<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 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 14, 1997, QFC acquired Keith Uddenberg, Inc. ("KUI") for
approximately $35.3 million in cash and 904,646 shares of QFC Common Stock
and, in connection therewith, assumed $24.3 million of existing KUI
indebtedness (the "KUI Acquisition"). KUI operates 25 stores in the western
and southern Puget Sound region of the state of Washington. Included under
Item 7 hereof are the historical financial statements of KUI, together with
certin pro forma information of QFC, as adjusted to give effect to the KUI
Acquisition and the Hughes Acquisition (as defined below).
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"). 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 amended historical financial statements of Hughes, together
with certain pro forma information of QFC, as adjusted to give effect to the
Hughes Acquisition and the KUI 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 and the KUI Acquisition.
(c) Filed as exhibit 99.3 are the historical financial statements, for
the periods indicated, of KUI.
(d) Filed as exhibit 99.4 is the Consent of Arthur Andersen LLP, Independent
Public Accountants for Hughes.
(e) Filed as exhibit 99.5 is the Consent of Deloitte & Touche LLP, Independent
Auditors for KUI.
(f) Filed as exhibit 99.6 is the Investors Rights Agreement, dated as of
February 14, 1997, by and among QFC and the signatories thereto, entered
into in connection with the KUI Acquisition.
(g) Filed as exhibit 99.7 is the Employment Agreement, dated as of
September 1, 1996, by and between QFC and Marc Evanger.
(h) Filed as exhibit 99.8 is the Employment Agreement, dated as of
September 1, 1996, by and between QFC and Dan Kourkoumelis.
(i) Filed as exhibit 99.9 is the Employment Agreement, dated as of
September 1, 1996, by and between QFC and Christopher A. Sinclair.
(j) EXHIBITS
99.1 Consolidated Financial Statements for the each of the three years in
the period ended March 3, 1996 and for the seven months ended
September 24, 1995 and September 29, 1996 for Hughes Markets, Inc. and
Subsidiaries.
99.2 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 7, 1996; Unaudited Pro Forma Condensed Consolidated
Statement of Earnings for the fiscal year ended December 30, 1995;
Unaudited Pro Forma Condensed Consolidated Statement of Earnings
for the 36 weeks ended September 7, 1996; Unaudited Pro Forma
Condensed Consolidated Statement of Earnings for the 52 weeks ended
September 7, 1996.
99.3 Financial Statements for the years ended December 31, 1994, and
December 30, 1995 and the nine months ended September 30, 1995
(unaudited) and September 28, 1996 (unaudited) for Keith
Uddenberg, Inc.
99.4 Consent of Arthur Andersen LLP, Independent Public Accountants for
Hughes.
99.5 Consent of Deloitte & Touche LLP, Independent Auditors for KUI.
99.6 Investors Rights Agreement, dated as of February 14, 1997, by and
among QFC and the signatories thereto, entered into in connection
with the KUI Acquisition.
99.7 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Marc Evanger.
99.8 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Dan Kourkoumelis.
99.9 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Christopher A. Sinclair.
<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.
February 18, 1997 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
99.1 Consolidated Financial Statements for the each of the three years in
the period ended March 3, 1996 and for the seven months ended
September 24, 1995 and September 29, 1996 for Hughes Markets, Inc. and
Subsidiaries.
99.2 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 7, 1996; Unaudited Pro Forma Condensed Consolidated
Statement of Earnings for the fiscal year ended December 30, 1995;
Unaudited Pro Forma Condensed Consolidated Statement of Earnings
for the 36 weeks ended September 7, 1996; Unaudited Pro Forma
Condensed Consolidated Statement of Earnings for the 52 weeks
ended September 7, 1996.
99.3 Financial Statements for the years ended December 31, 1994, and
December 30, 1995 and the nine months ended September 30, 1995
(unaudited) and September 28, 1996 (unaudited) for Keith Uddenberg,
Inc.
99.4 Consent of Arthur Andersen LLP, Independent Public Accountants for
Hughes.
99.5 Consent of Deloitte & Touche LLP, Independent Auditors for KUI.
99.6 Investors Rights Agreement, dated as of February 14, 1997, by and
among QFC and the signatories thereto.
99.7 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Marc Evanger.
99.8 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Dan Kourkoumelis.
99.9 Employment Agreement, dated as of September 1, 1996, by and between
QFC and Christopher A. Sinclair.
<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.
