<PAGE>
CONTENTS
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 30, 1995
[ ] 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
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 455-3761
---------------
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
----- -----
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 20, 1996: $179,261,924
Number of shares of Registrant's common stock, $.001 par value, outstanding
as of March 20, 1996: 14,445,107
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 30, 1995 are incorporated by reference into Part II and Part IV of
this Form 10-K.
Portions of the definitive Proxy Statement relating to the 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Form 10-K.
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CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
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 1995 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
1995 Annual Report to Shareholders) 12
Item 8. Financial Statements and Supplementary Data
(incorporated by reference from the Company's
1995 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
Registrant (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) 14
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
second largest supermarket chain and the largest independent supermarket
chain in the Seattle/Puget Sound area of Washington State. The Company began
operations in 1954 with four stores and has grown through acquisition and new
store development to 62 stores today.
As part of a recapitalization, on March 2, 1995, the Company purchased
7,000,000 shares of its common stock through a self-tender offer at a price
of $25.00 per share. In addition, the Company sold 1,000,000 shares of its
common stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00 per share
on March 29, 1995. Zell/Chilmark also acquired 2,975,000 shares from the
Company's chairman and chief executive officer in a separate transaction on
January 16, 1996. In March 1995, the Company borrowed approximately
$174,000,000 under a new $220,000,000 senior credit facility ("the Credit
Facility") to finance (i) the $24 million of long-term debt assumed in the
Olson's merger described under "Expansion Through New Stores" below and (ii)
the repurchase of its shares pursuant to the self-tender offer. Due to these
developments, the Company's financial statements have changed 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.
(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. QFC stores are open seven days a week, 24 hours a day.
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, fresh juice bars and a natural foods section. The
Company
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operates pharmacies in eight stores. Space is leased or sub-leased in
certain stores to Leeann Chin, Cucina! Cucina! Presto Italian Cafes,
Starbucks Coffee, Cinnabon Cinnamon Rolls, Noah's New York Bagels and
in-store banks. Photo processing and automated teller machines are available
in all stores.
The Company is developing a comprehensive proprietary brands program, which
includes signature items and store brands. The progam has been developed to
improve sales and margins by increasing the Company's mix of proprietary
brand sales. The Company's signature item program currently includes more
than 175 stock keeping units (SKUs) that are sold exclusively by the Company.
The store brands product lines are currently under development and the
Company expects to introduce these brands later in 1996.
GROWTH THROUGH EXPANSION AND REMODELING OF EXISTING STORES
The Company has continued its store remodeling and expansion program,
completing 30 remodels over the past ten years, including five in 1995. The
Company has completed the expansion and remodeling of one store so far in
1996. The Company plans to continue remodeling and expanding certain stores
that were added or remodeled in recent years. Nine such "re-remodels" have
been completed to-date, including two in 1995 and one in 1996. The Company
currently plans to complete two additional remodels and seven more
re-remodels in 1996.
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 1995, the total
square footage of all 62 stores was approximately 1,928,000 square feet with
an average store size of approximately 31,000 square feet, ranging in size
from 14,000 to 57,000 square feet.
EXPANSION THROUGH NEW STORES
The Company is adding new stores at an accelerated pace. Thirty-five stores
have been added in the last five years, including five in 1993, seven in 1994
and seventeen in 1995. Of the seventeen stores added in 1995, twelve were
added in March 1995, when the principal operations of the Olson's Food Stores
chain ("Olson's") were merged into the Company, including eight stores in
Snohomish County and four in King County, Washington. The Olson's merger also
included rights to 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
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its common stock and assumed $24 million of long-term debt of Olson's.
The Company acquired its Rainier Market store in Seattle in January 1995.
The store was closed and demolished and a replacement store was constructed
and opened in August of 1995. On March 26, 1995, the Company acquired three
stores from Puget Sound Marketing, located in Enumclaw, Auburn and Gig
Harbor, Washington. Including these recent developments, 30 of the Company's
last 41 stores were acquired from independent operators and the Company
believes acquisition will continue to be an important part of its expansion.
The Company opened a 55,000 square foot store in Federal Way in November 1995
and recently opened a 41,000 square foot store replacing a 14,000 square foot
store in the Northgate area of Seattle. In addition, construction has
commenced on one new store and one replacement store, which will open in
1996. The Company is pursuing other new store sites and acquisition
opportunities within the Seattle/Puget Sound Region, as well as in new
markets.
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 1995. The Company ran television ads to promote its
home delivery service "QFC Express" and its 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 1995,
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 utilizes a private voice and
data network and an electronic payment system that processes customer
purchases by debit and credit cards and authorizes check transactions. The
Company also has a 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 product receipts, merchandising and accounts payable functions.
The Company
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processes product orders, direct store deliveries and store accounting
functions on personal computers in each store which are integrated with
host-based systems. In addition, custom software and a laser printer are
used to create shelf tags, more attractive signs and customized promotional
materials on-site at each store. Electronic Data Interchange (EDI) is used
extensively to transmit various business documents to and from the Company's
trading partners. Today, although already highly automated, QFC remains
committed to the further use of information systems as a tool to enhance
profitability. In 1995, the Company continued the migration from its
mainframe host computer to a client-server based architecture 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
$208.6 million of products from West Coast during fiscal 1995, accounting for
37.9% of the Company's cost of sales and related occupancy expense during the
year. Pursuant to the Olson's merger, the Company is using Associated
Grocers ("A.G.") as its major wholesale supplier for thirteen of its stores.
A.G. is a cooperative wholesale supplier located in Seattle, Washington. The
Company purchased approximately $42.9 million of products from A.G. during
fiscal 1995, accounting for 7.8% 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 or
A.G. directly from the manufacturer. The remainder of products are purchased
from other manufacturers or distributors which, as do West Coast and A.G.,
deliver directly to the Company's stores. 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.
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(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.
(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 or 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
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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 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 and throughout 1995, the Company
experienced an unusually large number of new store openings or store
remodelings by its competitors near its existing stores, which has resulted
in reduced sales in certain of the Company's stores.
(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 4,200 employees as of the end of fiscal 1995.
Of these, approximately 3,800 are covered by collective bargaining agreements
in effect through May 3 and July 31, 1998. 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.
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ITEM 2 - PROPERTIES
As of March 20, 1996, the Company leased 57 of its 62 supermarkets and its
administrative facilities under non-cancellable operating leases with various
terms expiring through December 2053, including renewal periods. The average
remaining term of the Company's leases (including all renewal options) is
approximately 31 years. None of these leases is 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 March 20, 1996,
the Company owned the real estate at five of its store facilities in
operation, three 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. During 1995, the
Company sold one of the centers it previously operated 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 opened a 41,000 square foot replacement store in the Northgate
area on March 20, 1996. The Company has begun construction of a 66,000
square foot replacement store on the 8.8 acres of real estate that it
acquired in 1991, adjacent to the University Village Shopping Center where
the Company currently operates a 31,000 square foot store. Additionally, the
Company has commenced construction of a new 45,000 square foot store in the
First Hill area of Seattle. The Company has completed two store remodels in
1996 and several others are planned. In addition, 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. See "Item 13 - Certain Relationships and Related
Transactions."
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ITEM 3 - LEGAL PROCEEDINGS
On December 20, 1995, the Federal District Court in Seattle, Washington,
dismissed the class action lawsuit that had been filed in the United States
District Court for the District of Washington against the Company and three
of its officers. The lawsuit, which had been filed on May 31, 1995, alleged
violations of federal securities laws and a breach of fiduciary duties in
connection with the Company's recapitalization completed in March 1995 (see
"Item 1 - Business"). In dismissing the lawsuit, the court held that the
plaintiff did not establish any violation of federal securities laws. In
addition, the court dismissed without prejudice the plaintiff's state law
claim for breach of fiduciary duties.
The Company is currently involved in a number of other 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1995 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:
NAME AGE POSITION
---- --- --------
Stuart M. Sloan 52 Chairman, Chief Executive
Officer and Director
Dan Kourkoumelis 45 President, Chief Operating
Officer and Director
Marc W. Evanger 41 Vice President, Chief
Financial Officer and
Secretary/Treasurer
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.
from February 1989 until July 1990, as Chief Executive Officer from February
1989 until April 1991 and as
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Chairman from January 1990 to September 1992. Mr. Sloan serves as a director
of Anixter International, Inc. and Cucina! Cucina!, Inc.
Dan Kourkoumelis became a director of the Company in April 1991. He joined
the Company as a courtesy clerk 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 Associated Grocers,
Incorporated, 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 as a Certified Public Accountant in audit,
consulting, corporate tax planning and merger assignments. His prior
experience included three years with QFC as a retail clerk. 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
12/30/95 12/31/94
----------------- -----------------
High Low High Low
------- ------- -------- -------
<S> <C> <C> <C> <C>
First Quarter $24 1/2 $21 1/4 $25 1/4 $21 3/4
Second Quarter 22 1/4 19 24 19 1/2
Third Quarter 26 3/4 19 1/2 24 3/4 21 1/2
Fourth Quarter 22 1/2 19 1/2 24 1/4 19
</TABLE>
(b) HOLDERS
The Company had approximately 2,500 shareholders of record as of March 20,
1996.
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(c) DIVIDENDS
In February 1995, a cash dividend of $.05 per share, or $1.0
million, was paid to shareholders. During 1994, the Company paid quarterly
cash dividends of $.05 per share for an annual rate of $.20 per share, or
$3.9 million.
The payment of dividends has been discontinued. The credit facility
entered into in March 1995 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, 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
25 of the Company's Annual Report to Shareholders for the fiscal year ended
December 30, 1995 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 26 through 31 of the
Company's Annual Report to Shareholders for the fiscal year ended December
30, 1995 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 32 through 48 of the Annual Report to Shareholders for the fiscal
year ended December 30, 1995 are incorporated herein by reference:
Statements of Earnings for the three years
ended December 30, 1995.
Statements of Shareholders' Equity for the
three years ended December 30, 1995.
Balance Sheets as of December 30, 1995 and
December 31, 1994.
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Statements of Cash Flows for the three years
ended December 30, 1995.
Notes to Financial Statements including
supplementary data entitled "Selected
Quarterly Financial Data (Unaudited)."
Independent Auditors' Report.
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 March 1996 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 March 1996 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 March 1996 is incorporated by reference into this Item 12.
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ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
contained under the captions "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" in the
Proxy Statement to be filed with the Securities and Exchange Commission in
March 1996 is incorporated by reference into this Item 13.
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 30, 1995.
