECUTIVE COMPENSATION (INCORPORATED BY
REFERENCE FROM THE COMPANY'S PROXY STATEMENT) 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT (INCORPORATED BY
REFERENCE FROM THE COMPANY'S PROXY STATEMENT) 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS (INCORPORATED BY REFERENCE
FROM THE COMPANY'S PROXY STATEMENT) 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 14
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PART I
ITEM 1 - BUSINESS
(a) GENERAL DEVELOPMENT OF THE BUSINESS
The Registrant, Quality Food Centers, Inc. (the "Company" or "QFC"), is the
largest independent supermarket chain in the Seattle/Puget Sound area of
Washington State. The Company began in 1954 with four store locations and has
grown over the last 40 years through acquisition and new store expansion to 60
stores today.
As part of a recapitalization, on January 19, 1995, the Company commenced a
self-tender offer for up to 7,000,000 shares of its common stock at a price of
$25.00 per share payable in cash. The tender offer expired on March 17, 1995
with 11,179,838 shares tendered. The Company will purchase the 7,000,000 shares
on March 29, 1995. In addition, the Company will sell 1,000,000 newly issued
shares of its own common stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at
$25.00 per share on March 29, 1995. Zell/Chilmark will also acquire 2,975,000
shares at $25.00 per share directly from the Company's chairman and chief
executive officer in a separate transaction which is expected to close on
January 15, 1996. The Company will borrow approximately $174,000,000 under a
new $220,000,000 senior credit facility ("the Credit Facility") to finance the
$24 million of long-term debt assumed in the Olson's merger described under
"Expansion Through New Stores" below and to repurchase its shares pursuant to
the self-tender offer. Due to the above developments, the Company's financial
statements will change significantly, reflecting lower cash balances, a
significant reduction in shareholders' equity and increase in long-term debt and
a related reduction in interest income and increase in interest expense. Pro
forma information regarding the Olson's merger and recapitalization is presented
in Note J to the Company's financial statements for fiscal 1994.
(b) INDUSTRY SEGMENTS
The Company has only one industry segment - the operation of retail
supermarkets.
(c) DESCRIPTION OF BUSINESS
(i) GENERAL
The Company emphasizes superior customer service, high quality perishables,
competitive prices and convenient store locations in stable and growing areas.
All QFC stores are open seven days a week, 24 hours a day.
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QFC's supermarkets offer a wide variety of competitively priced grocery, meat,
produce, frozen foods and dairy items, along with a limited selection of non-
food items. Most of the stores also offer full service delicatessen, seafood
and bakery departments with coffee/espresso bars. Selected stores offer video
rentals and fresh juice bars. Photo processing and automated teller machines
are available in all stores. The recently merged Olson's Food stores also
feature an expanded natural foods section, additional health and beauty aids and
pharmacies in five stores. Space is leased or sub-leased to full-service banks
and oriental take-out kitchens in certain stores. The Company subleases space
to an Italian cafe in two stores, and in certain of the former Olson's Food
stores, space is subleased to Starbuck's gourmet coffee shops, Cinnabon cinnamon
roll bakeries and Ichibon sushi bars.
GROWTH THROUGH EXPANSION AND REMODELING OF EXISTING STORES
The Company has continued its store remodeling and expansion program, completing
25 remodels over the past nine years, including two in 1994. The Company has
completed the expansion and remodeling of two stores so far in 1995. The
Company plans to continue remodeling and expanding certain stores that were
added or remodeled in recent years. Six such "re-remodels" have been completed
to-date, including two in 1994.
Remodeling of the stores usually provides additional square footage for new
full-service specialty departments, for the expansion of existing departments
and for leased space for in-store banks and other services.
While the Company expects the average size of its stores to grow as departments
are added and expanded, the Company intends to continue to operate both large-
and small-format stores. At the end of 1994, the total square footage of all 45
stores was approximately 1,319,000 square feet with an average store size of
approximately 29,000 square feet, ranging in size from 14,000 to 49,000 square
feet.
EXPANSION THROUGH NEW STORES
The Company is adding new stores at an accelerated pace. Twenty-one stores have
been added in the last five years including three in 1992, five in 1993 and
seven in 1994. On March 2, 1995, the principal operations of the Olson's Food
Stores chain were merged into the Company, including twelve Olson's supermarkets
- eight in Snohomish County and four in King County, Washington, three
additional stores in various stages of development and rights to several other
future sites in the same market. As consideration for the operations being
merged, the Company paid $18 million in cash, issued 752,941 shares of Common
Stock and assumed $24 million of long-term debt of Olson's. The Company
acquired the Rainier Market store in Seattle in January 1995. The store was
closed and demolished and a replacement store is being
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constructed to be opened in the summer of 1995. On March 26, 1995, the Company
acquired three stores from Puget Sound Marketing, located in Enumclaw, Auburn
and Gig Harbor, Washington operating under the Hogan's Market and Bag n' Save
names. Including these recent developments, 28 of the Company's last 39 newest
stores were acquired from independent operators and the Company believes
acquisition will continue to be an important part of its expansion.
These new locations will bring the total number of QFC stores to 61. The
Company has three stores in various stages of development that were part of the
Olson's merger and plans to open two other stores in 1996 that are in the early
stages of development. The Company is evaluating and pursuing other potential
new store locations and acquisition opportunities.
The Company's plans to expand and remodel its existing stores and add new stores
are reviewed continually and are subject to change. In addition, the Company's
ability to expand and remodel existing stores and to open new stores is subject
to many factors, including successful negotiation of new leases or amendments to
existing leases, successful site acquisition and financing on acceptable terms
and may be limited by zoning, environmental and other governmental regulations.
MARKETING
The volume of the Company's newspaper, television and radio advertising
continued to increase in 1994. The Company ran television ads to promote its
home delivery service "QFC Express" and its new debit and credit card payment
options and introduced a new television and radio advertising theme, "At QFC,
You Know Its Going to be Good", which builds on the quality of its products,
employees and customer service. During 1994, along with special seasonal
promotions, there was additional advertising for the grand-openings of the
Company's new and remodeled stores.
MANAGEMENT INFORMATION SYSTEMS
The Company has installed P.C. based point-of-sale hardware and software in
every checkout lane of every store. The Company has a Company-wide high speed
digital data and voice network and an electronic payment system in every store
that enables customers to pay for their purchases with both debit and credit
cards. The Company also has an in-store computerized direct store delivery
system for non-perishable deliveries, which integrates the receipt of goods at
the store with accounting and merchandising at the Company's main office. This
integrated system offers the Company timely information and greater efficiency
and control over merchandising and accounts payable. The Company processes
product orders, direct store deliveries and store accounting functions on
personal computers in each store. In addition, custom software and a laser
printer are used to create shelf
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tags, more attractive signs and customized promotional materials on-site at each
store. Today, although already highly automated, QFC remains committed to the
further use of information systems as a tool to enhance profitability. In 1994,
the Company continued the conversion from its mainframe host computer to a new
client-server host computer to meet its long-term growth needs and convert to
"open-systems" technology.
(ii) NEW PRODUCTS OR INDUSTRY SEGMENTS
The Company has not introduced new products or added additional industry
segments that will require a material investment of the Company's assets.
(iii) RAW MATERIALS
Merchandise is ordered on a store-by-store basis, although product selection is
approved and monitored by a central buying group consisting of merchandise
managers for various classifications of products. The central buying group also
responds to customer requests and input from store managers regarding new
products and merchandising ideas and allocates shelf space to products.
QFC maintains no independent distribution facilities but purchases the majority
of its groceries, meat and some seafood, deli and produce from its major
wholesale supplier, West Coast Grocery Company ("West Coast"), a subsidiary of
Super Valu Stores, Inc. The Company purchased approximately $196,661,451 of
products from West Coast during fiscal 1994, accounting for 45.7% of the
Company's cost of sales and related occupancy expense during the year. The
Company also periodically purchases higher turnover products that would
otherwise be supplied by West Coast directly from the manufacturer. The
remainder of products are purchased from other manufacturers or distributors
which, as does West Coast, deliver directly to the Company's stores. Pursuant
to the Olson's merger, the Company is using Associated Grocers ("A.G.") as its
major wholesaler for the 12 former Olson's stores. A.G. is a cooperative
wholesaler located in Seattle, Washington. Management believes that alternative
wholesale sources for the purchases made from West Coast, A.G., and other
suppliers are available on terms approximately equal to those currently in
effect. The Company maintains a central commissary where certain items are
prepared primarily for the Company's deli department.
(iv) PATENTS, TRADEMARKS, LICENSES, ETC.
The Company employs various trademarks, trade names and service marks. Certain
governmental licenses and permits are required for the Company's operations.
Management believes the Company has all necessary licenses and permits.
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(v) SEASONALITY
No material portion of the Company's business is affected by seasonal
fluctuations, except that sales are generally stronger surrounding holidays,
especially from Thanksgiving through New Year's Day. In addition, the Company's
fiscal quarters consist of three 12-week quarters and a 16-week fourth quarter.
However, 1994 was a 53-week fiscal year, with a 17-week fourth quarter.
(vi) WORKING CAPITAL ITEMS
The Company experiences high inventory turnover. This is a result of the
Company not maintaining its own distribution facilities or warehouse, the
limited storage space in the individual stores and the perishable nature of much
of the Company's merchandise. Deliveries are received frequently to maintain
adequate inventory levels for meeting customers' needs. While some inventory is
purchased and held for a period of time to take advantage of pricing trends, no
significant levels of inventories are purchased and stored for anticipated
future sales.
Virtually all sales are on a cash basis. Sales paid for with debit and credit
cards are settled within one-two days of the sale. Purchases are paid on
various terms ranging from daily to 60 days.
(vii) DEPENDENCE UPON A FEW CUSTOMERS
The business of the Company is not dependent on a single or a few customers.
(viii) BACKLOG ORDERS
The Company does not have any backlog of orders.
(ix) GOVERNMENT CONTRACTS
The Company does not have any material contracts or subcontracts with any
governmental entities.
(x) COMPETITIVE CONDITIONS
The retail supermarket business is highly competitive. The Company competes
with national and regional supermarket chains, principally Safeway, Albertson's
and Fred Meyer, and with smaller chains and independent stores as well as
wholesale club formats and specialty and convenience food stores.
The principal areas of competition include store location; product selection and
quality; convenience and cleanliness; employee friendliness and service;
price; and management information enabling timely product selection, pricing
and promotion decisions. The Company addresses each of these
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factors, emphasizing superior service, high quality perishables, leading-edge
technology, and favorable store locations. Competitive pricing is implemented
by reviewing competitors' prices on a regular basis through observation and
independent surveys and adjusting prices as management deems appropriate.
Certain of these strategies are also used by the Company's competitors, some of
which have substantially greater financial and other resources than the Company.
During the fourth quarter of 1994, the Company experienced an increasing number
of new store openings or store remodelings by its competitors near its existing
stores, which has resulted in reduced sales in the Company's stores. The
Company expects this trend to continue in 1995.
(xi) RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has not expended material amounts in research and development
activities.
(xii) ENVIRONMENTAL LAWS
Compliance with federal, state, and local laws enacted for protection of the
environment has had no material effect on the Company's capital expenditures,
earnings or competitive position. The Company does not anticipate any material
adverse effects in the future based on the nature of its operations and the
thrust of such laws.
(xiii) NUMBER OF EMPLOYEES
The Company had approximately 3,200 employees as of the end of fiscal 1994. Of
these, approximately 2,800 are covered by collective bargaining agreements in
effect through April 30 and July 31, 1995. The Company has not had a work
stoppage in over 20 years and believes its labor relations continue to be
excellent. Nearly all employees of supermarket chains in the Seattle/Puget
Sound market, including the Company's, are members of collective bargaining
units.
(d) FOREIGN AND DOMESTIC OPERATIONS
The Company's operations are exclusively in the state of Washington. The
Company has no export sales.
ITEM 2 - PROPERTIES
As of March 27, 1995, the Company leases 55 of its 60 supermarkets and its
administrative facilities under non-cancellable operating leases with various
terms expiring through
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2053, including renewal periods. The average remaining term of the Company's
leases (including all renewal options) is approximately 31 years. Two of the
Company's store leases are subject to expiration within five years. The Company
renegotiates its leases prior to committing to a major store remodel. The
leases generally provide for minimum rental amounts, with contingent rental
payments based on a percentage of gross sales, plus real estate tax payments and
reimbursement of executory costs. The Company owns most of the equipment,
furniture and fixtures at its retail and administrative locations and has made
leasehold improvements at most locations.
Because of the opportunity to better control occupancy expenses, the Company is
more interested in owning future store locations. As of December 31, 1994, the
Company owned the real estate at five of its store facilities in operation, four
of which were part of small shopping centers owned by the Company. The real
estate operations of these centers are currently insignificant to the Company's
results of operations. The Company has sold one of the centers since year end
and the others are for sale. The Company retained ownership of its store
building and pad in the center that was sold, and intends to do so in the other
centers to be sold as well.
The Company has entered into option agreements and purchased real estate within
its existing market areas where it plans to locate stores in the future or sell
the real estate. These store locations are in the entitlement process or
subject to other contingencies.
The Company continues to study various long-term development strategies for the
8.8 acres of real estate that it acquired in 1991, adjacent to the University
Village Shopping Center where QFC operates a store. The Company has stated that
its goal is to develop a new store of approximately 50,000-60,000 square feet,
with capacity for expansion, in a prime location with improved parking. See
"Item 13 - Certain Relationships and Related Transactions."
ITEM 3 - LEGAL PROCEEDINGS
The Company is currently involved in a number of legal proceedings which have
arisen in the ordinary course of business. Management believes these
proceedings will not, in the aggregate, have a material impact on the Company's
operations or financial condition.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1994 to a vote of
shareholders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Stuart M. Sloan 51 Chairman, Chief Executive
Officer and Director
Dan Kourkoumelis 44 President, Chief Operating
Officer and Director
Marc W. Evanger 40 Vice President, Chief
Financial Officer and
Secretary/Treasurer
</TABLE>
Stuart M. Sloan became a director of the Company in 1985 and has been Chairman
since June 1986. Mr. Sloan served as Chief Executive Officer of the Company
from June 1986 to February 1987 and has been Chief Executive Officer since April
1991. Mr. Sloan is the founder and a principal of Sloan Capital Companies, a
private investment company. See "Item 13-Certain Relationships and Related
Transactions." Mr. Sloan served as President of Egghead, Inc., a reseller of
microcomputer software, from February 1989 until July 1990, as Chief Executive
Officer from February 1989 until April 1991 and as Chairman from January 1990 to
September 1992. Mr. Sloan serves as a director of ITEL Corp., Cucina! Cucina!,
Inc., the SeaFirst Corporation and SeaFirst Bank.
Dan Kourkoumelis became a director of the Company in April 1991. He joined the
Company as a boxboy in 1967 and his experience includes several ranks of store
management and executive positions. Mr. Kourkoumelis was appointed Executive
Vice President in 1983, Chief Operating Officer in 1987, and President in 1989.
Mr. Kourkoumelis is a member of the Board of Directors of the Western
Association of Food Chains and Washington State Food Dealers Association and
serves as a director of Expeditors International of Washington, Inc. and
Shurgard Storage Centers, Inc.
Marc W. Evanger joined QFC in 1984 as Controller. From 1978 to 1984, he was
employed by Price Waterhouse in audit, consulting, corporate tax planning and
merger assignments and spent his last two years at that firm as an audit
manager. His prior experience
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included three years with QFC as a retail clerk. Mr. Evanger is a Certified
Public Accountant. He was appointed Vice President in March 1986, Chief
Financial Officer in February 1987 and Corporate Secretary and Treasurer in
February 1988.
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
(a) MARKET INFORMATION
The common stock of the Company is traded on the Nasdaq National Market under
the symbol "QFCI". Presented below are quarterly closing sale price ranges for
QFC's common stock. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
12/31/94 12/25/93
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High Low High Low
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<S> <C> <C> <C> <C>
First Quarter $25 1/4 $21 3/4 $36 3/4 $29
Second Quarter 24 19 1/2 37 1/4 31 1/4
Third Quarter 24 3/4 21 1/2 35 1/2 30 1/4
Fourth Quarter 24 1/4 19 32 1/4 24 3/4
</TABLE>
(b) HOLDERS
The Company had approximately 2,225 shareholders of record as of March 27, 1995.
(c) DIVIDENDS
During 1994, the Company paid quarterly cash dividends of $.05 per share of
the Company's common stock for an annual rate of $.20 per share. Dividends
totalling $3.9 million, or $.20 per share were paid during 1994. In February
1995, a cash dividend of $.05 per share was paid to shareholders of record as of
February 3, 1995.
During 1993, the Company paid its first ever quarterly cash dividends of
$.05 per share of the Company's common stock for an annual rate of $.20 per
share. Dividends totalling $2.9 million, or $.15 per share were paid during
1993.
Dividends have been discontinued because the Credit Facility prohibits the
payment of dividends prior to 1997. Beginning in 1997, the Credit Facility
permits the payment of dividends subject to the Company achieving specified
amounts of earnings,
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but the resumption of dividends at that time or any future time will be
dependent on various factors which the Board of Directors will evaluate at that
time, principally including whether the Company will have sufficient excess cash
on hand at that time after providing for its operating needs, servicing debt and
reserving an appropriate amount of funds for the Company's expansion
opportunities. There can be no assurances when or whether the Board might
decide to resume paying dividends on the Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
The section entitled "Five Year Summary of Selected Financial Data" on page 15
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1994 is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The section entitled "Financial Review" on pages 16 through 21 of the Company's
Annual Report to Shareholders for the fiscal year ended December 31, 1994 is
incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data of the Registrant, and
the independent auditors' report on such financial statements, included on pages
22 through 33 of the Annual Report to Shareholders for the fiscal year ended
December 31, 1994 are incorporated herein by reference:
Statements of Earnings for the three years
ended December 31, 1994.
Statements of Shareholders' Equity for the
three years ended December 31, 1994.
Balance Sheets as of December 31, 1994 and
December 25, 1993.
Statements of Cash Flows for the three years
ended December 31, 1994.
Notes to Financial Statements including
supplementary data entitled "Selected
Quarterly Financial Data (Unaudited)."
Independent Auditors' Report.
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in independent auditors during the past two fiscal
years, and there has been no disagreement with the Company's independent
auditors on any matter of accounting principles or practices or financial
statement disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of the Company contained under the caption
"Election of Directors" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission (the "Proxy Statement") in April
1995 is incorporated by reference into this Item 10. The information regarding
executive officers of the Company contained under the caption "Executive
Officers of the Registrant" in Part I hereof is also incorporated by reference
into this Item 10.
ITEM 11 - EXECUTIVE COMPENSATION
The information regarding executive compensation contained under the caption
"Executive Compensation" in the Proxy Statement to be filed with the Securities
and Exchange Commission in April 1995 is incorporated by reference into this
Item 11.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information regarding security ownership of certain beneficial owners and
management contained under the caption "Voting Securities and Principal Holders"
in the Proxy Statement to be filed with the Securities and Exchange Commission
in April 1995 is incorporated by reference into this Item 12.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
contained under the caption "Certain Relationships and Related Transactions" in
the Proxy Statement to be filed with the Securities and Exchange Commission in
April 1995 is incorporated by reference into this Item 13.
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The financial statements of the Registrant listed in Item 8 on page 12
hereof are incorporated by reference from the Annual Report to
Shareholders for the fiscal year ended December 31, 1994.
2. FINANCIAL STATEMENT SCHEDULES
None required.
3. EXHIBITS
A list of the exhibits required to be filed as part of this report is
set forth in the Index to Exhibits on page 17 hereof. The Index to
Exhibits includes a subset containing each management contract,
compensatory plan, or arrangement required to be filed as an exhibit
to this report.
(b) REPORTS ON FORM 8-K
One report on Form 8-K was filed on December 30, 1994. The report
disclosed under Item 2 the proposed merger of Olson's Food Stores,
Inc. with and into the Company and under Item 5 the proposed
recapitalization of the Company. Such merger was consummated on March
2, 1995. It was impracticable to provide the required financial
statements at the time of filing the report. Such financial
statements will be filed within 60 days of the date the report was
due.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Quality Food Centers, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
QUALITY FOOD CENTERS, INC.
/s/ MARC W. EVANGER
------------------------------------
Marc W. Evanger, Vice President
and Chief Financial Officer,
and Secretary/Treasurer
Date: March 28, 1995
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 indicated on March 28, 1995.
SIGNATURE CAPACITY
/s/ STUART M. SLOAN Chairman, Chief Executive
----------------------------------------
Stuart M. Sloan Officer and Director
(Principal Executive Officer)
/s/ MARC W. EVANGER Vice President and Chief
----------------------------------------
Marc W. Evanger Financial Officer,
Secretary/Treasurer
(Principal Financial and
Accounting Officer)
Director
----------------------------------------
John W. Creighton, Jr.
/s/ NORMA CROCO Director
----------------------------------------
Norma Croco
/s/ DAN KOURKOUMELIS Director
----------------------------------------
Dan Kourkoumelis
/s/ FRED B. MCLAREN Director
----------------------------------------
Fred B. McLaren
/s/ MAURICE F. OLSON Director
----------------------------------------
Maurice F. Olson
/s/ RONALD A. WEINSTEIN Director
----------------------------------------
Ronald A. Weinstein
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INDEPENDENT AUDITORS' CONSENT
Board of Directors
and Shareholders
Quality Food Centers, Inc.
Bellevue, Washington
We consent to the incorporation by reference in Registration Statements No. 33-
32878, 33-34073, 33-38736, 33-69512, and 33-69514 of Quality Food Centers, Inc.
on Forms S-8 of our report dated March 15, 1995, incorporated by reference in
this Annual Report on Form 10-K of Quality Food Centers, Inc. for the year ended
December 31, 1994.
/s/ Deloitte & Touche LLP
----------------------------------------
Seattle, Washington
March 27, 1995
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QUALITY FOOD CENTERS, INC.
Index to Exhibits Filed
with the Annual Report
on Form 10-K for the
Fiscal Year Ended December 31, 1994
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
3.1 Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Form 10-K filed
March 29, 1991.)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.2 to the Company's Form 10-K filed March 29, 1991.)
