<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 12, 1996
Quality Food Centers, Inc.
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington
--------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-15590 91-1330075
- --------------------------------- --------------------------------------
(Commission File Number) (IRS Employer Identification No.)
10112 N.E. 10th Street
Bellevue, Washington 98004
- --------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (206) 455-3761
---------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Page 1 of __ Pages
Exhibit Index on Page 4
<PAGE>
2
ITEM 5. OTHER EVENTS
As previously reported under Item 5 in the Company's Current Report on
Form 8-K dated November 12, 1996, QFC entered into a definitive merger agreement
pursuant to which QFC will acquire Hughes Markets, Inc. ("Hughes") for
approximately $360 million in cash (the "Hughes Acquisition"). Hughes is an
independently owned supermarket chain of 56 stores in southern California. The
transaction is expected to be completed in early 1997, and is subject to certain
conditions, including regulatory approval. Included under Item 7 hereof are the
historical financial statements of Hughes, together with certain pro forma
information of QFC, as adjusted to give effect to the Hughes Acquisition.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Filed as exhibit 99.1 are the audited historical financial statements, for
the periods indicated, of Hughes.
(b) Filed as exhibit 99.2 is certain unaudited pro forma information of QFC, as
adjusted to give effect to the Hughes Acquisition.
(c) EXHIBITS
2(b) Agreement and Plan of Merger, dated as of November 20, 1996, by and
among QFC, QHI Acquisition Corporation and Hughes Markets, Inc.
(filed as exhibit 2(a) to QFC's Registration Statement on Form S-3
filed on December 23, 1996).
2(c) Principal Stockholders Agreement, dated as of November 20, 1996, among
QFC and certain stockholders of Hughes Markets, Inc. (filed as exhibit
2(b) to QFC's Registration Statement on Form S-3 filed on
December 23, 1996).
99.1 Consolidated Financial Statements, as of February 26, 1995 and
March 3, 1996, for Hughes Markets, Inc. and Subsidiaries.
99.2 Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 30, 1995 and for the 36 weeks ended
September 7, 1996; Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of September 7, 1996.
<PAGE>
3
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
QUALITY FOOD CENTERS, INC.
December 24, 1996 By: /s/ MARC W. EVANGER
- -------------------------- ---------------------------------
Marc W. Evanger, Vice President
and Chief Financial Officer
and Secretary/Treasurer
<PAGE>
4
INDEX TO EXHIBITS
Exhibit Number Exhibit Page
2(b) Agreement and Plan of Merger, dated as of November 20, 1996,
by and among QFC, QHI Acquisition Corporation and Hughes
Markets, Inc. (filed as exhibit 2(a) to QFC's Registration
Statement on Form S-3 filed on December 23, 1996).
2(c) Principal Stockholders Agreement, dated as of November 20,
1996, among QFC and certain stockholders of Hughes
Markets, Inc. (filed as exhibit 2(b) to QFC's Registration
Statement on Form S-3 filed on December 23, 1996).
99.1 Consolidated Financial Statements, as of February 26, 1995 and
March 3, 1996, for Hughes Markets, Inc. and Subsidiaries.
99.2 Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 30, 1995 and for the 36
weeks ended September 7, 1996; Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of September 7, 1996.
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 26, 1995 AND MARCH 3, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Hughes Markets, Inc.:
We have audited the accompanying consolidated balance sheets of HUGHES MARKETS,
INC. (a California corporation) AND SUBSIDIARIES as of February 26, 1995 and
March 3, 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for the three years in the period ended March 3, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hughes Markets, Inc. and
Subsidiaries as of February 26, 1995 and March 3, 1996, and the results of their
operations and their cash flows for the three years in the period ended
March 3, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 10, 1996, except for the
matters disclosed in Note 11 for
which the date is November 20, 1996.
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 26, March 3, September 29,
1995 1996 1996
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,348,217 $ 31,999,667 $ 10,453,573
Accounts receivable, net of allowances
of $427,270, $341,546 and $441,025
as of February 26, 1995, March 3, 1996,
and September 29, 1996, respectively 19,647,217 20,788,846 18,175,078
Inventories, at cost 52,775,428 50,095,352 53,966,366
Prepaid expenses and deposits 9,388,682 10,243,247 9,291,043
------------ ------------ ------------
Total current assets 106,159,544 113,127,112 91,886,060
------------ ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 39,799,709 38,579,263 43,913,243
Buildings 62,857,809 57,029,127 62,204,464
Market, automotive and office equipment 141,421,645 151,713,977 158,977,138
Leasehold improvements 43,532,936 46,669,490 48,384,807
Construction-in-process - - 11,871,502
------------ ------------ ------------
287,612,099 293,991,857 325,351,154
Less--Depreciation and amortization 106,131,836 121,915,875 131,477,731
------------ ------------ ------------
181,480,263 172,075,982 193,873,423
------------ ------------ ------------
PROPERTY UNDER CAPITAL LEASES, net of
amortization 17,461,416 18,424,802 19,500,023
------------ ------------ ------------
OTHER ASSETS:
Lease acquisition costs, net of amortization
of $4,693,553, $5,075,253 and $5,255,749
as of February 26, 1995, March 3, 1996,
and September 29, 1996, respectively 5,332,729 4,951,029 4,945,397
Other 6,293,684 7,920,284 5,504,397
------------ ------------ ------------
11,626,413 12,871,313 10,449,794
------------ ------------ ------------
$316,727,636 $316,499,209 $315,709,300
============ ============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 26, March 3, September 29,
1995 1996 1996
------------- ------------ -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 52,934,500 $ 50,756,904 $ 53,678,299
Accrued liabilities 36,325,725 38,019,396 38,673,998
Current portion of long-term debt 7,717,660 5,411,076 9,203,704
Current portion of obligations under
capital leases 554,094 549,759 558,572
Income taxes payable - 1,861,867 1,219,115
------------ ------------ ------------
Total current liabilities 97,531,979 96,599,002 103,333,688
------------ ------------ ------------
LONG-TERM DEBT, less current portion 34,266,184 22,051,704 3,043,650