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 indicates each management contract, compensatory plan,
or arrangement required to be filed as an exhibit to this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended
December 30, 1995.
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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 20, 1996
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 20, 1996.
Signature Capacity
--------- --------
/s/ STUART M. SLOAN Chairman, Chief Executive
- ---------------------------- Officer and Director
Stuart M. Sloan (Principal Executive Officer)
/s/ MARC W. EVANGER Vice President and Chief
- ---------------------------- Financial Officer,
Marc W. Evanger Secretary/Treasurer
(Principal Financial and
Accounting Officer)
/s/ JOHN W. CREIGHTON, JR. Director
- ----------------------------
John W. Creighton, Jr.
/s/ JOEL FRIEDLAND Director
- ----------------------------
Joel Friedland
/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
/s/ SAMUEL ZELL Director
- ----------------------------
Samuel Zell
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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 20, 1996, incorporated by reference
in this Annual Report on Form 10-K of Quality Food Centers, Inc. for the year
ended December 30, 1995.
/s/ Deloitte & Touche LLP
- ----------------------------
Seattle, Washington
March 27, 1996
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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 30, 1995
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 Amended and Restated Bylaws of the Company. (Filed herewith.)
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 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.)*
10.3 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.)*
10.4 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.)*
10.5 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.)*
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.6 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.)*
10.7 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.)*
10.8 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.)
10.8a 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.)
10.8b 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.)
10.8c 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.)
10.8d 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.)
10.8e 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.)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.8f 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.)
10.9 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.)
10.9a First Amendment to Agreement and Plan of Merger between the Company
and Olson's Food Stores, Inc., dated as of February 17, 1995.
(Incorporated by reference to Exhibit 10.15a to the Company's Form
10-K filed March 31, 1995.)
10.9b Second Amendment to Agreement and Plan of Merger between the Company
and Olson's Food Stores, Inc., dated as of March 1, 1995.
(Incorporated by reference to Exhibit 10.15b to the Company's Form
10-K filed March 31, 1995.)
10.9c Indemnification and Escrow Agreement between the Company and Maurice
F. Olson, dated as of March 1, 1995. (Incorporated by reference to
Exhibit 10.15c to the Company's Form 10-K filed March 31, 1995.)
10.9d 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. (Incorporated by reference to
Exhibit 10.15d to the Company's Form 10-K filed March 31, 1995.)
10.9e Investors Rights Agreement between the Company and Maurice F. Olson,
Charles M. Olson and Maurice S. Olson, Jr., dated as of March 1,
1995. (Incorporated by reference to Exhibit 10.15e to the Company's
Form 10-K filed March 31, 1995.)
10.9f Noncompetition Agreement between the Company and Maurice F. Olson
dated as of March 1, 1995. (Incorporated by reference to Exhibit
10.15f to the Company's Form 10-K filed March 31, 1995.)*
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Credit Agreement arranged by B A Securities, Inc. among the Company,
Bank of America National Trust and Savings Association, as Agent,
Seattle First National Bank, Bank of America Illinois, as Issuing
Lender and the Other Financial Institutions Party hereto, dated
March 15, 1995. (Incorporated by reference to Exhibit (b)(2) to the
Company's Schedule 13E-4 Amendment 2 filed March 28, 1995.)
10.11 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).
10.12 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).
10.13 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).
11 Statement re computation of per share earnings. (Filed herewith.)
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 30, 1995. (Filed
herewith.)
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 (Filed herewith.)
- ---------------------------
* Management contract, compensatory plan or arrangement required to be
filed as an exhibit to this report.
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AMENDED AND RESTATED BYLAWS
OF
QUALITY FOOD CENTERS, INC.
ARTICLE I
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation shall be located in the State of
Washington at such place as may be fixed from time to time by the Board of
Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office. A registered agent so appointed shall consent to appointment in writing
and such consent shall be filed with the Secretary of State of the State of
Washington.
If a registered agent changes the street address of the agent's business
office, the registered agent may change the street address of the registered
office of the Corporation by notifying the Corporation in writing of the change
and signing, either manually or in facsimile, and delivering to the Secretary of
State for filing a statement of such change, as required by law.
The Corporation may change its registered agent at any time upon the filing
of an appropriate notice with the Secretary of State, with the written consent
of the new registered agent either included in or attached to such notice.
ARTICLE II
SHAREHOLDERS' MEETINGS
1. MEETING PLACE. All meetings of the shareholders shall be held,
pursuant to proper notice as set forth in Article II Section 5 of these Bylaws,
at the principal executive office of the Corporation, or at such other place as
shall be determined from time to time by the Board of Directors.
2. ANNUAL MEETING TIME. The annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year not later than the end
of the fifth month following the end of the fiscal year, with the Board of
Directors to determine the exact date in each year.
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3. ANNUAL MEETING - ORDER OF BUSINESS. At the annual meeting of
shareholders, the order of business shall be as follows:
(a) Call to order.
(b) Proof of notice of meeting (or filing of waiver).
(c) Reading of minutes of last annual meeting.
(d) Reports of officers.
(e) Reports of committees.
(f) Election of directors.
(g) Other business.
4. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose may be called only as provided in the Articles of Incorporation.
Special shareholders' meetings shall be held at the Corporation's principal
executive office or at such other place as shall be identified in the notice of
such meeting.
5. NOTICE.
(a) Except as provided in subsection (c) hereunder, notice of the
date, time and place of the annual meeting of shareholders shall be given by
delivering personally or by mailing a written or printed notice of the same, at
least ten days, and not more than sixty days, prior to the meeting to each
shareholder of record entitled to vote at such meeting.
(b) Except as provided in subsection (c) hereunder, written or
printed notice of each special meeting of shareholders shall be given at least
ten days and not more than sixty days prior to the meeting. Such notice shall
state the date, time and place of such meeting, and the purpose or purposes for
which the meeting is called, and shall be delivered personally, or mailed to
each shareholder of record entitled to vote at such meeting.
(c) Notice of a shareholders' meeting at which the shareholders will
be called to act on an amendment to the articles of incorporation, a plan of
merger or share exchange, a proposed sale of assets other than in the regular
course of business or the dissolution of the Corporation shall be given not
fewer than twenty days and not more than sixty days before the meeting date.
6. RECORD DATE. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders, or at any adjournment
thereof, or entitled to receive dividends or distributions, the Board of
Directors shall fix in advance a record date for any such determination of
shareholders, such date to be not more than seventy days and, in
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case of a meeting of shareholders, not less than ten days prior to the date on
which the particular action requiring such determination of shareholders is to
be taken.
7. SHAREHOLDERS' LIST. After fixing a record date for a shareholders'
meeting, the Corporation shall prepare an alphabetical list of the names of all
its shareholders on the record date who are entitled to notice of a
shareholders' meeting. Such list shall be arranged by voting group, and within
each voting group by class or series of shares, and show the address of and
number of shares held by each shareholder. The shareholders' list shall be kept
on file at the registered office of the Corporation for a period beginning ten
days prior to such meeting and shall be kept open at the time and place of such
meeting for the inspection by any shareholder, or any shareholder's agent or
attorney.
8. QUORUM. Except as otherwise required by law, a quorum at any annual
or special meeting of shareholders shall consist of shareholders representing,
either in person or by proxy, a majority of the votes entitled to be cast on the
matter by each voting group.
9. VOTING.
(a) Except as otherwise provided in the Articles of Incorporation and
subject to the provisions of the laws of the State of Washington, each
outstanding share, regardless of class, is entitled to one vote on each matter
voted-on at a shareholders' meeting.
(b) If a quorum exists, action on a matter, other than the election
of directors, is approved by a voting group if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group opposing
the action, unless the question is one which by express provision of law, of the
Articles of Incorporation or of these Bylaws a greater number of affirmative
votes is required.
(c) Unless otherwise provided in the Articles of Incorporation, in
any election of directors the candidates elected are those receiving the largest
numbers of votes cast by the shares entitled to vote in the election, up to the
number of directors to be elected by such shares.
10. PROXIES. A shareholder may vote either in person or by appointing a
proxy by signing.an appointment form, either personally or by the shareholder's
attorney-in-fact or agent. An appointment of a proxy is effective when received
by the person authorized to tabulate votes for the Corporation. An appointment
of a proxy is valid for eleven months unless a longer period is expressly
provided in the appointment form.
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11. WAIVER OF NOTICE. A written waiver of any notice required to be given
to any shareholder, signed by the person or persons entitled to such notice,
whether before or after the time stated therein for the meeting, shall be deemed
the giving of such notice by the Corporation, provided that such waiver has been
delivered to the Corporation for inclusion in the minutes or filing with the
Corporation's records. A shareholder's attendance at a meeting waives any
notice required, unless the shareholder at the beginning of the meeting objects
to holding the meeting or transacting business at the meeting.
ARTICLE III
SHARES OF STOCK
1. ISSUANCE OF SHARES. No shares of the Corporation shall be issued
unless authorized by the Board of Directors. Such authorization shall include
the number of shares to be issued, the consideration to be received and a
statement regarding the adequacy of the consideration.
2. CERTIFICATES. Certificates, certificates of stock shall be issued in
numerical order, and each shareholder shall be entitled to a certificate signed,
either manually or in facsimile, by the President or a Vice President, and the
Secretary, and such certificate may bear the seal of the Corporation or a
facsimile thereof. If an officer who has signed or whose facsimile signature
has been placed upon such certificate ceases to be such officer before the
certificate is issued, it may be issued by the Corporation with the same effect
as if the person were an officer on the date of issue.
At a minimum each certificate of stock shall state:
(a) the name of the Corporation;
(b) that the Corporation is organized under the
laws of the State of Washington;
(c) the name of the person to whom the certificate is issued;
(d) the number and class of shares and the designation of the series,
if any, the certificate represents; and
(e) if the Corporation is authorized to issue different classes of
shares or different series within a class, the designations, relative rights,
preferences and limitations applicable to each class and the variations in
rights, preferences and limitations determined for each series, and the
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authority of the Board of Directors to determine variations for future series,
must be summarized either on the front or back of the certificate.
Alternatively, the certificate may state conspicuously on its front or back that
the Corporation will furnish the shareholder this information without charge on
request in writing.
In case of any mutilation, loss or destruction of any certificate of stock,
another certificate may be issued in its place on proof of such mutilation, loss
or destruction. The Board of Directors may impose conditions on such issuance
and may require the giving of a satisfactory bond or indemnity to the
Corporation in such sum as it might determine or establish such other procedures
as it deems necessary or appropriate.
