<PAGE>
[QUALITY FOOD CENTERS LOGO]
DEAR SHAREHOLDER:
You are cordially invited to attend the Quality Food Centers, Inc. ("QFC")
Annual Meeting of Shareholders to be held at 9:00 a.m. on Tuesday, April 30,
1996, at the Red Lion Hotel/Bellevue, 300 112th Avenue SE, Bellevue, Washington.
Information concerning the business to be conducted at the meeting is
included in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement. At the meeting, we also will report on the operations of QFC and
respond to any questions you may have.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the meeting,
it is important that your shares be represented. Therefore, we urge you to sign,
date and promptly return the enclosed proxy in the enclosed postage paid
envelope. If you attend the meeting, you will, of course, have the right to vote
in person.
I look forward to greeting you personally, and on behalf of the Board of
Directors and management, I would like to express our appreciation for your
interest in QFC.
Sincerely,
QUALITY FOOD CENTERS, INC.
[SIG]
Stuart M. Sloan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
March 28, 1996
<PAGE>
[QUALITY FOOD CENTERS LOGO]
10112 NE 10TH STREET
BELLEVUE, WASHINGTON 98004
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, APRIL 30, 1996
------------------------
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Quality Food Centers, Inc. ("QFC" or
the "Company") will be held at 9:00 a.m. local time on Tuesday, April 30, 1996,
at the Red Lion Hotel/Bellevue, 300 112th Avenue SE, Bellevue, Washington, for
the following purposes:
1. To elect three Class III directors;
2. To consider and act upon a proposal to amend the Company's 1987
Incentive Stock Option Plan to reserve an additional 200,000 shares of
the Company's common stock for issuance upon the exercise of options
granted under the plan;
3. To consider and act upon a proposal to amend the Company's 1990 Employee
Stock Purchase Plan to reserve an additional 300,000 shares of the
Company's common stock for issuance upon purchase of shares under the
plan and to increase the number of shares of common stock issuable in any
given payment period to 150,000;
4. To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 28, 1996; and
5. To transact such other business as may properly come before the meeting.
Only shareholders of record at the close of business on March 8, 1996 are
entitled to notice of, and to vote at, the meeting.
By Order of the Board of Directors
[SIG]
Marc W. Evanger
SECRETARY
Bellevue, Washington
March 28, 1996
EACH SHAREHOLDER IS URGED TO SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY
IN THE ENCLOSED ENVELOPE TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN THE
UNITED STATES.
<PAGE>
QUALITY FOOD CENTERS, INC.
10112 NE 10TH STREET
BELLEVUE, WASHINGTON 98004
------------------------
PROXY STATEMENT
---------------------
INFORMATION REGARDING PROXIES
This Proxy Statement and the accompanying form of proxy are furnished in
connection with the solicitation of proxies by the Board of Directors of Quality
Food Centers, Inc. ("QFC" or the "Company") for use at the Annual Meeting of
Shareholders to be held at 9:00 a.m. on Tuesday, April 30, 1996, and at any
adjournment thereof. Only shareholders of record on the books of the Company at
the close of business on March 8, 1996 (the "Record Date") will be entitled to
notice of, and to vote at, the meeting.
It is anticipated that these proxy solicitation materials and a copy of the
Company's 1995 Annual Report to Shareholders will be sent to shareholders on or
about March 29, 1996.
If the accompanying form of proxy is properly executed and returned, the
shares represented thereby will be voted in accordance with the instructions
specified therein. In the absence of instructions to the contrary, such shares
will be voted for the proposals set forth therein. Any shareholder executing a
proxy has the power to revoke it at any time prior to the voting thereof on any
matter (without, however, affecting any vote taken prior to such revocation) by
delivering written notice to Marc W. Evanger, Secretary of the Company, by
executing another proxy dated as of a later date or by voting in person at the
meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS
The only voting securities of the Company are shares of common stock, $.001
par value (the "Common Stock"), each of which is entitled to one vote. At March
8, 1996, the Record Date, there were issued and outstanding 14,444,827 shares of
Common Stock. The presence in person or by proxy of holders of record of a
majority of the outstanding shares of Common Stock is required to constitute a
quorum for the transaction of business at the meeting.
The following table sets forth information, as of the Record Date, with
respect to all shareholders known by the Company to be the beneficial owners of
more than five percent of its outstanding shares of Common Stock. It also shows
beneficial ownership for each director and nominee and for the executive
officers. Except as noted below, each person has sole voting and investment
power with respect to the shares shown.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF SHARES
NAME AND ADDRESS (1) OWNERSHIP (2) OUTSTANDING
- --------------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
Stuart M. Sloan (3)........................................................ 1,817,882 12.3
Ronald A. Weinstein........................................................ 295,559 2.0
Maurice F. Olson........................................................... 596,274 4.0
Zell/Chilmark Fund L.P. (4)(5)............................................. 3,975,000 27.0
Samuel Zell (4)(5)......................................................... 3,975,000 27.0
Joel S. Friedland (4)(5)................................................... 3,975,000 27.0
Sheli Z. Rosenberg (4)(5).................................................. 3,975,000 27.0
Dan Kourkoumelis........................................................... 97,723 *
Fred B. McLaren............................................................ 11,800 *
John W. Creighton, Jr...................................................... 13,075 *
Marc W. Evanger............................................................ 60,651 *
American Express Financial Corporation..................................... 1,120,000 7.6
All executive officers and directors as a group (10 persons)............... 6,867,964 46.6
</TABLE>
- ------------------------
* Denotes less than one percent.
1
<PAGE>
(1) The business address of each shareholder identified as the beneficial owner
of more than five percent of the Common Stock other than Zell/Chilmark Fund
L.P. ("Zell Chilmark"), Messrs. Zell and Friedland, Mrs. Rosenberg and
American Express Financial Corporation is 10112 N.E. 10th Street, Bellevue,
Washington 98004. The business address of Zell Chilmark, Messrs. Zell and
Friedland and Mrs. Rosenberg is Two North Riverside Plaza, Chicago, Illinois
60606. The business address of American Express Financial Corporation is IDS
Tower 10, Minneapolis, Minnesota 55440.
(2) Includes shares that may be acquired within 60 days through the exercise of
stock options, as follows: Mr. Sloan, 118,900 shares; Mr. Olson, 3,333
shares; Mr. Weinstein, 11,000 shares; Mr. Kourkoumelis, 91,985 shares; Mr.
McLaren, 11,000 shares; Mr. Creighton, 9,200 shares; Mr. Evanger, 56,284
shares; and all executive officers and directors as a group, 301,702.