------------ ------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion 22,093,947 23,556,188 24,923,943
------------ ------------ ------------
DEFERRED INCOME TAXES 9,363,459 8,845,146 8,644,496
------------ ------------ ------------
OTHER NON-CURRENT LIABILITIES 5,623,182 4,372,114 6,623,359
------------ ------------ ------------
MINORITY INTEREST 9,874,274 9,531,344 8,369,068
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, stated at redemption value:
Authorized--640,000,000 shares
Outstanding--20,967,000 shares 209,670 209,670 209,670
Common stock, nominal par value:
Authorized--10,000,000 shares
Outstanding--5,689,230, 5,612,385
and 5,588,360 as of February 26, 1995,
March 3, 1996, and September 29, 1996,
respectively 5,689 5,612 5,588
Additional paid-in capital 4,916,362 5,122,850 5,457,620
Retained earnings 133,831,697 147,203,762 156,054,919
------------ ------------ ------------
138,963,418 152,541,894 161,727,797
Less--Notes receivable from shareholders (988,807) (998,183) (956,701)
------------ ------------ ------------
137,974,611 151,543,711 160,771,096
------------ ------------ ------------
$316,727,636 $316,499,209 $315,709,300
============ ============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended For the Seven Months Ended
----------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
February 27, February 26, March 3, September 24, September 29,
1994 1995 1996 1995 1996
------------ -------------- -------------- ------------- -------------
(Unaudited)
NET SALES $1,083,708,509 $1,110,947,177 $1,147,447,465 $647,486,382 $675,431,524
COST OF SALES, INCLUDING DISTRIBUTION
AND OCCUPANCY EXPENSES 854,624,006 884,862,010 901,951,393 509,071,748 529,909,430
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 206,289,167 209,211,036 215,234,435 122,631,371 126,492,863
------------- -------------- ------------ ------------- ------------
Income from operations 22,795,336 16,874,131 30,261,637 15,783,263 19,029,231
------------- -------------- ------------ ------------- ------------
OTHER INCOME (EXPENSE):
INTEREST INCOME 796,288 1,054,317 1,271,754 1,203,903 708,628
INTEREST EXPENSE (4,598,498) (4,664,150) (4,335,433) (2,595,385) (2,100,190)
------------- -------------- ------------ -------------- ------------
(3,802,210) (3,609,833) (3,063,679) (1,391,482) (1,391,562)
Income before provision for income
taxes and minority interest 18,993,126 13,264,298 27,197,958 14,391,781 17,637,669
PROVISION FOR INCOME TAXES 7,974,000 5,631,000 11,382,473 6,129,956 8,401,246
------------- -------------- -------------- ------------- ------------
Income before minority interest 11,019,126 7,633,298 15,815,485 8,261,825 9,236,423
MINORITY INTEREST IN SUBSIDIARY LOSS 204,776 740,948 369,033 272,419 1,162,367
------------- -------------- -------------- ------------- ------------
NET INCOME $ 11,223,902 $ 8,374,246 $ 16,184,518 $ 8,534,244 $10,398,790
============= ============== ============== ============= ===========
NET INCOME PER COMMON SHARE $ 1.95 $ 1.47 $ 2.87 $ 1.51 $ 1.86
============= ============== =============== ============= ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,735,893 5,700,558 5,640,369 5,654,600 5,594,942
============= ============== ============== ============= ===========
The accompanying notes are an integral part of these consolidated Financial Statements.
</TABLE>
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Notes
--------------------- ------------------- Additional Receivable Total
Redemption Par Paid-In Retained from Shareholders'
Shares Value Shares Value Capital Earnings Shareholders Equity
---------- ---------- --------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1993 20,967,000 $209,670 5,757,028 $5,757 $4,506,891 $117,305,788 $ (950,955) $121,077,151
Repayments of notes
receivable from
shareholders - - - - - - 223,016 223,016
Purchases and
cancellation of stock - - (31,387) (32) - (733,622) - (733,654)
Proceeds from sale and
issuance of stock - - 4,800 5 116,827 - (116,832) -
Dividends - - - - - (501,338) - (501,338)
Net income - - - - - 11,223,902 - 11,223,902
---------- -------- --------- ------ ---------- ------------ ---------- ------------
BALANCE, February 27, 1994 20,967,000 209,670 5,730,441 5,730 4,623,718 127,294,730 (844,771) 131,289,077
Repayments of notes
receivable from
shareholders - - - - - - 148,619 148,619
Purchases and
cancellation of stock - - (52,411) (52) - (1,337,671) - (1,337,723)
Proceeds from sale and
issuance of stock - - 11,200 11 292,644 - (292,655) -
Dividends - - - - - (499,608) - (499,608)
Net income - - - - - 8,374,246 - 8,374,246
---------- -------- --------- ------ ---------- ------------ ---------- ------------
BALANCE, February 26, 1995 20,967,000 209,670 5,689,230 5,689 4,916,362 133,831,697 (988,807) 137,974,611
Repayments of notes
receivable from
shareholders - - - - - - 197,119 197,119
Purchases and cancellation
of stock - - (84,045) (84) - (2,317,551) - (2,317,635)
Proceeds from sale and
issuance of stock - - 7,200 7 206,488 - (206,495) -
Dividends - - - - - (494,902) - (494,902)
Net income - - - - - 16,184,518 - 16,184,518
---------- -------- --------- ------ ---------- ------------ ---------- ------------
BALANCE, March 3, 1996 20,967,000 209,670 5,612,385 5,612 5,122,850 147,203,762 (998,183) 151,543,711
---------- -------- --------- ------ ---------- ------------ ---------- ------------
</TABLE>
<PAGE>
- 2 -
<TABLE>
<CAPTION>
Preferred Stock Common Stock Notes
--------------------- ------------------- Additional Receivable Total
Redemption Par Paid-In Retained from Shareholders'
Shares Value Shares Value Capital Earnings Shareholders Equity
---------- ---------- --------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Repayments of notes
receivable from
shareholders - $ - - $ - $ - $ - $ 41,482 $ 41,482
Purchases and cancellation
of stock - - (35,225) (35) - (1,058,568) - (1,058,603)
Proceeds from sale and
issuance of stock - - 11,200 11 334,770 - - 334,781
Dividends - - - - - (489,065) - (489,065)
Net income - - - - - 10,398,790 - 10,398,790
---------- -------- --------- ------ ---------- ------------ ---------- ------------
BALANCE, September 29, 1996
(unaudited) 20,967,000 $209,670 5,588,360 $5,588 $5,457,620 $156,054,919 $ (956,701) $160,771,096
========== ======== ========= ====== ========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended For the Seven Months Ended
-------------------------------------------- --------------------------
February 27, February 26, March 3, September 24, September 29,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,223,902 $ 8,374,246 $ 16,184,518 $ 8,534,244 $ 10,398,790
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,309,646 21,313,241 19,570,835 7,309,300 7,485,972