3. TRANSFERS.
(a) Transfers of stock shall be made only upon the stock transfer
records of the Corporation, which records shall be kept at the registered office
of the Corporation or at its principal place of business, or at the office of
its transfer agent or registrar. The Board of Directors may, by resolution,
open a share register in any state of the United States, and may employ an agent
or agents to keep such register and to record transfers of shares therein.
(b) Shares of certificated stock shall be transferred by delivery of
the certificates therefor, accompanied either by an assignment in writing on the
back of the certificate or an assignment separate from certificate, or by a
written power of attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of certificated stock shall be
transferred on the records of the Corporation until the outstanding certificates
therefor have been surrendered to the Corporation or to its transfer agent or
registrar.
4. SHARES OF ANOTHER CORPORATION. Shares owned by the Corporation in
another Corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
ARTICLE IV
BOARD OF DIRECTORS
1. NUMBER AND POWERS; VACANCIES.
(a) The management of all the affairs, property and interests of the
Corporation shall be vested in a Board of Directors. In addition to the powers
and authorities expressly conferred upon it by these Bylaws and by the Articles
of
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Incorporation, the Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts as are not prohibited by statute or by
the Articles of Incorporation or by these Bylaws or as directed or required to
be exercised or done by the shareholders.
(b) The Board of Directors shall consist of not less than two persons
and not more than nine persons, as determined by resolution from time to time by
the Board of Directors. Directors need not be Shareholders or residents of the
State of Washington.
(c) The number of directors may at any time be increased or decreased
by amendment to these Bylaws by resolution of either the shareholders or
directors at any annual or special meeting; PROVIDED, that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, except as provided in Section 3 of this Article IV.
(d) Except as provided in the Articles of Incorporation, all
vacancies in the Board of Directors, whether caused by resignation, death or
otherwise, may be filled by the affirmative vote of a majority of the remaining
directors in office though less than a quorum of the Board of Directors. A
director elected to fill a vacancy shall hold office until the next
shareholders' meeting at which directors are elected and until his or her
successor is elected and qualified. Any directorship to be filled by reason of
an increase in the number of directors may be filled by the Board of Directors
for a term of office continuing only until the next election of directors by the
shareholders and until his or her successor is elected and qualified.
2. GENERAL STANDARDS FOR DIRECTORS.
(a) A director shall discharge the duties of a director, including
duties as a member of a committee:
(i) in good faith;
(ii) with the care an ordinary prudent person in a like position
would exercise under similar circumstances; and
(iii) in a manner the director reasonably believes to be in
the best interests of the Corporation.
3. RESIGNATION. A director may resign at any time by delivering written
notice to the Board of Directors, the President or the Secretary. A resignation
is effective when the notice is delivered unless the notice specifies a later
effective date.
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4. REGULAR MEETINGS. Regular meetings of the Board of Directors or any
committee may be held without notice at the principal place of business of the
Corporation or at such other place or places, either within or without the State
of Washington, as the Board of Directors or such committee, as the case may be,
may from time to time designate. The annual meeting of the Board of Directors
shall be held without notice immediately after adjournment of the annual meeting
of shareholders.
5. SPECIAL MEETINGS.
(a) Special meetings of the Board of Directors may be called at any
time by the Chairman, President, Secretary or any two directors to be held at
the principal place of business of the Corporation or at such other place or
places as the Board of Directors or the person or persons calling such meeting
may from time to time designate. Notice of all special meetings of the Board of
Directors, stating the date, time and place thereof, shall be given at least two
days prior to the date of the meeting, in accordance with the provisions set
forth in Article VII of these Bylaws. Such notice need not specify the business
to be transacted at, or the purpose of, the meeting.
(b) Special meetings of any committee of the Board of Directors may
be called at any time by such person or persons and with such notice as shall be
specified for such committee by the Board of Directors, or in the absence of
such specification, in the manner and with the notice required for special
meetings of the Board of Directors.
6. WAIVER OF NOTICE. A director may waive any notice required by law, by
the Articles of Incorporation or by these Bylaws before or after the time stated
for the meeting, and such waiver shall be equivalent to the giving of such
notice. Such waiver must be in writing, signed by the director entitled to such
notice and delivered to the Corporation for inclusion in the minutes or filing
with the corporate records. A director's attendance at or participation in a
meeting shall constitute a waiver of any required notice to the director of the
meeting unless the director at the beginning of the meeting, or promptly upon
the director's arrival, objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to action taken at the
meeting.
7. QUORUM. Except as otherwise provided by law:
(a) A majority of the full Board of Directors shall be necessary at
all meetings to constitute a quorum for the transaction of business.
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(b) If a quorum is present when a vote is taken, the affirmative vote
of a majority of directors present is the act of the Board of Directors.
8. REGISTERING DISSENT. A director who is present at a meeting of the
Board of Directors at which action on a corporate matter is taken is deemed to
have assented to such action unless:
(a) the director objects at the beginning of the meeting, or promptly
upon the director's arrival, to the holding of, or transaction of business at,
the meeting;
(b) the director's dissent or abstention from the action is entered
in the minutes of the meeting; or
(c) the director delivers written notice of the director's dissent or
abstention to the presiding officer of the meeting before its adjournment or to
the Corporation within a
reasonable time after adjournment of the meeting. The right to dissent or
abstain is not available to a director who voted in favor of the action taken.
9. ACTION BY DIRECTORS WITHOUT A MEETING.
(a) Any action required or permitted to be taken at a meeting of the
Board of Directors, or of a committee thereof, may be taken without a meeting if
the action is taken by all members of the Board of Directors. The action must
be evidenced by one or more written consents setting forth the action taken,
signed by each of the directors, or by each of the members of the committee, as
the case may be, either before or after the action taken, and delivered to the
Corporation for inclusion in the minutes or filing with the Corporation's
records.
(b) Action taken under this section is effective when the last
director signs the consent, unless the consent specifies a later effective date.
10. PARTICIPATION BY MEANS OF COMMUNICATIONS EQUIPMENT. Any or all
directors may participate in a regular or special meeting of the Board of
Directors (or of a committee thereof) by, or may conduct the meeting through the
use of, any means of communication by which all directors participating can hear
each other during the meeting.
11. COMMITTEES.
(a) The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its members an Executive
Committee and one or more other
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standing or special committees. Each committee must have two or more members
who serve at the pleasure of the Board of Directors. The Executive Committee
shall have and may exercise all of the authority of the Board of Directors, and
other standing or special committees may be invested with such powers, subject
to such conditions as the Board of Directors shall see fit; PROVIDED, that no
committee shall have the authority to:
(i) authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors;
(ii) approve or propose to shareholders action that by law is
required to be approved by shareholders;
(iii) fill vacancies on the Board of Directors or any of its
committees;
(iv) amend the Articles of Incorporation;
(v) adopt, amend or repeal these Bylaws;
(vi) approve a plan of merger not requiring shareholder approval;
or
(vii) authorize or approve the issuance or sale or contract
for sale of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee (or a senior executive officer of
the Corporation) to do so within limits specifically prescribed by the Board of
Directors.
(b) All committees so appointed shall keep regular minutes of their
meetings and shall cause them to be recorded in books kept for that purpose in
the office of the Corporation.
(c) The creation of, delegation of authority to or action by a
committee does not alone constitute compliance by a director with the standards
of conduct required by the Washington Business Corporation Act and these Bylaws.
12. REMUNERATION. No stated salary shall be paid directors, as such, for
their service, but by resolution of the Board of Directors, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board of Directors or of a committee thereof; provided,
that nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
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ARTICLE V
OFFICERS
1. DESIGNATIONS. The officers of the Corporation shall be a Chairman, a
President, a Secretary and, at the discretion of the Board of Directors, one or
more Vice-Presidents (one or more of whom may be Executive Vice-Presidents), a
Treasurer, Assistant Secretaries and Assistant Treasurers. The Board of
Directors shall appoint all officers. Any two or more offices may be held by
the same individual.
2. APPOINTMENT AND TERM OF OFFICE. The officers of the Corporation shall
be appointed annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of the shareholders. Each
officer shall hold office until a successor shall have been appointed and
qualified, or until such officer's earlier death, resignation or removal.
3. POWERS AND DUTIES. If the Board appoints persons to fill the
following positions, such officers shall have the power and duties set forth
below:
(a) THE CHAIRMAN: The Chairman shall have general control and
management of the Board of Directors and may also be the chief executive officer
of the Corporation. Except where by law the signature of the President is
required, the Chairman shall possess the same power as the President to sign all
certificates, contracts and other instruments of the Corporation. During the
absence or disability of the President, the Chairman shall exercise all the
powers and discharge all of the duties of the President. He shall preside at
all meetings of the Board of Directors at which he is present; and, in his
absence, the President shall preside at such meetings. He shall have such other
powers and perform such other duties as from time to time may be conferred or
imposed upon him by the Board of Directors.
(b) THE PRESIDENT: The President of the Corporation shall be the
chief executive officer of the Corporation, unless such position is held by the
Chairman. During the absence or disability of the Chairman, he shall exercise
all of the powers and discharge all of the duties of the Chairman. He shall be
generally responsible for the proper conduct of the business of the Corporation.
He shall possess power to sign all certificates, contracts and other instruments
of the Corporation. He shall preside at all meetings of the shareholders and,
in the absence of the Chairman of the Board of Directors. He shall perform all
such other duties as are incident to his office or are properly required of him
by the Board of Directors.
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(c) VICE PRESIDENT: During the absence or disability of the
President, the Executive Vice-Presidents, if any, and the Vice-Presidents in the
order designated by the Board of Directors, shall exercise all the functions of
the President. Each Vice-President shall have such powers and discharge such
duties as may be assigned to him from time to time by the Board of Directors.
(d) SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue
notices for all meetings, except for notices for special meetings of the
shareholders and special meetings of the directors which are called by the
requisite number of shareholders or directors, shall keep minutes of all
meetings, shall have charge of the seal and the corporate books, and shall make
such reports and perform such other duties as are incident to his office, or are
properly required of him by the Board of Directors. The Assistant Secretary, or
Assistant Secretaries in order designated by the Board of Directors, shall
perform all of the duties of the Secretary during the absence or disability of
the Secretary, and at other times may perform such duties as are directed by the
President or the Board of Directors.