10.1 Executive Supplemental Retirement Plan Participant Agreement,
dated July 3, 1984, between Quality Food Centers, Inc. and
Ruth F. Cook, under which Quality Food Centers, Inc.
undertakes to pay certain retirement benefits to Mrs. Cook,
one of the Company's former officers. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1, No. 33-9663, filed October 22, 1986.)
10.2 Form of Quality Food Centers, Inc. Defined Contribution Plan
and Trust, with Plan amendment, as adopted by written consent
of Quality Food Centers, Inc.'s Board of Directors, under
which the Company extends certain benefits to its employees.
(Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1, No. 33-9663, filed October
22, 1986.)
10.3 Quality Food Centers, Inc. 401(k) Retirement Plan, dated
December 30, 1988. (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-K filed March 30, 1989.)
10.4 Quality Food Centers, Inc. Amended and Restated 1987 Incentive
Stock Option Plan. (Incorporated by reference to the
Company's Form 10-K filed March 24, 1994.)
i
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.5 Form of Stock Option Agreement under Quality Food Centers,
Inc. 1987 Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1, No. 33-12474, filed March 9, 1987.)
10.6 Amended and Restated 1990 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 33-69512, filed
September 28, 1993.)
10.7 Director's Nonqualified Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8, No. 33-38736, filed January 25, 1991.)
10.8 Agreement between Quality Food Centers, Inc. and United Food
And Commercial Workers Union Local No. 1105 dated May 1, 1992,
governing certain labor relations. (Incorporated by reference
to Exhibit 10.8 to the Company's Form 10-K filed March 25,
1993.)
10.9 Agreement between Quality Food Centers, Inc. and United Food
And Commercial Workers Union Local No. 81, effective May 3,
1992, governing certain labor relations. (Incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K filed
March 25, 1993.)
10.10 Agreement between Allied Employers, Inc. and United Food And
Commercial Workers Union Local No. 44 AFL-CIO, effective May
7, 1989, governing certain labor relations. Labor Agreement
between Quality Food Centers and United Food & Commercial
Workers Union Local No. 44, ratifying and adopting above
Agreement. Labor Agreement between Quality Food Centers and
United Food & Commercial Workers Union Local No. 44, modifying
above Agreement and related ratification. (Incorporated by
reference to Exhibit 10.10 to the Company's Form 10-K filed
March 25, 1993.)
ii
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.11 Agreement between Allied Employers, Inc. and General Teamsters
Union Local No. 38 affiliated with International Brotherhood
of Teamsters, effective August 9, 1992, governing certain
labor relations. (Incorporated by reference to Exhibit 10.11
to the Company's Form 10-K filed March 25, 1993.)
10.12 Amended and Restated Management Agreement, dated August 17,
1986, between Sloan Capital Companies and Quality Food
Centers, Inc., under which the Company has engaged Sloan
Capital Companies to perform management services through June
18, 1996. (Incorporated by reference to Exhibit 10.12 to the
Company's Form 10-K filed March 25, 1993.)
10.13 Quality Food Centers, Inc. 1993 Executive Stock Option Plan.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 33-69514, filed
September 28, 1993.)
10.14 Shopping Center Lease, dated June 17, 1987 between Quality
Food Centers, Inc. and University Village, Inc. (Incorporated
by reference to Exhibit 10.15 to the Company's Form 10-K filed
March 24, 1994.)
10.14a First Amendment to Shopping Center Lease, dated August 15,
1993, between Quality Food Centers, Inc. and University
Village, Inc. (Incorporated by reference to Exhibit 10.15a to
the Company's Form 10-K filed March 24, 1994.)
10.14b Declaration of Restrictions and Easements, dated August 15,
1993, between Quality Food Centers, Inc. and University
Village, Inc. (Incorporated by reference to Exhibit 10.15b to
the Company's Form 10-K filed March 24, 1994.)
iii
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
10.14c Development Agreement, dated August 25, 1993, among Quality
Food Centers, Inc., U Village Land Limited Partnership and U
Village Imp. Limited Partnership. (Incorporated by reference
to Exhibit 10.15c to the Company's Form 10-K filed March 24,
1994.)
10.14d Franchise Agreement, dated August 25, 1993, between Quality
Food Centers, Inc., and University Village, Inc.
(Incorporated by reference to Exhibit 10.15d to the Company's
Form 10-K filed March 24, 1994.)
10.14e Tenant Estoppel Certificate, dated as of August 9, 1993, from
Quality Food Centers, Inc. to Principal Mutual Life Insurance
Company, U Village Land Limited Partnership and U Village Imp.
Limited Partnership. (Incorporated by reference to Exhibit
10.15e to the Company's Form 10-K filed March 24, 1994.)
10.14f Subordination, Forbearance and Attornment Agreement, dated as
of August 9, 1993, among Quality Food Centers, Inc., Principal
Mutual Life Insurance Company, U Village Land Limited
Partnership and U Village Imp. Limited Partnership.
(Incorporated by reference to Exhibit 10.15f to the Company's
Form 10-K filed March 24, 1994.)
10.15 Agreement and Plan of Merger between the Company and Olson's
Food Stores, Inc., dated as of December 23, 1994.
(Incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K filed December 30, 1994.)
10.15a First Amendment to Agreement and Plan of Merger between the
Company and Olson's Food Stores, Inc., dated as of February
17, 1995.
10.15b Second Amendment to Agreement and Plan of Merger between the
Company and Olson's Food Stores, Inc., dated as of March 1,
1995.
iv
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.15c Indemnification and Escrow Agreement between the Company and
Maurice F. Olson, dated as of March 1, 1995.
10.15d Right of First Refusal among the Company and Signature Bakery
LLC, North Snohomish Enterprises, Inc., and Olson's Management
Group LLC, dated as of March 1, 1995.
10.15e Investors Rights Agreement between the Company and Maurice F.
Olson, Charles M. Olson and Maurice S. Olson, Jr., dated as of
March 1, 1995.
10.15f Noncompetition Agreement between the Company and Maurice F.
Olson dated as of March 1, 1995.
10.16 Form of Letter Agreement from Bank of America National Trust
and Savings Association, Bank of America Illinois, Seattle
First National Bank and BA Securities, Inc. to the Company,
dated January 19, 1995. (Incorporated by reference to Exhibit
(b)(1) to the Company's Schedule 13E-4 filed on January 19,
1995.)
10.17 Recapitalization and Stock Purchase and Sale Agreement among
the Company, Zell/Chilmark Fund L.P., and Stuart M. Sloan
dated as of January 14, 1995. (Incorporated by reference to
Exhibit (c)(2) to the Company's Schedule 13E-4 filed on
January 19, 1995.)
10.18 Standstill Agreement between the Company and Zell/Chilmark
Fund L.P. dated as of January 14, 1995. (Incorporated by
reference to Exhibit (c)(4) to the Company's Schedule 13E-4
filed on January 19, 1995.)
10.19 Standstill Agreement between the Company and Stuart M. Sloan
dated as of January 14, 1995. (Incorporated by reference to
Exhibit (c)(5) to the Company's Schedule 13E-4 filed on
January 19, 1995.)
v
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
11 Statement re computation of per share earnings.
13 Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations,
and Financial Statements and Supplementary Data from the
Company's Annual Report to Shareholders for the year ended
December 31, 1994.
23 Independent Auditor's Consent to incorporation by reference of
its report on financial statements in Registration Statements on
Form S-8. (The consent appears on page 16 of this Annual Report
on Form 10-K.)
27 Financial Data Schedule
vi
<PAGE>
Subset of the
Index to Exhibits
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
This Subset of the Index to Exhibits includes a subset containing each
management contract, compensatory plan, or arrangement required to be filed as
an exhibit to this report.
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.1 Executive Supplemental Retirement Plan Participant Agreement,
dated July 3, 1984, between Quality Food Centers, Inc. and Ruth
F. Cook, under which Quality Food Centers, Inc. undertakes to
pay certain retirement benefits to Mrs. Cook, one of the
Company's former officers. (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-
1, No. 33-9663, filed October 22, 1986.)
10.2 Form of Quality Food Centers, Inc. Defined Contribution Plan and
Trust, with Plan amendment, as adopted by written consent of
Quality Food Centers, Inc.'s Board of Directors, under which the
Company extends certain benefits to its employees.
(Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1, No. 33-9663, filed October
22, 1986.)
10.3 Quality Food Centers, Inc. 401(k) Retirement Plan, dated
December 30, 1988. (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-K filed March 30, 1989.)
10.4 Quality Food Centers, Inc. Amended and Restated 1987 Incentive
Stock Option Plan. (Incorporated by reference to the Company's
1993 Form 10-K filed March 24, 1994.)
10.5 Form of Stock Option Agreement under Quality Food Centers, Inc.
1987 Incentive Stock Option Plan. (Incorporated by reference to
Exhibit 10.29 to the Company's Registration Statement on Form S-
1, No. 33-12474, filed March 9, 1987.)
vii
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.6 Amended and Restated 1990 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 33-69512, filed
September 28, 1993.)
10.7 Director's Nonqualified Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8, No. 33-38736, filed January 25, 1991.)
10.12 Amended and Restated Management Agreement, dated August 17,
1986, between Sloan Capital Companies and Quality Food
Centers, Inc., under which the Company has engaged Sloan
Capital Companies to perform management services through June
18, 1996. (Incorporated by reference to Exhibit 10.12 to the
Company's Form 10-K filed March 25, 1993.)
10.13 Quality Food Centers, Inc. 1993 Executive Stock Option Plan.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 33-69514, filed
September 28, 1993.)
10.15f Noncompetition Agreement between the Company and Maurice F.
Olson dated as of March 1, 1995.
viii
<PAGE>
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "First
Amendment"), dated as of February 17, 1995, between Quality Food Centers, Inc.,
a Washington corporation ("QFC"), and Olson's Food Stores, Inc., a Washington
corporation (the "Company").
RECITALS
QFC and the Company have entered into an Agreement and Plan of Merger,
dated as of December 23, 1994 (the "Agreement"; capitalized terms used in this
First Amendment and not otherwise defined herein shall have the respective
meanings assigned to those terms in the Agreement).
Certain closing conditions set forth in Sections 8.1 and 8.2 of the
Agreement have not been and cannot be fulfilled by February 18, 1995.
QFC and the Company desire to amend the Agreement as hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, the parties hereto hereby agree as follows:
1. CLOSING DATE. Section 8.4 of the Agreement is hereby amended by
deleting the date "February 18, 1995" where it appears in the first and second
sentences therein and substituting therefor the date "March 4, 1995."
2. AMENDMENT. Reference is made to Section 10.3 of the Agreement.
This First Amendment is intended to amend the Agreement, and, except as
specifically amended hereby, the Agreement shall remain in full force and effect
in accordance with its terms. Any reference to the Agreement contained in any
notice, request, certificate or other document shall be deemed to include this
First Amendment.
3. GOVERNING LAW. This First Amendment shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Washington, without regard to principles of conflict of laws.
4. COUNTERPARTS. This First Amendment may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all of
which together shall
-1-
<PAGE>
constitute one instrument. Each counterpart may consist of a number of copies,
each signed by less than all, but together signed by all, the parties hereto.
IN WITNESS WHEREOF, this First Amendment has been executed and
delivered by the parties set forth below.
QUALITY FOOD CENTERS, INC.
By:/S/ DAN KOURKOUMELIS
--------------------------------
Name: DAN KOURKEMELIS
---------------------------
Title: PRESIDENT
--------------------------
By: /S/ MARC EVANGER
--------------------------------
Name: MARC EVANGER
---------------------------
Title: VP/CFO
--------------------------
OLSON'S FOOD STORES, INC.
By: /S/ MAURICE F. OLSON
--------------------------------
Name: PRESIDENT
---------------------------
Title: MAURICE F. OLSON
--------------------------
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<PAGE>
SECOND AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Second
Amendment"), dated as of March 1, 1995, between Quality Food Centers, Inc., a
Washington corporation ("QFC"), and Olson's Food Stores, Inc., a Washington
corporation (the "Company").
RECITALS
QFC and the Company have entered into an Agreement and Plan of Merger,
dated as of December 23, 1994, and a First Amendment to Agreement and Plan of
Merger, dated as of February 17, 1995 (such Agreement and Plan of Merger, as
amended by such First Amendment to Agreement and Plan of Merger, the
"Agreement"; capitalized terms used in this Second Amendment and not otherwise
defined herein shall have the respective meanings assigned to those terms in the
Agreement).
QFC and the Company desire to amend the Agreement as hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, the parties hereto hereby agree as follows:
1. DEFINED TERMS. The following defined terms in Article 1 of the
Agreement are hereby amended and restated in their entirety to read as follows:
"Business Liabilities": The liabilities of the Company as of the
Effective Time that are associated with the Business, including
indebtedness for borrowed money in an aggregate principal amount not
to exceed $24,000,000.
"Closing Balance Sheet": As defined in Section 4.6(a).
2. SHARE CONSIDERATION.
(a) Sections 4.1(a) and (b) of the Agreement are hereby amended
and restated in their entirety to read as follows:
(1) The Shares issued and outstanding immediately prior to
the Effective Time held by Maurice F. Olson (90,000 Shares in the aggregate)
shall be converted into the right to receive (i) 592,941 QFC Common Shares in
the aggregate and (ii) $18,000,000 in cash in the aggregate (the "Share
Consideration" applicable to Maurice F. Olson).
-1-
<PAGE>
(2) The Shares issued and outstanding immediately prior to
the Effective Time held by Charles M. Olson and Maurice S. Olson (5,000 Shares
in the aggregate for each of them) shall be converted into the right to receive
80,000 QFC Common Shares in the aggregate for each of them (the "Share
Consideration" applicable to Charles M. Olson and Maurice S. Olson).
(b) Section 4.1(d) of the Agreement is hereby deleted.
3. POST-CLOSING ADJUSTMENT. Section 4.6(c) of the Agreement is
hereby amended by adding the following new sentence after the second sentence
thereof:
For the purpose of determining Current Assets, certain accounts
receivable to be mutually agreed upon by the parties in writing
shall be excluded.
4. AIRPORT/99. Notwithstanding anything in the Agreement to the
contrary, the assets and liabilities that relate to the site described in the
Company Disclosure Statement as Airport/99 (the "Airport/99 site") shall not
constitute Business Assets or Business Liabilities; prior to the Effective Time,
the Company shall dispose of the assets and liabilities that relate to the
Airport/99 site; the Company shall not be required to deliver to QFC any lease
for a future grocery store at the Airport/99 site; and all references in the
Agreement to "1995 Sites" shall exclude the Airport/99 site.
5. CERTAIN LIABILITIES. The Company hereby represents and warrants
to QFC that the Closing Balance Sheet will not reflect any long term obligations
other than indebtedness for borrowed money in an aggregate principal amount not
to exceed $24,000,000 and any capital lease obligations arising from the leases
of the Company Stores.
6. AMENDMENT. Reference is made to Section 10.3 of the Agreement.
This Second Amendment is intended to amend the Agreement, and, except as
specifically amended hereby, the Agreement shall remain in full force and effect
in accordance with its terms. Any reference to the Agreement contained in any
notice, request, certificate or other document shall be deemed to include this
Second Amendment.
7. GOVERNING LAW. This Second Amendment shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Washington, without regard to principles of conflict of laws.
-2-
<PAGE>
8. COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one instrument. Each counterpart may consist
of a number of copies, each signed by less than all, but together signed by all,
the parties hereto.
IN WITNESS WHEREOF, this Second Amendment has been executed and
delivered by the parties set forth below.
QUALITY FOOD CENTERS, INC.
By:/S/ DAN KOURKOUMELIS
--------------------------------
Name: DAN KOURKOUMELIS
---------------------------
Title: PRESIDENT
--------------------------
By: /S/ MARC EVANGER
--------------------------------
Name: MARC EVANGER
---------------------------
Title: VP/CFO
--------------------------
OLSON'S FOOD STORES, INC.
By: /S/ MAURICE F. OLSON
--------------------------------
Name: MAURICE F. OLSON
---------------------------
Title: PRESIDENT
--------------------------
-3-
<PAGE>
INDEMNIFICATION AND ESCROW AGREEMENT
This Indemnification and Escrow Agreement (this "Agreement") is made
this 1st day of March, 1995, by and among Maurice F. Olson, an individual (the
"Shareholder"), Qualify Food Centers, Inc., a Washington corporation ("QFC"),
and Seattle-First National Bank (the "Escrow Agent"), with respect to the
following facts:
RECITALS
A. QFC and Olson's Food Stores, Inc., a Washington corporation
("Olson's"), have entered into that certain Agreement and Plan of Merger, dated
as of December 23, 1994, as amended by a First Amendment to Agreement and Plan
of Merger, dated as of February 17, 1995, and a Second Amendment to Agreement
and Plan of Merger, dated as of March 1, 1995 (as so amended, the "Merger
Agreement"), pursuant to which QFC and Olson's have agreed that Olson's will
merge with and into QFC (such merger being referred to herein as the "Merger").
B. Prior to the Merger, the Shareholder owns substantially all the
outstanding capital stock of Olson's.
C. The execution and delivery of this Agreement is a condition
precedent to the obligations of QFC and Olson's to close the Merger.
NOW, THEREFORE, in consideration of the foregoing facts, the covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
DEFINITIONS
All capitalized terms used in this Agreement and not otherwise defined
herein shall have the respective meanings assigned to those terms in this
Section 1 or, if not defined in this Section 1, the Merger Agreement. Words
importing the singular number include the plural number and vice versa.
"Disclosure Statement" means the Company Disclosure Statement, as
defined in the Merger Agreement.
1
<PAGE>
"Escrow Claim Deadline" means (i) the second anniversary of the date
of Closing or (ii) with respect to the Olson Claim only, the Olson Claim
Resolution Date. Upon the opening of the escrow created pursuant to this
Agreement, QFC shall provide to the Escrow Agent a writing stating the date of
Closing.
"Indemnification Shares" means 272,941 QFC Common Shares to be
withheld from the Share Consideration and deposited with the Escrow Agent as
provided in Section 3.01.
"Loss" means liabilities, damages, penalties, expenses and costs
(including reasonable attorneys' fees and costs). "Loss" shall not include
consequential damages, lost profits or diminution in value. Losses with respect
to taxes shall be determined after taking into account all negative and positive
adjustments.
"Olson Claim" means, collectively, any and all claims asserted by the
Shareholder's brother, James M. Olson, or such brother's wife, Pamela K. Olson,
against the Shareholder relating to the purchase by the Shareholder of shares of
Olson's capital stock owned by such brother and wife or otherwise relating to
Olson's.
"Olson Claim Cash" shall have the meaning assigned to it in Section
2.07(a).
"Olson Claim Resolution Date" means the date that the Escrow Agent
receives from QFC a writing stating that the Olson Claim has been finally
resolved, which writing QFC shall immediately deliver to the Escrow Agent upon
issuance of a court order from which appeal may not be taken (due to lapse of
time or otherwise), or receipt of a settlement agreement or other written
statement from James M. Olson and Pamela K. Olson, to the effect that the Olson
Claim has been settled or otherwise finally resolved without any liability to
QFC, or upon receipt of a release from James M. Olson and Pamela K. Olson that
releases QFC from any liability in connection with the Olson Claim.
"Olson Claim Shares" shall have the meaning assigned to it in Section
2.07(a).
"Stores" means the Company Stores and the 1995 Sites, both as defined
in the Merger Agreement.
"Value" means, with respect to any given number of Indemnification
Shares, such number of shares multiplied by $21.25 per share.
2
<PAGE>
ARTICLE II
INDEMNIFICATION
2.01 INDEMNIFICATION. The Shareholder shall indemnify QFC and hold it
harmless from and against any Loss suffered or incurred by QFC arising as a
result of or in connection with the following:
(a) any breach of any representation or warranty of Olson's contained
in the Merger Agreement (other than Section 5.17 thereof), the
Disclosure Statement or any certificate delivered in connection with
the Merger Agreement or the Disclosure Statement;
(b) any breach of any covenant of Olson's contained in the Merger
Agreement;
(c) any tax liability assessed against Olson's with respect to a
determination that the Spin-Off does not qualify for tax-free
treatment under Section 355 of the Code;
(d) the ownership, operation, use or sale or other transfer by Olson's
of any asset other than the Business Assets;
(e) any liability other than a liability associated with the Business;
(f) any tax liability assessed against Olson's with respect to any
asset other than the Business Assets or the business of Olson's other
than the Business;
(g) any tax liability assessed against Olson's in connection with the
audit conducted by the State of Washington Department of Revenue,
which audit is further described in Section 5.9 of the Disclosure
Statement;
(h) any of the legal proceedings described in paragraphs (1), (2) and
(3) of Section 5.5 of the Disclosure Statement;
(i) any environmental-related liability at any of the Stores arising
as a result of any failure prior to the date of Closing to comply with
applicable federal, state and local laws and regulations relating to
pollution control and environmental contamination, including without
limitation all laws and regulations governing the generation, use,
collection, discharge or disposal of Hazardous Materials and all laws
and regulations with regard to record keeping, notification
3
<PAGE>
and reporting requirements respecting Hazardous Materials, whether or
not such liability or the potential for such liability is disclosed to
or otherwise known by QFC at any time; PROVIDED, that the liability
described in this clause (i) shall not include (1) Losses arising as a
result of the presence of asbestos in the floor of any of the Stores,
to the extent such presence has been disclosed to QFC by Olson's prior
to the date of the Merger Agreement and (2) Losses in the form of
floor and ceiling removal costs at Stores being remodeled, whether or
not the presence of asbestos in the floor and/or ceiling removed was
disclosed to QFC by Olson's, except to the extent such removal costs
include additional charges attributable to the presence of the
asbestos;
(j) the Olson Claim;
(k) any claim by Robert Slayton, d/b/a MCA Affiliates, or his assigns,
for amounts payable under the lease for the Mill Creek (#369) site
that apply to time periods prior to the Effective Time;
(l) (i) any claim by Starbucks Corporation, or its successors or
assigns, for amounts owed by Olson's prior to the Effective Time,
which claim the Shareholder acknowledges and agrees totals
$155,687, and (ii) any liability resulting from the failure to
terminate the lease between Starbucks Corporation and the landlord at
Canyon Park (#360);
(m) any claim by Fifth Avenue Associates, or its successors or
assigns, related to foregone rent in respect of the shop space
adjoining the Canyon Park (#360) site;
(n) any liability resulting from the failure to terminate, prior to
Closing, the letter agreement with John Stipek related to the
Mountlake Terrace (#365) site;
(o) that certain union grievance, filed February 16, 1995, regarding
service counter employees;
(p) that certain union grievance, filed December 8, 1994, regarding
Mark Speed; and
(q) that certain union grievance, filed December 16, 1994, regarding
POS employees.