/s/ 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 9,309,300 12,111,151
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) 2,175,735
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities 29,610,083 32,088,869 33,622,352 24,861,581 25,950,953
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (31,700,927) (36,062,608) (19,633,316) (3,847,798) (30,938,746)
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) 1,376,342 (30,836,615)
------------ ------------ ------------ ------------ ------------
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 $1,200,000, $3,000,000
and $7,200,000, 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 $100,000,000, including production equipment and
capitalized interest and other 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 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on historical
financial statements of QFC, Hughes Markets, Inc. ("Hughes"), and Keith
Uddenberg, Inc. ("KUI") and have been prepared to illustrate the effects of
the Acquisitions (as defined herein) and other related transactions described
below and the assumed financing therefor.
The unaudited pro forma condensed consolidated 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) the proposed acquisition of Hughes (the "Hughes Acquisition") and
certain related transactions; (ii) Hughes' sale to Stater Bros. Markets
("Stater") 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,
resulting in Santee ceasing to be a consolidated subsidiary of Hughes; (iii)
KUI's spin off of certain assets and liabilities, primarily related to
non-grocery operations, prior to the recent acquisition of KUI (the "KUI
Acquisition") (iv) the KUI Acquisition and certain related transactions; (v)
the application of the estimated net proceeds from the sale by QFC of
4,500,000 shares of its Common Stock (the "Common Stock Offering") and the
private placement of certain debt securities (the "Notes Offering"; and
collectively with the Common Stock Offering, the "Offerings") and
borrowings under an amended and restated $275 million term loan facility and
an amended and restated $125 million revolving credit facility (together the
"New Credit Facility") to finance the Hughes Acquisition and to refinance
bank debt of QFC expected to be outstanding at the time of the closing of the
Offerings (the "Closing") (including indebtedness which was incurred in
connection with the KUI Acquisition); and (vi) QFC's proposed divestiture of
five recently acquired KUI stores. The unaudited pro forma condensed
consolidated 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 pro forma condensed
consolidated statement of earnings for the 52 weeks ended September 7, 1996
gives effect to the transactions described above as if such transactions had
been completed as of September 10, 1995. The unaudited pro forma condensed
consolidated balance sheet as of September 7, 1996 gives effect to the
transactions described above as if such transactions had been completed as of
that date. The effect of the proposed divestiture of five recently acquired
KUI stores is reflected in the pro forma balance sheet as assets held for
sale.
The Hughes Acquisition and KUI Acquisition will be accounted for using the
purchase method of accounting. The total purchase price of each of the
Acquisitions will be allocated to the tangible and intangible assets and
liabilities acquired based upon their respective fair values. The allocation of
each of the aggregate purchase prices 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 Company anticipates
that the Acquisitions will result in certain synergies and economies of scale
resulting from, among other things, reduction in administrative costs and
enhanced buying power. However, none of these anticipated benefits is reflected
in the Pro Forma Financial Statements and there can be no assurance that they
will be realized. 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, and bank debt of QFC expected to
be outstanding at the time of the Closing (including indebtedness which was
incurred in connection with the KUI Acquisition) will be refinanced, with
proceeds from the Offerings and borrowings under the New Credit Facility. The
ability of QFC to obtain funds from these sources will be dependent upon market
conditions, and there can be no assurance as to the actual number of shares
which may be issued or the price which QFC will receive for such shares, or as
to the aggregate principal amount of Notes which may be so issued or the
interest rate thereon. Likewise, the availability of borrowings will require
that QFC enter into the New Credit Facility, which it is currently negotiating
with its bank group. Accordingly, the actual terms of any debt and equity
financing may differ from the assumed terms reflected in the Pro Forma Financial
Statements.
S-34
<PAGE>
In addition, the pro forma condensed consolidated statements of earnings
reflect QFC's proposed divestiture of five of the stores recently acquired in
the KUI Acquisition. QFC believes, based upon past experience in selling stores,
that it will be able to dispose of these stores, although it has not entered
into any definitive agreements for that purpose. Accordingly, there can be no
assurance as to the actual sales proceeds which may be received by the Company
therefor or when those stores may be sold. In addition, QFC anticipates that it
will make capital expenditures of approximately $22 million through 1998 in
order to convert certain KUI stores, expected to be retained following the KUI
Acquisition, to the QFC format; such capital expenditures are not reflected in
the Pro Forma Financial Statements.
The Pro Forma Financial Statements should be read in conjunction with
QFC's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the historical financial statements and 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, the historical consolidated
financial statements and notes thereto of Hughes included herein, and the
historical financial statements and notes thereto of KUI included herein.