(3) In connection with the Company's recapitalization that was completed in
March 1995 (the "Recapitalization"), Mr. Sloan and the Company entered into
a Standstill Agreement dated as of January 14, 1995 (the "Sloan Standstill
Agreement") pursuant to which Mr. Sloan agreed that he will not take any of
the following actions without the approval of a majority of the Company's
disinterested directors, subject to specified limited exceptions: (a) sell
or otherwise dispose of any Common Stock prior to March 29, 1997 (except for
the sale by Mr. Sloan to Zell Chilmark of 2,975,000 shares of Common Stock
(which occurred on January 16, 1996) and certain family related
transactions); (b) form, join or participate in any other way in a
partnership, voting trust or other "group" (as such term is defined under
Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), or enter into any agreement or arrangement or otherwise
act in concert with any other person, for the purpose of acquiring, holding,
voting or disposing of Common Stock; (c) engage in certain specified
takeover actions or take any other actions, alone or in concert with any
other person, to seek control of the Company or otherwise seek to circumvent
any of the foregoing limitations; or (d) engage in any material transaction
with the Company. See "Certain Relationships and Related Transactions."
(4) By virtue of their positions with the entities that indirectly control the
general partner of Zell Chilmark, Messrs. Zell and Friedland and Mrs.
Rosenberg may be deemed to beneficially own the shares of Common Stock
beneficially owned by Zell Chilmark. Messrs. Zell and Friedland and Mrs.
Rosenberg disclaim beneficial ownership of such shares.
(5) In connection with the Recapitalization, Zell Chilmark and the Company
entered into a Standstill Agreement dated as of January 14, 1995 (the "Zell
Chilmark Standstill Agreement") pursuant to which Zell Chilmark has agreed
that it and certain of its affiliates will not take any of the following
actions without the approval of a majority of the Company's disinterested
directors, subject to specified limited exceptions: (a) increase their
ownership of Common Stock (or securities convertible into or exchangeable
for Common Stock or other options or rights to acquire Common Stock) prior
to June 30, 2000 beyond 30%; (b) sell or otherwise dispose of any Common
Stock prior to March 29, 1997; (c) sell or otherwise dispose of any Common
Stock during the two-year period following March 29, 1997 to any person or
group that would own (to Zell Chilmark's knowledge) more than 5% of the
outstanding Common Stock after such transfer; (d) form, join or participate
in any other way in a partnership, voting trust or other "group" (as such
term is defined under Section 13(d) of the Exchange Act), or enter into any
agreement or arrangement or otherwise act in concert with any other person,
for the purpose of acquiring, holding, voting or disposing of Common Stock;
(e) engage in certain specified takeover actions or take any other actions,
alone or in concert with any other person, to seek control of the Company or
otherwise seek to circumvent any of the foregoing limitations; or (f) engage
in any material transaction with the Company. See "Certain Relationships and
Related Transactions."
2
<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
The Company's Articles of Incorporation provide that the Board is divided
into three classes: Class I, Class II and Class III. Each Class is as nearly
equal in number as possible. Unless a director has been appointed to fill a
vacancy or to fill a position that was created by increasing the number of
directors, each director serves for a term ending at the third annual
shareholders' meeting following the annual meeting at which elected. Each
director serves until such director's successor is elected and qualified or
until such director's earlier death, resignation or removal. Three Class III
directors are to be elected at the Annual Meeting.
Information as to the nominees and as to each other director whose term will
continue after the 1996 Annual Meeting of Shareholders is provided below. The
candidates elected will be 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. Shares held by persons who abstain from voting on the
election and broker "non-votes" will not be counted in the election. Unless
otherwise instructed, it is the intention of the persons named in the
accompanying form of proxy to vote shares represented by properly executed
proxies for the nominees of the Board of Directors named below. Although the
Board of Directors anticipates that the nominees will be available to serve as
directors of the Company, should any of them not accept the nomination, or
otherwise be unwilling or unable to serve, it is intended that the proxies will
be voted for the election of a substitute nominee or nominees designated by the
Board of Directors.
The terms of a Recapitalization and Stock Purchase and Sale Agreement dated
as of January 14, 1995 (the "Recapitalization Agreement") among the Company,
Stuart M. Sloan and Zell Chilmark, provide that Samuel Zell and a second
representative of Zell Chilmark will join the Company's Board of Directors. The
Zell Chilmark Standstill Agreement provides that (i) Zell Chilmark will continue
to have two representatives on the Company's Board as long as Zell Chilmark owns
at least 10% of the outstanding Common Stock; (ii) the Company will not increase
the size of its Board beyond nine members as long as Zell Chilmark is entitled
to two Board representatives; and (iii) Zell Chilmark will vote its Common Stock
for the election or removal of directors of the Company either (a) in accordance
with the recommendations of a majority of the Company's independent directors or
(b) in the same proportion as the other shareholders vote on such matter. The
Zell Chilmark Standstill Agreement also imposes limitations on how Zell Chilmark
may vote its Common Stock with respect to any matter that would relate to a
possible change in control of the Company.
NOMINEES FOR ELECTION -- CLASS III DIRECTORS (TERMS TO EXPIRE IN 1999)
Dan Kourkoumelis, 45, 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.
Sheli Z. Rosenberg, 54, has been President and Chief Executive Officer since
November 1994 of Equity Group Investments, Inc. and its subsidiary Equity
Financial and Management Company, both privately owned real estate and corporate
investment and management firms; and has been an executive officer and director
for more than the past five years of both of these companies; has been Chairman
of the Board of the law firm of Rosenberg & Liebentritt, P.C. since 1980; is a
director of Anixter International Inc., Great American Management and
Investment, Inc., Capsure Holdings Corp., Sealy Corporation, Falcon Building
Products, Inc., American Classic Voyages Co., Revco D.S., Inc., Jacor
Communications, Inc. and CFI Industries, Inc.; is a trustee of Equity
Residential Properties Trust; was an executive officer and director until
October 4, 1991 of Madison Management Group, Inc. which filed a petition under
Chapter 11 of the Bankruptcy Code in November 1991; and has been Vice President
of First Capital Benefit Administrators, Inc., which filed a petition under the
federal bankruptcy laws in January 1995.
3
<PAGE>
Ronald A. Weinstein, 55, served as a director of the Company from June 1986
to March 1987 and became a director again in February 1988. He was a principal
of Sloan Capital Companies, a private investment company, from 1984 to July
1991. From February 1989 until April 1991, Mr. Weinstein served as Executive
Vice President of Merchandising at Egghead, Inc., a reseller of microcomputer
software. Mr. Weinstein serves as Chairman of B & B Auto Parts, Inc. and is a
director of Molbak's, Inc. and Coinstar, Inc.
Joel S. Friedland, who served as a Class III director since April 1995, has
decided not to stand for re-election.