(e) THE TREASURER: The Treasurer shall have the custody of all
moneys and securities of the Corporation and shall keep regular books of
account. He shall disburse the funds of the Corporation in payment of the just
demands against the Corporation or as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render to the Board of
Directors from time to time as may be required of him an account of all his
transactions as Treasurer and of the financial condition of the Corporation. He
shall perform such other duties incident to his office of that are properly
required of him by the Board of Directors. The Assistant Treasurer, or
Assistant Treasurers in the order designated by the Board of Directors, shall
perform all of the duties of the Treasurer in the absence or disability of the
Treasurer, and at other times may perform such other duties as are directed by
the President or the Board of Directors.
4. STANDARDS OF CONDUCT FOR OFFICERS.
(a) An officer with discretionary authority shall discharge such
officer's duties under that authority:
(i) in good faith;
(ii) with the care an ordinary prudent person in a like position
would exercise under similar circumstances; and
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(iii) in a manner the officer reasonably believes to be in
the best interests of the Corporation.
5. DELEGATION. In the case of absence or inability to act of any officer
of the Corporation and of any person herein authorized to act in such officer's
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person whom
it may in its sole discretion select.
6. VACANCIES. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting of the Board.
The appointee shall hold office for the unexpired term and until his successor
is duly elected and qualified.
7. OTHER OFFICERS. The Board of Directors, or a duly appointed officer
to whom such authority has been delegated by Board resolution, may appoint such
other officers and agents as it shall deem necessary or expedient, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
8. RESIGNATION. An officer may resign at any time by delivering notice
to the Corporation. Such notice shall be effective when delivered unless the
notice specifies a later effective date. Any such resignation shall not affect
the Corporation's contract rights, if any, with the officer.
9. REMOVAL. Any officer elected or appointed by the Board of Directors
may be removed at any time, with or without cause, by the affirmative vote of a
majority of the whole Board of Directors, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
10. BONDS. The Board of Directors may, by resolution, require any and all
of the officers to give bonds to the Corporation, with sufficient surety or
sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
ARTICLE VI
DISTRIBUTIONS AND FINANCE
1. DISTRIBUTIONS. The Board of Directors may authorize and the
Corporation may make distributions to its shareholders; provided that no
distribution may be made if, after giving it effect, either:
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(a) The Corporation would not be able to pay its debts as they become
due in the usual course of business; or
(b) The Corporation's total assets would be less than the sum of its
total liabilities plus the amount which would be needed, if the Corporation were
to be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the distribution.
The Board of Directors may authorize distributions to holders of record at
the close of business on any business day prior to the date on which the
distribution is made. If the Board of Directors does not fix a record date for
determining shareholders entitled to a distribution, the record date shall be
the date on which the Board of Directors authorizes the distribution.
2. MEASURE OF EFFECT OF A DISTRIBUTION. For purposes of determining
whether a distribution may be authorized by the Board of Directors and paid by
the Corporation under Article VI, Section 1 of these Bylaws, the effect of the
distribution is measured:
(a) In the case of a distribution of indebtedness, the terms of which
provide that payment of principal and interest are made only if and to the
extent that payment of a distribution to shareholders could then be made under
this section, each payment of principal or interest is treated as a
distribution, the effect of which is measured on the date the payment is
actually made; or
(b) In the case of any other distribution:
(i) if the distribution is by purchase, redemption, or other
acquisition of the Corporation's shares, the effect of the distribution is
measured as of the earlier of the date any money or other property is
transferred or debt incurred by the Corporation, or the date the shareholder
ceases to be a shareholder with respect to the acquired shares;
(ii) if the distribution is of an indebtedness other than
described in subsection 2(a) and (b)(i) of this section, the effect of the
distribution is measured as of the date the indebtedness is distributed; and
(iii) in all other cases, the effect of the distribution is
measured as of the date the distribution is authorized if payment occurs within
120 days after the date of authorization, or the date the payment is made if it
occurs more than 120 days after the date of authorization.
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3. DEPOSITORIES. The monies of the Corporation shall be deposited in the
name of the Corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out only
by check or other order for payment of money signed by such persons and in such
manner as may be determined by resolution of the Board of Directors.
ARTICLE VII
NOTICES
Except as may otherwise be required by law, any notice to any shareholder
or director must be in writing and may be transmitted by: mail, private carrier
or personal delivery; telegraph or teletype; or telephone, wire or wireless
equipment which transmits a facsimile of the notice. Written notice by the
Corporation to its shareholders shall be deemed effective when mailed if mailed
with first-class postage,prepaid and correctly addressed to the shareholder's
address shown in the Corporation's current record of shareholders. Except as
set forth in the previous sentence, written notice shall be deemed effective at
the earliest of the following: (i) when received; (ii) five days after its
deposit in the United States mail, as evidenced by the postmark, if mailed with
first-class postage, prepaid and correctly addressed; or (iii) on the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and receipt is signed by or on behalf of the addressee.
ARTICLE VIII
SEAL
The Corporation may adopt a corporate seal which seal shall be in such form
and bear such inscription as may be adopted by resolution of the Board of
Directors.
ARTICLE IX
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
1. DEFINITIONS. For purposes of this Article:
(a) "Corporation" includes any domestic or foreign predecessor entity
of the Corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
(b) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a
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director of the Corporation, is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A director is considered to be serving an employee benefit
plan at the Corporation's request if the director's duties to the Corporation
also impose duties on, or otherwise involve services by, the director to the
plan or to participants in or beneficiaries of the plan. "Director" includes,
unless the context requires otherwise, the estate or personal representative of
a director.
(c) "Expenses" include counsel fees.
(d) "Liability" means the obligation to pay a
judgment, settlement, penalty, fine, including an excise tax assessed with
respect to an employee benefit plan, or reasonable expenses incurred with
respect to a proceeding.
(e) "Official capacity" means: (i) When used with respect to a
director, the office of director in the Corporation; and (ii) when used with
respect to an individual other than a director, as contemplated in Section 8 of
this Article IX, the office in the Corporation held by the officer or the
employment or agency relationship undertaken by the employee or agent on behalf
of the Corporation. "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture, trust,
employee benefit plan, or other enterprise.
(f) "Party" includes an individual who was, is, or is threatened to
be made a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative
and whether formal or informal.
2. RIGHT OF INDEMNIFICATION.
(a) The Corporation shall indemnify any person (or the estate of any
person) who was or is a party to any proceeding, whether or not brought by or in
the right of the Corporation, by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise (all
such persons, hereinafter "Agent"), against reasonable expenses incurred by such
person in connection with the proceeding.
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<PAGE>
(b) Except as provided in subsection (e) of this Section 2, the
Corporation shall indemnify an individual made a party to a proceeding because
the individual is or was an Agent (as defined above) against liability incurred
in the proceeding if:
(i) The individual acted in good faith; and
(ii) The individual reasonably believed:
(A) In the case of conduct in the individual's official
capacity with the Corporation, that the individual's conduct was in the
Corporation's best interests;
(B) In all other cases, that the individual's conduct was
at least not opposed to the Corporation's best interests; and
(iii) In the case of any criminal proceeding, the individual
had no reasonable cause to believe the individual's conduct was unlawful.
(c) A director's conduct with respect to an employee benefit plan for
a purpose the director reasonably believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subsection (b)(ii) of this Section 2.
(d) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contenders or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this Section.
(e) The Corporation shall not indemnify an Agent under this Section
2:
(i) In connection with a proceeding by or in the right of the
Corporation in which the Agent was adjudged liable to the Corporation; or
(ii) In connection with any other proceeding charging improper
personal benefit to the Agent, whether or not involving action in the Agent's
official capacity, in which the director was adjudged liable on the basis that
personal benefit was improperly received by the Agent.
(f) Indemnification under this Article IX, Section 2 in connection
with a proceeding by or in the right of the Corporation is limited to reasonable
expenses incurred in connection with the proceeding.
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<PAGE>
3. ADVANCE FOR EXPENSES.
(a) The Corporation shall pay for or reimburse the reasonable
expenses incurred by an Agent who is a party to a proceeding in advance of final
disposition of the proceeding if:
(i) The Agent furnishes the Corporation a written affirmation of
the Agent's good faith belief that the director has met the standard of conduct
described in Section 2 of this Article IX; and
(ii) The Agent furnishes the Corporation a written undertaking,
executed personally or on the Agent's behalf, to repay the advance if it is
ultimately determined that the Agent did not meet the standard of conduct.
(b) The undertaking required by subsection (a)(i) of this Section 3
must be an unlimited general obligation of the Agent but need not be secured and
may be accepted without reference to financial ability to make repayment.
4. COURT-ORDERED INDEMNIFICATION. An Agent of the Corporation who is a
party to a proceeding may apply for indemnification or advance of expenses to
the court conducting the proceeding or to another court of competent
jurisdiction. on receipt of an application, the court after giving any notice
the court considers necessary, may order indemnification or advance of expenses
if it determines:
(a) The Agent is entitled to mandatory indemnification pursuant to
RCW 23B.08.520, in which case the court shall also order the Corporation to pay
the Agent's reasonable expenses incurred to obtain court-ordered
indemnification;
(b) The Agent is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not the director met the
standard of conduct set forth in section 2 of this Article IX, or was adjudged
liable as described in Section 2(e) of this Article IX, but if the Agent was
adjudged so liable, the Agent's indemnification is limited to reasonable
expenses incurred; or
(c) In the case of an advance of expenses, the Agent is entitled
pursuant to the Articles of Incorporation, Bylaws, or any applicable resolution
or contract, to payment or reimbursement of the Agent's reasonable expenses
incurred as a party to the proceeding in advance of final disposition of the
proceeding.
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<PAGE>
5. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION.
(a) The Corporation shall not indemnify an Agent under this Article
IX unless authorized in the specific case after a determination has been made
that indemnification of the Agent is permissible in the circumstances because
the Agent has met the standard of conduct set forth in Section 2(b) of this
Article IX.
(b) The determination shall be made:
(i) By the Board of Directors by majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
(ii) If a quorum cannot be obtained under (i) of this subsection,
by majority vote of a committee duly designated by the Board of Directors, in
which designation directors who are parties may participate, consisting solely
of two or more directors not at the time parties to the proceeding;
(iii) By special legal counsel:
(A) Selected by the Board of Directors or its
committee in the manner prescribed in (i) or (ii) of this subsection; or
(B) If a quorum of the Board of Directors cannot be
obtained under (i) of this subsection and a committee cannot be designated under
(ii) of this subsection, selected by majority vote of the full Board of
Directors, in which selection directors who are parties may participate; or
(iv) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not be
voted on the determination.
(c) Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (b)
(iii) of this Section to select counsel.
6. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee, or agent of
the Corporation, or who, while a director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of
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<PAGE>
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, against liability asserted against
or incurred by the individual in that capacity or arising from the individual's
status as a director, officer, employee, or agent, whether or not the
Corporation would have power to indemnify the individual against the same
liability under this Article IX.
7. INDEMNIFICATION AS A WITNESS. This Article IX does not limit a
Corporation's power to pay or reimburse expenses incurred by an Agent in
connection with the Agent's appearance as a witness in a proceeding at a time
when the Agent has not been made a named defendant or respondent to the
proceeding.
8. REPORT TO SHAREHOLDERS. If the Corporation indemnifies or advances
expenses to a director pursuant to this Article IX in connection with a
proceeding by or in the right of the Corporation, the Corporation shall report
the indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
9. SHAREHOLDER AUTHORIZED INDEMNIFICATION.
(a) If authorized by a resolution adopted or ratified, before or
after the event, by the shareholders of the Corporation, the Corporation shall
have the power to indemnify or agree to indemnify a director made a party to a
proceeding, or obligate itself to advance or reimburse expenses incurred in a
proceeding, without regard to the limitations contained in this Article IX
(other than this Section 9); provided that no such indemnity shall indemnify any
director from or on account of:
(i) Acts or omissions of the director finally adjudged to be
intentional misconduct or a knowing violation of law;
(ii) Conduct of the director finally adjudged to be an unlawful
distribution under RCW 23B.08.310; or
(iii) Any transaction with respect to which it was finally
adjudged that such director personally received a benefit in money, property, or
services to which the director was not legally entitled.
(b) Unless a resolution adopted or ratified by the shareholders of
the Corporation provides otherwise, any determination as to any indemnity or
advance of expenses under subsection (a) of this Section 9 shall be made in
accordance with Section 5 of this Article IX.
10. SAVINGS CLAUSE. If this Article IX or any portion thereof shall be
invalidated on any ground by any court of
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competent jurisdiction, the Corporation shall nevertheless indemnify each Agent
as to expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any proceeding whether or not brought by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article IX that shall not have been invalidated, or by any other
applicable law.
ARTICLE X
BOOKS AND RECORDS
The Corporation shall maintain appropriate accounting records and shall
keep as permanent records minutes of all meetings of its shareholders and Board
of Directors, a record of all actions taken by the shareholders or the Board of
Directors without a meeting and a record of all actions taken by a committee of
the Board of Directors. In addition, the Corporation shall keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders in alphabetical order by class of shares showing
the number and class of the shares held by each. Any books, records and minutes
may be in written form or any other form capable of being converted into written
form within a reasonable time.
The Corporation shall keep a copy of the following records at its principal
office:
1. The Articles or Restated Articles of Incorporation and all amendments
thereto currently in effect;
2. The Bylaws or Restated Bylaws and all amendments thereto currently in
effect;
3. The minutes of all shareholders' meetings, and records of all actions
taken by shareholders without a meeting, for the past three years;
4. Its financial statements for the past three years, including balance
sheets showing in reasonable detail the financial condition of the Corporation
as of the close of each fiscal year, and an income statement showing the results
of its operations during each fiscal year prepared on the basis of generally
accepted accounting principles or, if not, prepared on a basis explained
therein;
5. All written communications to shareholders generally within the past
three years;
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6. A list of the names and business addresses of its current directors
and officers; and
7. Its most recent annual report delivered to the Secretary of State of
Washington.
ARTICLE XI
AMENDMENTS
1. Subject to the Articles of Incorporation:
(a) The Board of Directors shall have power to amend or repeal the
Bylaws of, or adopt new bylaws for, the Corporation. However, any such Bylaws,
or any alteration, amendment or repeal of the Bylaws, may be subsequently
changed or repealed by the holders of a majority of the stock entitled to vote
at any shareholders' meeting.
(b) These Bylaws may be amended or repealed by the shareholders in
the manner set forth in Article II Section 9 of these Bylaws at any regular or
special meeting of the shareholders.
2. EMERGENCY BYLAWS. The Board of Directors may adopt emergency Bylaws,
subject to repeal or change by action of the shareholders, which shall be
operative during any emergency in the conduct of the business of the Corporation
resulting from an attack on the United States, any state of emergency declared
by the federal government or any subdivision thereof, or any other catastrophic
event.
Adopted by resolution of the Corporation's Board of Directors on March 27,
1995.
[ sig ]
----------------------------------------
Marc W. Evanger
Secretary
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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 30, 1995 December 31, 1994 December 25, 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
PRIMARY
- -------
Weighted average
shares outstanding 15,706,279 19,434,211 19,299,718
Dilutive effect
of stock options 123,721 221,789 292,282
----------------- ----------------- -----------------
Weighted average
common and equivalent
shares outstanding 15,830,000 19,656,000 19,592,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
FULLY DILUTED
- -------------
Weighted average
shares outstanding 15,706,279 19,434,211 19,299,718
Dilutive effect
of stock options 125,721 239,789 292,282
----------------- ----------------- -----------------
Weighted average
common and equivalent
shares outstanding 15,832,000 19,674,000 19,592,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
<PAGE>
25
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
(IN THOUSANDS EXCEPT
PER SHARE DATA) DEC. 30, 1995 DEC. 31, 1994(2) DEC. 25, 1993 DEC. 26, 1992 DEC. 28, 1991
- ------------------------ ------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $729,856 $575,879 $518,260 $460,107 $395,151
Operating income 42,777 39,212 38,897 36,845 29,987
Interest expense 9,639 -- -- -- --
Net earnings 20,216(1) 26,376 25,994 25,076 20,647
Earnings per share 1.28(1) 1.34 1.33 1.28 1.06
Weighted average
shares outstanding 15,830 19,656 19,592 19,623 19,510
Cash dividends
per share $ .05 $ .20 $ .15 $ -- $ --
Total assets 282,878 207,914 181,275 150,974 115,922
Long-term debt 164,500 -- -- -- --
Shareholders' equity 45,368 158,178 133,620 108,345 81,169
Depreciation and
amortization 16,169 11,605 9,283 7,782 6,511
</TABLE>
(1) Includes one-time charge of $1.4 million, or $.08 per share, resulting
from the Company's recapitalization completed in March 1995.
(2) 53-week fiscal year.
<PAGE>
26
FINANCIAL REVIEW
OVERVIEW
QFC reported record results for its ninth consecutive year since going public
in 1987 and the Company's margins and financial ratios remain among the
highest in the supermarket industry. 1995 was a challenging year for the
Company as it faced its fourth consecutive year of food price deflation, a
continued soft regional economy, a more cautious consumer and a supermarket
industry that remained highly competitive.These factors, along with several
competitive store remodels and new store openings near the Company's stores,
caused a decrease in comparable store sales for 1995 and resulting pressure on
operating margins.In addition, the Company experienced its most significant
growth in its 40-year history, adding 17 stores, or 609,000 square feet -- a
46% increase -- primarily through acquisitions completed during March of 1995.
This growth produced a significant increase in sales and operating income for
the year, but resulted in lower operating margins due to higher occupancy
costs, start-up and pre-opening expenses, and additional amortization due to
goodwill and other intangibles created in connection with the acquisitions.
Another significant development in 1995 was the major recapitalization
completed in March, where the Company reduced its outstanding shares by six
million and incurred $164.5 million in long-term debt, whereas the Company had
no long-term debt at the beginning of the year.The recapitalization resulted
in lower cash balances, less interest income and significant interest expense.
Further, during the first quarter of 1995, the Company recorded a one-time
charge of $1.4 million for nondeductible expenses associated with the
recapitalization.
This annual report contains forward-looking statements that involve a
number of risks and uncertainties. There are certain important factors that
could cause results to differ materially from those anticipated by the
statements made in this report. These include, but are not limited to, the
competitive environment in the supermarket industry generally and specifically
in the Company's market areas, economic conditions, inflation, cost changes,
and changes in the Company's expansion plans.
The table below sets forth items in the Company's statements of earnings as a
percentage of sales:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales & related occupancy expenses 75.4 74.8 74.7
- --------------------------------------------------------------------------
Gross margin 24.6 25.2 25.3
Marketing, general & administrative expenses 18.7 18.4 17.8
- --------------------------------------------------------------------------
Operating income 5.9 6.8 7.5
Interest income .1 .2 .2
Interest expense 1.3 -- --
Other expense .2 -- --
- --------------------------------------------------------------------------
Earnings before income taxes 4.5 7.0 7.7
Taxes on income 1.7 2.4 2.7
- --------------------------------------------------------------------------
Net earnings 2.8% 4.6% 5.0%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
27
SALES
Over the past three years, sales increases have been driven primarily by the
acquisition and opening of new stores and the expansion and remodeling of
existing stores.
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Total sales increase 26.7% 11.1% 12.6%
Store square footage increase 46.2% 22.1% 19.0%
Comparable store sales increase (decrease) (1.7)% (.5)% 2.9%
- ----------------------------------------------------------------------
</TABLE>
The Company's sales increases have been lower than the increases 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 per square foot of selling space were $548, $619 and $681 in 1995,
1994 and 1993. This trend and the decreases in comparable store sales (which
excluded sales in stores opened or remodeled during the previous 12 months and
the 53rd week of 1994) during the last two years are the result of several
factors: new, larger and less mature stores are becoming a more significant
part of the Company's sales, older stores are maturing to a level where
substantial sales growth is more difficult, and the Company has experienced
food price deflation combined with a softer regional economy. In addition to
these factors, the decreases in 1995 were largely due to the Company
experiencing lower sales in certain existing stores due to the Company's
competitors opening new, replacing or remodeling an unusually large number of
their stores that are located near the Company's stores during the fourth
quarter of 1994 and throughout 1995, combined with 1994 sales that were higher
than normal in the Company's affected stores due to the closure of certain of
these competitors' stores while they were being remodeled or replaced. In
addition, the Company has followed a 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. Management believes
that the trend in comparable store sales will continue in the first half of
1996 but will improve in the second half of the year as the Company laps the
dates of many of the store openings and remodelings which impacted the
Company's stores in 1995. Further, modest inflation is anticipated for 1996
and the regional economy is projected to be healthier than in recent years.
The Company expects the maturing of its newer stores, its 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 to help build comparable store sales, as they
have historically.
Sales for 1995 were $729.9 million, an increase of $154 million, or 26.7%.
Excluding the impact of the 53rd week in 1994, sales would have increased 29%.
This large sales gain was due primarily to the acquisition of 16 stores and
construction of one new store in 1995.
<PAGE>
28
Sales for 1994 reached $575.9 million, an increase of $57.6 million, or
11.1%, reflecting the addition of seven stores and the additional week due to
1994 being a 53-week year.