Loss on sale of property 160,080 109,934 26,391 - -
Minority interest (204,776) (740,948) (342,930) (272,419) (1,162,276)
Changes in assets and liabilities:
Accounts receivable (1,974,115) 421,547 (1,141,629) 783,816 2,613,768
Inventories (9,897,817) (2,989,590) 2,680,076 1,780,508 (3,871,014)
Prepaid expenses and deposits (2,522,384) (2,353,790) (854,565) 271,970 952,204
Accounts payable 8,184,401 8,682,642 (2,177,596) 1,211,742 2,921,395
Accrued liabilities 4,036,596 1,917,488 1,693,671 5,372,296 654,602
Income taxes payable 3,283,419 (3,556,176) 1,861,867 924,978 (642,752)
Deferred income taxes (1,634,000) 1,197,000 (518,313) (605,176) (200,650)
Other, net (354,869) (286,725) (3,359,973) (2,449,678) 4,602,292
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities 29,610,083 32,088,869 33,622,352 22,861,581 23,752,331
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (31,700,927) (36,062,608) (19,633,316) (1,847,789) (28,740,124)
Proceeds from sale of property and
equipment 5,043,724 448,022 10,670,178 5,224,140 102,131
Proceeds from non-current deposits - 675,922 703,246 - -
Payments on non-current deposits - (48,938) (112,489) - -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (26,657,203) (34,987,602) (8,372,381) 3,376,342 (28,637,993)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 6,944,443 6,000,000 2,796,731 - 3,000,000
Repayments of long-term debt - (882,271) (17,317,795) (18,200,116) (18,215,426)
Repayments of notes receivable from
shareholders 290,932 222,356 277,174 88,819 91,313
Principal payments on obligations under
capital leases (482,015) (547,267) (542,094) (322,823) (323,432)
Proceeds from sale of common stock - - - - 334,781
Repurchases of common stock (733,654) (1,337,723) (2,317,635) (1,466,803) (1,058,603)
Payment of dividends (501,338) (499,608) (494,902) (494,902) (489,065)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 5,518,368 2,955,487 (17,598,521) (20,395,825) (16,660,432)
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
- 2 -
<TABLE>
<CAPTION>
For the Years Ended For the Seven Months Ended
-------------------------------------------- --------------------------
February 27, February 26, March 3, September 24, September 29,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 8,471,248 $ 56,754 $ 7,651,450 $ 5,842,098 $(21,546,094)
CASH AND CASH EQUIVALENTS,
beginning of period 15,820,215 24,291,463 24,348,217 24,348,217 31,999,667
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 24,291,463 $ 24,348,217 $ 31,999,667 $ 30,190,315 $10,453,573
============ ============ ============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for interest $ 4,600,483 $ 4,518,823 $ 4,442,464 $ 2,421,506 $ 2,076,007
Cash paid for income taxes $ 6,086,548 $ 8,105,874 $ 8,700,000 $ 4,926,000 $ 9,276,500
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for notes
receivable $ 116,832 $ 292,655 $ 206,495 $ - $ -
Purchases of property under capital
leases $ - $ - $ 2,000,000 $ 2,000,000 $1,700,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Hughes Markets, Inc. (the Company), its wholly owned subsidiary, Hughes
Realty, Inc. (HRI) and its 51 percent owned subsidiary, Santee Dairies,
Inc. (Santee). See Note 11 regarding ownership changes subsequent to March
3, 1996. All significant intercompany accounts and transactions have been
eliminated in consolidation.
b. DESCRIPTION OF BUSINESS
The Company operates a chain of supermarkets through which it sells food
and nonfood items in the Southern California area. HRI is a real estate
entity which holds two of the Company's stores. Santee is a dairy which
produces fluid milk and juice products. Santee sells its products to its
owners as well as to outside parties.
c. INVENTORY VALUATION
The Company values its inventory associated with its supermarket operations
at cost using the last-in, first-out (LIFO) method. If the inventory had
been valued using the first-in, first-out (FIFO) method, inventory balances
would have been $17,068,155, $16,844,154 and $17,719,154 (unaudited)
greater at February 26, 1995, March 3, 1996 and September 29, 1996,
respectively.
Santee's inventory balances of $3,266,189, $4,393,411 and $4,290,244
(unaudited) at February 26, 1995, March 3, 1996 and September 29, 1996,
respectively, which consist primarily of raw materials and supplies, are
valued using the lower of FIFO cost or market.
d. INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." Under
the assets and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
<PAGE>
- 2 -
e. PROPERTY AND EQUIPMENT
Depreciation of buildings and equipment and amortization of leasehold
improvements are computed on a straight-line basis. Property under capital
leases is amortized using methods consistent with the Company's
depreciation policy for purchased assets, except that depreciation is
computed over the lease term or useful life, whichever is less.
Estimated useful lives for the principal asset classifications are as
follows:
Buildings 10 to 50 years
Equipment 3 to 25 years
Leasehold improvements Lease term
Maintenance and repairs are charged to expense as incurred and major
replacements and improvements are capitalized. The cost and accumulated
depreciation of items sold or retired are removed from the property
accounts, and any resultant gain or loss is recognized currently.
f. LEASE ACQUISITION COSTS
Costs associated with the acquisition of certain leases are capitalized and
amortized on a straight-line basis over the terms of the related leases.
g. CASH FLOWS
The Company uses the indirect method as prescribed by SFAS No. 95 for
presentation of its cash flows. The Company considers all investment
instruments with original maturities of less than three months to be cash
equivalents.
h. FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to the last day of
February. Fiscal year 1996 was a 53 week year, fiscal 1995 and fiscal 1994
covered 52 weeks. The seven months ended September 24, 1995 and
September 29, 1996 covered 30 weeks.
i. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
j. EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares and common stock equivalents outstanding during the periods. Net
income has been reduced for preferred dividends.
<PAGE>
- 3 -
k. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995 and will have
no impact on the Company's results of operations.
In 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued. SFAS No. 123 is effective for fiscal years beginning after
December 15, 1995 and will have no impact on the Company's results from
operations.
l. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal
1996 presentation.