CONTINUING -- CLASS I DIRECTORS (TERMS TO EXPIRE IN 1997)
John W. Creighton, Jr., 63, became a director of the Company in December
1989. He has served since 1988 as President and a director, and since August
1991 as Chief Executive Officer, of Weyerhaeuser Company, a forest products
company. Mr. Creighton serves as a director of Washington Energy Company,
Portland General Corporation and Unocal.
Fred B. McLaren, 61, became a director of the Company in 1988. Since 1974 he
has been the President and, since 1972, a director, of Hughes Markets Inc., a
privately-held chain of 54 supermarkets headquartered in Irwindale, California,
and since 1987 has been Chairman and Chief Executive Officer of Santee Dairies,
Inc. Mr. McLaren is past President of the Western Association of Food Chains and
a former director of Certified Grocers of California. He currently is a director
of the Food Marketing Institute and a member of the Food Employers Council
Executive Committee.
Samuel Zell, 54, became a director of the Company on March 29, 1995. Mr.
Zell is, and since 1981 has been, Chairman of the Board of Equity Financial and
Management Company and, since 1986 has been, Chairman of the Board of Equity
Group Investments, Inc.; is, and since mid-1990 has been, one of two individuals
who control the general partners of the general partner of Zell Chilmark; is,
and since 1985 has been, Chairman of the Board of Anixter International Inc., a
company engaged in the distribution of wiring systems products; is, and since
1983 has been, Chairman of the Board, and from 1990 through 1994 was Chief
Executive Officer and President, of Great American Management and Investment,
Inc., a diversified company with interests in manufacturing, agriculture,
chemicals and fertilizers and financial services; from 1987 has served as
Chairman of the Board and Chief Executive Officer of Capsure Holdings Corp., a
company engaged in the business of speciality property and casualty insurance;
is, and since 1992 has been, Co-Chairman of Revco D.S., Inc., a company that
operates a chain of retail drug stores; and from August 1993 to the present has
been Chairman of the Board of American Classic Voyages Co., a provider of
overnight cruises in the United States; is, and since 1993 has been, Chairman of
the Board of Equity Residential Properties Trust, a self-administered,
self-managed equity real estate investment trust; and from June 1994 to the
present has been Chairman of the Board of Falcon Building Products, Inc., a
manufacturer and supplier serving the residential and commercial construction
and home improvement markets; and from 1993 to March 1995 was Co-Chairman, and
from March 1995 to the present has been, Chairman of the Board and Chief
Executive Officer of Manufactured Home Communities, Inc., a self-administered
and self-managed equity real estate investment trust which owns and operates
properties in 16 states. Mr. Zell is also a member of the board of directors of
Sealy Corporation. Prior to October 4, 1991, Mr. Zell was President of Madison
Management Group, Inc., which filed a petition under Chapter 11 of the
Bankruptcy Code on November 8, 1991.
CONTINUING -- CLASS II DIRECTORS (TERMS TO EXPIRE IN 1998)
Maurice F. Olson, 52, became a director of the Company on March 2, 1995. Mr.
Olson was formerly Chairman and Chief Executive Officer of Olson's Food Stores,
Inc. Mr. Olson is the controlling member of Olson Management Group, LLC, a real
estate development and management company, and a member of the Board of
Directors of Associated Grocers, Incorporated.
Stuart M. Sloan, 52, 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
4
<PAGE>
Sloan Capital Companies. See "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
Chairman from January 1990 to September 1992. Mr. Sloan serves as a director of
Anixter International Inc. and Cucina! Cucina!, Inc.
BOARD AND COMMITTEE MEETINGS
The Board of Directors of the Company held eight meetings during the fiscal
year ended December 30, 1995. In addition, as allowed by Washington law, the
Board of Directors took certain actions without a formal meeting one time during
the last fiscal year.
The Company has an Audit Committee consisting of Messrs. Creighton,
Friedland, McLaren, Olson and Weinstein. Two meetings of the Audit Committee
were held during the last fiscal year. The functions of the Audit Committee
include: (i) reviewing the plan, scope and results of the independent audit and
reporting to the full Board whether financial information is fairly presented
and whether generally accepted accounting principles are followed; (ii)
monitoring the internal accounting and financial functions of the Company to
assure quality of staff and proper internal controls; and (iii) investigating
conflicts of interest, ethics and compliance with laws and regulations.
The Company has a Compensation Committee consisting of Messrs. Creighton,
McLaren, Weinstein and Zell. Five meetings of the Compensation Committee were
held during the last fiscal year and, as allowed by Washington law, the
Compensation Committee took certain actions without formal meetings four times
during the last fiscal year. The functions of the Compensation Committee
include: (i) setting the compensation of the Company's executive officers; and
(ii) administering certain of the Company's stock option plans.
The Board of Directors does not have a nominating committee.
DIRECTORS' FEES
Directors who are not employees of the Company, and excluding Mr. Sloan, are
paid an annual retainer fee of $10,000 plus $1,000 for each Board of Directors
meeting attended in person and $250 for each teleconference, are reimbursed for
their expenses incurred in attending such meetings, and are granted stock
options under the Directors' Nonqualified Stock Option Plan (the "Directors'
Plan"). Under the Directors' Plan, each non-employee (non-affiliated) director
of the Company is granted a non-qualified option to purchase 10,000 shares of
Common Stock upon becoming a director. Each director also is granted a
non-qualified option to purchase 1,000 shares of common stock on an annual
basis. Options vest in equal annual installments over three years and terminate,
to the extent not previously exercised, upon the occurrence of the first of the
following events: (i) ten years after the date of grant; (ii) termination as a
director for any reason other than death or disability; or (iii) 30 days after
termination as a director due to death or disability. The exercise price for the
options is the fair market value of the Common Stock on the date of grant. Upon
exercise, the exercise price may be paid in cash, by certified or cashier's
check or in shares of stock of the Company owned by a director. Options to
purchase up to 100,000 shares of Common Stock are authorized under the
Directors' Plan. At the end of fiscal year 1995, options to acquire an aggregate
of 47,200 shares were held by four directors at an average exercise price of
$21.33 per share. Options to purchase 1,000 shares were granted under the
Directors' Plan to Messrs. Creighton, McLaren and Weinstein during fiscal year
1995 at an option price of $20.75 and options to purchase 10,000 shares were
granted to Mr. Olson in 1995 at an option price of $24.125. Messrs. Zell and
Friedland declined option grants as a matter of policy with any company in which
Zell Chilmark has an investment.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation for services rendered during
fiscal years 1995, 1994 and 1993 for the Chief Executive Officer and the other
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
FISCAL -------------------------- ------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($)(2)
- ----------------------------------------- --------- --------------- --------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Stuart M. Sloan ......................... 1995 981,068(1) 0 58,900 0
Chairman, Chief 1994 1,151,757(1) 0 50,000 0
Executive Officer 1993 1,036,520(1) 0 100,000 0
Dan Kourkoumelis ........................ 1995 275,000 145,000 130,000 35,996
President, Chief 1994 233,528 143,000 30,000 20,862
Operating Officer 1993 228,013 120,626 15,000 17,127
Marc Evanger ............................ 1995 150,000 75,000 100,000 17,663
Vice President, Chief 1994 121,093 73,000 20,000 12,929
Financial Officer 1993 117,866 61,873 10,000 15,640
</TABLE>
- ------------------------
(1) Mr. Sloan does not receive a salary or bonus from the Company. Since 1986,
Sloan Capital Companies, which is controlled by Mr. Sloan, has received from
the Company a management fee of 0.2% of the Company's total sales pursuant
to a management agreement dated August 17, 1986. The management fee has not
been adjusted during the term of the management agreement, which expires in
June 1996, except that for the fourth quarter of 1995, the parties agreed
that Mr. Sloan would accept options to purchase 58,900 shares of the
Company's stock in lieu of the management fee, which would have been
approximately $479,000. See "Certain Relationships and Related
Transactions."