4
<PAGE>
2.02 DOLLAR AMOUNT OF SHAREHOLDER'S INDEMNIFICATION OBLIGATIONS.
(a) The indemnification obligations of the Shareholder under Section
2.01 shall not be limited in amount or subject to a minimum aggregate Losses
threshold where such obligations arise (i) with respect to or in connection with
any matter involving fraudulent misrepresentation or concealment (within the
meaning of the common law of the State of Washington) or any breach of any
representation, warranty or covenant of Olson's contained in Section 5.4 or 5.19
of the Merger Agreement or (ii) under clause (c), (d), (e), (f), (g), (j), (k),
(l) or (m) of Section 2.01.
(b) With respect to all other matters giving rise to indemnification
obligations of the Shareholder under Section 2.01, the total aggregate
cumulative liability of the Shareholder therefor shall not exceed $5,800,000,
and the Shareholder shall not have any liability with respect thereto unless the
aggregate of all the respective Losses for which the Shareholder would, but for
this clause, be liable exceeds $250,000, in which case the Shareholder shall be
liable for all such Losses exceeding such amount; PROVIDED, that, if any one
item of such Losses exceeds $250,000, then the Shareholder shall be liable for
the full amount of such item of Loss up to and exceeding $250,000; FURTHER
PROVIDED, that any of such Losses incurred with respect to an indemnification
obligation under clause (h), (n), (o), (p) or (q) of Section 2.01 shall not be
subject to such $250,000 minimum aggregate Losses threshold, and the Shareholder
shall be liable for the full amount of such Losses.
(c) Notwithstanding anything to the contrary in paragraph (b) of this
Section 2.02, with respect to matters giving rise to an indemnification
obligation of the Shareholder under clause (i) of Section 2.01, (i) the total
aggregate cumulative liability of the Shareholder therefor during the period
that begins with the second anniversary of the date of Closing shall not exceed
the lesser of $3,000,000 or the amount remaining under the $5,800,000 limit on
liability described in paragraph (b) of this Section 2.02 (as such limit is
reduced by claims paid that are properly credited against such limit) and (ii)
the Shareholder shall not have any liability with respect thereto unless the
aggregate of all the respective Losses for which the Shareholder would, but for
this clause, be liable exceeds $250,000, in which case the Shareholder shall be
liable for all such Losses exceeding such amount; PROVIDED, that, if any one
item of such Losses exceeds $250,000, then the Shareholder shall be liable for
the full amount of such item of Loss up to and exceeding $250,000.
Notwithstanding anything in this Agreement to the contrary, the minimum
aggregate Losses threshold set forth in this paragraph (c) is separate from the
minimum aggregate Losses threshold set forth in paragraph (b) of this Section
2.02.
5
<PAGE>
(d) Notwithstanding anything in this Agreement to the contrary,
amounts paid to QFC with respect to indemnification obligations described in
paragraph (a) of this Section 2.02 shall not be set-off or credited against the
$5,800,000 limit on liability described under paragraph (b) of this Section 2.02
and shall not be subject to either of the $250,000 minimum aggregate Losses
thresholds described in paragraphs (b) and (c) of this Section 2.02.
2.03 TERMINATION OF INDEMNIFICATION.
(a) The indemnification and hold harmless obligations of the
Shareholder under Section 2.01 shall not terminate with respect to (i) matters
involving allegations of fraudulent misrepresentation or concealment (within the
meaning of the common law of the State of Washington), (ii) any breach of any
representation or warranty of Olson's contained in Section 5.4 of the Merger
Agreement, and (iii) matters arising under clause (d), (e), (g), (h), (j), (k),
(l), (m), (n), (o), (p) or (q) of Section 2.01.
(b) Except as provided in Section 2.03(a), the indemnification
and hold harmless obligations of the Shareholder under Section 2.01 that (i)
result from a breach of any representation, warranty or covenant of Olson's
contained in Section 5.9, 5.19 or 7.6 of the Merger Agreement or (ii) arise
under clause (c) or (f) of Section 2.01 shall terminate on the expiration of the
statutory period of limitations applicable with respect to the State of
Washington Department of Revenue's or Internal Revenue Service's assessment of
the respective tax liability (after giving effect to any waiver, mitigation or
extension of any such statutory period of limitations).
(c) Except as provided in Section 2.03(a), the indemnification
and hold harmless obligations of the Shareholder under clause (i) of Section
2.01 shall terminate at 12:01 a.m. on the fifth anniversary of the date of
Closing; PROVIDED, that pending or threatened claims for Losses of which QFC
notifies the Shareholder prior to such time, but which have not been finally
determined or resolved by such time, shall continue until finally determined or
resolved.
(d) Except as provided in Sections 2.03(a), (b) and (c), the
indemnification and hold harmless obligations of the Shareholder under Section
2.01 shall terminate at 12:01 a.m. on the second anniversary of the date of
Closing; PROVIDED, that pending or threatened claims for Losses of which QFC
notifies the Shareholder prior to such time, but which have not been finally
determined or resolved by such time, shall continue until finally determined or
resolved.
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2.04 PROCEDURES. The Shareholder's indemnification obligations under
Section 2.01 shall be satisfied first from the Indemnification Shares in
accordance with Article III, except to the extent the Shareholder pays cash in
lieu of Indemnification Shares or deposits cash into the Account (as hereinafter
defined) as provided in Section 2.07 and Section 3.03. If, for any reason, and
to the extent that the Indemnification Shares and cash in the Account are not
available to satisfy any such indemnification obligation, then, subject to
Sections 2.02 and 2.03, and upon delivery by QFC to the Shareholder of written
notice of the Loss giving rise to such indemnification obligation, such
indemnification obligation shall be satisfied by direct payments of cash from
the Shareholder. The parties hereto agree that payment of a Loss pursuant to
Article III shall not be a waiver of any right, claim or amount to which QFC may
be entitled under Section 2.01 or otherwise, including any claim relating to a
Loss insofar as the Indemnification Shares and cash distributed to QFC hereunder
are insufficient to satisfy the entire amount for which QFC is entitled to
indemnification hereunder in respect of such Loss; PROVIDED, that any
distribution of Indemnification Shares or cash to QFC under Article III in
respect of a Loss to which QFC is entitled to be indemnified under Section 2.01
shall be set-off or credited against such Loss.
2.05 REPRESENTATIVE'S RIGHT TO DEFEND WITH RESPECT TO THIRD PARTY
CLAIMS. Notwithstanding any provision herein to the contrary, within 20
calendar days following receipt by QFC of notice of any claim by a third party
or of the commencement of any action or proceeding by any third party which may
give rise to an indemnification obligation of the Shareholder under Section
2.01, QFC shall notify the Shareholder in writing of such claim, action or
proceeding; PROVIDED, that failure to give such notification shall not affect
the indemnification provided under Section 2.01, except to the extent the
Shareholder shall have been actually prejudiced as a result of such failure. If
any such claim is asserted or any such action or proceeding is brought against
QFC, and QFC notifies the Shareholder thereof, the Shareholder shall be entitled
to participate in and, to the extent he so chooses, assume the defense of such
claim, action or proceeding with counsel reasonably satisfactory to QFC and,
after notice from the Shareholder that he so chooses, the Shareholder shall not
be liable for any legal or other expenses subsequently incurred by QFC in
connection with the defense of such claim, action or proceeding; PROVIDED, that,
if the Shareholder fails to take reasonable steps necessary to diligently defend
such claim, action or proceeding within 20 calendar days after receiving written
notice from QFC that it believes the Shareholder has failed to take such steps,
then QFC may assume its own defense, and the Shareholder shall be liable for any
expenses therefor.
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2.06 THIRD PARTY RECOVERIES. To the extent that a third party may be
responsible for a Loss under any contractual obligation or otherwise, QFC either
(a) may seek recovery of the Loss from the third party, in which case the
Shareholder shall be responsible only to the extent that the Loss is not
recoverable from the third party (other than claims for Losses incurred in
obtaining such recovery), or (b) seek indemnification from the Shareholder for
the Loss under this Agreement, in which case QFC shall assign to the Shareholder
all rights relating to the Loss that QFC may have against the third party, shall
not release the third party from its obligations and shall cooperate with the
Shareholder and take all other action reasonably requested by the Shareholder to
enable him to seek recovery of the Loss from the third party.
2.07 SHAREHOLDER'S NET WORTH; ADDITIONAL CONTRIBUTIONS TO ESCROW.
(a) From the date of this Agreement until the Olson Claim Resolution
Date, the Shareholder agrees to maintain his net worth at not less than
$15,000,000 and to obtain and promptly deliver to QFC certification of such net
worth from Ernst & Young LLP on a semiannual basis, with the first such
certification to be obtained on April 15, 1995. If, at any time during the
two-year period ending on the second anniversary of the date of this Agreement
and prior to the Olson Claim resolution date, the Shareholder's net worth is
less than $15,000,000, then the Shareholder shall immediately notify QFC in
writing of his net worth and shall immediately contribute to the Account cash or
QFC Common Shares (valued at $21.25 per share) with a value equal to $5,800,000
less the amount remaining in the Account. Such contribution shall not exceed
$3,600,000. For example, if the Shareholder's net worth is less than
$15,000,000, and the amount remaining in the Account is $4,000,000, then the
Shareholder shall immediately contribute to the Account cash or QFC Common
Shares (valued at $21.25 per share) with a value equal to $1,800,000. If the
amount remaining in the Account is $1,000,000, then the Shareholder shall
immediately contribute to the Account cash or QFC Common Shares with a value
equal to $3,600,000. If the Olson Claim Resolution Date occurs later than the
second anniversary of the date of this Agreement, then, from such second
anniversary until the Olson Claim Resolution Date, the Shareholder shall from
time to time contribute to the Account such cash or QFC Common Shares (valued at
$21.25 per share) necessary to maintain in the Account at all times cash and/or
QFC Common Shares (valued at $21.25 per share) in an aggregate amount of not
less than $3,600,000. Subject to paragraph (b) below, cash deposited into the
Account pursuant to this Section 2.07 (such cash being referred to herein as the
"Olson Claim Cash") and QFC Common Shares deposited into the Account pursuant to
this Section 2.07 (such shares being referred to herein collectively as the
"Olson Claim Shares") shall be distributed, designated or
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held by the Escrow Agent with respect to Final Claims and Pending Claims in the
same manner as, and shall be fully subject to the terms of this Agreement to the
same extent as, the Indemnification Shares, except that the Escrow Agent shall
apply Olson Claim Cash, to the extent thereof, to Final Claims and Pending
Claims prior to applying Olson Claim Shares to such claims. Olson Claim Cash
may be invested in an interest-bearing account as provided in Section 3.03(d).
Notwithstanding any provision in this Agreement to the contrary, the maximum
aggregate amount of Olson Claim Cash and Olson Claim Shares that the Shareholder
must contribute to the Account pursuant to this Section 2.07 shall not exceed
$3,600,000.
(b) Notwithstanding any provision in this Agreement to the contrary,
Olson Claim Cash and Olson Claim Shares, if any, are being placed in escrow
hereunder for purposes of providing cash and/or QFC Common Shares from which to
satisfy only Losses for which the Shareholder is obligated to indemnify QFC
under clause (j) of Section 2.01, and the Olson Claim Cash and the Olson Claim
Shares shall be held, designated and/or distributed to QFC hereunder only with
respect to such Losses. The Indemnification Shares other than the Olson Claim
Shares shall also be applied to satisfy such Losses pursuant to this Agreement,
but only if and to the extent the Olson Claim Cash and Olson Claim Shares are
insufficient to satisfy such Losses.
ARTICLE III
ESCROW ADMINISTRATION AND INDEMNIFICATION PROCEDURES
3.01 DEPOSIT OF INDEMNIFICATION SHARES; DISTRIBUTION OF DIVIDENDS;
SECURITY INTEREST.
(a) Simultaneously with entering into this Agreement, QFC shall
withhold the Indemnification Shares from the Share Consideration otherwise to be
delivered to the Shareholder pursuant to the Merger Agreement and shall deliver
the Indemnification Shares to the Escrow Agent. Upon receipt of the
Indemnification Shares, the Escrow Agent shall acknowledge receipt thereof in a
writing delivered to QFC and the Shareholder.
(b) The Escrow Agent shall establish an escrow account (the
"Account") for the Shareholder and shall place the Indemnification Shares into
the Account. The Indemnification Shares shall be registered in the name of the
Shareholder, endorsed in blank or accompanied by stock powers executed in blank,
in proper form for transfer. The Shareholder shall not assign or otherwise
transfer his interest in the Account or pledge any of the Indemnification Shares
in the Account.
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(c) All QFC Common Shares issued with respect to the
Indemnification Shares, other than the Olson Claim Shares, in connection with a
stock split or stock dividend shall be delivered by the Shareholder to the
Escrow Agent and held by the Escrow Agent in the Account as additional
Indemnification Shares fully subject to the terms of this Agreement. All QFC
Common Shares issued with respect to Olson Claim Shares shall be delivered by
the Shareholder to the Escrow Agent and held by the Escrow Agent in the Account
as additional Olson Claim Shares fully subject to the terms of this Agreement.
(d) The Escrow Agent shall hold the Indemnification Shares until
authorized under this Agreement to deliver the same.
(e) No later than 5 business days after any distribution
hereunder of Indemnification Shares from the Account, the Escrow Agent shall
provide written notice of such distribution to the Shareholder.
(f) QFC and the Shareholder acknowledge and agree that, to the
extent and for so long as Indemnification Shares are held by the Escrow Agent
hereunder, QFC shall have, as of and from the date such Indemnification Shares
are received by the Escrow Agent, a perfected, first priority security interest
in such Indemnification Shares to secure the payment of amounts, if any, payable
by the Shareholder pursuant to Section 2.01 of this Agreement. In connection
therewith, the Shareholder expressly agrees (i) that the Escrow Agent is acting
solely as QFC's agent to the extent necessary to perfect QFC's first-priority
security interest in the Indemnification Shares and (ii) to execute and deliver
such instruments as QFC may from time to time reasonably request for the purpose
of evidencing and perfecting such security interest.
(g) QFC agrees to promptly issue replacement certificates for
the Indemnification Shares at the request of the Escrow Agent in order to effect
any distribution under this Agreement. The Shareholder agrees to endorse such
replacement certificates in blank or to execute in blank the accompanying stock
powers of such replacement certificates as the case may be.
3.02 CLAIMS AND DISTRIBUTIONS.
(a) Prior to the Escrow Claim Deadline, QFC may, from time to
time, deliver to the Escrow Agent a certificate or certificates in the form of
Annex 1 for Final Claims (as defined below; each a "Final Claim Certificate") or
Annex 2 for Pending Claims (as defined below; each a "Pending Claim
Certificate") (a Final Claim Certificate or a Pending Claim Certificate being
sometimes referred to herein generically as a "Certificate"):
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1. stating that QFC has (i) incurred a Loss which QFC is
legally bound to pay or has paid (such Loss being referred to herein
as a "Final Claim"), or (ii) identified a specific Loss that QFC will
incur, the actual amount of which is not known at that time (such Loss
being referred to herein as a "Pending Claim"), against which Final
Claim or Pending Claim QFC is entitled to be indemnified pursuant to
Section 2.01;
2. in the case of a Final Claim, stating the aggregate amount
of such Loss, and in the case of a Pending Claim, stating a good faith
and reasonable estimate of the aggregate amount of such Loss;
3. specifying in reasonable detail the nature of each item
included in such Final Claim or Pending Claim (each an
"Indemnification Item"), the amount (or estimated amount) thereof and,
in the case of a Final Claim, the date on which such Indemnification
Item was paid or incurred;
4. specifying whether and to what extent the Indemnification
Items are to be satisfied from the Olson Claim Cash or the Olson Claim
Shares;
5. with attachments reasonably demonstrating that QFC has
incurred the Final Claim.
Upon receipt of any such Certificate, the Escrow Agent shall, within 5 business
days of receipt thereof, deliver a copy of such Certificate to the Shareholder.
After the Escrow Claim Deadline, QFC (i) may only file a Final Claim Certificate
with respect to a Pending Claim for which a Pending Claim Certificate has been
filed on or prior to the Escrow Claim Deadline and subsequently becomes a Final
Claim and (ii) may not file any Pending Claim Certificates.
(b) If the Shareholder objects to any Indemnification Item
specified in a Certificate delivered to the Shareholder, then the Shareholder
shall, within 30 calendar days following the receipt thereof, deliver to the
Escrow Agent a certificate in the form of Annex 3 (a "Reply Certificate")
specifying (i) each Indemnification Item to which the Shareholder objects and
(ii) in reasonable detail, the nature and basis for each such objection. Within
5 business days of receipt by the Escrow Agent of a Reply Certificate, the
Escrow Agent shall deliver a copy of such Reply Certificate to QFC. For a
period of 30 calendar days following QFC's receipt of a Reply Certificate, QFC
and the Shareholder shall negotiate in good faith to reach a written resolution
of any objections set forth in the Reply Certificate. If a resolution is not
made within such 30-day period, then QFC and the Shareholder shall submit the
matter to
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arbitration in accordance with Article V. Section 3.02(d) sets forth additional
requirements of the Escrow Agent upon receipt of a Reply Certificate.
(c) If the Escrow Agent does not receive from the Shareholder a
Reply Certificate delivered in accordance with Section 3.02(b), or receives a
properly delivered Reply Certificate that does not object to all Indemnification
Items in the Certificate, then, (1) in the case of a Final Claim Certificate,
the Shareholder shall be deemed to have acknowledged QFC's right to receive from
the Account an amount of Indemnification Shares with a Value equal to the
undisputed Indemnification Items, and the Escrow Agent shall, in accordance with
this Section, Section 2.07(b) and Section 3.02(e), transfer to QFC such amount
of Indemnification Shares from the Account and (2) in the case of a Pending
Claim Certificate, the Shareholder shall be deemed to have acknowledged QFC's
right to have the Escrow Agent designate an amount of Indemnification Shares
with a Value equal to the undisputed Indemnification Items, which amount of
Indemnification Shares shall, in accordance with this Section, Section 2.07(b)
and Section 3.02(e), be held in the Account by the Escrow Agent and not
distributed until such Pending Claim is finally determined.
(d) In the case of a Final Claim Certificate, if the Escrow
Agent receives a properly delivered Reply Certificate from the Shareholder
objecting to any Indemnification Items specified in such Certificate, then an
amount of Indemnification Shares with a Value equal to the disputed
Indemnification Items shall be held in the Account by the Escrow Agent, in
accordance with this Section, Section 2.07(b) and Section 3.02(e), and shall not
be transferred to QFC or released except pursuant to either (i) written
instructions signed by QFC and the Shareholder, or (ii) a written order of an
arbitrator in connection with an arbitration proceeding conducted pursuant to
Article V, with which the Escrow Agent shall promptly comply. In the case of a
Pending Claim Certificate, if the Escrow Agent receives a properly delivered
Reply Certificate from the Shareholder objecting to any Indemnification Items
specified in such Certificate, then an amount of Indemnification Shares with a
Value equal to the disputed Indemnification Items shall be held in the Account
by the Escrow Agent, in accordance with this Section, Section 2.07(b) and
Section 3.02(e), and not designated or released except in accordance with either
(i) written instructions signed by QFC and the Shareholder, or (ii) a written
order of an arbitrator in connection with an arbitration proceeding conducted
pursuant to Article V, with which the Escrow Agent shall promptly comply.
Notwithstanding any provision herein to the contrary, Indemnification Shares
held by the Escrow Agent with respect to either disputed Final Claims or
disputed Pending Claims shall be available at any time for distribution with
respect to any undisputed Final Claim made in accordance
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with this Section 3.02. If at any time the Value of the Indemnification Shares
remaining in the Account is insufficient to satisfy either a disputed Final
Claim or disputed Pending Claim, the Escrow Agent shall hold such remaining
Indemnification Shares as required by this Agreement, but shall be released from
its responsibility for holding a sufficient amount of Indemnification Shares
necessary to satisfy such disputed Final Claim or disputed Pending Claim.
(e) In the case of a Final Claim, all distributions hereunder
that (1) are not the subject of a dispute, shall be made no later than 10
business days following the expiration of the 30-day period for filing a Reply
Certificate in response to the respective Final Claim Certificate and (2) are
subject to a dispute, shall be made no later than 10 business days after
resolution of such dispute. In the case of any distribution of Indemnification
Shares with respect to a Final Claim, any designation of Indemnification Shares
to be held with respect to a Pending Claim or the holding of Indemnification
Shares with respect to a disputed Indemnification Item, the number of
Indemnification Shares so distributed, designated or held shall be rounded to
the nearest whole share.
(f) When a Pending Claim becomes a Final Claim, (i) QFC shall
file a Final Claim Certificate with respect thereto in accordance with the
delivery procedures set forth in Section 3.02(a) and (ii) the Escrow Agent shall
(A) terminate the designation of the Indemnification Shares made pursuant to the
previously filed Pending Claim Certificate, (B) distribute or hold
Indemnification Shares in accordance with the distribution and dispute
procedures with respect to Final Claims set forth in this Section 3.02, and
(C) if such Final Claim Certificate is filed after the Escrow Claim Deadline,
distribute to the Shareholder any previously designated Indemnification Shares
not distributed to QFC or held by the Escrow Agent pursuant to the preceding
clause (B), except to the extent such Indemnification Shares are the subject of
another outstanding Pending Claim Certificate(s) or Final Claim Certificate(s).