Sales for 1993 were $518.3 million, an increase of $58.2 million, or 12.6%.
INFLATION
In 1995, the Company's sales reflected food price deflation of nearly 1% in
the first two quarters, flat prices in the third quarter, and after more than
three years of deflation, food price inflation of approximately .5% during the
fourth quarter. During 1994 and 1993, the Company's sales reflected food price
deflation of approximately 1.4% and less than 1%, respectively.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses increased .6% of sales in 1995
due primarily to lower initial margins and higher occupancy expenses in the
new and acquired stores due to the larger square footage and higher rent
structure in the newer stores. Also, due to the slight inflation during the
fourth quarter of 1995, the Company recorded a $619,000 charge for its
last-in, first-out (LIFO) inventory method, whereas the adjustment for LIFO
inventory resulted in no change in cost of sales in 1994 and an increase of
$25,000 in 1993.
The slight increase in cost of sales in 1994 was 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 on gross
margin over the last three years has been largely mitigated by a larger
portion of sales coming from higher margin service departments, more effective
merchandising and buying and reduced inventory shrinkage due to improved
systems and controls.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses (operating expenses) as a
percent of sales, increased .3% of sales to 18.7% in 1995 after a .6% of sales
increase in 1994. These increases resulted from various factors. While sales
reflect continued deflation, rates for certain operating expenses, such as
store labor and utilities, continued to increase and the decline in sales in
stores affected by competitive openings resulted in deleveraging of operating
expenses. Also, lower sales per square foot and higher expenses associated
with new stores had an impact on operating expenses. Operating expenses in
1995 also include an additional $1.7 million in amortization arising from
intangibles created in connection with 1995 acquisitions. These expense
increases were partially offset during the fourth quarter when the Company's
chairman and chief executive officer received stock options in lieu of a
management fee, which would have been approximately $479,000. 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.
<PAGE>
29
OPERATING INCOME
Operating income increased 9.1% in 1995 after an increase of less than 1% in
1994. Operating margins decreased from 7.5% of sales in 1993 to 6.8% of
sales in 1994 and 5.9% of sales in 1995. The declines were due to higher cost
of sales and occupancy expenses and higher operating expenses as described
above. The Company anticipates operating margins will stabilize in 1996 based
upon its current expansion plans.
INTEREST
Interest income decreased $431,000 during the year ended December 30, 1995,
compared to the same period in 1994, reflecting lower cash balances due to the
recapitalization completed in March 1995. Interest income increased $53,000 in
1994 over 1993 due to higher cash balances and interest rates.
Interest expense of $9.6 million for 1995 reflected interest on the debt
assumed (and refinanced) in the Olson's merger and debt incurred in connection
with the recapitalization. Interest expense was net of approximately $167,000
of interest capitalized in connection with store construction and remodeling
costs incurred during 1995. The Company had no borrowings or related interest
expense in 1994 or 1993.
INCOME TAXES
The Company's effective income tax rate was 37.3% for 1995 due to the
nondeductible amortization of goodwill and certain other assets that were
included in the Olson's merger and the nondeductible $1.4 million charge
relating to the Company's recapitalization. This compares to an effective tax
rate of 34.3% in 1994 and 34.7% in 1993.
NET EARNINGS
While 1995 operating income was higher than in 1994, net earnings declined
from $26.4 million to $20.2 million due to an increase in net interest expense
of $10 million, the higher effective tax rate and the $1.4 million one-time
charge incurred in connection with the recapitalization. Reflecting the new
capital structure, weighted average shares outstanding declined from 19.7
million in 1994 to 15.8 million in 1995. Earnings per share were $1.28 for 1995
compared with $1.34 in 1994 and $1.33 in 1993. Excluding the $1.4 million
one-time charge, net earnings and earnings per share in 1995 would have been
$21.6 million and $1.36, respectively. Higher operating and interest income
and a slightly lower effective tax rate than in 1993 resulted in a 1.5%
increase in net earnings in 1994 to $26.4 million.
<PAGE>
30
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity has been cash generated from
operations. In 1995, in connection with its recapitalization, the Company
also entered into a credit facility that is now an additional source of
liquidity for the Company. The Company's cash and cash equivalents decreased
$24.2 million in 1995 to $10.9 million. The Company's ratio of current
assets to current liabilities decreased to 1.09 to 1 at December 30, 1995,
compared to 1.58 to 1 at December 31, 1994.
The Company's expansion and remodeling and new store activities for the
period from 1986 through 1995 are summarized below:
NEW OR SQUARE CAPITAL
MAJOR ACQUIRED FEET EXPENDITURES
REMODELS RE-REMODELS STORES ADDED (IN THOUSANDS)
- ----------------------------------------------------------------------
1986 3 - 1 58,000 $ 3,500
1987 2 - - 8,000 5,700
1988 5 - - 16,000 7,600
1989 2 - 2 85,000 9,900
1990 1 2 3 107,000 16,600
1991 2 1 3 127,000 25,900
1992 5 1 3 137,000 26,800
1993 3 - 5 173,000 43,000
1994 2 2 7 239,000 28,200
1995 5 2 17 609,000 89,100
- ----------------------------------------------------------------------
Total 30 8 41 1,559,000 $256,300
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
1995 was the Company's most active year to date in terms of growth with an
increase in square footage of 46% from the 17 stores added. The Company's
new 41,000 square foot Northgate replacement store opened on March 20, 1996.
Construction of a 66,000 square foot replacement store at the University
Village and the new 45,000 square foot Harvard Market store is underway. The
Company has completed two store remodels in 1996 and several others are
planned. In addition, the Company has secured a number of other sites that
are still in the entitlement process or subject to other contingencies and is
actively pursuing other new store locations and acquisition opportunities.
The Company owns the real estate at five of its 62 store facilities in
operation. The Company owns the strip shopping centers where three of these
stores are located; however, the real estate operations of these centers are
currently insignificant to the Company's results of operations. Another
shopping center owned by the Company was sold during the first quarter of
1995 and the others are for sale, however, the Company plans to retain
ownership of its store buildings and pads. The remaining stores are leased
under long-term operating leases.
Capital expenditures, which include the purchase of land, fixtures,
equipment and leasehold improvements, as well as the purchase of leasehold
interests, other property rights, goodwill and covenants not to compete, were
$89.1 million in 1995 (which includes $60.1 million related to
<PAGE>
31
the Olson's merger) and are projected to be approximately $30 million in 1996
based on the Company's announced plans, and to remain substantial in
subsequent years as the Company continues to expand and remodel existing
stores and acquire and open new stores.
During 1994, the Company paid cash dividends of $0.20 per share of the
Company's common stock totaling $3.9 million and a dividend of $0.05 per
share was paid in February 1995, totaling $1.0 million. The payment of
dividends has been discontinued because the credit facility described below
restricts the payment of dividends prior to 1997.
The $220.0 million credit facility entered into in connection with the
recapitalization consists of a term loan of $140.0 million and revolving
credit loans of up to $80.0 million. Principal repayments of the term loan
are due in equal quarterly installments from March 1997 through September
2001. The revolving loans are available for general corporate purposes and
any outstanding amounts would become due in September 2001. At the Company's
option, the interest rate per annum applicable to the credit facility is
either (1) the greater of the bank agent's reference rate or .5% above the
federal funds rate or (2) IBOR plus a margin of 1.25% initially, with margin
reductions if the Company meets specified financial ratios. The credit
facility contains a number of significant covenants that, among other things,
restrict the ability of the Company to incur additional indebtedness or incur
liens on its assets, in each case subject to specified exceptions, impose
specified financial tests as a precondition to the Company's acquisition of
other businesses, prohibit the Company from making certain restricted
payments (including dividends) and restrict the Company from making share
repurchases above certain amounts before January 1, 1997 and, subject to
specified financial tests, restrict its ability to make such payments and
repurchases thereafter. In addition, the Company is required to comply with
specified financial ratios and tests, including a maximum debt to cash flow
ratio, minimum ratios of cash flow to fixed charges, a minimum accounts
payable to inventory ratio and a minimum net worth test. The credit facility
is secured by a lien on all of the Company's receivables and intangible
assets. The Company had $164.5 million of borrowings under the facility with
an interest rate of 125 basis points over IBOR, or 7.0% at December 30, 1995.
The Company is currently in compliance with all financial covenants
contained in the credit facility.
The amount of the credit facility is significantly higher than the
Company's planned current financing needs, which will help to accommodate
other future growth opportunities. While the Company believes the credit
facility and existing cash and cash generated from operations will be
adequate to fund planned expansion, the Company believes it can readily
obtain additional capital, if needed, through other institutional financing
or further issuance of debt or equity securities.
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," was recently issued and is effective for the
Company's fiscal year ending December 28, 1996. The Company, as allowed,
intends to continue to measure stock-based compensation using its current
method of accounting prescribed by Accounting Principles Board (APB) Opinion
No. 25. The Company will be required to disclose certain additional
information related to its stock options and Employee Stock Purchase Plan;
however, management believes the impact to the financial statements, taken as
a whole, will not be material.