(2) These amounts represent the accrued Company contributions to the Quality
Food Centers, Inc. Defined Contribution Profit Sharing Plan. The amounts for
1995 include cash compensation of $25,226 and $6,894 payable to Mr.
Kourkoumelis and Mr. Evanger, respectively, representing the shortfall in
contributions that would otherwise have been made had a $150,000 salary
limit on compensation to be considered for profit sharing contributions not
been imposed by the Internal Revenue Code.
The Company has stock option plans pursuant to which options to purchase
Common Stock are granted to officers and key employees of the Company. The
following tables show stock option grants and exercises in fiscal year 1995 to
or by the executive officers of the Company, and the year-end value of
unexercised options.
6
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TERM (1)
OPTIONS TO EMPLOYEES EXERCISE EXPIRATION ------------------------
NAME GRANTED (#)(2) IN FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------- -------------- --------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stuart M. Sloan...................... 58,900 11.4 20.75(3) 09/28/2000 337,664 746,150
Dan Kourkoumelis..................... 30,000 15.8 20.50(4) 04/12/2005 386,770 980,151
100,000 19.4 20.25(5) 04/23/2005 1,273,511 3,227,328
Marc Evanger......................... 30,000 15.8 20.50(4) 04/12/2005 386,770 980,151
70,000 13.6 20.25(5) 04/23/2005 891,458 2,259,130
</TABLE>
- ------------------------
(1) Potential realizable value is based on the assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the five or ten year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect the
Company's estimate of future stock price performance.
(2) The Company's stock option plans are administered by the Compensation
Committee of the Board of Directors, which determines to whom the options
are granted, the number of shares subject to each option, the vesting
schedule and the exercise price. Stock options granted to Messrs. Sloan,
Kourkoumelis and Evanger were granted pursuant to the 1993 Executive Stock
Option Plan. The options granted to Mr. Sloan, which were in lieu of the
fourth quarter management fee of approximately $479,000, vested immediately
upon grant and expire after five years. The options granted to Messrs.
Kourkoumelis and Evanger vest in equal annual installments over five years
and expire after 10 years.
(3) The options were granted on September 29, 1995, at fair market value.
(4) The options were granted on April 13, 1995, at fair market value.
(5) The options were granted on April 24, 1995, at fair market value.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAR OPTIONS AT FISCAL
END (#) YEAR END ($)(1)
------------------- -------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
--------------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stuart M. Sloan........................... 0 0 108,900/100,000 73,625/0
Dan Kourkoumelis.......................... 31,794 641,817 65,985/171,000 283,074/220,000
Marc Evanger.............................. 25,931 529,787 36,284/127,200 117,663/167,500
</TABLE>
- ------------------------
(1) Value is (i) the fair market value at fiscal 1995 year end ($22.00 per
share) less the option exercise price times (ii) the number of shares.
7
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is determined by the
Compensation Committee, which is comprised solely of outside directors.
The policy of the Compensation Committee in determining executive
compensation is that such compensation should (i) reflect Company performance,
(ii) reward individual performance, (iii) align the interests of the executives
with the long-term interests of the shareholders and (iv) assist the Company in
attracting and retaining key executives critical to the long-term success of the
Company.
Executive compensation, other than for the Company's Chairman and Chief
Executive Officer, consists primarily of (i) base salary, (ii) a bonus and (iii)
the grant of stock options. Base salary is determined at or about the beginning
of a fiscal year while bonuses are determined at the end of the fiscal year,
thereby allowing the Compensation Committee to take into account Company and
individual performance in determining a significant portion of an executive's
compensation. Stock option grants generally are determined at the end of the
fiscal year but may occur at any time.
The base salary for such executive officers is fixed at levels the
Compensation Committee believes are at the low range of the salaries paid to
executive officers having similar positions at public companies in the retail
food chain industry based upon reports, salary surveys and input from
compensation consultants. The other public retail food chain companies
considered relevant for salary comparison purposes include some that are in the
S&P Retail Stores -- Food Chains Index which is plotted in the performance graph
following this report and some that are not. A relatively low base salary
permits the Compensation Committee to rely significantly on bonuses to reflect
Company and executive performance. There is no target percentage of total cash
compensation that the Compensation Committee expects to be represented by
bonuses. The Compensation Committee believes that total cash compensation paid
to such executive officers in 1995 was in the medium range of the compensation
paid by the relevant other public retail food chain companies.
Bonuses are discretionary and are determined subjectively, with the
Compensation Committee taking into account Company and individual performance.
Both financial and non-financial factors, including the Company's growth,
increases in operating income and increases in the executive's responsibilities,
are considered but no predetermined goals are set that need to be met before
bonuses are paid.
The Compensation Committee grants stock options to its executive officers
pursuant to the Company's 1993 Executive Stock Option Plan and 1987 Incentive
Stock Option Plan. Such awards are designed to align a significant portion of
executive compensation with shareholder interests as well as provide long-term
incentives to the executive. The Compensation Committee considers the amount of
options granted to the executive officer in prior years as well as his position.
The stock option grants are discretionary and are determined subjectively. There
is no target percentage or range of overall executive compensation that the
Committee expects to be represented by stock option grants. The number of stock
options granted to executive officers of the Company in 1995 were increased
significantly to provide additional incentives to such officers as the Company
enters its new phase of growth.
The policy of the Compensation Committee regarding executive compensation
also generally applies to the compensation of the Company's employees. In fiscal
year 1995, the Company awarded bonuses in the aggregate amount of $3,488,192 to
514 employees other than the executive officers and granted options to purchase
213,050 shares of Common Stock to 634 of such employees.