If QFC reasonably believes that a Pending Claim will not become a Final Claim,
then QFC shall give notice to the Escrow Agent to terminate its designation of
Indemnification Shares with respect to such Pending Claim. If a Pending Claim
is so terminated after the Escrow Claim Deadline, the Indemnification Shares
designated therefor shall be distributed to the Shareholder within 10 business
days of such termination by QFC, except to the extent such Indemnification
Shares are the subject of another outstanding Pending Claim Certificate(s) or
Final Claim Certificate(s). If the Shareholder reasonably believes that a
Pending Claim will not become a Final Claim, then the Shareholder shall have the
right to commence an arbitration proceeding pursuant to Article V to seek
termination of the Pending Claim.
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3.03 CASH IN LIEU OF INDEMNIFICATION SHARES.
(a) Notwithstanding anything to the contrary in this Agreement,
with respect to any undisputed Final Claim, the Shareholder may elect to pay
directly to QFC, in lieu of the transfer to QFC of Indemnification Shares
hereunder, an amount of cash equal to the amount of the undisputed
Indemnification Items of such Final Claim. To make such election, the
Shareholder must provide written notice of such election to the Escrow Agent and
QFC by no later than the expiration of the 30-day period for filing a Reply
Certificate in response to the respective Final Claim Certificate. If the
Shareholder makes the election, the payment of cash must be made to QFC no later
than 5 calendar days following the expiration of such 30-day period. If the
Shareholder fails to deliver the cash within such 5-day period, then QFC shall
notify the Escrow Agent of such failure in writing, and the Escrow Agent shall
disburse to QFC, within 5 business days of the Escrow Agent's receipt of such
notice, the Indemnification Shares which, but for this Section 3.03(a), would
have been delivered to QFC in respect of the undisputed Indemnification Items of
the Final Claim. The Shareholder shall also have the right to pay cash in lieu
of Indemnification Shares to satisfy any amount payable by the Shareholder with
respect to disputed Final Claims that are resolved by agreement of QFC and the
Shareholder or pursuant to an arbitration proceeding (as contemplated by Section
3.02(d)); PROVIDED, that such right of the Shareholder shall not effect the duty
of the Escrow Agent under Section 3.02(d) to hold Indemnification Shares in the
Account while such disputed Final Claim is being resolved.
(b) Without limiting the foregoing, the Shareholder may, at any
time, substitute cash for Indemnification Shares in the Account by delivering to
the Escrow Agent cash in an amount equal to the Value of the number of
Indemnification Shares the Shareholder wishes to receive from the Account and a
written request ("Distribution Request") for a distribution by the Escrow Agent
to the Shareholder of such number of Indemnification Shares, a copy of which
request shall be delivered to QFC simultaneously. Within 5 business days
following receipt of the cash and the Distribution Request, the Escrow Agent
shall distribute to the Shareholder the number of Indemnification Shares set
forth in the Distribution Request and shall add the delivered cash to the
Account. Any substitution of cash for Indemnification Shares pursuant to this
Section 3.03(b) shall be deemed to have been made first with respect to and to
the extent of Indemnification Shares, other than the Olson Claim Shares, and
then with respect to Olson Claim Shares.
(c) Cash placed in the Account pursuant to Section 3.03(b) shall be
distributed, designated or held by the Escrow Agent with respect to Final Claims
and Pending Claims in the same manner as, and shall be fully subject to the
terms of this
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Agreement to the same extent as, the Indemnification Shares substituted, except
that the Escrow Agent shall apply cash in the Account, to the extent thereof, to
Final Claims and Pending Claims prior to applying any remaining Indemnification
Shares to such claims. The foregoing sentence shall not be construed to permit
cash to be applied to Final Claims or Pending Claims to the extent there are
Olson Claim Shares in the Account that, pursuant to Section 2.07(b), are
required to be applied to such claims.
(d) If the Shareholder wishes cash in the Account to be placed in an
interest-bearing account, the Shareholder shall provide to the Escrow Agent
written instructions directing such placement. The Escrow Agent shall have no
duty or right to invest cash on deposit in the Account other than as provided in
the foregoing sentence. Interest earned on cash so placed in an interest-
bearing account shall be paid to the Shareholder. If the Shareholder directs
the Escrow Agent to place cash in an interest-bearing account, the Shareholder
shall timely provide the Escrow Agent with an executed W-8 or W-9 Internal
Revenue Service Form.
3.04 DISTRIBUTIONS AFTER THE ESCROW CLAIM DEADLINE.
(a) On the next business day following the second anniversary
of the date of Closing, the Escrow Agent shall deliver to the Shareholder the
Indemnification Shares in the Account, except for Indemnification Shares that
are the subject of an outstanding Certificate(s), and except for the Olson
Claim Cash and the Olson Claim Shares, if any, in the Account. Cash and shares
remaining in the Account following such distribution shall be distributed
pursuant to the procedures set forth in Section 3.02. On the next business day
following the Olson Claim Resolution Date, the Escrow Agent shall distribute to
the Shareholder all the Olson Claim Cash and the Olson Claim Shares, if any, in
the Account, except for the Olson Claim Cash and Olson Claim Shares, if any,
that are the subject of an outstanding Certificate(s). The Olson Claim Cash and
the Olson Claim Shares, if any, remaining in the Account following such
distribution shall be distributed pursuant to the procedures set forth in
section 3.02.
(b) Upon any distribution to the Shareholder of Indemnification
Shares pursuant to this Article III, QFC's security interest in such
Indemnification Shares so distributed shall be, and shall be deemed to be,
released and discharged as of and from the moment of such release from escrow.
QFC shall sign such additional documents as may be reasonably necessary to
extinguish such security interests.
3.05 VOTING OF INDEMNIFICATION SHARES. The Indemnification Shares in
the Account shall be voted by the
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Shareholder with respect to all matters as to which holders of QFC Common Shares
are entitled to vote.
ARTICLE IV
CONCERNING THE ESCROW AGENT
4.01 DUTIES. This Agreement expressly sets forth all the duties of
the Escrow Agent with respect to any and all matters pertinent hereto, and the
duties of the Escrow Agent shall be determined solely by reference to this
Agreement and not by reference to the Merger Agreement or any other agreement.
No implied duties or obligations shall be read into this Agreement against the
Escrow Agent. The Escrow Agent shall not be bound by the provisions of any
agreement among the other parties hereto, except this Agreement. Subject to
Sections 3.01(b) and (f), the Escrow Agent's duties hereunder shall be
ministerial in nature.
4.02 LIABILITY; INDEMNIFICATION. The Escrow Agent shall not be liable
to the other parties hereto, except for the Escrow Agent's own gross negligence
or wilful misconduct, and, except with respect to claims based upon such gross
negligence or wilful misconduct that are successfully asserted against the
Escrow Agent, the other parties hereto shall jointly and severally indemnify and
hold harmless the Escrow Agent from and against any and all losses, liabilities,
claims, actions, taxes, damages and expenses, including reasonable attorneys'
fees and expenses, incurred by the Escrow Agent which arise out of or in
connection with this Agreement, including the legal costs and expenses of
defending itself against any claim or liability in connection with its
performance hereunder.
4.03 RELIANCE. The Escrow Agent shall be entitled to rely upon any
order, judgment, certification, demand, notice, instrument or other writing
delivered to it hereunder without being required to determine the authenticity
or the correctness of any fact stated therein or the propriety, validity or
service thereof. The Escrow Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that any person purporting
to give notice or receipt or advice, or make any statement or execute any
document, in connection with the provisions hereof has been duly authorized to
do so.
4.04 ADVICE OF COUNSEL. The Escrow Agent may act pursuant to the
advice of counsel with respect to any matter relating to this Agreement and
shall not be liable for any action taken or omitted in accordance with such
advice.
4.05 POSSESSION ONLY. The Escrow Agent does not have any interest in
the Indemnification Shares, but is serving as escrow agent only and has only
possession thereof. This Section
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and Section 4.02 shall survive notwithstanding any termination of this Agreement
or the resignation of the Escrow Agent.
4.06 NO REPRESENTATION AS TO DOCUMENTS. The Escrow Agent makes no
representation as to the validity, value, genuineness or collectability of any
document, instrument or security held by or delivered to it.
4.07 NO ADVICE. The Escrow Agent shall not be called upon to advise
any party as to the wisdom in selling or retaining, or taking or refraining from
taking any action with respect to, the Indemnification Shares.
4.08 RIGHT TO RESIGN. The Escrow Agent may at any time resign as such
by delivering written notice to QFC and the Shareholder. The resignation of the
Escrow Agent will take effect on the earlier to occur of (i) the appointment of
a successor escrow agent (including a court of competent jurisdiction) by joint
written instructions from QFC and the Shareholder or (ii) the day which is 30
calendar days after the date of delivery of its written notice of resignation to
QFC and the Shareholder, whereupon the Escrow Agent shall be discharged from all
further obligations arising in connection with this Escrow Agreement; PROVIDED,
that if the Escrow Agent's resignation takes effect due to the passing of the
30-day period described in the foregoing clause (ii), then the Escrow Agent's
sole responsibility after that time shall be to safekeep the Indemnification
Shares until receipt of designation of a successor escrow agent, joint written
instructions by QFC and the Shareholder directing disposition or a final and
nonappealable order of a court of competent jurisdiction directing disposition.
4.09 NO RESPONSIBILITY FOR THIRD PARTY WRITINGS. The Escrow Agent
shall have no responsibility for the contents of any writing of any third party
contemplated herein as a means to resolve disputes, and may rely without any
liability upon the contents thereof.
4.10 RIGHT TO WAIT FOR ORDER OR INSTRUCTIONS. In the event of any
disagreement between the other parties hereto resulting in adverse claims or
demands being made in connection with the Indemnification Shares, or in the
event that the Escrow Agent in good faith is in doubt as to what action it
should take hereunder, the Escrow Agent shall be entitled to retain the
Indemnification Shares until the Escrow Agent shall have received (i) a final
nonappealable order of a court of competent jurisdiction, (ii) a final
nonappealable order of an arbitrator in connection with an arbitration
proceeding held pursuant to Article V or (iii) written instructions executed by
QFC and the Shareholder, directing delivery of the Indemnification Shares, in
which case the Escrow Agent shall promptly disburse the Indemnification Shares
in accordance with such order or
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instructions. Any court order referred to in (i) above or arbitrator order
referred to in (ii) above shall be accompanied by a legal opinion of counsel for
the presenting party, satisfactory to the Escrow Agent, to the effect that said
order is final and nonappealable. The Escrow Agent shall act on such court
order or arbitrator order and legal opinions without further question.
4.11 ESCROW AGENT'S FEE. The Escrow Agent shall be paid for services
hereunder in accordance with the fee schedule set forth in SCHEDULE A. Payments
of all such fees shall be the sole responsibility of QFC. The Escrow Agent may
amend the attached fee schedule from time to time on 60 days prior written
notice to QFC and the Shareholder.
4.12 PROMOTIONAL MATERIAL. No party shall issue any material in any
language (including without limitation prospectuses, notices, reports and
promotional materials) which mentions the Escrow Agent's name or the rights,
powers or duties of the Escrow Agent hereunder, unless the Escrow Agent shall
first give its specific written consent thereto.
4.13 NO LIABILITY FOR INSTRUCTIONS. The Escrow Agent shall not incur
any liability for following the instructions herein contained or any written
instructions given by QFC and the Shareholder.
4.14 NO REQUIREMENT AS TO LEGAL PROCEEDINGS. The Escrow Agent shall
not be required to institute legal proceedings of any kind and shall not be
required to defend any legal proceedings which may be instituted against it in
respect of the subject matter of this Agreement. If the Escrow Agent does elect
to institute or defend a legal proceeding, then it will do so only to the extent
that it is indemnified to its satisfaction against the cost and expense thereof.
4.15 SUCCESSOR ESCROW AGENTS. As used in this Agreement, the term
"Escrow Agent" shall include any successor escrow agent. Without limiting the
foregoing, any corporation into or to which the Escrow Agent may merge, sell or
transfer its escrow business and assets shall automatically become the successor
escrow agent under this Agreement and shall automatically be vested with all
powers as was its predecessor without the execution or filing of any instrument
or any further act, deed or conveyance on the part of any party hereto.
ARTICLE V
ARBITRATION
Matters which, pursuant to the terms of this Agreement, are to be
resolved by arbitration proceeding shall be submitted
18
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for binding arbitration in Seattle, Washington, in an arbitration proceeding
that, except as may otherwise be provided herein, shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association before a single arbitrator chosen in accordance with such rules.
All evidentiary and discovery matters shall be conducted in accordance with and
governed by the applicable laws of the State of Washington as they relate to
arbitration proceedings, including without limitation those sections of the
Washington Code of Civil Procedure relating to rights of discovery, procedure
and enforcement. No later than 10 calendar days after the arbitrator is
appointed, the arbitrator shall schedule the arbitration for a hearing to
commence on a mutually convenient date. All discovery shall be completed no
later than the commencement of the arbitration hearing or 90 calendar days after
the date that a proper demand for arbitration is served, whichever occurs first,
unless, upon a showing of good cause, the arbitrator extends such period. The
hearing shall commence no later than 90 calendar days after the arbitrator is
appointed and shall continue until completed. The arbitrator shall issue his or
her award in writing no later than 20 calendar days after the conclusion of the
hearing. The parties to this Agreement agree that, in rendering an award, the
arbitrator shall have no jurisdiction to consider evidence with respect to or
render any award of judgment for punitive, exemplary or consequential damages or
any other amount awarded for purposes of imposing a penalty. The arbitrator
shall not have the power to amend this Agreement in any respect. The
arbitrator's decision shall be binding and conclusive upon the parties.
ARTICLE VI
MISCELLANEOUS
6.01 NOTICES. All notices, requests, demands and other
communications, required or otherwise, with respect to this Agreement shall be
in writing and shall be deemed to have been duly given to any party when
delivered personally (by courier service or otherwise), when delivered by
facsimile transmission and confirmed by return facsimile transmission, or seven
calendar days after being mailed by first-class mail, postage prepaid and return
receipt requested, in each case to the applicable address set forth below:
if to the Shareholder:
Maurice F. Olson
21309 44th Avenue West
Mountlake Terrace, WA 98043
19
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with a copy to:
Stephen A. McKeon
Perkins Coie
1201 Third Avenue
Seattle, WA 98101-3099
if to QFC:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, WA 98004
Attention: Dan Kourkoumelis
with a copy to:
Edmund O. Belsheim, Jr.
Bogle & Gates
Two Union Square
601 Union Street
Seattle, WA 98101-2346
if to the Escrow Agent:
c/o BankAmerica State Trust Company
1100 Second Avenue, Suite 500
Seattle, WA 98101
Attention: Irene Craigen
or to such other address as such party shall have designated by notice so given
to each other party.
6.02 AMENDMENTS, WAIVERS, ETC. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified except by an instrument in
writing signed by all the parties hereto.
6.03 NO ASSIGNMENT. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto and their respective
heirs, successors and assigns; PROVIDED, that, except as otherwise expressly set
forth in this Agreement, including without limitation Section 4.15, neither the
rights nor the obligations of any party may be assigned or delegated without the
prior written consent of the other parties.
6.04 ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding among the parties relating to the subject matter hereof and
supersedes all prior agreements and understandings relating to such subject
matter. There are no representations, warranties or covenants by the parties
hereto relating to such matter, other than those expressly set forth in this
Agreement and any writing expressly required hereby.
20
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6.05 WAIVER OF COMPLIANCE. No failure or delay of any party to
exercise any right of such party hereunder shall operate as a waiver of such
right, and no single or partial exercise of any such right shall preclude any
other or further exercise thereof or the exercise of any other right hereunder.
6.06 GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of Washington,
without regard to the principles of conflict of laws.
6.07 NAME, CAPTIONS, ETC. The name assigned to this Agreement and the
article and section captions used herein are for convenience of reference only
and shall not affect the interpretation or construction hereof. Unless
otherwise specified, references herein to articles and sections refer to
articles and sections of this Agreement.
6.08 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one instrument. Each counterpart may consist of a
number of copies, each signed by less than all, but together signed by all, the
parties hereto.
6.09 EXPENSES. Unless otherwise provided in this Agreement, all costs
incurred by a party in connection with the transactions contemplated by this
Agreement shall be borne by such party.
6.10 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
be for the benefit of and shall not be enforceable by any person or entity who
or which is not a party hereto.
6.11 DISBURSEMENT BY WIRE TRANSFER. Whenever QFC or the Shareholder
is entitled to a disbursement of funds under this Agreement, such party may
elect to request transfer of such funds by Fedwire from time to time, subject to
the conditions stated herein. The parties agree that the wire transfer security
procedures identified in SCHEDULE B are commercially reasonable. The parties
further agree that the Escrow Agent should use such procedures to detect
unauthorized wire transfer payment requests prior to executing such requests and
further agree that any request acted upon by the Escrow Agent in compliance with
these security procedures, whether or not authorized, shall be treated as an
authorized request. The parties agree that the Escrow Agent may change the wire
transfer security procedures from time to time upon obtaining the prior consent
of QFC and the Shareholder, and QFC and the Shareholder agree not to
unreasonably withhold their consent.
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6.12 WEEKENDS AND HOLIDAYS. If any deadline for action or performance
under this Agreement falls on a weekend day or a day when banks are required or
authorized to close in Seattle, Washington, then the deadline for such action or
performance shall be extended until the next succeeding day that is not a
weekend day or on which banks are not so required or authorized to close.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered or have caused to be duly executed and delivered this Agreement as of
the day and year first above written.
/S/ MAURICE F. OLSON
------------------------------
Maurice F. Olson
Quality Food Centers, Inc.
By /S/ DAN KOURKOUMELIS
----------------------------
Its PRESIDENT
---------------------------
Seattle-First National Bank, escrow
agent
By: BankAmerica State Trust
Company, its authorized agent
By: /S/ IRENE CRAIGEN
--------------------------
Its: ASSISTANT VICE PRESIDENT
------------------------
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ANNEX 1
To Indemnification and Escrow Agreement
FINAL CLAIM CERTIFICATE
Date:
------------
Dear Escrow Agent:
Reference is made to the Indemnification and Escrow Agreement, made
the ___ day of ________, 199__ (the "Escrow Agreement"), among Maurice F. Olson,
an individual (the "Shareholder"), Quality Food Centers, Inc., a Washington
corporation ("QFC"), and Seattle-First National Bank (the "Escrow Agent"). All
capitalized terms used but not otherwise defined in this Certificate shall have
the meanings assigned to those terms in the Escrow Agreement.
(a) QFC has incurred the following Final Claim:
[DESCRIBE FINAL CLAIM]
(b) The aggregate amount (the "Aggregate Amount") of such Final Claim is
$[ ].
(c) The Aggregate Amount includes the following Indemnification Items paid
on the dates set forth opposite each item:
[LIST INDEMNIFICATION ITEMS, AMOUNT FOR EACH ITEM, AND DATE PAID.]
INCLUDE ATTACHMENTS REASONABLY DEMONSTRATING THE INDEMNIFICATION
ITEMS.]
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<PAGE>
ANNEX 1
To Escrow Agreement
(d) [None of the foregoing Indemnification Items is required to be]
satisfied from Olson Claim Cash or Olson Claim Shares] [The aggregate amount]
(the "Olson Claim Amount") of the foregoing Indemnification Items required to be
satisfied from [Olson Claim Cash] [Olson Claim Shares] is $[ ]].
[(e) QFC hereby requests that the Escrow Agent deliver to QFC, from the]
Account, an amount of Indemnification Shares, other than Olson Claim Cash and
Olson Claim Shares, with a Value equal to the Aggregate Amount [less the Olson]
Claim Amount].]
[(f) QFC hereby [further] requests that the Escrow Agent deliver to QFC an
amount of [Olson Claim Cash] [Olson Claim Shares] with a Value equal to the
Olson Claim Amount.]
QUALITY FOOD CENTERS, INC.
By:
---------------------------
Its:
------------------------
2
<PAGE>
ANNEX 2
To Indemnification and Escrow Agreement
PENDING CLAIM CERTIFICATE
Date:
--------------
Dear Escrow Agent:
Reference is made to the Indemnification and Escrow Agreement, made
the ____ day of _________, 199_ (the "Escrow Agreement"), among Maurice F.
Olson, an individual (the "Shareholder"), Quality Food Centers, Inc., a
Washington corporation ("QFC"), and Seattle-First National Bank (the "Escrow
Agent"). All capitalized terms used but not otherwise defined in this
Certificate shall have the meanings assigned to those terms in the Escrow
Agreement.
(a) QFC has identified the following Pending Claim:
[DESCRIBE PENDING CLAIM]
(b) QFC estimates that it will incur the following aggregate amount (the
"Estimated Aggregate Amount") with respect to such Pending Claim: $[]
].
(c) The Estimated Aggregate Amount includes the following Indemnification
Items:
[LIST ESTIMATED INDEMNIFICATION ITEMS AND ESTIMATED AMOUNT FOR EACH]
ITEM.]
(d) [None of the foregoing Indemnification Items is required to be]
satisfied from Olson Claim Cash or Olson Claim
1
<PAGE>
ANNEX 2
To Escrow Agreement
Shares] [The estimated aggregate amount (the "Estimated Olson Claim Amount") of]
the foregoing Indemnification Items required to be satisfied from [Olson Claim]
Cash] [Olson Claim Shares] is $[ ]].
[(e) QFC hereby requests that the Escrow Agent designate an amount of]
Indemnification Shares with a Value equal to the Estimated Aggregate Amount
[less the Estimated Olson Claim Amount], to be held in the Account and not
distributed except in connection with such Pending Claims (or other undisputed
Final Claims).]
[(f) QFC hereby [further] requests that the Escrow Agent designate an
amount of [Olson Claim Cash] [Olson Claim Shares] with a Value equal to the
Estimated Olson Claim Amount, to be held in the Account and not distributed
except in connection with such Pending Claims (or other undisputed Final
Claims).]
QUALITY FOOD CENTERS, INC.
By:
---------------------------
Its:
------------------------
2
<PAGE>
ANNEX 3
To Indemnification and Escrow Agreement
REPLY CERTIFICATE
Date:
-----------
Dear Escrow Agent:
Reference is made to the Indemnification and Escrow Agreement, made
the ___ day of ________, 199__ (the "Escrow Agreement"), among Maurice F. Olson,
an individual (the "Shareholder"), Quality Food Centers, Inc., a Washington
corporation ("QFC"), and Seattle-First National Bank (the "Escrow Agent"). All
capitalized terms used but not otherwise defined in this Certificate shall have
the meanings assigned to those terms in the Escrow Agreement.