<PAGE>
32
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994,
AND DECEMBER 25, 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $729,855,999 $575,878,589 $518,259,868
Cost of sales and related occupancy expenses 550,434,224 430,711,080 386,895,474
Marketing, general and administrative expenses 136,644,381 105,955,569 92,467,509
- ------------------------------------------------------------------------------------------
Operating income 42,777,394 39,211,940 38,896,885
Interest income 501,249 932,596 879,687
Interest expense 9,639,405 - -
Other expense 1,400,000 - -
- ------------------------------------------------------------------------------------------
Earnings before income taxes 32,239,238 40,144,536 39,776,572
Taxes on income:
Current 10,087,000 11,593,000 11,207,000
Deferred 1,936,000 2,175,000 2,576,000
- ------------------------------------------------------------------------------------------
Total taxes on income 12,023,000 13,768,000 13,783,000
- ------------------------------------------------------------------------------------------
Net earnings $ 20,216,238 $ 26,376,536 $ 25,993,572
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Earnings per share $ 1.28 $ 1.34 $ 1.33
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Weighted average shares outstanding 15,830,000 19,656,000 19,592,000
- ------------------------------------------------------------------------------------------
Dividends per common share $ .05 $ .20 $ .15
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
33
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net earnings - - 20,216,238 20,216,238
Common stock issued 1,951,119 45,130,515 - 45,130,515
Common stock repurchased
(including offering fees
and expenses aggregating
$2,849,947) (7,000,000) (43,510,084) (134,339,863) (177,849,947)
Tax benefit related
to stock options - 666,987 - 666,987
Cash dividend ($.05 per share) - - (974,050) (974,050)
- ----------------------------------------------------------------------------------------------
Balance at December 30, 1995 14,432,128 $28,932,034 $16,435,547 $ 45,367,581
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
34
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 10,932,711 $ 35,162,625
Accounts receivable 9,031,239 3,285,717
Inventories 36,706,259 23,615,073
Prepaid expenses 5,523,611 2,645,579
- --------------------------------------------------------------------------------------------------
Total Current Assets 62,193,820 64,708,994
Properties
Land 8,576,024 9,721,225
Buildings, fixtures and equipment 132,594,371 96,096,154
Leasehold improvements 38,766,871 32,577,792
Construction in progress 15,953,743 -
- --------------------------------------------------------------------------------------------------
195,891,009 138,395,171
Accumulated depreciation and amortization (48,810,330) (36,095,273)
- --------------------------------------------------------------------------------------------------
147,080,679 102,299,898
Leasehold interest, net of accumulated amortization
of $9,534,637 and $7,946,985 27,953,998 16,133,654
Real estate held for investment 5,622,756 19,166,054
Goodwill, net of accumulated amortization of
$1,008,745 and $136,137 34,598,787 2,185,369
Other assets 5,428,115 3,419,633
- --------------------------------------------------------------------------------------------------
$282,878,155 $207,913,602
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 34,173,236 $ 24,043,452
Accrued payroll and related benefits 12,555,638 9,941,414
Accrued business and sales taxes 5,036,853 3,915,494
Other accrued expenses 4,720,079 2,692,404
Federal income taxes payable 405,000 340,000
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 56,890,806 40,932,764
Deferred income taxes 9,992,000 8,803,000
Other liabilities 6,127,768 -
Long-term debt 164,500,000 -
Shareholders' Equity
Common stock, at stated value --
Authorized 60,000,000 shares
Issued and outstanding 14,432,128 shares and 19,481,009 shares 28,932,034 26,644,616
Retained earnings 16,435,547 131,533,222
- --------------------------------------------------------------------------------------------------
Total Shareholders' Equity 45,367,581 158,177,838
- --------------------------------------------------------------------------------------------------
$282,878,155 $207,913,602
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
35
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994,
AND DECEMBER 25, 1993 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 20,216,238 $ 26,376,536 $ 25,993,572
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of properties 12,892,275 10,130,395 8,040,474
Amortization of leasehold interest and other 3,277,506 1,474,404 1,242,383
Amortization of debt issuance fees 142,609 -- --
Deferred income taxes 1,936,000 2,175,000 2,576,000
Changes in operating assets and liabilities:
Accounts receivable (5,292,349) (506,700) 164,327
Inventories (4,550,186) (4,185,146) (3,587,343)
Prepaid expenses (2,878,032) (755,442) (327,116)
Accounts payable 297,137 (35,120) 1,751,063
Accrued payroll and related benefits 2,614,224 481,610 603,201
Accrued business and sales taxes 1,121,359 727,172 406,122
Other accrued expenses 2,108,396 (1,066,647) 258,027
Federal income taxes payable 1,384,987 (201,000) (568,000)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,270,164 34,615,062 36,552,710
- -------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures, net (28,638,585) (20,983,065) (39,864,618)
Cash portion of Olson's merger (18,000,000) -- --
Increase in real estate held for investment (406,674) (7,196,079) (3,156,420)
Other (531,337) (710,845) 1,493,830
Proceeds from sale of real estate 1,340,000 -- --
- -------------------------------------------------------------------------------------------------------
Net cash used by investing activities (46,236,596) (28,889,989) (41,527,208)
- -------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuances of common stock 27,060,515 2,068,965 2,180,411
Common stock repurchased (177,849,947) -- --
Net proceeds under revolving credit facility 500,000 -- --
Proceeds from long-term debt 140,000,000 -- --
Cash dividends paid (974,050) (3,887,905) (2,899,049)
- -------------------------------------------------------------------------------------------------------
Net cash used by financing activities (11,263,482) (1,818,940) (718,638)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (24,229,914) 3,906,133 (5,693,136)
Cash and cash equivalents at beginning of period 35,162,625 31,256,492 36,949,628
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,932,711 $ 35,162,625 $ 31,256,492
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
36
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 25, 1993
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Quality Food Centers, Inc. (QFC) is the second largest
supermarket chain in the Seattle/Puget Sound region of Washington State, and
the largest independent chain. The Company has been in operation since 1954
and currently operates 62 stores and employs over 4,200 people.
Basis of Presentation - The Company's financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from the
estimates.
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 years ended December 30, 1995 and December 25, 1993 represent 52-week
fiscal years. The year ended December 31, 1994 was a 53-week fiscal year.
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 $18,082,833 and $13,004,480 at
December 30, 1995 and December 31, 1994, are included in accounts payable.
Construction in Progress - Costs associated with acquiring land, buildings,
fixtures and equipment while a store is under construction are recorded as
construction in progress. Additionally, the Company capitalizes interest on
debt incurred during the construction of a new store. When a store opens, all
costs are then transferred to the appropriate property account.
Depreciation and Amortization - Depreciation is provided on the straight-line
method over the shorter of the estimated useful lives or 31 1/2 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.
Goodwill - Goodwill arises primarily from business acquisitions and represents
the cost of purchased businesses in excess of amounts assigned to tangible and
identified intangible assets. Goodwill is being amortized over estimated lives
of up to 40 years.
<PAGE>
37
Long-lived Assets - The Company periodically reviews long-lived assets,
including identified intangible assets and goodwill for impairment to
determine whether events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Such review includes
estimating expected future cash flows. No such events or circumstances have
occurred during 1995.
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.
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. Upon commencement of construction, costs are transferred to
construction in progress.
Reclassifications - Certain prior years' balances have been reclassified to
conform to classifications used in the current year.
NOTE B
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense for the last three years was
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $8,872,000 $11,718,000 $11,576,000
Interest (net of $166,959 of interest capitalized) 9,328,328 -- --
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1995, the Company acquired all of the outstanding
shares of Olson's Food Stores, Inc. in a merger transaction for $60,070,000
(Note K). In connection with the merger, liabilities assumed were as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Fair value of assets acquired $ 69,246,000
Cash paid (18,000,000)
Long-term debt assumed (24,000,000)
Common stock issued (18,070,000)
- ---------------------------------------------------------------------
Current liabilities assumed $ 9,176,000
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
38
During the first quarter of 1995 the Company recorded $4,000,000 as an
increase in goodwill and deferred income taxes payable to record deferred
income taxes arising from the Olson's merger. In addition, a deferred tax
asset and corresponding liability of $5,400,000 were recorded to reflect
amounts due the former shareholders of Olson's when tax loss and tax credit
carryforwards are utilized by the Company. During 1995, the Company utilized
$653,000 of the tax asset to reduce current taxes payable.
NOTE C
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 $1,984,000 and
$1,365,000 as of December 30, 1995 and December 31, 1994, and net earnings
would have increased by $402,000 in 1995 and $16,000 in 1993. There was no
LIFO adjustment in 1994.
NOTE D
LEASES
The Company leases its administrative offices and 57 of its 62 store
facilities in operation under noncancelable operating leases expiring through
2023. Certain of the leases include renewal provisions at the Company's
option. Minimum rental commitments under noncancelable leases, which exclude
stores to be added in 1996, as of December 30, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER
- ---------------------------------------------------------------------------
<S> <C>
1996 $ 14,031,600
1997 13,817,300
1998 13,631,300
1999 13,391,100
2000 13,415,800
Thereafter 166,611,900
- ---------------------------------------------------------------------------
$234,899,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</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.
<PAGE>
39
A summary of rental expense under operating leases is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rent $12,417,234 $ 8,184,998 $ 7,170,043
Contingent rentals 1,820,196 1,744,072 1,989,793
Real estate taxes and executory costs 3,565,656 2,321,142 2,029,980
Less sublease rentals (569,636) (164,263) (161,030)
- ----------------------------------------------------------------------------------
$17,233,450 $12,085,949 $11,028,786
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
NOTE E
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 30, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Compensated absences $ 834,000 $ 750,000
Self insurance 321,000 388,000
Other 793,000 688,000
Deferred tax asset arising from Olson's merger (Note K) 4,747,000 --
- -----------------------------------------------------------------------------------------
6,695,000 1,826,000
- -----------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Accelerated depreciation 11,338,000 9,813,000
Multi-employer pension contribution 724,000 558,000
Deferred tax liability arising from Olson's merger (Note K) 4,000,000 --
Other 625,000 258,000
- -----------------------------------------------------------------------------------------
16,687,000 10,629,000
- -----------------------------------------------------------------------------------------
Net deferred tax liability $ 9,992,000 $ 8,803,000
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
No valuation allowance was necessary for the deferred tax assets at
December 30, 1995 and December 31, 1994.
<PAGE>
40
The differences between the Company's effective income tax rates and the
federal statutory rates are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Nondeductible goodwill .9 -- --
Nondeductible recapitalization fees 1.6 -- --
Other (primarily interest on tax-free
municipal securities) (.2) (.7) (.7)
Revaluation of deferred tax liability
due to tax rate change -- -- .4
- -----------------------------------------------------------------------------
Effective tax rate 37.3% 34.3% 34.7%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
NOTE F
- --------------------------------------------------------------------------------
LONG-TERM DEBT
In March 1995, the Company entered into a $220,000,000 credit facility to
finance the repurchase of its shares pursuant to a self-tender offer (Note L)
and to finance a portion of the Olson's merger (Note K). The credit facility
consists of a term loan of $140,000,000 and revolving credit loans of up to
$80,000,000.
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 or .5% above the federal funds rate
or (2) IBOR plus a margin of 1.25% initially, with margin reductions if the
Company meets specified financial ratios. At December 30, 1995, the borrowings
under the credit facility bore interest at an average rate of approximately
7.0%. Additionally, the credit facility requires a commitment fee of .37% on
the average daily unused portion of the revolving credit loans, computed on a
quarterly basis in arrears.