For fiscal year 1995, Mr. Sloan, through Sloan Capital Companies, was paid a
management fee of 0.2% of the Company's total sales for the first three fiscal
quarters of 1995 pursuant to a management agreement that was entered into in
1986. Mr. Sloan and the Company exchanged the management fee that would have
been payable for the fourth quarter of 1995, which would have been approximately
$479,000, for stock options to purchase 58,900 shares of Common Stock. The grant
was made in September 1995, at the same time grants were made to other employees
of the Company. The number of option shares granted in lieu of the management
fee was determined using the "Binomial" model
8
<PAGE>
adapted for use in valuing executive stock options. The management fee was
negotiated between Mr. Sloan and the Company in connection with Mr. Sloan's
acquisition of the Company in 1986. The management agreement expires in June
1996.
The Compensation Committee believes Mr. Sloan should receive stock options
to provide additional incentive to improve long-term performance of the
Company's stock from current levels. In addition to the grant that was made in
lieu of the management fee, an additional grant of stock options to purchase
50,000 shares was made in February 1996, at fair market value.
COMPENSATION COMMITTEE
Fred B. McLaren, Chairman
John W. Creighton, Jr.
Ronald A. Weinstein
Samuel Zell
9
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Messrs. Creighton, McLaren,
Weinstein and Zell. Mr. Sloan, the Company's Chairman and Chief Executive
Officer, is a director and serves on the compensation committee of Anixter
International Inc. Mr. Zell is the Chairman of the Board of Anixter
International Inc.
In connection with the Recapitalization, the Company issued to Zell Chilmark
1,000,000 shares of Common Stock at $25 per share on March 29, 1995. Mr. Zell
indirectly controls the general partner of Zell Chilmark. See "Certain
Relationships and Related Transactions."
PERFORMANCE GRAPH
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG QUALITY FOOD CENTERS, INC.
S&P 500 INDEX AND S&P RETAIL STORES -- FOOD CHAINS INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEARS ENDING QUALITY FOOD CENTERS, INC S&P 500 INDEX RETAIL (FOOD CHAINS)
<S> <C> <C> <C>
Dec90 100.00 100.00 100.00
Dec91 163.29 130.47 105.51
Dec92 186.08 140.41 137.96
Dec93 125.95 154.56 133.82
Dec94 123.89 156.60 143.24
Dec95 113.21 215.45 183.48
</TABLE>
The above comparison assumes $100 invested in the Company's Common Stock,
the S&P 500 Index and the S&P Retail Stores -- Food Chains Index on December 31,
1990.
PROPOSAL II
AMENDMENT TO 1987 INCENTIVE STOCK OPTION PLAN
On February 21, 1996, the Company's Board of Directors amended the 1987
Incentive Stock Option Plan (the "Plan") to increase from 1,500,000 to 1,700,000
the number of shares of Common Stock authorized for issuance upon the exercise
of options granted under the Plan, subject to approval by the shareholders at
the Annual Meeting of Shareholders. Currently, 302,770 shares remain available
for future grants under the Plan.
The Board of Directors of the Company believes it is in the best interests
of the Company to increase the number of shares authorized under the Plan. Such
an increase would enable the Company to continue to attract high-quality
employees and to retain the services of current employees by enabling them to
obtain a proprietary interest in the Company. The Board believes that stock
ownership by employees also serves to make their interests consistent with the
interests of the other shareholders of the Company.
10
<PAGE>
DESCRIPTION OF THE PLAN. The Plan provides for the grant of options to
officers and key employees of the Company to acquire shares of Common Stock.
Approximately 630 individuals were eligible to receive options under the Plan as
of December 30, 1995. Options granted under the Plan are intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The Board of Directors has delegated administration of the Plan to the
Compensation Committee, including the authority to determine the exercise price,
size and vesting schedule of options. The exercise price of all options granted
under the Plan must be no less than the fair market value of the Common Stock
(110 percent of fair market value for shareholders owning more than ten percent
of the combined voting power of all classes of stock of the Company) on the date
the option is granted. Options are non-transferable except by will or the laws
of descent and distribution. Options vest in equal annual installments over five
years and terminate ten years after grant (five years in the case of
shareholders owning more than ten percent of the combined voting power of all
classes of stock of the Company). Options may be exercised for a period of one
month following termination of employment, except that under certain
circumstances options expire at the time of termination of employment.
If the Company is a party to a reorganization in which the Company is either
the surviving or resulting corporation, or is not the surviving or resulting
corporation but options to purchase the Company's stock are assumed by the
surviving or resulting corporation, any option granted under the Plan shall
apply to the number and type of securities to which a holder of the number of
shares of Common Stock subject to the option would be entitled under the terms
of the reorganization. The Board of Directors may, at any time, modify or amend
the Plan and any option granted thereunder, except that no amendment with
respect to an outstanding option may be made over the objection of the optionee.
The purchase price of option shares may be paid in cash, by certified or
cashier's check, in shares of the Company's Common Stock already owned by the
option holder or, with the permission of the Board of Directors, by having
shares withheld from the number of shares of Common Stock to be received by the
option holder. Shares used in payment shall be valued at their fair market
value. The last sale price of the Company's Common Stock as reported by the
Nasdaq National Market on March 8, 1996 was $22.50.
The proposed amendment to the Plan requires the affirmative vote of holders
of a majority of the shares of Common Stock represented at the meeting. An
abstention from voting will have the effect of a vote against. Broker
"non-votes" will have no effect.
FEDERAL INCOME TAX CONSEQUENCES OF INCENTIVE STOCK OPTIONS. The following
description of federal income tax consequences addresses the tax consequences
for "Incentive Stock Options" ("Incentive Stock Options" or "Options") as
defined in Section 422 of the Code. Although the Company believes the following
statements are correct based on existing provisions of the Code and the
legislative history and administrative and judicial interpretations thereof, no
assurance can be given that legislative, administrative or judicial changes or
interpretations will not occur that would modify such statements.
The Plan is not subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and is not qualified under Code Section
401(a).
Holders of Incentive Stock Options will not recognize income as a result of
the grant or exercise of an Incentive Stock Option. However, the difference
between the purchase price of shares issued pursuant to the exercise of an
Incentive Stock Option and the fair market value of such shares at the date of
exercise of the option will be included in income for the purpose of calculating
the alternative minimum tax. As a general rule, stock acquired pursuant to the
exercise of Incentive Stock Options is subject to tax at the time of its
subsequent sale or disposition.
In order for an optionee to receive the favorable tax treatment provided by
Code Section 421(a) for Incentive Stock Options, certain requirements set forth
in Code Section 422 must be satisfied. The optionee must be an employee of the
corporation granting the Option or of a parent corporation of
11
<PAGE>
such corporation that assumes a stock option pursuant to a merger, consolidation
or certain similar transactions described in Code Section 424(a). In general,
the optionee must be an employee at all times within the period beginning on the
date of grant of the Option and ending on a date within three months before the
date of exercise or, in the case of an optionee who dies while holding an
option, the date of death. In the case of an optionee who becomes disabled while
holding an option, the three month period is extended to one year.