2. PREFERRED STOCK
The Company's preferred shares are voting, entitled to non-cumulative dividends
of $0.0006 per share per year and preference in liquidation of $0.01 per share.
They are redeemable at the option of the Company upon the payment of $0.01 per
share plus any declared but unpaid dividends. For the years ended February 27,
1994, February 26, 1995 and March 3, 1996, the board of directors declared
dividends in the amount of $0.0006 per preferred share and $.085 per common
share.
The Company's bylaws provide that the Company has the option to repurchase stock
at any time by giving notice to the holder, at a price equal to book value or at
the holder's cost of common stock, whichever is greater, and repurchase the
preferred stock at the redemption value of $0.01 per share plus any declared but
unpaid dividend.
3. STOCK OPTIONS
The Company has a stock option plan (the Plan) which provides for the granting
of options to officers and certain key employees for the purpose of purchasing
common shares. The exercise price of the options is equivalent to the book
value (as defined by the Plan) of the common stock or its par value, whichever
is greater, at the date such options were exercised.
<PAGE>
- 4 -
Transactions under the Plan are summarized as follows:
Number Exercise Price
of Shares Per Shares
--------- --------------
Outstanding at February 28, 1993 - -
Granted 4,800 $24.34
Exercised (4,800) $24.34
Canceled - -
--------- ---------------
Outstanding at February 27, 1994 - -
Granted 11,200 $26.13
Exercised (11,200) $26.13
Canceled - -
--------- ---------------
Outstanding at February 26, 1995 - -
Granted 7,200 $28.68
Exercised (7,200) $28.68
Canceled - -
--------- ---------------
Outstanding at March 3, 1996 - -
Granted 11,200 $29.83 - $30.40
Exercised (11,200) $29.83 - $30.40
Canceled - -
--------- ---------------
Outstanding at September 29,
1996 (Unaudited) - -
========= ===============
For the years ended February 27, 1994, February 26, 1995 and March 3, 1996, the
Company repurchased 31,387, 52,411 and 84,045 shares of common stock for
$733,654, $1,337,723 and $2,317,635, respectively, which represented the book
value (as defined in the Plan) of the common shares at the date of purchase.
As of February 26, 1995, March 3, 1996 and September 29, 1996, the Company had
extended loans of $988,807, $998,183 and $956,701 (unaudited), respectively, to
certain officers and employees to purchase stock under the Plan. The loans,
which are collateralized by the common shares, bear interest of 4.81 to 9.25
percent, and have varying repayment terms, not exceeding ten years.
4. LONG-TERM DEBT
The Company has a $32,000,000 revolving loan facility. Provisions under the
facility require the Company to comply with certain financial covenants
including the maintenance of a minimum tangible net worth, a funded indebtedness
to capital ratio, an interest coverage ratio and a limitation on the debt to
tangible net worth ratio. As of September 29, 1996, no amounts were outstanding
under the $32,000,000 revolving loan facility.
Santee has a revolving line of credit providing for borrowings of up to
$5,000,000. The unused portion of the revolving line of credit is subject to an
annual commitment fee of 1/4 of 1 percent.
<PAGE>
- 5 -
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
February 26, March 3, September 29,
1995 1996 1996
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Revolving loan, unsecured, interest
at the prime rate or LIBOR plus
5/8 percent at the time of borrowing
(8.38% at March 3, 1996). Principal
may be repaid and reborrowed until
maturity, October 31, 2000. $ - $17,000,000 $ -
Revolving loan, unsecured, interest
at LIBOR plus 5/8 percent at the
time of borrowing (6.69% at
February 26, 1995). Principal due
quarterly at an increasing rate
during the period September 30, 1995
through June 30, 1998. 24,000,000 - -
Revolving loan, unsecured, interest
at 9.13% at February 26, 1995.
Principal due quarterly at an
increasing rate during the period
September 30, 1995 through
June 30, 1998. 8,000,000 - -
Non-negotiable certificates of
indebtedness, interest payable
quarterly at 7 and 8 percent, due
at various dates through 1998. 6,274,544 6,455,851 5,897,578
Note payable, secured by store
equipment and fixtures, interest at
9.4 percent, due in monthly
installments of $103,986 including
interest through August 1996. 1,751,538 615,992 306,901
Note payable, secured by land and
building, interest at 6 percent,
due in monthly installments of
$42,977 including interest through
December 1997. 1,341,323 893,874 620,222
Notes payable, collateralized by
deeds of trust and equipment,
interest at 8.25 to 8.75 percent,
due through January 2001. 616,439 497,063 422,653
<PAGE>
- 6 -
Revolving line of credit with a bank,
interest at bank's reference rate
plus one-half percent, interest due
monthly, principal due
December 1, 1996 $ - $ 2,000,000 $ 5,000,000
----------- ----------- -----------
41,983,844 27,462,780 12,247,354
Less--Current portion 7,717,660 5,411,076 9,203,704
----------- ----------- -----------
$34,266,184 $22,051,704 $ 3,043,650
=========== =========== ===========
</TABLE>
As of March 3, 1996, long-term debt matures as follows:
Fiscal year:
1997 $ 5,411,076
1998 2,400,940
1999 2,525,930
2000 61,278
2001 17,055,067
Thereafter 8,489
-----------
$27,462,780
===========
5. INCOME TAXES
The significant components of the consolidated provision for income tax for the
fiscal years ended February 27, 1994, February 26, 1995 and March 3, 1996, are
as follows:
1994 1995 1996
----------- ---------- -----------
Current $ 9,608,000 $4,434,000 $10,864,000
Deferred (1,634,000) 1,197,000 518,000
----------- ---------- ----------
$ 7,974,000 $5,631,000 $11,382,000
=========== ========== ==========
The tax effect of temporary differences and carryforwards which give rise to
deferred tax assets and liabilities at February 26, 1995 and March 3, 1996 are
as follows:
1995 1996
----------- -----------
Deferred tax assets:
Workers compensation accrual $ 2,306,577 $1,687,251
Capitalize leases 1,696,904 1,773,723
California state taxes 673,254 1,173,605
Self insurance reserve 1,338,942 1,338,942
Vacation accrual 952,501 987,039
Other 1,956,964 3,331,887
----------- -----------
8,925,142 10,292,447
----------- -----------
<PAGE>
- 7 -
Deferred tax liabilities:
Plant and equipment basis differences $(10,702,118) $(11,666,038)
Union pension benefits paid (3,324,338) (3,978,062)
Other (4,262,145) (3,493,493)
----------- -----------
(18,288,601) (19,137,593)
----------- -----------
Net deferred tax liability $ 9,363,459 $ 8,845,146
=========== ===========
The differences between the Company's effective income tax rates and the federal
statutory rates are summarized as follows:
1994 1995 1996
---- ---- ----
- -
Statutory rate 35.0% 35.0% 35.0%
State taxes 9.3 9.3 9.3
Other (2.3) (1.8) (2.4)
----- ----- -----
Effective rate 42.0% 42.5% 41.9%
===== ===== =====
6. LEASES
The Company leases a majority of its store facilities under long-term leases.