(a) QFC prepared a [Final][Pending] Claim Certificate, dated ________ (the
"Claim Certificate").
(b) The Shareholder objects to the following Indemnification Items set
forth in the Claim Certificate:
[LIST INDEMNIFICATION ITEMS THAT THE SHAREHOLDER OBJECTS TO AND STATE,]
IN REASONABLE DETAIL, THE NATURE AND BASIS FOR EACH OBJECTION.]
(c) Of the Indemnification Items set forth in (b) above, [none is required]
to be satisfied from Olson Claim Cash or Olson Claim Shares] [the following]
Indemnification Items are described
1
<PAGE>
ANNEX 3
To Indemnification and Escrow Agreement
in the Claim Certificate as required to be satisfied from [Olson Claim Cash]
[Olson Claim Shares]:
LIST INDEMNIFICATION ITEMS REQUIRED TO BE SATISFIED FROM [OLSON CLAIM]
CASH] [OLSON CLAIM SHARES]].
[(d) The Shareholder hereby requests that the Escrow Agent hold in the]
Account an amount of Indemnification Shares with a Value equal to the
Indemnification Items listed in (b) above[, excluding those also listed in (c)]
above,] and not transfer, designate or release such Indemnification Shares
except as otherwise permitted in the Escrow Agreement.]
[(e) The Shareholder hereby [further] requests that the Escrow Agent hold
in the Account an amount of [Olson Claim Cash] [Olson Claim Shares] with a Value
equal to the Indemnification Items listed in (c) above and not transfer,
designate or release such [Olson Claim Cash] [Olson Claim Shares] except as
otherwise permitted in the Escrow Agreement.]
------------------------
Maurice F. Olson
2
<PAGE>
RIGHT OF FIRST REFUSAL
This Right of First Refusal (this "Agreement") is entered into by and
among QUALITY FOOD CENTERS, INC., a Washington corporation ("QFC") and SIGNATURE
BAKERY LLC, a Washington limited liability company ("Bakery"), NORTH SNOHOMISH
ENTERPRISES, INC., a Washington corporation ("NSE"), and OLSON'S MANAGEMENT
GROUP LLC, a Washington limited liability company ("OMG") as of this 1st day of
March, 1995.
RECITALS:
A. Olson's Food Stores, Inc., former owner of the Max Foods stores
and the Bakery (defined below) merged into QFC (or its merger subsidiary)
pursuant to an Agreement and Plan of Merger, dated December 23, 1994.
B. NSE owns that certain store located in Mukilteo, Washington
(which is to be converted to a Max store) at the site legally described in
EXHIBIT A, OMG has interests in certain proposed stores located at Murphy's
Corner, Snohomish County, Washington at the site legally described in EXHIBIT B,
at 130th and Aurora in King County, Washington, at the site legally described in
EXHIBIT C, and at Thrasher's Corner, Snohomish County, Washington, at the site
legally described in EXHIBIT D, which are in various stages of development and
documentation (together, the "Max Stores"). The "Max Stores" consist of the
inventory, furniture, fixtures and equipment, improvements, leasehold interests,
fee ownership interests, name "Max Foods," rights to the proposed stores, and
all other assets, tangible and intangible, owned by the above-mentioned entities
or in which they have an interest, associated with the grocery stores and sites
at the locations described above.
C. Bakery is the owner of the "Bakery," which consists of all
inventory, furniture, fixtures and equipment, improvements, leasehold interests,
and all other assets, tangible and intangible, owned by Bakery or in which
Bakery has an interest regarding that certain bakery located at 18027
Highway 99, Building A, Suite H, Lynnwood, Washington.
D. Pursuant to the Agreement and Plan of Merger, the Max Stores and
Bakery were not included in the merger with QFC, and QFC is to be granted the
right of first refusal to purchase the Max Stores and Bakery described herein.
THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, QFC and Bakery, NSE and OMG agree
as follows:
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AGREEMENT
1. RIGHT OF FIRST REFUSAL: MAX STORES. NSE and OMG hereby grant QFC
the first right to purchase all their right, title and interest in and to the
Max Stores as provided herein. Said right shall apply during the time either
NSE or OMG (or any entity under common ownership and control with said entities)
own all or any of the Max Stores. If during said period of ownership either NSE
or OMG (for purposes of this Section 1, the "Recipient") receives a bona fide
written offer to purchase one (1) or more of the Max Stores (the "Property")
from a third party which Recipient desires to accept, Recipient shall give
written notice to QFC thereof, together with a complete copy of the offer or
agreement and copies of all disclosure materials or information of any kind
provided to the perspective purchaser regarding the Property (the "Notice of
Offer"). Recipient may sign an agreement to sell so long as the agreement is
subject to QFC's rights to purchase hereunder. QFC shall have three (3)
business days after receipt of the Notice of Offer to notify the seller in
writing that QFC will purchase the Property pursuant to the terms and conditions
contained in the Notice of Offer, except that, if the sale takes place within
one (1) year of the date of this Agreement, at Recipient's option QFC shall pay
Recipient the purchase price specified in the Notice of Offer in cash and in QFC
common shares (valued at their fair market value as of closing) in any
proportion specified by Recipient. If QFC exercises its right of first refusal,
the sale shall proceed in accordance with the terms of the Notice of Offer. If
QFC declines in writing to purchase the Property or fails to notify Recipient
that it will accept the terms contained in the Notice of Offer, Recipient may
proceed to sell the Property to the party who made the offer in accordance with
the term specified in the Notice of Offer. QFC's right of first refusal to
purchase will terminate with respect to that Property only, and so long as, (1)
the terms of sale specified in the Notice of Offer are not modified so as to
involve a lower sales price, or other terms that are materially more favorable
to the purchaser; (2) the Property being purchased is not enlarged or reduced in
any material respect; and (3) closing of the purchase and sale pursuant to the
Notice of Offer takes place within a commercially reasonable time. Otherwise,
QFC's right of first refusal will again apply as to that Property, and in any
event will remain applicable to all Max Stores, or portions thereof, which are
not included in the Property which is the subject of the Notice of Offer. The
right of first refusal for Thrasher's Corner provided in this Section 1 shall
only apply if Thrasher's Corner is to be developed as a grocery store.
2. RIGHT OF FIRST REFUSAL: BAKERY. Bakery hereby grants QFC the
first right to purchase the Bakery as provided herein. If, while QFC purchases
at least $2,000,000 per year of bakery products from Bakery, Bakery receives a
bona fide written offer to purchase the Bakery from a third party which Bakery
desires to accept, Bakery shall give written notice to QFC
2
<PAGE>
thereof, together with a complete copy of the offer or agreement and copies of
all disclosure materials or information of any kind provided to the perspective
purchaser regarding the Bakery (the "Notice of Offer"). Bakery may sign an
agreement to sell so long as the agreement is subject to QFC's rights to
purchase hereunder. QFC shall have three (3) business days after receipt of the
Notice of Offer to notify Bakery in writing that QFC will purchase the Bakery
pursuant to the terms and conditions contained in the Notice of Offer, except
that, if the sale takes place within one (1) year of the date of this Agreement,
at Bakery's option QFC shall pay Bakery the purchase price specified in the
Notice of Offer in cash and in QFC common shares (valued at their fair market
value as of closing) in any proportion specified by Bakery. If QFC exercises
its right of first refusal, the sale shall proceed in accordance with the terms
of the Notice of Offer. If QFC declines in writing to purchase the Bakery or
fails to notify Bakery that it will accept the terms contained in the Notice of
Offer, Bakery may proceed to sell the Bakery to the party who made the offer in
accordance with the term specified in the Notice of Offer. QFC's right of first
refusal to purchase will terminate with respect to the Bakery only, and so long
as (1) the terms of sale specified in the Notice of Offer are not modified so as
to involve a lower sales price, or other terms that are materially more
favorable to the purchaser; (2) the Bakery property being purchased is not
enlarged or reduced in any material respect; and (3) closing of the purchase and
sale pursuant to the Notice of Offer takes place within a commercially
reasonable time. Otherwise, QFC's right of first refusal will again apply, and
in any event will remain applicable to any portion of the Bakery which is not
the subject of the Notice of Offer.
3. REPRESENTATION AND WARRANTIES OF BAKERY, NSE AND OMG. Bakery,
NSE and OMG (each as to itself only) hereby represent and warrant to QFC as of
the date hereof and as of the date QFC purchases any or all of the Max Stores
and/or Bakery that:
3.1 NSE is a corporation and Bakery and OMG are limited
liability companies duly organized, validly existing and in good standing under
the laws of the State of Washington and have all requisite corporate (for NSE)
and company (for OMG and Bakery) power and authority to own and operate the Max
Stores and the Bakery, to carry on their businesses as now conducted, to enter
into this Agreement and to carry out all the provisions of this Agreement and
consummate the transactions contemplated hereby. Bakery, NSE and OMG are duly
qualified and in good standing in each jurisdiction in which the property owned,
leased or operated by it or of the nature of the business conducted by it make
such qualification necessary and where the failure to be so qualified has or
would be reasonably expected (so far as can be foreseen at the time) to have a
material adverse affect on the
3
<PAGE>
business, properties, operations, conditions (financial or other) or prospects
of Bakery, NSE and OMG.
3.2 This Agreement and consummation of the transactions
contemplated hereby have been approved by the Board of Directors of NSE and
members of Bakery and OMG and been duly authorized by all other corporate and
company action on the part of Bakery, NSE and OMG and have been approved by the
shareholders and members of NSE, OMG and Bakery. This Agreement has been duly
executed and delivered by duly authorized officers and members of NSE, OMG and
Bakery, and constitute a valid and binding agreement of NSE, OMG and Bakery,
enforceable against Bakery, NSE and OMG in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws of general application that may affect the enforcement of
creditors' rights generally and by generally equitable principles. Bakery, NSE
and OMG will deliver prior to QFC's acquisition of all or any of the Max Stores
or Bakery true and correct copies of the resolutions adopted by the Board of
Directors of NSE and by the NSE shareholders approving this Agreement. All
shareholders of NSE and members of Bakery and OMG shall execute this Agreement.
3.3 The performance (subject to Bakery, NSE and OMG obtaining
any necessary lender or other consents at the time of sale), execution and
delivery of this Agreement by Bakery, NSE and OMG will not result in any
violation of or conflict with, constitute a default under or require any consent
under any term of the agreement, charter or bylaws of Bakery, NSE and OMG or any
agreement, instrument, law, ordinance, rule, regulation, order, judgment or
decree to which Bakery, NSE or OMG is a party or for which Bakery, NSE and OMG
or any of the Max Stores or the Bakery are subject, or result in the creation of
(or impose any obligation on Bakery, NSE or OMG to create) any mortgage, lien,
charge, security interest or other encumbrance upon any of the Max Stores or the
Bakery.
4. REPRESENTATIONS AND WARRANTIES OF QFC. QFC hereby represents and
warrants to Bakery, NSE and OMG as of the date hereof and as of the date QFC
purchases any or all of the Max Stores and/or the Bakery that:
4.1 QFC is a corporation duly organized, validly existing and in
good standing under the laws of the State of Washington and has all requisite
corporate power and authority to enter into this Agreement and to carry out all
the provisions of this Agreement and consummate the transactions contemplated
hereby.
4.2 This Agreement and consummation of the transactions
contemplated hereby have been approved by the Board of Directors of QFC and been
duly authorized by all other corporate action on the part of QFC and have been
approved by the
4
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shareholders of QFC. This Agreement has been duly executed and delivered by
duly authorized officer of QFC and constitutes a valid and binding agreement of
QFC, enforceable against QFC in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application that may affect the enforcement of
creditors' rights generally and by generally equitable principles. QFC will
deliver prior to the sale of all or any of the Max Stores or the Bakery to QFC
true and correct copies of the resolutions adopted by the Board of Directors of
QFC and by the QFC shareholders approving this Agreement.
5. CONTINUATION OF MAX FOODS FORMAT. NSE and OMG (each with
respect to the Max Store(s) it operates) hereby covenants and agrees that during
the time the Max Stores, or any of them, are owned or operated by NSE or OMG,
they shall continue to be run consistent with current practices including, but
not limited to retaining the discount, warehouse nature of the Max Stores.
6. MISCELLANEOUS AND GENERAL.
6.1 NOTICES. All notices, requests, demands or other
communications required by or otherwise with respect to this Agreement shall be
in writing and shall be deemed to have been duly given to any party when
delivered personally (by courier service or otherwise), when delivered by
facsimile and confirmed by return facsimile, or seven days after being mailed by
first-class mail, postage prepaid and return receipt requested in each case to
the applicable addresses set forth below:
If to Bakery, NSE
or OMG: Max Foods
P.O. Box L
Lynnwood, WA 98046
Attn: Maurice F. Olson
with a copy to: Jeffrey L. Pewe, Esq.
Montgomery, Purdue, Blankenship & Austin
701 Fifth Ave., Suite 5800
Seattle, WA 98104
If to QFC: Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, WA 98004
Attention: Dan Kourkoumelis
with a copy to: Timothy R. Osborn, Esq.
Bogle & Gates
Two Union Square
601 Union Street
Seattle, WA 98101-2346
5
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or to such other address as such party shall have designated by notice so given
to each other party.
6.2 AMENDMENTS, WAIVERS, ETC. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified except by an
instrument in writing signed by the party against whom enforcement is sought.
6.3 ENTIRE AGREEMENT. Except as otherwise provided herein, this
Agreement embodies the entire agreement and understanding between the parties
relating to the subject matter hereof and supersedes all prior agreements and
understandings relating to such subject matter. There are no representations,
warranties or covenants by the parties hereto relating to such matter other than
those expressly set forth in this Agreement and any writings expressly required
hereby.
6.4 REMEDIES. In the event of a breach or default of this
Agreement by either party, the non-defaulting party shall have all remedies
available at law or in equity, including specific performance and the right of
injunctive relief.
6.5 NO WAIVER. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by such
party of its right to exercise any such or other right, power or remedy or to
demand such compliance.
6.6 NO THIRD-PARTY BENEFICIARIES. This Agreement is not
intended to be for the benefit of and shall not be enforceable by any person or
entity who or which is not a party hereto.
6.7 PUBLIC ANNOUNCEMENTS. QFC and Bakery, NSE or OMG, as the
case may be, will agree upon the timing and content of the initial press release
to be issued describing the transactions contemplated by this Agreement, and
will not make any public announcement thereof prior to reaching such agreement
unless required to do so by applicable law. To the extent reasonably requested
by either party, each party will thereafter consult with and provide reasonable
cooperation to the other in connection with the issuance of further press
releases or other public documents describing the transactions contemplated by
this Agreement.
6.8 GOVERNING LAW. This Agreement and all disputes hereunder
shall be governed by and construed and
6
<PAGE>
enforced in accordance with the internal laws of the State of Washington,
without regard to principles of conflict of laws.
6.9 ATTORNEYS' FEES. In the event a lawsuit is commenced
concerning the terms of this Agreement in which the parties hereto are parties,
the prevailing party shall be entitled to its costs and attorneys' fees.
6.10 NAME, CAPTIONS, ETC. The name assigned to this Agreement
and the section captions used herein are for convenience of reference only and
shall not affect the interpretation or construction hereof. Unless otherwise
specified, references herein to Articles or Sections refer to articles or
sections of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties set forth below.
QUALITY FOOD CENTERS, INC.
a Washington corporation
By /S/ DAN KOURKOUMELIS
--------------------------------
Dan Kourkoumelis
Its President and C.O.O.
SIGNATURE BAKERY LLC, a Washington
limited liability company
By /S/ MAURICE S. OLSON
--------------------------------
By /S/ MAURICE F. OLSON
--------------------------------
By /S/ CHARLES M. OLSON
--------------------------------
NORTH SNOHOMISH ENTERPRISES, INC.,
a Washington corporation
By /S/ MAURICE F. OLSON
-------------------------------
Maurice F. Olson
Its President and
sole shareholder
7
<PAGE>
OLSON'S MANAGEMENT GROUP LLC, a
Washington limited liability
company
By /S/ MAURICE S. OLSON
--------------------------------
By /S/ MAURICE F. OLSON
--------------------------------
By /S/ CHARLES M. OLSON
--------------------------------
8
<PAGE>
363 MUKILTEO
Order No. 525974
LEGAL DESCRIPTION:
PARCEL A:
The South 34 feet of that portion of Tract 9, Block 8, Alderwood Manor No.
7, according to the plat thereof, recorded in Volume 9 of Plats, pages 100
through 102, inclusive, records of Snohomish County, Washington, lying
Westerly of State Road No. 1;
ALSO
That part of Tract 10, Block 8, Alderwood Manor No. 7, as per plat recorded
in Volume 9 of Plats, pages 100 through 102, inclusive, records of
Snohomish County, Washington, lying Westerly of State Road No. 1;
EXCEPT that portion thereof conveyed to the State of Washington by deed
recorded under Auditor's File Number 743107;
ALSO EXCEPT that portion of said Tract 10, described as follows:
BEGINNING on the Northerly right of way margin of Lincoln Way, which right
of way margin is 30.00 feet, measured at right angles, from the centerline
of Lincoln Way, at a point that is at the end of a 150 foot radius curve as
described in Warranty Deed to the State of Washington, recorded under
Auditor's File Number 743107, records of Snohomish County, Washington;
thence North 77-DEGREES- 31-MINUTES- 00-SECONDS- West, along the Northerly
margin of Lincoln Way a distance of 31.62 feet;
thence North 12-DEGREES- 29-MINUTES- 00-SECONDS- East, leaving the right of
way margin of Lincoln Way, a distance of 22.00 feet;
thence North 26-DEGREES- 29-MINUTES- 00-SECONDS- East a distance of 54.00
feet;
thence North 12-DEGREES- 29-MINUTES- 00-SECONDS- East a distance of 118.00
feet;
thence North 43-DEGREES- 32-MINUTES- 58-SECONDS- East a distance of 34.06
feet;
thence East a distance of 148.00 feet;
thence South 37-DEGREES- 04-MINUTES- 41-SECONDS- East a distance of 55.00
feet to the Northwesterly right of way margin of Primary State Highway
No. 1; thence South 32-DEGREES- 55-MINUTES- 19-SECONDS- West along said
State Highway right of way margin a distance of 128.35 feet to the beginning
of the 150 foot radius curve described above;
thence along said curve, the radius point of which bears North 57-DEGREES-
04-MINUTES- 41-SECONDS- West, through a central angle of 69-DEGREES-
33-MINUTES- 41-SECONDS- an arc distance of 182.11 feet to the point of
beginning;
PARCEL B:
That portion of Tract 11, Block 8, Alderwood Manor No. 7, as per plat
recorded in Volume 9 of Plats, pages 100 through 102, inclusive, records of
Snohomish County, Washington, lying Easterly of Secondary State Highway No.
1-I;
EXCEPT the Southerly 10 feet thereof conveyed to the State of Washington by
Deed recorded March 2, 1943 under Auditor's File No. 743105;
EXCEPT that portion thereof conveyed to the State of Washington by deed
recorded under Auditor's File Number 9011280285.
Situate in the County of Snohomish, State of Washington.
Exhibit A
<PAGE>
363 MUKILTEO
Order No. 525974
PARCEL C:
All that portion of Lot 12, Block 8, Alderwood Manor No. 7, as per plat
recorded in Volume 9 of Plats, pages 100 through 102, inclusive, records of
Snohomish County, Washington, lying Easterly of New Secondary State Highway
No. 1-I;
EXCEPT the following described tract:
BEGINNING at the intersection of the North line of Lot 12 with the East
line of New Secondary State Highway No. 1-I;
thence East 125 feet;
thence South parallel with the East line of Lot 12, 100 feet;
thence West parallel with the North line of Lot 12 to the East line of New
Secondary State Highway No. 1-I;
thence Northwesterly along said highway to the point of beginning;
PARCEL D:
That portion of Lot 12, Block 8, Alderwood Manor No. 7, as per plat
recorded in Volume 9 of Plats, pages 100 through 102, inclusive, records of
Snohomish County, Washington, described as follows:
BEGINNING at the intersection of North line of said Lot 12 and the Easterly
line of new location of Secondary State Highway No. 1-I;
thence East along the North line of said lot 125 feet;
thence South parallel with the East line of said Lot 12, a distance of 100
feet;
thence West parallel to the North line of said Lot 12 to the Easterly line
of new location of Secondary State Highway 1-I;
thence Northeasterly along said highway to the point of beginning;
PARCEL E:
A non-exclusive easement for ingress, egress, utilities and project signs,
as established by Operating and Mutual Access Agreement recorded September
7, 1990 under Auditor's File No. 9009070434, as amended by instrument
recorded under Snohomish County Recording No. 9409300963;
PARCEL F:
A non-exclusive easement for ingress, egress, utilities and parking, as
established by Declaration of Easements, Covenants and Restrictions
recorded May 7, 1992 under Auditor's File No. 9205070487;
Situate in the County of Snohomish, State of Washington.
Exhibit A
<PAGE>
MURPHY'S CORNER
Order No. 525964
LEGAL DESCRIPTION:
PARCEL A:
The North half of the Northeast quarter of the Northwest quarter of the
Northeast quarter of Section 31, Township 28 North, Range 5 East, W.M.;
EXCEPT the North 60 feet thereof.
PARCEL B:
The South half of the Northeast quarter of the Northwest quarter of the
Northeast quarter of Section 31, Township 28 North, Range 5 East, W.M.;
EXCEPTING any portion thereof lying within SR 527 (aka Old Pacific Highway).
PARCEL C:
That portion of the Northeast quarter of the Northeast quarter of Section
31, Township 28 North, Range 5 East, W.M. described as follows:
BEGINNING 330 feet Southerly from the Northwest corner of said Northeast
quarter;
thence Easterly at right angles, a distance of 5 rods (82.5 feet);
thence Southerly at right angles to an intersection with North line of
State Road as now located and established;
thence Southwesterly along the North side of the State Road to the
intersection of said North line of State Road with the West line of the
Northeast quarter of the Northeast quarter;
thence Northerly along said West line to place of beginning.