The credit facility contains a number of significant covenants that, among
other things, restrict the ability of the Company to incur additional
indebtedness or incur liens on its assets, in each case subject to specified
exceptions, impose specified financial tests as a precondition to the
Company's acquisition of other businesses, prohibit the Company from making
certain restricted payments (including dividends) and restrict the Company
from making share repurchases above certain amounts before January 1, 1997
and, subject to specified financial tests, restrict its ability to make such
payments and repurchases thereafter. In addition, the Company is required to
comply with specified financial ratios and tests, including a maximum debt to
cash flow ratio, minimum ratios of cash flow to fixed charges, a minimum
accounts payable to inventory ratio and a minimum net worth test. The credit
facility is secured by a lien on all of the
<PAGE>
41
Company's receivables and intangible assets. The carrying amount of this debt
approximates fair market value, as rates are approximately equal to those
currently available to the Company for similar purposes.
As of December 30, 1995, long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER
- --------------------------------------------------------------------------------
<S> <C>
1996 $ --
1997 25,200,000
1998 25,200,000
1999 29,400,000
2000 35,000,000
Thereafter 49,700,000
- --------------------------------------------------------------------------------
$164,500,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTE G
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
The Company is involved in various matters of litigation, all arising in the
ordinary course of business. In the opinion of management, the ultimate
outcome of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE H
- --------------------------------------------------------------------------------
RELATED PARTY TRANSACTIONS
Pursuant to an agreement with its chairman and chief executive officer, the
Company pays a management fee of up to 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 1995, 1994 and 1993 was $981,068, $1,151,757 and $1,036,520.
During the fourth quarter of 1995, in lieu of the management fee, which would
have been approximately $479,000, the Company granted stock options for 58,900
shares of its stock under the Company's 1993 Executive Stock Option Plan (Note
J) to its chairman and chief executive officer.
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
<PAGE>
42
paid to the previous owner of the center and totaled approximately $683,000,
$715,000 and $244,000 for 1995, 1994 and 1993.
During 1995, the Company assumed a lease for one of its stores included in
the Olson's merger (Note K) where the landlord is an entity that is controlled
by a member of the Company's Board of Directors. Rental payments for the
store, which include reimbursements for common area maintenance and real
estate taxes, totaled $142,000 during 1995. The lease terminates in April
2001, with options to renew through April 2035. In addition, during 1995 the
Company purchased approximately $1,673,000 of products from an entity owned by
certain family members of the same member of its Board of Directors.
The Company's president is a member of the board of directors of the
Associated Grocers, Inc. (A.G.) cooperative, which became one of the Company's
major suppliers in 1995. Amounts paid to A.G. for products and services
totaled $44,903,000 for 1995.
NOTE I
- --------------------------------------------------------------------------------
RETIREMENT PLANS
The Company participates in a union administered multi-employer defined
benefit pension plan for employees covered by collective bargaining
agreements. The contributions under this plan were $3,067,232, $2,386,971 and
$2,166,699 for 1995, 1994 and 1993.
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 $548,000, $467,000 and $372,000 for 1995, 1994 and
1993.
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 J
- --------------------------------------------------------------------------------
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 nonqualified 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 nonqualified options vest ratably over five years and expire after 10
years. For all the plans, the exercise price must not be less than the fair
market value of the common stock at the date of grant.
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
1,365,778 shares granted to 692 employees and
<PAGE>
43
four directors were outstanding at December 30, 1995. 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 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
Granted 514,950 20.125 to 24.125
Forfeited (20,730) 17.25 to 34.00
Exercised (113,895) 3.25 to 22.50
- -------------------------------------------------------------------------------
Outstanding, December 30, 1995 1,365,778 $ 3.25 to $34.00
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Exercisable, December 30, 1995 582,089 $ 3.25 to $34.00
- -------------------------------------------------------------------------------
</TABLE>
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, 84,283, 91,206 and 60,622 shares were issued to 956, 1,061 and 1,088
employees, in 1995, 1994 and 1993. As of December 30, 1995, payroll deductions
totaling $1,357,000 on behalf of approximately 1,268 employees were accrued
for purchase of shares on March 31, 1996.
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," was recently issued and is effective for the
Company's fiscal year ending December 28, 1996. The Company, as allowed,
intends to continue to measure stock-based compensation using its current
method of accounting prescribed by Accounting Principles Board (APB) Opinion
No. 25. The Company will be required to disclose certain additional
information related to its stock options and Employee Stock Purchase Plan;
however, management believes the impact to the financial statements, taken as
a whole, will not be material.
NOTE K
- -------------------------------------------------------------------------------
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.
<PAGE>
44
The merger was effected through an acquisition of 100% of the outstanding
voting securities of Olson's 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. The merger has been accounted for under the "purchase" method of
accounting.
Goodwill of $32,367,000 is being amortized over a period of 35 years.
Because the merger was a statutory merger, the Company has a carryover tax
basis and amortization of the excess of the book value over the tax basis of
the assets included in the merger is not deductible for federal income tax
purposes.
The Company has recorded $4,000,000 to goodwill and deferred income taxes
to give effect to deferred income taxes arising from the Olson's merger.
Further, as part of the merger agreement, the Company agreed to remit the
benefits, if any, of Olson's net operating loss carryforwards totaling
approximately $12,000,000 and certain other tax credit carryforwards totaling
approximately $1,200,000 to the former shareholders of Olson's when utilized.
A deferred tax asset and a corresponding liability of $5,400,000 related to
these carryforward items were recorded in the Company's financial statements.
During 1995, the Company utilized $653,000 of the tax asset to reduce current
taxes payable.
Following is a summary of the assets and liabilities recorded as a result
of the Olson's merger:
<TABLE>
<S> <C>
- --------------------------------------------------------------------
Cash $ 182,000
Inventories 8,541,000
Other Current Assets 453,000
- --------------------------------------------------------------------
Total Current Assets 9,176,000
Property Plant and Equipment (net) 18,087,000
Leasehold Interest 12,829,000
Goodwill 32,367,000
Other Assets 7,487,000
Current Liabilities (9,176,000)
Deferred Income Taxes (4,000,000)
Other Liabilities (6,700,000)
- --------------------------------------------------------------------
$60,070,000
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The $24,000,000 in long-term debt assumed in connection with the Olson's
merger was partially repaid with cash and partially refinanced with
$15,000,000 in borrowings under the Company's credit facility.
Pursuant to the merger agreement, the former shareholders of Olson's are
required to pay to the Company the excess of Olson's current liabilities over
current assets as of the merger date. Such amount totalled $10,216,000, of
which $2,539,000 remained payable to the Company at December 30, 1995.
<PAGE>
45
NOTE L
- --------------------------------------------------------------------------------
RECAPITALIZATION
During the second quarter of 1995, the Company successfully completed its
recapitalization plan announced in December 1994. The Company's self-tender
offer that commenced on January 18, 1995, for up to 7,000,000 shares of its
common stock at a price of $25.00 per share payable in cash expired on March
17, 1995. On March 29, 1995, the Company purchased 7,000,000 shares of its
common stock and entered into a new $220,000,000 credit facility to finance
the tender offer, Olson's merger and provide additional capital.
Additionally, the Company sold 1,000,000 newly issued shares of its common
stock to Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00 per share on March
29, 1995. Zell/Chilmark acquired an additional 2,975,000 shares at $25.00
per share, plus an amount equal to a 5% annual return on such amount from
March 17, 1995 through January 16, 1996, directly from the Company's
chairman and chief executive officer in a separate transaction that closed on
January 16, 1996.
To reflect the net reduction in shareholders' equity resulting from the
recapitalization, the Company reduced retained earnings to zero at the
beginning of the second quarter of 1995 and allocated the remaining amount as
a reduction to common stock.
Fees payable in connection with the recapitalization aggregated
approximately $4,250,000. During the first quarter of 1995, $1,400,000 of
these fees were recorded as a one-time expense, which is not deductible for
federal income tax purposes. The remaining costs of $2,849,947 were recorded
as a direct reduction to shareholders' equity.
NOTE M
- --------------------------------------------------------------------------------
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma financial information sets forth historical
information which has been adjusted to reflect the Olson's merger and the
recapitalization described in Notes K and L. 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 (IN THOUSANDS EXCEPT PER SHARE
DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------- PRO FORMA
DEC. 31, 1994 OLSON'S OLSON'S RECAPITALIZATION DEC. 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>
<PAGE>
46
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET INFORMATION (IN THOUSANDS)
- -------------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA
DEC. 31, 1994 OLSON'S OLSON'S RECAPITALIZATION DEC. 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>
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 the recapitalization. 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 acquired.
The pro forma results are not necessarily indicative of what actually
would have occurred if the Olson's merger and the 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 $1,400,000 directly resulting
from the recapitalization are not reflected in the pro forma information for
the 53 weeks ended December 31, 1994.
<PAGE>
47
NOTE N
- --------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected financial data for each of the four
quarters of 1995 and 1994. (In thousands except earnings per share):
- -------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(12 WEEKS) (12 WEEKS) (12 WEEKS) (16 WEEKS)
- --------------------------------------------------------------------------
1995
Sales $138,938 $175,539 $176,057 $239,322
Cost of sales and related
occupancy expenses 104,656 131,659 132,861 181,257
Gross margin 34,282 43,880 43,196 58,065
Operating income 7,712 11,071 10,099 13,896
Interest income 273 76 76 76
Interest expense 72 2,875 2,938 3,754
Other expense 1,400 - - -
Net earnings 3,781 5,277 4,612 6,546
Earnings per share .19 .36 .32 .45
Average shares outstanding 19,842 14,821 14,553 14,548
- --------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(12 WEEKS) (12 WEEKS) (12 WEEKS) (17 WEEKS)
- --------------------------------------------------------------------------
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
- --------------------------------------------------------------------------
<PAGE>
48
INDEPENDENT AUDITORS
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 30, 1995 and December 31, 1994, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 30, 1995. 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 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
30, 1995 and December 31, 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
March 20, 1996
Seattle, Washington
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-30-1995
<EXCHANGE-RATE> 1
<CASH> 10,933
<SECURITIES> 0
<RECEIVABLES> 9,031
<ALLOWANCES> 0
<INVENTORY> 36,706
<CURRENT-ASSETS> 62,194
<PP&E> 195,891
<DEPRECIATION> 48,810
<TOTAL-ASSETS> 282,878
<CURRENT-LIABILITIES> 56,891
<BONDS> 0
0
0
<COMMON> 28,932
<OTHER-SE> 16,436
<TOTAL-LIABILITY-AND-EQUITY> 282,878
<SALES> 729,856
<TOTAL-REVENUES> 729,856
<CGS> 550,434
<TOTAL-COSTS> 687,078
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,639
<INCOME-PRETAX> 32,239
<INCOME-TAX> 12,023
<INCOME-CONTINUING> 20,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,216
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
</TABLE>