These leases extend for varying periods through 2023, and the majority of the
leases contain renewal options at rentals similar to those required during the
initial lease periods. In addition to required minimum lease payments, taxes
and insurance, contingent rentals may become payable under certain leases on the
basis of a percentage of sales in excess of stipulated amounts.
The Company has capitalized certain leases in accordance with the requirements
of SFAS No. 13. The following is an analysis of property under capital leases:
February 26, March 3, September 29,
1995 1996 1996
------------- ----------- ------------
(Unaudited)
Store facilities
under capital leases $ 26,000,306 $ 28,000,306 $ 29,700,306
Equipment under capital
leases 1,983,877 1,983,877 1,983,877
------------ ------------ ------------
27,984,183 29,984,183 31,684,183
Less--Accumulated
amortization (10,522,767) (11,559,381) (12,184,160)
------------ ------------ ------------
$ 17,461,416 $ 18,424,802 $ 19,500,023
============ ============ ============
<PAGE>
- 8 -
At March 3, 1996, future minimum obligations on capital and operating leases
were as follows:
Capital Operating
Leases Leases
------------ -------------
Due in fiscal year:
1997 $ 3,278,551 $ 10,481,065
1998 3,278,551 9,919,108
1999 3,278,551 9,509,672
2000 3,278,551 9,231,955
2001 3,278,551 8,775,313
Thereafter 46,905,328 106,094,809
------------ ------------
Minimum lease payments 63,298,083 $154,011,922
Less--Amount representing interest (39,192,136) ============
------------
Present value of minimum lease payments 24,105,947
Current portion 549,759
------------
Long-term portion $ 23,556,188
============
Minimum lease obligations under capital leases include $22,060,197 payable to
partnerships, including principal shareholders of the Company.
As of March 3, 1996, the total minimum rent obligations under operating leases
include $9,016,978 due to partnerships, including principal shareholders of the
Company, and have not been reduced for minimum sublease rentals of $203,715 due
in the future under non-cancelable sublease agreements.
Rental expense related to non-cancelable operating leases is as follows:
<TABLE>
<CAPTION>
For the Years Ended For the Seven Months Ended
-------------------------------------------- -----------------------------
February 27, February 26, March 3, September 24, September 29,
1994 1995 1996 1995 1996
------------ ------------- ----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Minimum rentals $ 9,897,902 $10,635,245 $12,498,876 $ 8,634,473 $ 9,824,944
Contingent rentals 3,059,345 2,963,852 3,004,046 1,665,037 1,554,938
----------- ----------- ----------- ----------- -----------
12,957,247 13,599,097 15,502,922 10,299,510 11,379,882
Less--Sublease rentals (437,372) (395,777) (454,830) (250,478) (271,305)
----------- ----------- ----------- ----------- -----------
Net rental expense $12,519,875 $13,203,320 $15,048,092 $10,049,032 $11,108,577
=========== =========== =========== =========== ===========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
At March 3, 1996, the Company had approximately $8,982,626 in outstanding
letters of credit related to its workers' compensation insurance requirement
(see Note 10).
<PAGE>
- 9 -
Various claims and lawsuits arising in the normal course of business are pending
against the Company. In the opinion of management, the ultimate outcome of such
actions will not materially affect the Company's financial position or results
of operations.
8. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's hourly employees are covered by union-
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed and charged to expense approximately $26,921,000, $27,544,000 and
$26,488,000 for the years ended February 27, 1994, February 26, 1995 and
March 3, 1996, respectively. These contributions are determined in accordance
with the provisions of negotiated labor contracts and generally are based on the
number of hours worked. Information from the plans' administrators is not
available to permit the Company to determine its share of unfunded vested
benefits, if any.
For the years ended February 27, 1994, February 26, 1995 and March 3, 1996, the
Company recorded reductions (credits) of approximately $1,220,000, $3,000,000
and $7,000,000, respectively, as an offset to required contributions to the
Southern California UFCW Unions and Food Employers Benefit Fund. For the seven
months ended September 29, 1996 and September 24, 1995 such credits were
approximately $3,000,000 and $2,400,000, respectively.
The Company also maintains a profit-sharing plan for its salaried employees;
Company contributions to the plan are determined by the board of directors.
Annual contributions were approximately $1,764,000, $1,570,000 and $2,563,000
for the years ended February 27, 1994, February 26, 1995 and March 3, 1996,
respectively.
The Company has deferred compensation arrangements with certain executives. In
connection with these compensation arrangements, the Company has purchased life
insurance policies on the lives of upper management and other non-union
employees in order to accumulate liquid assets with which the Company expects to
pay a substantial portion of the deferred compensation obligations as they
mature. The portion of deferred compensation obligations not paid from
insurance policy proceeds will be paid from the general assets of the Company.
On the date of their expected retirement or the date that deferred compensation
payments become vested the present value of the future deferred compensation
payments due participants will have been accrued.
9. Disclosure about Fair Value of Investments
The carrying value of the Company's long-term debt approximates fair value based
on quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
<PAGE>
- 10 -
The Company maintains a non-current deposit with Certified Grocers of
California, Ltd. (Cergro), in the form of 7.1% of issued and outstanding Class B
Shares of Cergro as of February 6, 1996 (the record date for Cergro's 1996
Annual Meeting of Shareholders). Cergro is not obligated in any fiscal year to
redeem more than a prescribed number of the Class B Shares issued. In December
1995 Certified redeemed 4,240 shares of the Company's Class B shares for total
proceeds of approximately $703,000 and a total gain of approximately $200,000.