PARCEL D:
All that portion of the Northeast quarter of the Northeast quarter of
Section 31, Township 28 North, Range 5 East, W.M. described as follows:
BEGINNING at the Southeast corner of the Northeast quarter of the Northwest
quarter of the Northeast quarter of said Section 31;
thence South 89-DEGREES- 51-MINUTES- 33-SECONDS- West, along the South line
of said Northeast quarter of the Northwest quarter of the Northeast quarter
to an intersection with the Westerly boundary line of the Old Pacific
Highway (SR 527) as laid out and constructed, said intersection being the
true point of beginning of the parcel herein described;
thence continuing South 89-DEGREES- 51-MINUTES- 33-SECONDS- West, along the
South line of said subdivision to the Southwest corner of said subdivision;
thence continuing South 89-DEGREES- 51-MINUTES- 33-SECONDS- West, along the
South line of the Northwest quarter of the Northwest quarter of the
Northeast quarter of said Section 31, a distance of 12.36 feet to an
intersection with the North line of that certain tract of land conveyed to
Clara Benner by Deed recorded under Snohomish County Auditor's File No.
274719;
thence South 53-DEGREES- 10-MINUTES- 00-SECONDS- East, along the North line
of said Benner Tract, a distance of 469.00 feet, more or less, to an
intersection with the Westerly margin of the Old Pacific Highway (SR 527);
thence Northeasterly along said Westerly margin, a distance of 371.4 feet,
more or less, to the true point of beginning.
(ALSO KNOWN AS Lot 1 of Snohomish County Short Plat recorded under Auditor's
File No. 8012160119).
Exhibit B
<PAGE>
MURPHY'S CORNER
Order No. 525964
LEGAL DESCRIPTION CONTINUED:
PARCEL E:
That portion of the West 118.50 feet of the Northeast quarter of the
Northeast quarter of Section 31, Township 28 North, Range 5 East, W.M., in
Snohomish County, Washington, lying Northerly of State Highway No. 2-A;
EXCEPT that portion thereof described as follows:
BEGINNING 330 feet Southerly from the Northwest corner of said Northeast
quarter;
thence Easterly at right angles, a distance of 5 rods;
thence Southerly at right angles to an intersection with the North line of
State Road, as now located and established;
thence Southerly along the North side of the State Road to the intersection
of said North line of said State Road with the West line of said Northeast
quarter of the Northeast quarter;
thence Northerly along said West line to plat of beginning; and
EXCEPT that portion conveyed to the County of Snohomish by Deed recorded
under Auditor's File No. 2244613; and
EXCEPT that portion conveyed to the State of Washington by Deed recorded
under Auditor's File No 8609190369.
(ALSO KNOWN AS Parcel 1 of Binding Site Plan recorded in Volume 1 of
Binding Site Plan at pages 206 and 207 under Auditor's File No.
9008295001.)
PARCEL F:
The West 330 feet of the Northeast quarter of the Northeast quarter of
Section 31, Township 28 North, Range 5 East, W.M., in Snohomish County,
Washington, lying Northerly of State Highway No. 2-A;
EXCEPT the North 244.00 feet thereof, as measured along the West line of
said subdivision; and
EXCEPT that portion conveyed to the County of Snohomish by Deed recorded
under Auditor's File No. 2244613; and
EXCEPT the West 118.50 feet thereof; and
EXCEPT that portion thereof conveyed to the State of Washington by Deed
recorded under Auditor's No. 8609190369.
(ALSO KNOWN AS Parcel 3 of Binding Site Plan recorded in Volume 1 of Binding
Site Plan at pages 206 and 207 under Auditor's File No. 9008295001.)
Situate in the City of Mill Creek, County of Snohomish, State of
Washington.
Exhibit B
<PAGE>
130TH & AURORA
PARCEL A:
THE NORTH 1/2 OF THE NORTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF
SECTION 19, TOWNSHIP 26 NORTH, RANGE 4 EAST W.M.;
EXCEPT THE EASTERLY 105 FEET THEREOF;
AND EXCEPT THE WESTERLY 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD
PURPOSES BY DEED RECORDED UNDER RECORDING NO. 555217;
AND EXCEPT THE NORTHERLY 30 FEET THEREOF CONVEYED TO CITY OF SEATTLE FOR ROAD
PURPOSES BY DEED RECORDED UNDER RECORDING NO. 4917187;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON;
PARCEL B:
THE NORTH 1/2 OF THE SOUTH 1/2 OF THE NORTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE
SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4 EAST W.M;
EXCEPT THE WEST 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD PURPOSES BY
DEED RECORDED UNDER RECORDING NO. 555216;
AND EXCEPT THE EAST 25 FEET THEREOF CONVEYED TO THE CITY OF SEATTLE FOR ROAD
PURPOSES BY DEEDS RECORDED UNDER RECORDING NOS. 4917176, 4917177, 4917178 AND
4917181;
TOGETHER WITH THE EAST 108 FEET OF THE NORTH 1/2 OF THE NORTHWEST 1/4 OF THE
NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4
EAST W.M.;
EXCEPT THE NORTH 30 FEET AND THE EAST 25 FEET THEREOF CONVEYED TO CITY OF
SEATTLE FOR ROAD PURPOSES BY DEED RECORDED UNDER RECORDING NO. 4917187;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit C
<PAGE>
PARCEL C:
THE NORTH 1/2 OF THE NORTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE
SOUTHEAST 1/4; AND THE SOUTH 1/2 OF THE SOUTH 1/2 OF THE NORTHWEST 1/4 OF THE
NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4
EAST W.M.;
EXCEPT THE WEST 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD PURPOSES BY
DEEDS RECORDED UNDER RECORDING NOS. 555215 AND 555216;
AND EXCEPT THE EAST 25 FEET THEREOF CONVEYED TO CITY OF SEATTLE FOR ROAD
PURPOSES BY DEEDS RECORDED UNDER RECORDING NOS. 4917179 AND 4717181;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON;
PARCEL D:
THE SOUTH 1/2 OF THE NORTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE
SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4 EAST W.M.;
EXCEPT THE EAST 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD PURPOSES BY
DEEDS RECORDED UNDER RECORDING NO. 555215;
AND EXCEPT THE EAST 212 FEET THEREOF;
AND EXCEPT THE SOUTH 2.25 FEET OF THE REMAINDER THEREOF;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON;
PARCEL E (1):
THE WEST 259 FEET OF THE NORTH 1/2 OF THE SOUTH 1/2 OF THE SOUTHWEST 1/4 OF THE
NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4
EAST W.M.; AND THE WEST 259 FEET OF THE SOUTH 2.25 FEET OF THE SOUTH 1/2 OF THE
NORTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF
SAID SECTION 19;
EXCEPT THE WEST 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD PURPOSES BY
DEED RECORDED UNDER RECORDING NOS. 555214 AND 555215;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit C
<PAGE>
PARCEL E (2):
THE NORTH 1/2 OF THE SOUTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE
SOUTHEAST 1/4; AND THE SOUTH 2.25 FEET OF THE SOUTH 1/2 OF THE SOUTHEAST 1/4 OF
SECTION 19, TOWNSHIP 26 NORTH, RANGE 4 EAST W.M.;
EXCEPT THE WEST 259 FEET THEREOF;
AND EXCEPT THE EAST 25 FEET THEREOF CONVEYED TO CITY OF SEATTLE FOR ROAD
PURPOSES BY DEED RECORDED UNDER RECORDING NO. 4917180;
TOGETHER WITH THE EAST 212 FEET OF THE SOUTH 1/2 OF THE NORTH 1/2 OF THE
SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF SAID SECTION 19;
EXCEPT THE SOUTH 2.25 FEET THEREOF;
AND EXCEPT THE EAST 25 FEET THEREOF CONVEYED TO CITY OF SEATTLE FOR ROAD
PURPOSES BY DEED RECORDED UNDER RECORDING NO. 4917180;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
PARCEL F:
THE SOUTH 1/2 OF THE SOUTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF THE
SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4 EAST W.M.;
EXCEPT THE WEST 195 FEET THEREOF;
AND EXCEPT THE EAST 25 FEET THEREOF CONVEYED TO THE CITY OF SEATTLE FOR ROAD
PURPOSES BY DEED RECORDED UNDER RECORDING NOS. 5015947 AND 4917182;
AND EXCEPT THAT PORTION THEREOF CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE
NO. 612752 FOR WIDENING NORTH 130TH STREET;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit C
<PAGE>
PARCEL G:
THE WEST 195 FEET OF THE SOUTH 1/2 OF THE SOUTH 1/2 OF THE SOUTHWEST 1/4 OF THE
NORTHWEST 1/4 OF THE SOUTHEAST 1/4 OF SECTION 19, TOWNSHIP 26 NORTH, RANGE 4
EAST W.M.;
EXCEPT THE WEST 45 FEET THEREOF CONVEYED TO KING COUNTY FOR ROAD PURPOSES BY
DEED RECORDED UNDER RECORDING NO. 555214;
AND EXCEPT THAT PORTION THEREOF CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE
NO. 612752 FOR WIDENING NORTH 130TH STREET;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit C
<PAGE>
Thrasher's Corner
LEGAL DESCRIPTION
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF WASHINGTON, COUNTY OF
SNOHOMISH AND IS DESCRIBED AS FOLLOWS:
The Southwest quarter of the Southwest quarter of Section 20, Township 27
North, Range 5 East, W.M.; Except the South 198 feet of the West 660 feet;
Also Except the following described property:
Beginning at a point on the Easterly margin of SR 527 (State Highway No 2J)
920 feet North of the South line of said Section 20, said point being the
true point of beginning; Thence East parallel with the South margin of
Filbert Road (formerly Turners Corner Road) for 736 feet; Thence North 370
feet to the South margin of Filbert Road; Thence West along said road for
736 feet to the East margin of said SR527 (State Highway No 2J) thence
South along said highway for 370 feet to the true point of beginning; ALSO
Except any portion lying within SR527 (State Highway No. 2J) ALSO Except
that portion conveyed to the State of Washington by instruments recorded
under Recording Nos. 9010090270 and 9010090271 for 208th St. S.E. ALSO KNOWN
as Maltby Road)
Situate in the County of Snohomish, State of Washington.
Exhibit D
<PAGE>
INVESTORS RIGHTS AGREEMENT
This Agreement is made as of March 1, 1995 by and among Quality Food
Centers, Inc., a Washington corporation (the "Company"), and Maurice F. Olson,
Charles M. Olson and Maurice S. Olson (the "Investors").
RECITALS
A. Simultaneously herewith, the Company is acquiring Olson's Food Stores,
Inc. by merger (the "Merger") pursuant to an Agreement and Plan of Merger dated
December 23, 1994 (the "Merger Agreement").
B. Pursuant to the Merger Agreement, the Company is issuing to the
Investors on the date hereof 752,941 shares (the "Shares") of its Common Stock,
par value $.001 per share ("QFC Common Stock").
C. It is a condition precedent to the obligations of Olson's Food Stores,
Inc. to consummate the Merger that the parties enter into this Agreement.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange Commission.
"Holder" shall mean the holders of Registrable Securities and any
person holding such securities to whom the rights under this Agreement have been
transferred in accordance with Section 2.8 hereof.
"Initiating Holders" shall mean any Holder or Holders who in the
aggregate hold at least 50% of the Registrable Securities.
"Registrable Securities" means (i) the Shares (ii) any additional
shares of QFC Common Stock issued to the Investors pursuant to the Merger
Agreement, and (iii) any Common Stock or other securities of the Company issued
or issuable with respect to, or in exchange for or in replacement of the Shares
or such additional shares upon any stock split, stock dividend,
recapitalization, or similar
1
<PAGE>
event; provided, however, that shares of Common Stock or other securities shall
only be treated as Registrable Securities for the purposes of Section 2 hereof
if and so long as they have not been sold pursuant to Rule 144 under the
Securities Act or pursuant to an effective Registration Statement under the
Securities Act, or otherwise to or through a broker or dealer or underwriter in
a public distribution or a public securities transaction.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as otherwise
stated below, incurred by the Company in complying with Section 2 hereof,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company and one special counsel to the selling Holders, blue sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the selling Holders and any other expenses that are not Registration Expenses
and that are incurred by the selling Holders.
2. REGISTRATION RIGHTS
2.1 COMPANY REGISTRATION
(a) NOTICE OF REGISTRATION. If at any time or from time to time the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) subject to Section 2.1(b), include in such registration (and
any related qualification under blue sky laws or other compliance), and in any
underwriting
2
<PAGE>
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.1(a) hereof. In such event the right of any Holder to
registration pursuant to this Section 2.1 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 2.1, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities and other securities to be distributed through such
underwriting, with shares to be offered by the Company having priority over
shares to be offered by Holders of Registrable Securities. The Company shall so
advise all Holders distributing their securities through such underwriting of
such limitation and the number of shares of Registrable Securities, if any, that
may be included in the registration (and underwriting if any) shall be allocated
among all Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities requested by such Holders to be included in
such Registration Statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company may round the number of shares
allocated to any Holder or holder to the nearest 100 shares.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.1 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.3 hereof.
2.2 DEMAND REGISTRATION
(a) If, at any time after the first anniversary and before the fifth
anniversary of the date of this Agreement, any Holder or Holders who in the
aggregate hold a majority of the Registrable Securities request that the Company
file a registration statement for a public offering
3
<PAGE>
of Registrable Securities, the Company shall cause such Registrable Securities
to be registered for the offering and cause such Registrable Securities to be
qualified in such jurisdictions as the Holder or Holders may reasonably request.
If requested by the Holder or Holders requesting registration pursuant to this
Section 2.2, the Company shall use all reasonable efforts to cause any such
registration to be a non-underwritten shelf registration and to cause such shelf
registration to be maintained effective for at least 120 days.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 2.2: (i) for more than one
registration, (ii) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act; (iii) if the Company, within 20 days of the receipt of the request of the
Initiating Holders, gives notice of its bona fide intention to effect the filing
of a registration statement with the Commission within 90 days of receipt of
such request; (iv) during the period starting with the date 60 days prior to the
Company's estimated date of filing of, and ending on the date 120 days
immediately following, the effective date of any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan), provided
that the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective; or (v) if the Company
shall furnish to such Holder a certificate signed by the Chairman or President
of the Company stating that the Company has reasonably determined that it should
postpone for a specified period of time not to exceed 120 days in the case of
clause (A) below, or 30 days in the case of clause (B) below (each, a "Blackout
Period"), any action pursuant to this Section, including, without limitation,
the preparation and/or filing of a registration statement or prospectus or any
amendments or supplements to any registration statement or prospectus, because
any such filing would (A) materially impede, delay or otherwise interfere with
an offer or sale of securities, acquisition, corporate reorganization or other
significant transaction involving the Company, or (B) require disclosure of
material information (other than an event described in clause (A) above) which,
if disclosed at that time, would be materially harmful to the interests of the
Company and its shareholders. Upon delivery of such a certificate to the
Holders by the Company, each the Holders covenants that he shall (X) keep the
fact of the notice strictly confidential, (Y) promptly halt any offer, sale,
trading or transfer by him and his affiliates of any QFC Common Stock for the
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<PAGE>
duration of the Blackout Period set forth in the certificate or until the
Blackout Period is earlier terminated by the Company and (Z) promptly halt any
use or distribution of the registration statement and prospectus by him and his
affiliates for the duration of the Blackout Period or until such Blackout Period
is earlier terminated by the Company. The Company shall not be entitled to
deliver a certificate and impose a Blackout Period pursuant to Clause A more
than once in any twelve month period.
2.3 EXPENSES OF REGISTRATION
All Registration Expenses incurred in connection with registrations
pursuant to Sections 2.1 and 2.1 shall be borne by the Company. All Selling
Expenses relating to securities registered on behalf of the Holders shall be
borne by the Holders of securities included in such registration pro rata,
severally and not jointly, among each other on the basis of the number of shares
so registered.
2.4 REGISTRATION PROCEDURES
In the case of each registration effected by the Company pursuant to this
Section 2, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least 120 days or,
if earlier, until the distribution described in the registration statement has
been completed;
(b) Prepare and file with the Commission during the period specified
in Section 2.4(a) such amendments and supplements to such registration statement
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement;
(c) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as the Holders and such underwriters may reasonably
request in order to facilitate the public offering of such securities;
(d) Furnish, at the request of any Holder requesting registration of
Registrable Securities at the time such securities are delivered to the
underwriters (if
5
<PAGE>
any) for sale in connection with a registration pursuant to this Section 2,
(i) an opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated the date of commencement of the offering and a "bring-down"
letter dated as of the closing date of such offering, from the independent
accountants of the Company, in form and substance as is customarily given by
independent accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
2.5 INDEMNIFICATION
(a) The Company will indemnify each Holder and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration has been effected pursuant to this Section 2,
and each underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of the Securities Act or any other applicable
federal and state securities laws or any rules or regulations promulgated
thereunder in connection with any such registration, qualification or
compliance, and the Company will reimburse each such Holder, each of its
officers, directors, partners, and legal counsel and each person controlling
such Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder, controlling person or
underwriter and stated to be specifically for use therein.
6
<PAGE>
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other Holder, each of its officers and directors, and each person controlling
such Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such Holders,
and such directors, officers, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and stated to be specifically for use therein. Notwithstanding the foregoing,
the liability of each Holder under this subsection (b) shall be limited to the
proportion of any such loss, claim, damage, liability or expense which is equal
to the proportion that the public offering price of the shares sold by such
Holder under such registration statement bears to the total public offering
price of all securities sold thereunder, but not to exceed the proceeds received
by such Holder from the sale of Registrable Securities covered by such
registration statement.
(c) Each party entitled to indemnification under this Section 2.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein
7
<PAGE>
shall not relieve the Indemnifying Party of its obligations under this Section 2
unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action and provided further, that
the Indemnifying Party shall not assume the defense for matters as to which
there is a conflict of interest or separate and different defenses but shall
bear the expense of such defense nevertheless. Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation resulting
therefrom. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Notwithstanding the other provisions of this Agreement, no
Indemnifying Party shall be obligated to indemnify any Indemnified Party for
amounts paid by the Indemnified Party in settlement of any loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Indemnifying Party (which consent has not been unreasonably withheld).
(d) If the indemnification provided for paragraphs (a) through (c) of
this Section 2.5 is unavailable or insufficient to hold harmless an Indemnified
Party under such paragraphs in respect of any losses, claims, damages,
liabilities, expenses or actions in respect thereof referred to therein, then
each Indemnifying Party shall in lieu of indemnifying such Indemnified Party
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the Holder of such Registrable Securities, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities, expenses or actions in respect thereof as well as
any other relevant equitable considerations, including the failure to give any
notice under paragraph (c). The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact relates to information supplied by the Company, on the one hand,
or the underwriters or the Holders of such Registrable Securities, on the other,
and to the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each of the Holders agrees that it would not be just and equitable if
contributions pursuant to this paragraph were determined by PRO RATA allocation
8
<PAGE>
(even if all of the Holders of such Registrable Securities were treated as one
entity for such purpose) or by any other method of allocation which did not take
account of the equitable considerations referred to above in this paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or action in respect thereof, referred to above in
this paragraph, shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
paragraph, no Holder shall be required to contribute any amount in excess of the
lesser of (i) the proportion that the public offering price of shares sold by
such Holder under such registration statement bears to the total public offering
price of all securities sold thereunder, but not to exceed the proceeds received
by such Holder for the sale of Registrable Securities covered by such
registration statement and (ii) the amount of any damages which they would have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Securities Act), shall be entitled
to contribution from any person who is not guilty of such fraudulent
misrepresentation.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement (if
any) entered into in connection with an underwritten public offering of the
Registrable Securities are in conflict with the foregoing provisions, the
provisions in such underwriting agreement shall control.
2.6 INFORMATION BY HOLDER
The Holder or Holders of Registrable Securities included in any
registration shall furnish to the Company such information regarding such Holder
or Holders, the Registrable Securities held by them and the distribution
proposed by such Holder or Holders as the Company may reasonably request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 2.
2.7 RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:
9
<PAGE>
(a) At all times make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Securities
Exchange Act of 1934, as amended;
(c) So long as a Holder owns any Registrable Securities to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Securities Exchange Act of 1934, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
2.8 TRANSFER OF REGISTRATION RIGHTS
The rights to cause the Company to register securities granted Holders
under this Section 2 may be assigned (a) to a transferee or assignee in
connection with any transfer or assignment of Registrable Securities by a Holder
of not less than 100,000 shares of Registrable Securities (as presently
constituted and subject to subsequent adjustments for stock splits, stock
dividends, reverse stock splits, and the like), or (b) to the estate of a
Holder, provided in each case that such transfer may otherwise be effected in
accordance with applicable securities laws and written notice of the transfer is
given to the Company at the time of or within a reasonable time after such
transfer or assignment, stating the name and address of the transferee or
assignee and identifying the Registrable Securities with respect to which such
registration rights are being transferred or assigned, and provided, further,
that the transferee or assignee of such rights agrees in writing to be bound by
the terms of this Agreement as if such transferee were a party hereto.
2.9 STANDOFF AGREEMENT
Each Holder agrees, in connection with registered public offerings of the
Company's securities for the account of the Company, upon request of the Company
or the underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of or otherwise dispose of any
Registrable Securities (other than those included in the registration) without
the prior written consent of the Company or such underwriters, as the
10
<PAGE>
case may be, for such period of time (not to exceed 90 days in the case of other
public offerings) from the effective date of such registration as may be
requested by the underwriters, provided, that the officers and directors of the
Company who own stock of the Company also agree to such restrictions.
2.10 TERMINATION OF REGISTRATION RIGHTS
The rights granted under this Section 2 shall terminate on the earlier of
the fifth anniversary of the date of this Agreement or such time as the
aggregate number of Registrable Securities held by all Holders represents less
than one percent of the outstanding shares of QFC Common Stock.
2.11 DELAY OF REGISTRATION
No Holder or Holders shall have any right to take any action to restrain,
enjoin, or otherwise delay any registration as a result of any controversy that
might arise with respect to the interpretation or implementation of this Section
2.