In order for options to qualify for Incentive Stock Option treatment under
Section 421(a) of the Code, the following additional conditions must be
satisfied. The Incentive Stock Option must be granted pursuant to a plan
specifying the aggregate number of shares to be issued and the employees, or
class of employees, eligible to receive Options. Such plan must be approved by
the shareholders of the corporation within twelve months before or after the
date of adoption of the plan. The Option price must be not less than the fair
market value of the stock at the date of grant of the Option. The Option must be
granted within ten years from the earlier of (i) the date of adoption of the
plan or (ii) the receipt of shareholder approval for the plan; and by its terms
must not be exercisable after ten years from the date it is granted. The Option
by its terms cannot be transferable, except by will and by the laws of descent
and distribution. During the optionee's lifetime, the Option can be exercised
only by the optionee. At the time of the grant, the optionee cannot own,
directly or indirectly, more than ten percent of the total combined voting power
or value of the corporation unless the Option exercise price is at least 110
percent of the fair market value of the stock on the date of grant of the Option
and the exercise period of the Incentive Stock Option is by its terms limited to
five years. Finally, the aggregate fair market value (determined at the time of
the grant(s)) of the stock for which Incentive Stock Options are exercisable for
the first time by any individual in any calendar year under all relevant plans
of an issuer cannot exceed $100,000. This limitation is applied by taking
options into account in the order in which they were granted.
Any gain or loss realized as a result of the sale or other disposition of
shares issued upon exercise of an Incentive Stock Option will be long-term
capital gain or loss if the disposition occurs more than one year following
exercise and two years following the grant of the Option. If the disposition
occurs before the one- and two-year periods have elapsed (a "Disqualifying
Disposition"), the optionee will be required, at the time of the disposition, to
treat the lesser of the gain realized or the difference between the exercise
price and the fair market value of the stock as of the date of exercise as
ordinary income and the excess, if any, as short-term or long-term capital gain,
depending on how long the shares have been held following exercise. Any loss
sustained on the disposition of shares issued upon exercise of the Option will
be a capital loss. An optionee's tax basis in shares issued on exercise of an
Incentive Stock Option for which the exercise price is paid solely in cash will
be equal to the cash paid.
Currently, the maximum rate on ordinary income is 39.6 percent. The maximum
rate applicable to net capital gains is 28 percent.
Currently, the alternative minimum tax rates are 26 percent for a taxpayer's
first $175,000 of alternative minimum taxable income over the exemption amount
and 28 percent on amounts in excess thereof. The exemption amounts are currently
$45,000 for joint returns, $33,750 for single returns and $22,500 for married
taxpayers filing separately and are reduced by 25 percent of the amount by which
the alternative minimum taxable income exceeds $150,000 for joint returns,
$112,500 for single returns and $75,000 for married taxpayers filing separately.
The portion of a taxpayer's minimum tax attributable to certain items included
in income for purposes of alternative minimum tax (including the spread with
respect to the exercise of an Incentive Stock Option) may under certain
circumstances be credited against the taxpayer's regular tax liability in later
years.
The Company is entitled to a compensation expense deduction with respect to
an Incentive Stock Option only if the stock received upon exercise of the Option
is later sold in a Disqualifying Disposition, and the amount of the deduction
will be equal to the amount that the optionee recognizes as ordinary income as a
result of the Disqualifying Disposition, provided that such amount, when added
to any other compensation paid to the optionee is reasonable and otherwise
deductible under the Code.
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<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
PROPOSED AMENDMENT TO THE 1987 INCENTIVE STOCK OPTION PLAN.
PROPOSAL III
AMENDMENTS OF THE 1990 EMPLOYEE STOCK PURCHASE PLAN
On February 21, 1996, the Board of Directors amended the 1990 Employee Stock
Purchase Plan (the "Purchase Plan") to increase from 500,000 to 800,000 the
number of shares of Common Stock available for purchase under the Purchase Plan.
On March 14, 1996, the Board of Directors amended the Purchase Plan to increase
the number of shares of Common Stock that may be issued under the Purchase Plan
in any given Payment Period (as hereinafter defined) from 100,000 to 150,000.
Both amendments are subject to the approval by the shareholders at the Annual
Meeting of Shareholders. A total of 359,835 shares of Common Stock have been
purchased under the Purchase Plan since its inception, and a total of 140,165
shares remained available for purchase as of March 8, 1996. As of December 30,
1995, payroll deductions of approximately $1,357,000 were accrued for purchase
of shares on March 31, 1996. The Board of Directors believes the Purchase Plan
has contributed to strengthening the incentive of employees to achieve the
objectives of the Company and its shareholders by encouraging employees to
acquire a greater proprietary interest in the Company.
The proposed amendments to the Plan require the affirmative vote of holders
of a majority of the shares of Common Stock represented at the meeting. An
abstention from voting will have the effect of a vote against. Broker
"non-votes" will have no effect. Unless otherwise instructed, it is the
intention of the persons named in the accompanying form of proxy to vote shares
represented by properly executed proxies in favor of the amendment.
The Purchase Plan was adopted by the Company's Board of Directors in January
1990 and approved by its shareholders in April 1990. The Purchase Plan currently
provides that 500,000 shares of the Company's Common Stock be reserved for
issuance upon exercise of purchase rights granted thereunder. Employees are
eligible to participate, with certain exceptions, if they are employed by the
Company for at least 8 hours per week and for at least five months during the
year. At December 30, 1995, the number of eligible participants was
approximately 1,268. Employees who immediately after receiving an option grant
would own 5% or more of the voting stock of the Company are not eligible to
participate in the Purchase Plan.
Each person electing to participate in the Purchase Plan must execute and
deliver to the Company an enrollment agreement which indicates the amount to be
deducted from the participant's paychecks. The deduction may not be less than $5
per pay period or greater than 10% of the participant's base pay. No participant
may purchase more than 400 shares of Common Stock in any given Payment Period
(as hereinafter defined) and no more than 100,000 shares of Common Stock may be
issued in any given Payment Period, which will be increased to 150,000 shares if
the proposed amendment is approved by the shareholders. Deductions are
accumulated for an annual period beginning April 1 (the "Offering Date") and
ending on March 31 (the "Payment Period"). For each Payment Period, on the
Offering Date, the Company will grant to each participant an option to purchase
on the last day of such Payment Period at a price determined as described below
(the "Option Price") the number of full shares of Common Stock of the Company
that such participant's accumulated payroll deductions on the last day of such
Payment Period will purchase at the Option Price. The Option Price for each
Payment Period is the lesser of (i) 85% of the fair market value of the
Company's Common Stock on the first business day of the Payment Period or (ii)
85% of the fair market value of the Company's Common Stock on the last business
day of the Payment Period. The fair market value is the last sale price for the
Common Stock as reported by the Nasdaq National Market on the first or last day
of the Payment Period as the case may be. Such price on April 1, 1995 was
$21.00. Such sale price on March 8, 1996 was $22.50.