Cergro's fiscal 1996 Class B Shares redemption limit is 19,238 shares with
84,448 tendered for redemption as of Cergro's fiscal year ended September 2,
1995. Therefore, it is not practicable to estimate the fair value of this
investment. The investment is carried at its original cost of $3,631,334 in the
accompanying consolidated balance sheets. At September 2, 1995, the total assets
reported by Cergro were $398,603,000 ($398,569,000 in 1994), stockholders'
equity was $72,160,000 ($71,306,000 in 1994), annual revenues were
$1,822,804,000 ($1,873,872,000 in 1994), and net income was $769,000 ($94,000 in
1994).
10. WORKERS' COMPENSATION
The Company is partially self-insured as to workers' compensation claims and
provides for losses of estimated known and incurred but not reported insurance
claims. Known claims are estimated and accrued when reported, and the unpaid
long-term balance is classified as an other non-current liability in the
accompanying consolidated balance sheets. Incurred but not reported claims are
estimated and accrued based on the Company's experience and related actuarial
assumptions, and any long-term portion is also included in other non-current
liabilities in the accompanying consolidated balance sheets. At March 3, 1996
and February 26, 1995, the Company had accrued approximately $4,757,000 and
$5,240,000, respectively, for workers' compensation claims.
11. SUBSEQUENT EVENTS
On November 20, 1996, the Company signed a definitive agreement, whereby it
would merge with Quality Food Centers, Inc. in return for approximately
$360 million in cash. The merger is expected to close in early 1997.
Santee has signed agreements with contractors to build a new dairy estimated to
cost approximately $98,000,000, including the cost of land and capitalized
construction costs. Construction began during May 1996. As of March 3, 1996
and September 29, 1996, Santee was out of compliance with certain of its
financial covenants. Santee has obtained waivers of non-compliance through May
1996. On October 17, 1996, the bank extended the line of credit through
December 1, 1996. Presently, Santee is negotiating with the bank to extend the
line of credit and to obtain the appropriate waivers. Santee is arranging a
private placement in the amount of approximately $80,000,000 to finance the
construction of the new dairy facility. In connection with the new dairy,
Santee extended the lease on the existing dairy until April 30, 1998.
In November 1996, the Company sold approximately 1 percent of its investment in
Santee to Stater Bros. Markets (Stater)(a 50 percent shareholder of Santee after
this investment). Also in November 1996, Santee sold approximately $9,600,000
of additional preferred stock to the Company and Stater to provide funds for the
construction of the new dairy.
<PAGE>
- 11 -
12. INFORMATION RELATED TO UNAUDITED INTERIM FINANCIAL STATEMENTS
a. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures
made are adequate to make the information presented not misleading. These
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes
in cash flows and financial position as of and for the periods presented.
The results for the interim periods presented are not necessarily
indicative of results to be expected for a full year.
b. PROVISION FOR INCOME TAXES
The provision for income taxes for the seven months ended September 24,
1995 and September 29, 1996 are based upon the estimated annualized rate
for each of the respective years.
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma financial statements (the "Pro
Forma Financial Statements") are based on historical financial statements of
Quality Food Centers, Inc. ("QFC") and Hughes Markets, Inc. ("Hughes") and
have been prepared to illustrate the effects of the acquisition described
below and the assumed financing therefore.
The unaudited condensed consolidated pro forma statement of earnings for the
year ended December 30, 1995 gives effect to each of the following
transactions as if such transactions had been completed as of January 1,
1995: (i) QFC's acquisition of Hughes (the "Hughes Acquisition") and certain
related transactions, (ii) Hughes' sale in November 1996 of a 1% equity
interest in Santee Dairies, Inc. ("Santee"), which, prior to that sale, was a
51%-owned subsidiary of Hughes, to Stater Bros. Markets ("Stater"), resulting
in Santee ceasing to be a consolidated subsidiary of Hughes; and (iii) the
assumed incurrence of indebtedness and issuance of common stock by QFC to
finance the Hughes Acquisition. The unaudited condensed consolidated pro
forma statement of earnings for the 36 weeks ended September 7, 1996 gives
effect to the transactions described above as if such transactions had been
completed as of December 31, 1995. The unaudited condensed consolidated pro
forma balance sheet as of September 7, 1996 gives effect to the transactions
described above as if such transactions had been completed on that date.
The Hughes Acquisition will be accounted for using the purchase method of
accounting. The total purchase price of the acquisition will be allocated to
the tangible and intangible assets and liabilities acquired based upon their
respective fair values. The allocation of the aggregate purchase price
reflected in the Pro Forma Financial Statements is preliminary and is subject
to adjustment, upon the receipt of, among other things, certain appraisals of
the acquired assets and liabilities.
The Pro Forma Financial Statements do not purport to present the actual
financial position or results of operations that would have occurred had the
transactions and events reflected therein in fact occurred on the dates
specified, nor do they purport to be indicative of the results of operations
or financial condition that may be achieved in the future. The Pro Forma
Financial Statements are based on certain assumptions and adjustments
described in the notes hereto and should be read in conjunction therewith.
In particular, the Pro Forma Financial Statements assume that the Hughes
Acquisition will be financed from the issuance by QFC of additional shares of
common stock and by bank borrowings. The ability of QFC to obtain funds from
the assumed issuance of common stock will be dependent upon market
conditions, and there can be no assurance as to the actual number of shares
which may be issued to finance the Hughes Acquisition or the price which QFC
will receive for such shares. Likewise, the availability of bank borrowings
to finance the Hughes Acquisition will require that QFC enter into an amended
and restated bank credit facility, which it is currently negotiating with its
existing bank group. Accordingly, the actual terms of any debt and equity
financing used to finance the Hughes Acquisition will likely differ from the
assumed terms reflected in the Pro Forma Financial Statements.