3. MISCELLANEOUS
3.1 WAIVERS AND AMENDMENTS
With the written consent of the Company and Holders of a majority of
Registrable Securities outstanding, the obligations of the Company and the
rights of the Holders of Registrable Securities under this Agreement may be
waived (either generally or in a particular instance, and either for a specified
period of time or indefinitely), and with the same consent the Company, when
authorized by resolution of its Board of Directors, may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement. Neither
this Agreement nor any provisions hereof may be changed, waived, discharged or
terminated orally, but only by a signed statement in writing.
3.2 GOVERNING LAW
This Agreement shall be governed in all respects by the laws of the State
of Washington as such laws are applied to agreements between Washington
residents entered into and to be performed entirely within Washington.
3.3 SUCCESSORS AND ASSIGNS
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of, and be
11
<PAGE>
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
3.4 ENTIRE AGREEMENT
This Agreement constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof.
3.5 NOTICES
All notices and other communications required or permitted hereunder shall
be effective upon receipt and shall be in writing and may be delivered in
person, by telecopy, electronic mail, overnight delivery service or U.S. mail,
in which event it may be mailed by first class, postage prepaid, addressed
(a) if to a Holder, at P.O. Box L, Lynnwood, WA 98046, or at such other address
as the Holder shall have furnished to the Company, or (b) if to the Company or
Sloan, at 10112 N.E. 10th Street, Bellevue, WA 98004, Attention: President, or
at such other address as shall have furnished to the Holders in writing.
Notwithstanding the foregoing, all notices and communications to addresses
outside the United States shall be given by telecopier and confirmed in writing
sent by overnight or two-day courier service.
3.6 TITLES AND SUBTITLES
The titles of the paragraphs and subparagraphs of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
3.7 LITIGATION; PREVAILING PARTY
In the event of any litigation between the Company and the Investors with
regard to this Agreement, the prevailing party shall be entitled to
reimbursement from the non-prevailing party for all reasonable fees and expenses
of counsel for the prevailing party.
3.8 NOMINEES
Securities registered in the name of a nominee for a Holder shall, for
purposes of this Agreement, be treated as being owned by such Holder.
3.9 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
12
<PAGE>
The foregoing Investors Rights Agreement is hereby executed as of the date
first above written.
QUALITY FOOD CENTERS, INC.
By /S/ DAN KOURKOUMELIS
---------------------------------
Title PRESIDENT
------------------------------
/s/ MAURICE F. OLSON
-----------------------------------
MAURICE F. OLSON
/S/ CHARLES M. OLSON
-----------------------------------
CHARLES M. OLSON
/S/ MAURICE S. OLSON
-----------------------------------
MAURICE S. OLSON
13
<PAGE>
NONCOMPETITION AGREEMENT
This Noncompetition Agreement, dated as of March 1, 1995 (the "Effective
Date"), is entered into by and between Quality Food Centers, Inc., a Washington
corporation ("QFC"), and Maurice F. Olson ("Olson").
RECITALS
A. Olson is the President and majority shareholder of Olson Food Stores,
Inc. ("OFS"), a Washington corporation.
B. OFS and QFC are engaged in the retail grocery business.
C. As of the date of this Agreement, QFC has acquired OFS pursuant to an
Agreement of Merger dated December 23, 1994 (the "Merger Agreement").
D. Olson has been appointed to the QFC Board of Directors as of the
Effective Date, and QFC and Olson have discussed the possibility that Olson may
become a consultant to QFC following the date of this Agreement.
E. QFC and Olson desire to set forth in this Agreement certain
noncompetition covenants that will be applicable to Olson.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, QFC and Olson hereby agree as follows:
1. NONCOMPETITION
1.1 NONCOMPETITION
Olson agrees that, except as otherwise provided in this Agreement, he shall
not, during the period commencing on the Effective Date and ending on the later
of (a) five years from the date of this Agreement or (b) three years after the
termination, whether voluntary or involuntary, of any consulting arrangement
which may be entered into after the Effective Date by QFC and Olson (the
"Noncompetition Period"), be employed by, consult with or otherwise perform
services for, own, manage, operate, control or participate in the ownership,
management, operation or control of, any retail
<PAGE>
grocery store located within 20 miles of any retail grocery store operated by
QFC at the later of (a) the date of termination of his employment, if any, by
QFC as a consultant or (b) the date Olson ceases to be a member of the Board of
Directors of QFC (a "QFC Store"); PROVIDED, HOWEVER, that nothing herein shall
prevent the purchase or ownership by Olson of securities that constitute less
than five percent of the outstanding voting securities of a publicly held
corporation. Olson also agrees that during the period described above he will
not invest funds in, enter into agreements to lease real property at below
market rates to, or make loans to any retail grocery store owned by his sons and
located within 20 miles of any QFC Store.
1.2 EXCLUSIONS
The noncompetition covenants in Section 1.1 shall not be applicable to the
ownership, management, operation and control by Olson of, or to the performance
by Olson of services for, the retail grocery stores and retail grocery store
sites defined as the "Max Stores" in that certain Right of First Refusal entered
into in connection with the closing under the Merger Agreement, so long as Olson
has a direct or indirect ownership interest in the Max Stores and Max Sites.
Olson agrees that he will divest himself of any and all direct or indirect
ownership interests in the Max Stores within two years after the Effective Date.
The parties acknowledge that Olson will continue to own, manage and operate a
wholesale bakery business supplying QFC Stores and other retail grocery stores,
as well as the equipment business currently conducted by Signature Equipment
Co., none of which are intended by the parties to be within the scope of Olson's
noncompetition covenants. The parties also agree that Olson shall not be
required by this Agreement to divest any shares of stock of Associated Grocers,
Inc. owned by him or by any business under his control, nor shall Olson be
prevented from receiving rental income, including without limitation percentage
rent, from retail grocery stores that lease real or personal property from Olson
or from any business under his control, provided that Olson does not subsidize
grocery stores competing with QFC Stores by entering into agreements to lease
real property to them at below market rates.
2. CONSIDERATION
The parties agree that $2,000,000 of the consideration paid to Olson
pursuant to the Merger Agreement was paid in consideration of Olson's
noncompetition covenants set forth in this Agreement.
-2-
<PAGE>
3. BOARD SEAT
The Merger Agreement provides that Olson will be appointed to the QFC Board
of Directors on the date of this Agreement. QFC further agrees to make all
reasonable efforts to cause Olson to be elected to a three-year term on the
Board of Directors at QFC's annual meeting of shareholders to be held in 1995,
including nominating Olson as a management candidate to the Board of Directors
and recommending his election to shareholders.
4. EQUITABLE RELIEF
Olson acknowledges that this Agreement is essential to QFC and that damages
sustained by QFC as a result of a breach of this Agreement cannot be measured
precisely. As a consequence of the foregoing Olson agrees that QFC,
notwithstanding any other provision of this Agreement, and in addition to any
other remedy it may have under this Agreement or at law, shall be entitled to
injunctive and other equitable relief, including, without limitation, specific
performance, to prevent or curtail any breach of any provision of this
Agreement.
5. ARBITRATION
Any controversies or claims arising out of or relating to this Agreement
shall be fully and finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect (the "AAA Rules"), conducted in Seattle, Washington by one arbitrator
either mutually agreed upon by Olson and QFC or chosen in accordance with the
AAA Rules, except that the parties thereto shall have any right to discovery as
would be permitted by the Federal Rules of Civil Procedure for a period of 90
days following the commencement of such arbitration and the arbitrator thereof
shall resolve any dispute which arises in connection with such discovery. The
prevailing party shall be entitled to costs, expenses and reasonable attorneys'
fees, and judgment upon the award rendered by the arbitrator may be entered in
any court of competent jurisdiction.
6. MISCELLANEOUS
All notices given hereunder shall be given as provided in the Merger
Agreement. No delay or failure by either party in exercising, protecting or
enforcing any of its rights or remedies shall constitute a waiver thereof. The
express waiver by a party of any right or remedy in a particular instance or
circumstance shall not constitute a waiver thereof in any other instance or
circumstance. No amendment, modification, waiver, termination or discharge of
any
-3-
<PAGE>
provision of this Agreement shall be effective unless set forth in writing and
signed by the parties. This Agreement shall be governed by and construed in
accordance with the laws of the state of Washington. If any provision of this
Agreement shall for any reason be held invalid, illegal or unenforceable by a
court of competent jurisdiction, then, to the full extent permitted by law, all
other provisions shall remain in full force and effect and shall be construed in
order to carry out the intent of the parties hereto and any court or arbitrator
having competent jurisdiction shall have the power to reform such invalid,
illegal or unenforceable provision to the extent necessary for such provision to
be enforceable. This Agreement constitutes the entire agreement between the
parties and supersedes any and all other oral or written communications,
understandings or agreements between the parties with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date.
QUALITY FOOD CENTERS, INC.
By: /S/ DAN KOURKOUMELIS
--------------------------------
Title: PRESIDENT
/S/ MAURICE F. OLSON
-----------------------------------
Maurice F. Olson
-4-
<PAGE>
QUALITY FOOD CENTERS, INC.
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Calculations of earnings per share reported in this report on Form 10-K for the
periods presented are based on the following:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 31, 1994 December 25, 1993 December 26, 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
PRIMARY
Weighted average
shares outstanding 19,434,211 19,299,718 19,233,684
Dilutive effect
of stock options 221,789 292,282 389,316
---------- ---------- ----------
Weighted average
common and equivalent
shares outstanding 19,656,000 19,592,000 19,623,000
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED
Weighted average
shares outstanding 19,434,211 19,299,718 19,233,684
Dilutive effect
of stock options 239,789 292,282 389,316
---------- ---------- ----------
Weighted average
common and equivalent
shares outstanding 19,674,000 19,592,000 19,623,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
FISCAL YEAR ENDED (IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dec. 31, 1994 Dec. 25, 1993 Dec. 26, 1992 Dec. 28, 1991 Dec. 29, 1990
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $575,879 $518,260 $460,107 $395,151 $347,652
Operating income 39,212 38,897 36,845 29,987 23,080
Net earnings 26,376 25,994 25,076 20,647 15,937
Earnings per share 1.34 1.33 1.28 1.06 .83
Weighted average
shares outstanding 19,656 19,592 19,623 19,510 19,294
Cash dividends
per share $ .20 $ .15 $ - $ - $ -
Total assets $207,914 $181,275 $150,974 $115,922 $ 92,707
Shareholders' equity 158,178 133,620 108,345 81,169 59,077
Depreciation and
amortization 11,605 9,283 7,782 6,511 6,001
-------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
15
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL REVIEW
--------------------------------------------------------------------------------
R E C E N T D E V E L O P M E N T S
On March 2, 1995, the principal operations of the Olson's Food Stores chain were
merged into the Company, including twelve Olson's supermarkets - eight in
Snohomish County and four in King County, Washington - three additional stores
in various stages of development and rights to several other future sites in the
same market. As consideration for the operations being merged, the Company paid
$18 million in cash, issued 752,941 shares of common stock and assumed $24
million of Olson's long-term debt. The Company acquired the Rainier Market
store in Seattle in January 1995. The store was closed for demolition and a
replacement store is being constructed to be opened in the summer of 1995. The
Company also entered into an agreement to acquire three stores from Puget Sound
Marketing, located in Auburn, Enumclaw and Gig Harbor, Washington operating
under the Hogan's Market and Bag & Save names. This transaction is expected to
be consummated on March 25, 1995, subject to the satisfaction of certain
conditions.
As part of a recapitalization, on January 19, 1995, the Company commenced a
self-tender offer for up to 7,000,000 shares of its common stock at a price of
$25.00 per share payable in cash. The tender offer will expire on March 17,
1995. In addition, the Company agreed to sell 1,000,000 newly issued shares of
its own common stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00 per
share. This transaction is expected to close on March 30, 1995. Zell/Chilmark
will also acquire 2,975,000 shares at $25.00 per share directly from the
Company's chairman and chief executive officer in a separate transaction which
is expected to close on January 15, 1996. The Company will borrow up to
approximately $174,000,000 under a new $220,000,000 senior credit facility to
finance the $24 million of long-term debt assumed in the Olson's merger and to
repurchase its shares pursuant to the self-tender offer.
Due to the above developments, the Company's financial statements will
change significantly, reflecting lower cash balances, a significant reduction in
shareholders' equity and increase in long-term debt and a related reduction in
interest income and increase in interest expense. Pro forma information
regarding the Olson's merger and recapitalization is presented in Note J to the
Company's 1994 financial statements.
O V E R V I E W
QFC reported record sales and earnings for its eighth consecutive year since
going public in 1987. While its margins and financial ratios are among the
highest in the supermarket industry, 1994 was a challenging year for the Company
as it faced its third consecutive year of food price deflation, difficult
comparisons during the first part of the year due to external events in 1993, as
well as a softer regional economy, a more cautious consumer and a supermarket
industry that remains highly competitive. The Company also experienced
increases in certain operating expenses and occupancy costs due to rate
increases in certain areas such as labor and from adding a record number of
stores. As a result of these factors, the Company experienced lower operating
margins and modest increases in its sales and earnings in 1994.
16
<PAGE>
--------------------------------------------------------------------------------
The table below sets forth items in the Company's statements of earnings as a
percentage of sales:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- ---------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales & related occupancy expenses 74.8 74.7 74.6
--------- -------- ---------
Gross margin 25.2 25.3 25.4
Marketing, general & administrative expenses 18.4 17.8 17.4
--------- -------- ---------
Operating income 6.8 7.5 8.0
Interest income .2 .2 .2
--------- -------- ---------
Earnings before income taxes 7.0 7.7 8.2
Taxes on income 2.4 2.7 2.8
--------- -------- ---------
Net earnings 4.6% 5.0% 5.4%
--------- -------- ---------
------------------------------------------------------ -------- ---------
</TABLE>
SALES
Sales increases over the past three years are due primarily to the opening of
new stores and the expansion and remodeling of existing stores. Square footage
from new stores, acquired stores and expansion and remodeling increased 22%, 19%
and 18% in 1994, 1993 and 1992.
Sales for 1994 reached $575.9 million, an increase of $57.6 million, or
11.1%. Comparable store sales, which exclude sales in stores opened or
remodeled during the previous 12 months and the 53rd week of 1994, decreased
0.5%. This reflects food price deflation and the unusually strong results in
the first half of 1993 due to increased sales from widespread power outages in
our market area resulting from a major windstorm and an E. coli-bacteria
outbreak in a local fast-food chain. These external events helped produce an
18% sales gain with a 6.5% increase in comparable store sales in the first
quarter of 1993. The sales increase in 1994 includes the additional week due to
1994 being a 53-week year. The Company's sales increase in 1994 was lower than
the 22% increase in store square footage because the majority of square feet
added was from new and acquired stores open for a partial year, and whose sales
per square foot are significantly lower than newly remodeled or older, more
mature stores.
Sales for 1993 were $518.3 million, an increase of $58.2 million, or 12.6%.
Comparable store sales increased 2.9%.
Sales increased $64.9 million in 1992, reaching $460.1 million, a 16.4%
increase. Comparable store sales were up 2.9%.
17
<PAGE>
--------------------------------------------------------------------------------
Sales per square foot of selling space were $619, $681 and $718 in 1994,
1993 and 1992. This trend, and the lower percentage growth in comparable store
sales, are the result of new, larger and less mature stores 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. In addition, the Company experienced lower sales in certain existing
stores due to the Company's competitors opening new stores and remodeling their
stores that are located near the Company's stores. Management believes that
these sales trends will continue in 1995 due to the above factors, especially if
deflation and a softer regional economy continue. Historically, comparable
store sales increases have resulted from market penetration through the maturing
of the Company's newer stores, the Company's continuing commitment to customer
service and quality merchandise, its expanding marketing and merchandising
efforts and the long-term benefits from its store expansion and remodeling
program.
INFLATION
During 1994, the Company's sales reflect food price deflation of approximately
1.4% while during 1993 and 1992, the Company's sales reflect food price
deflation of less than 1%.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses increased slightly in 1994 and 1993
due to promotional pricing for the opening of new and remodeled stores, ongoing
competitive pricing and rising occupancy costs, including depreciation and
amortization resulting from new and remodeled stores. The impact of these
factors has been largely mitigated by a larger portion of sales coming from
higher margin service departments, more effective merchandising and buyin
g and reduced inventory shrinkage due to improved systems and controls. The
adjustment for LIFO inventory resulted in no change in cost of sales in 1994, an
increase of $25,000 in 1993, and a decrease of $161,000 in 1992.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses (operating expenses), as a
percent of sales, increased .6% to 18.4% in 1994 after a .4% increase in 1993.
These increases resulted primarily from two factors. First, while sales reflect
continued deflation, rates for certain operating expenses, such as store labor
and utilities continued to increase. Secondly, lower sales per square foot and
higher expenses associated with new stores had an impact on operating expenses.
Further, four of the newly acquired stores were undergoing major remodeling
during the fourth quarter of 1994, resulting in higher operating expenses. The
Company continues to focus on controlling operating expenses and improving
productivity while maintaining superior service levels and high product quality
and selection in well-maintained stores.
18
<PAGE>
--------------------------------------------------------------------------------
OPERATING INCOME
Operating income increased less than 1% in 1994 on an 11.1% sales increase and
6% in 1993 on a 12.6% sales gain due to declining operating margins as described
above. Operating income increased 23% in 1992 on a sales gain of 16.4% as
improved gross margins and a lower operating expense ratio resulted in record
operating margins of 8% of sales.
INTEREST INCOME
Interest income increased $53,000 in 1994 due to higher cash balances and
interest rates, while 1993 was up slightly over 1992 due to higher average cash
balances.
INCOME TAXES
The Company's effective federal income tax rate was 34.3% in 1994, 34.7% in 1993
and 33.5% in 1992. The increase in the Company's effective tax rate in 1993 was
due to the Omnibus Budget Reconciliation Act of 1993 ("the 1993 Tax Act"),
which raised corporate tax rates one percent to 35% retroactive to the beginning
of 1993. This resulted in additional federal income tax expense for 1993,
including $138,000 for the revaluation of the Company's deferred tax liability
in its financial statements as required by Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes", which the Company
adopted effective December 27, 1992. Including this effect, the impact of the
1993 Tax Act on the Company's 1993 earnings was a reduction of approximately
$535,000, or $.03 per share.
NET EARNINGS
Higher operating and interest income and a slightly lower effective tax rate
resulted in a 1.5% increase in net earnings in 1994 to a record $26.4 million,
or 4.6% of sales. The 6% increase in 1993 operating income and slight increase
in interest income were offset in part by the effect of the 1993 Tax Act,
resulting in a 3.7% increase in net earnings for 1993, which were $26 million,
or 5.0% of sales, compared with net earnings of $25.1 million, or 5.4% of sales
in 1992. Earnings per share were $1.34 in 1994, compared with $1.33 in 1993 and
$1.28 in 1992.
19
<PAGE>
--------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's principal source of liquidity has been cash generated from
operations. Cash provided by operations of $34.6 million along with proceeds
from issuances of stock under the Company's benefit plans of $2.1 million in
1994, were offset by capital expenditures of $28.2 million and cash dividends of
$3.9 million. This resulted in an increase in the Company's cash and cash
equivalents of $3.9 million during 1994 to $35.2 million. The Company's ratio
of current assets to current liabilities increased to 1.58 to 1 at December 31,
1994, compared to 1.35 to 1 at December 25, 1993.
The Company's expansion and remodeling and new store activities for the
period from 1986 through 1994, are summarized below:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
New or Square Capital
Major Remodels / Acquired Feet Expenditures*
Replacement Stores Re-remodels Stores Added (in thousands)
------------------ ------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
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
------------------ ------------- ------------- ------------- ------------------
Total 25 6 24 950,000 $167,200
------------------ ------------- ------------- ------------- ------------------
------------------------- ------------- ------------- ------------- ------------------
<FN>
* Includes purchase of real estate held for investment.
</TABLE>
1994 was the Company's most active year to date in terms of square footage
growth. New stores included one new construction, the acquisition of a store
in Sequim, the Company's first on t
he Olympic Peninsula, and the acquisition of five other stores from two
independent operators in the Company's existing market.
1995 will represent an even more aggressive year with an increase in square
footage of 48% expected from the 12 Olson's stores, the Rainier Market store and
three stores to be acquired from Puget Sound Marketing described above under
Recent Developments. 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.
20
<PAGE>
--------------------------------------------------------------------------------
The Company owns the real estate at five of its 45 store facilities in
operation. As of December 31, 1994, the Company owned the strip shopping
centers where four of these stores are located; however, the real estate
operations of these centers are currently insignificant to the Company's results
of operations. The Company has sold one of the centers since year end and the
others are for sale. 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 remain substantial in 1995 and subsequent years as the Company
continues to expand and remodel existing stores and acquire and open new stores.
During 1994, the Company paid cash dividends of $.20 per share of the
Company's common stock totalling $3.9 million and a dividend of $.05 per share
was paid in February 1995. The Company has a share repurchase program under
which it is authorized to make open market purchases from time to time of up to
1,000,000 shares of the outstanding common stock of the Company. No shares have
been purchased under this program.
The $220 million Credit Facility to be entered into in connection with the
recapitalization discussed above under Recent Developments consists of a term
loan of $140 million (the "Term Loan") and revolving credit loans of up to $80
million (the "Revolving Loans"), if 7,000,000 Shares are purchased in the Offer.
Principal repayments of the Term Loan are due in quarterly installments from
March 1997 through September 2001. The Revolving Loans are available on a
revolving credit basis 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 and .5% above the federal funds rate
or (2) LIBOR 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, and 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 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 this 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, through other institutional financing or further issuance of
debt or equity securities.