13
<PAGE>
NEW PLAN BENEFITS
1990 EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
DOLLAR NUMBER OF
NAME AND PRINCIPAL POSITION VALUE ($)(1) UNITS (2)
- ----------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Stuart M. Sloan ......................................................................... 0 0
Chairman, Chief Executive Officer
Dan Kourkoumelis ........................................................................ 1,252 400
President, Chief Operating Officer
Marc Evanger ............................................................................ 1,252 400
Vice President, Chief Financial Officer
All Executive Officers as a Group........................................................ 2,504 800
All Directors who are not Executive Officers as a Group.................................. 0 0
All Employees who are not Executive Officers as a Group.................................. 261,406 83,483
</TABLE>
- ------------------------
(1) Represents the difference between the exercise price on March 31, 1995 of
$17.74 and the market price of the stock on such date of $20.875 multiplied
by the number of shares.
(2) Represents the number of shares purchased on March 31, 1995 pursuant to the
Purchase Plan. As of December 30, 1995, payroll deductions of $1,357,000
were accrued for purchase of shares on March 31, 1996. Messrs. Kourkoumelis
and Evanger have each designated that the maximum of 400 shares be purchased
under the plan on March 31, 1996.
FEDERAL INCOME TAX INFORMATION. The following description addresses the
federal tax consequences of participation in the Purchase Plan and is intended
merely to provide basic information with respect to the tax treatment applied to
the Purchase Plan. Although the Company believes the following statements are
correct based on existing provisions of the Code, and the Treasury regulations
promulgated thereunder and the legislative history and administrative and
judicial interpretations thereof, no assurance can be given that legislative,
administrative or judicial changes or interpretations will not occur that would
modify such statements.
Under Section 423(a) of the Code, the transfer of a share of stock to a
participant pursuant to the Purchase Plan is entitled to the benefits of Section
421(a) of the Code. Under Section 421(a), a participant will not be required to
recognize income at the time the option is granted or at the time the option is
exercised. As the option price under the Purchase Plan is less than the fair
market value of the stock on the date of grant, Section 423(c) of the Code
requires that, provided the holding periods described below are met, when the
shares of stock received pursuant to the Purchase Plan are sold or otherwise
disposed of in a taxable transaction (or in the event of the death of the
participant while owning such shares whether or not the holding period
requirements are met), the participant will recognize compensation income (taxed
as ordinary income) in an amount equal to the lesser of (i) the excess of the
fair market value of the Common Stock at the time of such disposition or death
over the amount paid for the shares or (ii) 15% of the stock's fair market value
at the time the option was granted. The amount of compensation income recognized
is added to the participant's basis in such shares. Any additional gain or loss
resulting from the disposition, measured by the difference between the amount
paid for the shares (plus the amount recognized as compensation income as
described above) and the amount realized, will be taxed as long-term capital
gain or loss. The compensation income recognized as a result of a participant's
death, however, does not increase the basis of such shares in the hands of the
participant's beneficiary or estate. No portion of the amount received pursuant
to such a disposition will be subject to withholding for federal income taxes or
be subject to FICA or FUTA taxes. The Company will not be entitled to any
business expense deduction with respect to the Purchase Plan, except in
connection with a disqualifying disposition as discussed below.
14
<PAGE>
In order for a participant to receive the favorable tax treatment provided
in Section 421(a) of the Code, Section 423(a) requires that the participant make
no disposition of the shares within two years from the date the option was
granted nor within one year from the date such option was exercised and the
shares were transferred to the participant. In addition, the participant must be
an employee of the corporation granting the option (or of a parent or subsidiary
of such corporation, as defined in Section 424(e) and (f) of the Code, or a
corporation, or parent or subsidiary thereof, issuing or assuming the option in
a transaction to which Section 424(a) applies) at all times within the period
beginning on the date of the grant of the option and ending on a date within
three months before the date of exercise.
If a participant disposes of stock acquired pursuant to the Purchase Plan
before the expiration of the holding period requirements set forth above, the
participant will realize, at the time of the disposition, ordinary income to the
extent the fair market value of the stock on the date the shares were purchased
exceeds the Option Price. The amount of ordinary income recognized is added to
the participant's basis in such shares. Any further gain or loss, measured by
the difference between the fair market value of the stock on the date the shares
were purchased and the amount realized on disposition, will be taxed as capital
gain or loss. Income recognized as a result of such a disposition may be subject
to the income tax withholding requirements of the Code and FICA withholding
requirements, and the Company will withhold from a participant's wages such
amounts as may be necessary to comply with such requirements. At the time of the
disposition, the Company will be allowed a corresponding business expense
deduction under Section 162 of the Code to the extent of the amount of the
participant's ordinary income, provided such amount when added to any other
compensation paid to the participant is reasonable and otherwise deductible
under the Code and the Company's tax reporting obligations are satisfied.
The Purchase Plan is not subject to the Employee Retirement Income Security
Act of 1974, as amended, and is not qualified under Code Section 401(a).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
PROPOSED AMENDMENTS TO THE PURCHASE PLAN.
PROPOSAL IV
SELECTION OF INDEPENDENT AUDITORS
The Company has selected Deloitte & Touche LLP to continue as its
independent auditors for the fiscal year ending December 28, 1996.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting of Shareholders and to have the opportunity to make a statement
if they so desire and to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS
OF THE COMPANY.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a management agreement dated August 17, 1986 with Sloan Capital
Companies (the "Management Agreement"), the Company pays Sloan Capital Companies
a management fee in an amount not greater than 0.2% of QFC's total sales in
exchange for general advisory and policy-making services. Stuart M. Sloan, the
Company's Chairman and Chief Executive Officer, controls Sloan Capital
Companies. Pursuant to the Management Agreement, $981,068 was paid for fiscal
year 1995 representing 0.2% of sales for the first three quarters of 1995. No
management fee was paid for the fourth quarter of 1995. Instead of the
management fee, which would have been approximately $479,000, the Company issued
stock options for 58,900 shares at fair market value to Mr. Sloan. The
Management Agreement expires June 18, 1996.
In August 1993, two partnerships which include Mr. Sloan acquired the
24-acre University Village Shopping Center, where one of the Company's stores is
located and which is adjacent to an 8.8 acre parcel of land the Company acquired
in 1991. In connection with the transaction the Company
15
<PAGE>
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 being amortized over the life of the lease as leasehold interest.
Rentals and common area and real estate tax reimbursements paid to the
partnerships were at the same rates paid to the previous owner of the center and
totaled approximately $683,000 for the fiscal year ended December 30, 1995.