<PAGE>
The Pro Forma Financial Statements should be read in conjunction with the
historical consolidated financial statements and notes thereto of Hughes
which are included elsewhere in this Form 8-K/A and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the Notes thereto of QFC, incorporated by
reference in QFC's Annual Report on Form 10-K for the year ended December 30,
1995 and included in its Quarterly Reports on Form 10-Q for the 12 weeks
ended March 23, 1996, the 12 weeks ended June 15, 1996, and the 12 weeks
ended September 7, 1996.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL
HUGHES HUGHES PRO FORMA HUGHES
SEPTEMBER 29, 1996 ADJUSTMENTS{1} PRO FORMA
------------------- ---------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 10,453,573 $ (18,767) $ 10,434,806
Accounts receivable 18,175,078 (10,437,263) 7,737,815
Inventories 53,966,366 (4,290,244) 49,676,122
Prepaid expenses 9,291,043 (1,726,952) 7,564,091
------------ ----------- ------------
TOTAL CURRENT ASSETS 91,888,060 (16,473,226) 75,412,834
Investment in subsidiary -- 8,649,467 8,649,467
Properties
Land 43,913,243 (6,392,354) 37,520,889
Buildings, fixtures and equipment 221,181,602 (32,976,283) 188,205,319
Leasehold improvements 48,384,807 -- 48,384,807
Construction in progress 11,881,502 (11,871,502) --
------------ ----------- ------------
325,351,154 (51,240,139) 274,111,015
Accumulated depreciation and amortization (131,477,731) 24,597,258 (106,880,473)
------------ ----------- ------------
193,873,423 (26,642,881) 167,230,542
Property under capital leases 19,500,023 -- 19,500,023
Leasehold Interest 4,945,397 (464,022) 4,481,375
Real estate held for investment -- -- --
Goodwill -- --
Other Assets 5,504,397 (437,307) 5,067,090
------------ ------------- --------------
TOTAL ASSETS $315,709,300 $(35,367,969) $280,341,331
------------ ------------ --------------
------------ ------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,678,299 $(12,694,345) $40,983,954
Accrued liabilities 39,893,113 (5,715,366) 34,177,747
Current Portion Long Term Debt 9,203,704 (5,000,000) 4,203,704
Current Portion Capital Lease Obligation 558,572 558,572
------------ ----------- ------------
TOTAL CURRENT LIABILITIES 103,333,688 (23,409,711) 79,923,977
Deferred Income Taxes 8,644,496 (168,720) 8,475,776
Other Liabilities 6,623,359 (3,420,470) 3,202,889
Long Term Debt 3,043,650 3,043,650
Capital Lease Obligation 24,923,943 24,923,943
Minority Interest 8,369,068 (8,369,068) --
Shareholders' Equity 160,771,096 160,771,096
------------ ------------- ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $315,709,300 $(35,367,969) $280,341,331
------------ ------------- ------------
------------ ------------- ------------
-- -- --
<CAPTION>
HISTORICAL QFC/HUGHES
QFC ACQUISITION CONSOLIDATED
SEPTEMBER 7, 1996 ADJUSTMENTS{2} PRO FORMA (AS ADJUSTED)
----------------- ---------------- ----------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 11,570,000 $(358,833,629){2} $ 21,996,177
100,000,000 {3}
258,825,000 {4}
Accounts receivable 9,655,000 17,392,815
Inventories 35,670,000 17,068,000 {5} 102,414,122
Prepaid expenses 6,442,000 14,006,091
----------- ------------ ------------
TOTAL CURRENT ASSETS 63,337,000 17,059,371 155,809,205
Investment in subsidiary -- 8,649,467
Properties
Land 15,025,000 52,545,889
Buildings, fixtures and equipment 152,331,000 20,000,000 {5} 360,536,319
Leasehold improvements 43,084,000 91,468,807
Construction in progress 6,927,000 6,927,000
----------- ------------ ------------
217,367,000 20,000,000 511,478,015
Accumulated depreciation and amortization (59,878,000) (166,758,473)
----------- ------------ ------------
157,489,000 20,000,000 344,719,542
Property under capital leases 19,500,023
Leasehold Interest 27,382,000 55,000,000 {5} 86,863,375
Real estate held for investment 5,888,000 5,888,000
Goodwill 33,857,000 105,994,533 {5} 139,851,533
Other Assets 5,657,000 1,175,000 {4} 11,899,090
----------- ------------ ------------
TOTAL ASSETS $293,610,000 $199,228,904 $773,180,235
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,414,000 $ -- $ 74,397,954
Accrued liabilities 27,926,000 62,103,747
Current Portion Long Term Debt 18,900,000 23,103,704
Current Portion Capital Lease Obligation 558,572
----------- ------------ ------------
TOTAL CURRENT LIABILITIES 80,240,000 -- 160,163,977
Deferred Income Taxes 11,735,000 20,210,776
Other Liabilities 6,128,000 9,330,889
Long Term Debt 131,100,000 260,000,000 {4} 394,143,650
Capital Lease Obligation 24,923,943
Minority Interest -- --
Shareholders' Equity 64,407,000 (160,771,096){2} 164,407,000
100,000,000 {3}
----------- ------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $293,610,000 $199,228,904 $773,180,235
----------- ------------ ------------
----------- ------------ ------------
-- -- --
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Historical Historical
Hughes QFC QFC/Hughes
9 months ended Hughes Pro Hughes 36 weeks ended Acquisition Consolidated
September 29, 1996 Forma Adjustments(1) Pro Forma September 7, 1996 Adjustments(2) Pro Forma (As Adjusted)
---------------- --------------------- ----------- ---------------- -------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 884,733,672 $(128,658,833) $ 756,074,839 $ 547,166,000 $ $1,303,240,839
Cost of Sales
and related
occupancy
expenses 686,620,509 (112,780,391) 573,840,118 410,549,000 984,389,118
Marketing,
general, and
administative
expenses 172,729,894 (19,163,485) 153,566,409 103,850,000 4,384,267 (6) 261,800,676
---------------- ---------------- -------------- -------------- ---------- -------------
Operating
income 25,383,269 3,285,043 28,668,312 32,767,000 (4,384,267) 57,051,045
Interest
income 847,585 (316,010) 531,575 301,000 832,575
Interest
expense (2,821,682) 116,438 (2,705,244) (6,901,000) (13,103,906) (7) (22,710,150)
---------------- ---------------- -------------- -------------- ---------- -------------
Earnings before
income taxes 23,409,172 3,085,471 26,494,643 26,167,000 (17,488,173) 35,173,470
Total taxes
on income 10,845,654 356,698 11,202,352 9,372,000 (4,979,484)(8) 15,594,868
---------------- ---------------- -------------- -------------- ---------- -------------
Income before
minority
interest 12,563,518 2,728,773 15,292,291 16,795,000 (12,508,689) 19,578,602
---------------- ---------------- -------------- -------------- ---------- -------------
Equity losses (1,390,856) (1,390,856) (1,390,856)
Minority interest
in subsidiary
loss 1,337,917 (1,337,917) -- -- --
---------------- ---------------- -------------- -------------- ---------- -------------
Net Earnings $ 13,901,435 $ -- $ 13,901,435 $ 16,795,000 $(12,508,689) $ 18,187,746