21
<PAGE>
--------------------------------------------------------------------------------
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 25, 1993 AND DECEMBER 26, 1992
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Sales $575,878,589 $518,259,868 $460,106,878
Cost of sales and related occupancy expenses 430,711,080 386,895,474 343,118,425
Marketing, general and administrative expenses 105,955,569 92,467,509 80,143,311
------------- ------------- -------------
Operating income 39,211,940 38,896,885 36,845,142
Interest income 932,596 879,687 863,578
------------- ------------- -------------
Earnings before income taxes 40,144,536 39,776,572 37,708,720
Taxes on income:
Current 11,593,000 11,207,000 10,628,000
Deferred 2,175,000 2,576,000 2,005,000
------------- ------------- -------------
Total taxes on income 13,768,000 13,783,000 12,633,000
------------- ------------- -------------
Net earnings $ 26,376,536 $ 25,993,572 $ 25,075,720
------------- ------------- -------------
------------- ------------- -------------
Earnings per share $ 1.34 $ 1.33 $ 1.28
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding 19,656,000 19,592,000 19,623,000
------------- ------------- -------------
Dividends per common share $ .20 $ .15 -
------------- ------------- -------------
------------------------------------------------------------ ------------- -------------
<FN>
See notes to financial statements.
</TABLE>
22
<PAGE>
--------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------------- Retained
Shares Amount Earnings Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 28, 1991 19,120,060 $20,294,449 $ 60,874,348 $ 81,168,797
Net earnings - - 25,075,720 25,075,720
Common stock issued 113,624 1,577,791 - 1,577,791
Tax benefit related
to stock options - 523,000 - 523,000
------------- ------------- ------------- -------------
Balance at December 26, 1992 19,233,684 22,395,240 85,950,068 108,345,308
Net earnings - - 25,993,572 25,993,572
Common stock issued 115,463 1,980,582 - 1,980,582
Tax benefit related
to stock options - 199,829 - 199,829
Cash dividends ($.15 per share) - - (2,899,049) (2,899,049)
------------- ------------- ------------- -------------
Balance at December 25, 1993 19,349,147 24,575,651 109,044,591 133,620,242
Net earnings - - 26,376,536 26,376,536
Common stock issued 131,862 1,992,900 - 1,992,900
Tax benefit related
to stock options - 76,065 - 76,065
Cash dividends ($.20 per share) - - (3,887,905) (3,887,905)
------------- ------------- ------------- -------------
Balance at December 31, 1994 19,481,009 $26,644,616 $131,533,222 $158,177,838
------------- ------------- ------------- -------------
-------------------------------------------------- ------------- ------------- -------------
<FN>
See notes to financial statements.
</TABLE>
23
<PAGE>
--------------------------------------------------------------------------------
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1994 December 25, 1993
------------------ ------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 35,162,625 $ 31,256,492
Accounts receivable 3,285,717 2,779,017
Inventories 23,615,073 19,429,927
Prepaid expenses 2,645,579 1,890,137
------------------ ------------------
Total Current Assets 64,708,994 55,355,573
Properties
Land 9,721,225 9,410,200
Buildings, fixtures and equipment 96,096,154 82,834,617
Leasehold improvements 32,577,792 28,571,543
------------------ ------------------
138,395,171 120,816,360
Accumulated depreciation and amortization (36,095,273) (26,169,199
------------------ ------------------)
102,299,898 94,647,161
Leasehold interest, net of accumulated amortization
of $7,946,985 and $6,800,940 16,133,654 16,479,699
Real estate held for investment 19,166,054 11,969,975
Other assets 5,605,002 2,822,583
------------------ ------------------
$207,913,602 $181,274,991
------------------ ------------------
------------------ ------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 24,043,452 $ 24,078,572
Accrued payroll and related benefits 9,941,414 9,459,804
Accrued business and sales taxes 3,915,494 3,188,322
Other accrued expenses 2,692,404 3,759,051
Federal income taxes payable 340,000 541,000
------------------ ------------------
Total Current Liabilities 40,932,764 41,026,749
Deferred income taxes 8,803,000 6,628,000
Shareholders' Equity
Common stock, at stated value -
Authorized 60,000,000 shares
Issued and outstanding 19,481,009 shares
and 19,349,147 shares 26,644,616 24,575,651
Retained earnings 131,533,222 109,044,591
------------------ ------------------
Total Shareholders' Equity 158,177,838 133,620,242
------------------ ------------------
$207,913,602 $181,274,991
------------------ ------------------
------------------------------------------------------------------------------- ------------------
<FN>
See notes to financial statements.
</TABLE>
24
<PAGE>
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 25, 1993 AND DECEMBER 26, 1992
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 26,376,536 $ 25,993,572 $ 25,075,720
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 10,130,395 8,040,474 6,869,675
Amortization of leasehold interest and other 1,474,404 1,242,383 912,267
Deferred income taxes 2,175,000 2,576,000 2,005,000
Change in operating assets and liabilities:
Accounts receivable (506,700) 164,327 (979,399)
Inventories (4,185,146) (3,587,343) (2,454,325)
Prepaid expenses (755,442) (327,116) (721,730)
Accounts payable (35,120) 1,751,063 4,720,957
Accrued payroll and related benefits 481,610 603,201 498,642
Accrued business and sales taxes 727,172 406,122 457,964
Other accrued expenses (1,066,647) 258,027 (17,087)
Federal income taxes payable (201,000) (568,000) 210,000
------------- ------------- -------------
Net cash provided by operating activities 34,615,062 36,552,710 36,577,684
------------- ------------- -------------
Investing Activities
Capital expenditures (20,983,065) (39,864,618) (26,468,742)
Purchase of real estate held for investment (7,196,079) (3,156,420) (358,582)
Other (710,845) 1,493,830 2,260,944
------------- ------------- -------------
Net cash used by investing activities (28,889,989) (41,527,208) (24,566,380)
------------- ------------- -------------
Financing Activities
Proceeds from issuances of common stock 2,068,965 2,180,411 2,100,791
Cash dividends (3,887,905) (2,899,049) -
------------- ------------- -------------
Net cash provided (used) by financing activities (1,818,940) (718,638) 2,100,791
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents 3,906,133 (5,693,136) 14,112,095
Cash and cash equivalents
at beginning of period 31,256,492 36,949,628 22,837,533
------------- ------------- -------------
Cash and cash equivalents at end of period $ 35,162,625 $ 31,256,492 $ 36,949,628
------------- ------------- -------------
---------------------------------------------------------------- ------------- -------------
Supplemental cash flow information
Cash paid during the year for:
Income taxes $ 11,718,000 $ 11,576,000 $ 9,895,000
------------- ------------- -------------
<FN>
See notes to financial statements.
</TABLE>
25
<PAGE>
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 25, 1993 AND DECEMBER 26, 1992
--------------------------------------------------------------------------------
Note A
Summary of Significant Accounting Policies
Organization - Quality Food Centers, Inc. (QFC) owns and operates a chain of
retail supermarkets in Washington State.
Earnings Per Share - Earnings per share is based upon the weighted average
number of common shares and common share equivalents outstanding during the
period.
Fiscal Year - The Company's fiscal year ends on the last Saturday in December.
The year ended December 31, 1994 was a 53-week fiscal year. The years ended
December 25, 1993 and December 26, 1992 represent 52-week fiscal years.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents. The Company's investment portfolio is diversified and consists of
investment grade securities, recorded at cost which approximates market value.
The Company's cash management system provides for reimbursement of bank
disbursement accounts on a daily basis. Checks issued but not presented for
payment to the bank in the aggregate amount of $13,004,480 and $11,452,149 at
December 31, 1994 and December 25, 1993, are included in accounts pa
yable.
Depreciation and Amortization - Depreciation is provided on the straight-line
method over the shorter of the estimated useful lives or 311/2 years for
buildings and three to ten years for fixtures and equipment. Amortization of
leasehold improvements is computed on the straight-line method over the term of
the lease or useful life of the assets, whichever is shorter.
Start-up and Promotional Expenses - Costs incurred in connection with the start-
up and promotion of new store openings and major store remodels are expensed as
incurred.
Leasehold Interest - Leasehold interests from acquired operating lease rights
are amortized over the term of the respective leases, including renewal periods
exercisable at the option of the Company. Management believes that exercise of
renewal options is probable. Periodically, the Company renegotiates its leases
to facilitate the remodeling and expansion of its stores. The impact of lease
modifications on the related leasehold interest is evaluated to determine if the
asset has been impaired.
Real Estate Held for Investment - Real estate held for investment includes land
and buildings the Company has acquired where it plans to either operate a store
in the future or sell the real estate, and is recorded at the lower of cost or
market.
Reclassifications - Certain prior years' balances have been reclassified to
conform to classifications used in the current year.
26
<PAGE>
--------------------------------------------------------------------------------
NOTE B
INVENTORIES
Substantially all merchandise inventories are valued at the lower of last-in,
first-out (LIFO) cost or market. The LIFO method results in a better matching
of costs and revenues, as current merchandise cost is recognized in cost of
merchandise sold instead of in ending inventories as is the practice under the
first-in, first-out (FIFO) method. Information related to the FIFO method may
be useful in comparing operating results to those of companies not on LIFO.
On a supplemental basis, if inventories had been valued at the lower of FIFO
cost or market, inventories would have increased by $1,214,500 as of December
31, 1994 and December 25, 1993, and net earnings would have increased by $16,000
in 1993 and decreased by $106,000 in 1992.
--------------------------------------------------------------------------------
NOTE C
LEASES
The Company leases its administrative offices and 40 of its 45 store facilities
in operation under noncancelable operating leases expiring through 2022.
Certain of the leases include renewal provisions at the Company's option.
Minimum rental commitments under noncancelable leases, which exclude stores
added in 1995, as of December 31, 1994, are as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ending
December
------------ -------------
<S> <C>
1995 $ 8,140,900
1996 7,991,400
1997 7,844,100
1998 7,649,900
1999 7,412,600
Thereafter 73,767,000
------------ -------------
$112,805,900
-------------
-------------------------------------------------------------- -------------
</TABLE>
A majority of the store facility leases provide for contingent rentals based
upon specified percentages of sales, real estate tax escalation clauses and
executory costs. Space in several store facilities has been sublet.
A summary of rental expense under operating leases is as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Minimum rent $ 8,184,998 $ 7,170,043 $5,212,688
Contingent rentals 1,744,072 1,989,793 2,813,105
Real estate taxes and executory costs 2,321,142 2,029,980 1,686,011
Less sublease rentals (164,263) (161,030) (170,091)
------------ ------------ -----------
$12,085,949 $11,028,786 $9,541,713
------------ ------------ -----------
------------------------------------------------- ------------ -----------
</TABLE>
27
<PAGE>
--------------------------------------------------------------------------------
NOTE D
FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and result from
differences in the timing of recognition of revenue and expenses for tax and
financial statement reporting. The tax effects of significant items comprising
the Company's deferred tax liability as of December 31, 1994 and December 25,
1993 are as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Compensated absences $ 750,000 $ 606,000
Self insurance 388,000 433,000
Other 688,000 606,000
-------------- --------------
1,826,000 1,645,000
Deferred tax liabilities:
Accelerated depreciation 9,813,000 7,364,000
Multiemployer pension contribution 558,000 439,000
Other 258,000 470,000
-------------- --------------
10,629,000 8,273,000
-------------- --------------
Net deferred tax liability $ 8,803,000 $ 6,628,000
-------------- --------------
--------------------------------------------------------------- --------------
</TABLE>
The Company's effective tax rate was 34.3%, 34.7% and 33.5% in 1994, 1993 and
1992. Differences from statutory rates resulted primarily from investments in
tax-free municipal securities. No valuation allowance was necessary for the
deferred tax assets at December 31, 1994.
--------------------------------------------------------------------------------
NOTE E
RELATED PARTY TRANSACTIONS
Pursuant to an agreement with its chairman, chief executive officer and
principal shareholder, the Company pays a management fee of 0.2% of sales as
compensation for management advisory services. The Company does not pay a
salary or bonus to its chairman and chief executive officer. Management fee
expense under the agreement for 1994, 1993 and 1992 was $1,151,757, $1,036,520
and $920,214.
In August 1993, two partnerships which include the Company's chairman and
chief executive officer acquired the 24-acre University Village Shopping Center,
where one of the Company's stores is located and which is adjacent to the 8.8
acre parcel of land the Company acquired in 1991. In connection with the
transaction the Company negotiated with the partnerships for certain property
rights and lease modifications, which among other rights, provide the Company
with the right to be the exclusive grocery store in the center, the right to
relocate its store and a lease term extension of 15 years. The Company paid
$4,960,000 for these rights, which is included in Leasehold Interest and is
being amortized over the life of the lease. Rentals and common area and real
estate tax reimbursements paid to the partnerships were at the same rates paid
to the previous owner of the center and totaled approximately $715,000 and
$244,000 for fiscal years ended December 31, 1994 and December 25, 1993.
28
<PAGE>
--------------------------------------------------------------------------------
NOTE F
RETIREMENT PLANS
The Company participates in a union administered multiemployer defined benefit
pension plan for employees covered by collective bargaining agreements. The
contributions under this plan were $2,386,971, $2,166,699 and $1,950,836 for
1994, 1993 and 1992.
The Company's defined contribution profit-sharing plan includes employees not
covered by collective bargaining agreements who meet certain service
requirements. Contributions to the plan are based on a percentage of gross
wages and are made at the discretion of the Company. The Company's profit-
sharing expense was $467,000, $372,000 and $366,000 for 1994, 1993 and 1992.
The Company maintains a voluntary defined contribution retirement plan qualified
under Section 401(k) of the Internal Revenue Code of 1986, available to all
eligible employees not covered by collective bargaining agreements. The Company
does not currently match employee contributions to the plan.
--------------------------------------------------------------------------------
NOTE G
SHAREHOLDERS' EQUITY
In March 1987, the Company adopted an Incentive Stock Option Plan, under which
options vest ratably over five years and expire after 10 years from the date of
grant. In December 1989, the Company adopted its Directors' Nonqualified Stock
Option Plan for non-employee (non-affiliated) directors of the Company, under
which non-qualified options vest ratably over three years and expire, with
certain exceptions, ten years after the date of grant. In 1993, the Company's
shareholders approved the 1993 Executive Stock Option Plan, under which non-
qualified options vest ratably over five years and expire after 10 years.
These plans provide for the grant of options to acquire up to 2,300,000 shares
of common stock to officers, directors and employees. Options for 985,453
shares granted to 502 employees and four directors were outstanding at December
31, 1994. Stock option activity under these plans for the last three years was
as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Option Price
of Shares per Share
---------- ------------
<S> <C> <C>
Outstanding, December 28, 1991 632,280 $ 3.25 to 33.00
Granted 112,550 31.38 to 34.00
Forfeited (6,240) 6.06 to 33.50
Exercised (52,100) 3.25 to 28.50
Outstanding, December 26, 1992 686,490 3.25 to 34.00
Granted 205,800 25.50 to 32.75
Forfeited (3,930) 6.06 to 34.00
Exercised (54,841) 3.25 to 31.38
Outstanding, December 25, 1993 833,519 3.25 to 34.00
Granted 204,200 21.00 to 22.75
Forfeited (11,610) 6.06 to 34.00
Exercised (40,656) 3.25 to 17.25
Outstanding, December 31, 1994 985,453 3.25 to 34.00
Exercisable, December 31, 1994 487,393 $ 3.25 to 34.00
</TABLE>
29
<PAGE>
--------------------------------------------------------------------------------
In 1990, the Company adopted an Employee Stock Purchase Plan under which
500,000 shares of the Company's common stock are reserved for issuance to
employees. Employees are eligible to participate through payroll deductions in
amounts related to their basic compensation. At the end of each offering
period, shares are purchased by the participants at 85% of the lower of the fair
market value at the beginning or the end of the offering period.
Under the plan, 91,206, 60,622 and 61,524 shares were issued to 1,061,
1,088 and 801 employees, in 1994, 1993 and 1992. As of December 31, 1994,
payroll deductions totaling $1,141,242 on behalf of approximately 950 employees
were accrued for purchase of shares on March 31, 1995.
--------------------------------------------------------------------------------
NOTE H
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 will have
the effect of an acquisition of 100% of the outstanding voting securities of
Olson's Food for $18,000,000 cash, 752,941 shares of the Company's common stock,
which as of March 2, 1995 had a value of $18,070,000, and the assumption by the
Company of approximately $24,000,000 of indebtedness of Olson's Food. Pro forma
financial information related to this transaction is presented in Note J.
--------------------------------------------------------------------------------
NOTE I
RECAPITALIZATION
On January 19, 1995, the Company commenced a self-tender offer for up to
7,000,000 shares of its common stock at a price of $25.00 per share payable in
cash. In addition, the Company agreed to sell 1,000,000 newly issued shares of
its own common stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00 per
share. Zell/Chilmark will also acquire 2,975,000 shares at $25.00 per share
directly from the Company's chairman and chief executive officer in a separate
transaction. In connection with the self-tender and the Olson's merger
described in Note H, the Company will also borrow up to approximately
$174,000,000 under a new $220,000,000 senior credit facility. Pro forma
financial information related to the recapitalization is presented in Note J.
30
<PAGE>
--------------------------------------------------------------------------------
NOTE J
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma financial information sets forth historical information
which has been adjusted to reflect the Olson's Food merger and the
recapitalization described in Notes H and I. The pro forma information is
presented as of and for the year ended December 31, 1994. Olson's historical
information is as of and for the year ended October 29, 1994. The pro forma
statement of earnings information assumes the transactions have taken place at
the beginning of the period presented, while the pro forma balance sheet
information assumes the transactions have occurred on December 31, 1994.
CONDENSED STATEMENTS OF EARNINGS INFORMATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
-------------------------------
December 31, 1994 Olson's Olson's Recapitalization December 31, 1994
----------------- ----------- ---------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Sales $575,879 $112,098 $ - $ - $687,977
Net earnings 26,376 3,685 (2,591) (7,937) 19,533
Earnings per share $ 1.34 N/A - - $ 1.36
Weighted average
shares outstanding 19,656 N/A 753 (6,000) 14,409
-------------------------------------- ----------- ----------- ----------------- --------------------
</TABLE>
CONDENSED BALANCE SHEET INFORMATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
------------------------------
December 31, 1994 Olson's Olson's Recapitalization December 31, 1994
------------------ ---------- ---------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Current assets $ 64,709 $ 7,694 $(18,000) $ (5,500) $ 48,903
Property, plant
and equipment 102,300 16,721 - - 119,021
Other assets 40,905 961 42,388 1,200 85,454
------------------ ---------- ---------- ----------------- ------------------
$207,914 $ 25,376 $ 24,388 $ (4,300) $253,378
------------------ ---------- ---------- ----------------- ------------------
-------------------------------------- ---------- ---------- ----------------- ------------------
Current liabilities $ 40,933 $ 7,694 $ - $ - $ 48,627
Long-term debt - 6,583 17,417 150,000 174,000
Deferred income
taxes 8,803 - - - 8,803
Shareholders'
Equity 158,178 11,099 6,971 (154,300) 21,948
------------------ ---------- ---------- ----------------- ------------------
$207,914 $ 25,376 $ 24,388 $ (4,300) $253,378
------------------ ---------- ---------- ----------------- ------------------
-------------------------------------- ---------- ---------- ----------------- ------------------
</TABLE>
31
<PAGE>
--------------------------------------------------------------------------------
Pro forma adjustments to the balance sheet information reflect the
reduction in cash, increase in long-term debt and change in common stock
outstanding as a result of the Olson's merger and recapitalization, assuming
7,000,000 shares are repurchased. Pro forma adjustments to the statement of
earnings information reflect the related reduction in interest income, increase
in interest expense and additional depreciation and amortization of the excess
of the price paid in connection with the Olson's merger over the fair value of
the net tangible assets to be acquired.
The pro forma results are not necessarily indicative of what actually would
have occurred if the Olson's merger and recapitalization had been in effect for
the period presented, are not intended to be a projection of future results and
do not reflect any synergies that might be achieved from combined operations.
Nonrecurring charges of $1.4 million directly resulting from the
recapitalization are not reflected in the pro forma information for the 53 weeks
ended December 31, 1994.
--------------------------------------------------------------------------------
NOTE K
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected financial data for each of the four
quarters of 1994 and 1993. (In thousands except earnings per share):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(12 weeks) (12 weeks) (12 weeks) (17 weeks)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994
Sales $120,986 $127,182 $135,471 $192,239
Cost of sales and
related occupancy expenses 90,446 94,624 101,241 144,401
Gross margin 30,540 32,558 34,230 47,838
Operating income 8,144 9,627 9,040 12,400
Interest income 162 189 221 361
Net earnings 5,451 6,444 6,082 8,399
Earnings per share .28 .33 .31 .43
Average shares outstanding 19,594 19,547 19,695 19,685
-------------------------------------------- ----------- ----------- -----------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(12 weeks) (12 weeks) (12 weeks) (16 weeks)
----------- ----------- ----------- -----------
1993
Sales $116,043 $119,753 $118,842 $163,622
Cost of sales and
related occupancy expenses 86,577 88,896 88,646 122,777
Gross margin 29,466 30,857 30,196 40,845
Operating income 9,183 9,691 9,018 11,007
Interest income 187 219 229 243
Net earnings 6,240 6,607 5,753 7,394
Earnings per share .32 .34 .29 .38
Average shares outstanding 19,580 19,659 19,646 19,607
-------------------------------------------- ----------- ----------- -----------
</TABLE>
32
<PAGE>
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
Board of Directors and Shareholders
Quality Food Centers, Inc.
Bellevue, Washington
We have audited the accompanying balance sheets of Quality Food Centers, Inc. as
of December 31, 1994 and December 25, 1993, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, such financial statements present fairly, in all material
respects, the financial position of Quality Food Centers, Inc. as of December
31, 1994 and December 25, 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
/S/ Deloitte & Touche llp
Deloitte & Touche llp
March 15, 1995
Seattle, Washington
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 35,162,625
<SECURITIES> 0
<RECEIVABLES> 3,285,717
<ALLOWANCES> 0
<INVENTORY> 23,615,073
<CURRENT-ASSETS> 64,708,994
<PP&E> 138,395,171
<DEPRECIATION> 36,095,273
<TOTAL-ASSETS> 207,913,602
<CURRENT-LIABILITIES> 40,932,764
<BONDS> 0
<COMMON> 26,644,616
0
0
<OTHER-SE> 131,533,222
<TOTAL-LIABILITY-AND-EQUITY> 207,913,602
<SALES> 575,878,589
<TOTAL-REVENUES> 575,878,589
<CGS> 430,711,080
<TOTAL-COSTS> 105,955,569
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 40,144,536
<INCOME-TAX> 13,768,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,376,536
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