Pursuant to the Recapitalization Agreement, the Company on March 29, 1995
(i) issued to Zell Chilmark 1,000,000 newly issued shares of Common Stock at $25
per share, (ii) completed a tender offer, purchasing 7,000,000 shares of Common
Stock at $25 per share (the "Offer") and (iii) entered into a credit facility to
finance the Offer. Samuel Zell and Joel S. Friedland, who became directors of
the Company as a result of the Recapitalization, indirectly control the general
partner of Zell Chilmark. See "Election of Directors." The Recapitalization was
approved by a special committee of the Board of Directors consisting solely of
outside directors.
In connection with the Recapitalization Agreement, Mr. Sloan and Zell
Chilmark entered into a Stock Purchase and Sale Agreement dated as of January
14, 1995, pursuant to which Mr. Sloan sold to Zell Chilmark on January 16, 1996,
2,975,000 shares of Common Stock owned by Mr. Sloan at $25 per share plus an
additional amount equal to a 5% annual return on that base price calculated from
March 17, 1995 through January 16, 1996.
Also in connection with the Recapitalization Agreement, Mr. Sloan and the
Company entered into the Sloan Standstill Agreement and Zell Chilmark and the
Company entered into the Zell Chilmark Standstill Agreement. See footnotes (3)
and (5) to the beneficial ownership table under "Voting Securities and Principal
Holders."
In connection with the merger of Olson's Food Stores, Inc. ("Olson's") into
the Company, Maurice F. Olson, a director of the Company, received 592,941
shares of the Company's Common Stock and $18,000,000 in cash and members of his
immediate family received an aggregate of 160,000 shares of such stock on March
1, 1995.
Commencing March 2, 1995, the Company began leasing one of the former
Olson's stores included in the merger from Olson Management Group, LLC ("OMG"),
of which Mr. Olson is the controlling member. Annual lease payments paid to OMG
under the lease were approximately $142,000 for fiscal year 1995.
In April 1995, the Company purchased the equipment, inventory, prescription
files and related assets of two pharmacies owned by OMG for approximately
$150,000. These assets were subsequently transferred to two of the Company's
nearby stores that operate in-store pharmacies.
The Company purchased $1,673,000 in wholesale bakery goods from Signature
Bakery, L.L.C., which is owned by members of Mr. Olson's immediate family,
during fiscal year 1995.
OTHER BUSINESS
Management knows of no other business that will be presented for action at
the meeting. If other business requiring a vote of the shareholders should come
before the meeting, the persons designated as your proxies will vote or refrain
from voting in accordance with their best judgment.
SHAREHOLDER PROPOSALS FOR THE
1997 ANNUAL MEETING OF SHAREHOLDERS
Shareholder proposals to be presented at the 1997 Annual Meeting of
Shareholders must be received at the Company's executive offices by November 28,
1996, in order to be included in the Company's proxy statement and form of proxy
relating to that meeting.
The Company's charter provides that advance notice of nominations for the
election of directors or the proposal of business at an annual meeting must be
submitted in writing and delivered to or
16
<PAGE>
mailed and received by the Secretary of the Company not less than 30 days nor
more than 60 days prior to the meeting; provided, however, that if less than 40
days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholders to be timely must be so
received not later than the close of business on the tenth day following the
date on which such notice of the date of the meeting was mailed or such public
disclosure was made. The notice must contain, among other things: (i) a brief
description of the business desired to be brought before the annual meeting;
(ii) the name and address of the shareholder who intends to make the nomination
or proposal; (iii) the class and number of shares of stock of the Company which
are beneficially owned by such shareholder; (iv) a disclosure of any material
interest of such shareholder in such business; and (v) such other information
regarding each nominee or proposal as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission. The chairman of the meeting may in his discretion determine and
declare to the meeting that a proposal was not made in accordance with the
foregoing procedures, and if he should so determine, he shall so declare to the
meeting and the proposal shall be disregarded.
SOLICITATION OF PROXIES
This solicitation is made on behalf of the Board of Directors of the
Company. Proxies may be solicited by officers, directors and employees of the
Company, none of whom will receive any additional compensation for their
services. Solicitations of proxies may be made personally, or by mail,
telephone, telegraph, facsimile or messenger.
The Company will pay persons holding shares of Common Stock in their names
or in the names of nominees, but not owning such shares beneficially, such as
brokerage houses, banks and other fiduciaries, for the expense of forwarding
soliciting materials to their principals. All of the costs of solicitation of
proxies will be paid by the Company.
By Order of the Board of Directors
[SIG]
Marc W. Evanger
SECRETARY
Bellevue, Washington
March 28, 1996
17
<PAGE>
- --------------------------------------------------------------------------------
QUALITY FOOD CENTERS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Stuart M. Sloan and Marc W. Evanger, and each
of them, as proxies, each with full power of substitution, to represent and
vote for and on behalf of the undersigned the number of shares of common stock
of Quality Food Centers, Inc. that the undersigned would be entitled to vote if
personally present at the annual meeting of shareholders to be held on April
30, 1996, or at any adjournment thereof. The undersigned directs that this
Proxy be voted as directed on the reverse side of this card.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting. This Proxy, when properly
executed, will be voted in the manner directed herein by the undersigned
shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR ALL
NOMINEES" IN ITEM 1 AND "FOR" ITEMS 2, 3 AND 4.
Please sign exactly as your name appears below. When shares are held jointly,
each person should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. An authorized person
should sign on behalf of corporations, partnerships and associations and give
his or her title.
Dated: ___________________,1996
_______________________________
Signature
_______________________________
Signature if held jointly
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND RETURN THIS PROXY CARD PROMPTLY.
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<PAGE>
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Please mark
your votes as
indicated in
this example /X/
FOR all Nominees WITHHOLD AUTHORITY (to
(except as indicated vote for all nominees
to the contrary below) listed below)
1. Election of Directors:
/ / / /
Dan Kourkoumelis,
Sheli Z. Rosenberg, and
Ronald A. Weinstein
INSTRUCTIONS: To withhold authority
to vote for any individual nominee, print
that nominee's name
in the following space:
_________________________________________
FOR AGAINST ABSTAIN
2. Amend the Company's 1987 Incentive Stock / / / / / /
Option Plan to reserve an additional 200,000
shares of common stock for issuance upon
exercise of options granted under this plan.
3. Amend the Company's 1990 Employee / / / / / /
Stock Purchase Plan to reserve an additional
300,000 shares of common stock for issuance
upon purchase of shares under the plan and to
increase the number of shares of common
stock issuable in any given payment period to
150,000.
4. Ratification of the selection / / / / / /
of Deloitte & Touche LLP as
the independent auditors of
the Company.
(Continued and to be signed on the other side)
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