---------------- ---------------- -------------- -------------- ---------- -------------
---------------- ---------------- -------------- -------------- ---------- -------------
Earnings per
share $ 1.14 $ 1.02
Weighted Average
Shares
Outstanding 14,766,000 3,007,519 (3) 17,773,519
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Historical Historical
Hughes QFC QFC/Hughes
Fiscal Year Ended Hughes Pro Forma Hughes Fiscal Year Ended Acquisition Consolidated
March 3, 1996 Adjustments {1} Pro Forma December 30, 1995 Adjustments {2} Pro Forma (As Adjusted)
----------------- ----------------- --------- ----------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,147,447,465 $(161,677,861) $985,769,604 $729,855,999 $ $1,715,625,603
Cost of
Sales
and
related
occupancy
expenses 901,951,393 (139,446,271) 762,505,122 550,434,224 1,312,939,346
Marketing,
general,
and
administative
expenses 215,234,435 (24,007,992) 191,226,443 136,644,381 5,845,689 {6} 333,716,513
------------ -------------- ------------ ----------- ------------- ------------
Operating
income 30,261,637 1,776,402 32,038,039 42,777,394 (5,845,689) 68,969,744
Interest income 1,271,754 (602,002) 669,752 501,249 1,171,001
Interest expense (4,335,433) 50,446 (4,284,987) (9,639,405) (17,471,875){7} (31,396,267)
Other expense -- -- -- (1,400,000) (1,400,000)
------------ -------------- ------------ ----------- ------------- ------------
Earnings
before income
taxes 27,197,958 1,224,846 28,422,804 32,239,238 (23,317,564) 37,344,478
Total taxes
on income 11,382,473 472,178 11,854,651 [12,023,000] (6,639,312){8} 17,238,339
------------ -------------- ------------ ----------- ------------- ------------
Income before
minority
interest 15,815,485 752,668 16,568,153 20,216,238 (16,678,252) 20,106,139
------------ -------------- ------------ ----------- ------------- ------------
Equity losses (383,635) (383,635) (383,635)
Minority interest
in subsidiary
loss 369,033 (369,033) -- -- --
------------ -------------- ------------ ----------- ------------- ------------
Net Earnings $ 16,184,518 $ -- $ 16,184,518 $ 20,216,238 $(16,678,252) $ 19,722,504
------------ -------------- ------------ ----------- ------------- ------------
------------ -------------- ------------ ----------- ------------- ------------
Earnings per
share $ 1.28 $ 1.05
Weighted average
shares
outstanding 15,830,000 3,007,519{3} 18,837,519
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
{1} Gives effect to the sale by Hughes to Stater in November 1996 of a 1%
equity interest in Santee, resulting in (A) Hughes (which previously
owned 51% of Santee) and Stater (which previously owned 49% of Santee)
each becoming 50% owners of Santee and (B) Santee ceasing to be a
consolidated subsidiary of Hughes and being reflected in the
accompanying Pro Forma Financial Statements using the equity method of
accounting.
{2} Gives effect to (i) the assumed incurrence of $260,000,000 of
indebtedness and the assumed issuance of approximately $105,000,000 of
common stock by QFC to finance the Hughes Acquisition, and (ii) the
consummation of the Hughes Acquisition at an assumed purchase price (the
"purchase price") of $358,833,629 ($360,000,000 equity value less
$956,701 of shareholder loans and $209,670 preferred stock redemption)
and the allocation of the purchase price to tangible and intangible
assets. The Hughes purchase price is subject to certain adjustments
pursuant to the merger agreement with Hughes and the actual purchase
price may differ from such assumed purchase price, which would also
affect the amount of financing required for the Hughes Acquisition. In
addition, the ultimate financing structure has not yet been finalized
and the structure presented is based upon QFC management's estimate of
the ultimate structure at this time. The actual type, amount
and cost of such financing is subject to market conditions and will
likely differ from the assumed financing structure reflected herein.
{3} Gives effect to the assumed issuance of 3,007,519 shares of QFC common
stock at an assumed price of $35.00 per share net of estimated issuance
costs of $5,263,165, for net proceeds of $100,000,000. The actual net
proceeds, if any, received from the assumed issuance of common stock, as
well as the actual number of shares, if any, which may be issued, will
depend on market conditions at the time, and therefore the number of
shares issued and the price per share will likely differ from the
assumed amounts set forth in this note.
<PAGE>
{4} Gives effect to the estimated borrowings of $260,000,000 under the assumed
terms of an amended and restated bank credit facility and related
estimated deferred financing and other fees of $1,175,000. The
fees will be amortized based on the life of the related
debt. The debt has an assumed interest rate of 6.625%, the rate of
interest under QFC's existing $220,000,000 bank credit facility as of
December, 1996. QFC is currently negotiating the terms of such
amended and restated credit facility with its bank group, and the
availability of borrowings thereunder to finance the Hughes Acquisition
is subject to QFC and the banks entering into such facility. In
addition, borrowings under such facility will likely bear interest at
fluctuating rates based on certain indices and therefore will likely
differ from the foregoing assumed interest rate, and will in any event
fluctuate over the term of such borrowings.
{5} Gives effect to the estimated write-up to estimated fair value of Hughes
property, plant, and equipment and leasehold interest as of the date of
the Hughes Acquisition, the elimination of Hughes historical LIFO
reserves, and the excess of the estimated Hughes purchase price over the
fair value of the net tangible assets acquired.
{6} Gives effect to the additional depreciation and amortization expense
resulting from the allocation of the estimated Hughes purchase price to
the assets acquired, including an increase in property, plant, and
equipment, leasehold interest, and identifiable intangible assets to
their estimated fair market values and the recording of goodwill
associated with the acquisition. Goodwill is amortized over 40 years.
{7} Gives effect to the estimated interest expense on the $260,000,000 in
estimated borrowings plus the amortization of deferred financing fees
and other bank fees referred to in note 4 above.
{8} Gives effect to the adjustment for federal and state income taxes at a
statutory rate of 38%, adjusted to include non-deductible amortization,
estimated to be approximately $5,845,689 for the year ended December 30,
1995 and $4,384,267 for the 36 weeks ended September 7, 1996.