S-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 7, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
QFC HUGHES HUGHES PRO KUI
SEPTEMBER 7, SEPTEMBER 29, FORMA HUGHES SEPTEMBER 28,
1996(a) 1996(a) ADJUSTMENTS(b) PRO FORMA 1996(a)
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents..................... $ 11,570 $ 10,454 $ (19) $ 10,435 $ 1,865
Accounts receivable......................... 9,655 18,175 (10,437) 7,738 5,190
Inventories................................. 35,670 53,966 (4,290) 49,676 11,523
Prepaid expenses............................ 6,442 9,291 (1,727) 7,564 281
------------ ------------- -------------- ----------- -------------
TOTAL CURRENT ASSETS.................... 63,337 91,886 (16,473) 75,413 18,859
Investment in subsidiary.................... 8,649 8,649
Properties
Land........................................ 15,025 43,913 (6,392) 37,521 2,415
Buildings, fixtures and equipment........... 152,331 221,182 (32,976) 188,206 50,728
Leasehold improvements...................... 43,084 48,385 48,385 2,576
Construction in progress.................... 6,927 11,871 (11,871) 4,017
------------ ------------- -------------- ----------- -------------
217,367 325,351 (51,239) 274,112 59,736
Accumulated depreciation and amortization... (59,878) (131,478) 24,597 (106,881) (29,531)
------------ ------------- -------------- ----------- -------------
157,489 193,873 (26,642) 167,231 30,205
Property under capital leases............... 19,500 19,500
Assets held for sale........................
Leasehold interest.......................... 27,382 4,946 (464) 4,482
Real estate held for investment............. 5,888 865
Goodwill.................................... 33,857
Other assets................................ 5,657 5,504 (438) 5,066 7,248
------------ ------------- -------------- ----------- -------------
TOTAL ASSETS............................ $ 293,610 $ 315,709 $ (35,368) $ 280,341 $ 57,177
------------ ------------- -------------- ----------- -------------
------------ ------------- -------------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 33,414 $ 53,678 $ (12,694) $ 40,984 $ 14,496
Accrued liabilities......................... 27,926 39,893 (5,716) 34,177 4,893
Current portion long term debt.............. 18,900 9,204 (5,000) 4,204 2,662
Current portion capital lease obligation.... 559 559
------------ ------------- -------------- ----------- -------------
TOTAL CURRENT LIABILITIES............... 80,240 103,334 (23,410) 79,924 22,051
Deferred income taxes....................... 11,735 8,644 (169) 8,475
Other liabilities........................... 6,128 6,623 (3,420) 3,203 4,168
Long term debt.............................. 131,100 3,044 3,044 23,621
Capital lease obligation.................... 24,924 24,924
Preferred stock dividend.................... 3,328
Minority interest........................... 8,369 (8,369)
Shareholders' equity........................ 64,407 160,771 160,771 4,009
------------ ------------- -------------- ----------- -------------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY................................ $ 293,610 $ 315,709 $ (35,368) $ 280,341 $ 57,177
------------ ------------- -------------- ----------- -------------
------------ ------------- -------------- ----------- -------------
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR QFC/HUGHES/KUI
KUI ACQUISITIONS CONSOLIDATED
PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(c) PRO FORMA OFFERINGS(d) (AS ADJUSTED)
--------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents..................... $ -- $ 1,865 $ (3,966)(d) $ 19,904
Accounts receivable......................... (150) 5,040 22,433
Inventories................................. (2,060) 9,463 23,866(h) 115,175
(3,500)(m)
Prepaid expenses............................ (7) 274 14,280
------- ----------- --------------- ----------------
TOTAL CURRENT ASSETS.................... (2,217) 16,642 16,400 171,792
Investment in subsidiary.................... (2,500)(n) 6,149
Properties
Land........................................ (675) 1,740 3,000(i) 57,286
Buildings, fixtures and equipment........... (3,361) 47,367 20,000(i) 401,804
(6,100)(m)
Leasehold improvements...................... (155) 2,421 93,890
Construction in progress.................... 4,017 10,944
------- ----------- --------------- ----------------
(4,191) 55,545 16,900 563,924
Accumulated depreciation and amortization... 2,129 (27,402) (194,161)
------- ----------- --------------- ----------------
(2,062) 28,143 16,900 369,763
Property under capital leases............... 19,500
Assets held for sale........................ 9,600(m) 9,600
Leasehold interest.......................... 75,000(j) 106,864
Real estate held for investment............. (865) 5,888
Goodwill.................................... 136,625(k) 172,982
2,500(n)
Other assets................................ (183) 7,065 5,930(l) 30,218
6,500(d)
------- ----------- --------------- ----------------
TOTAL ASSETS............................ $ (5,327) $ 51,850 $ 266,955 $ 892,756
------- ----------- --------------- ----------------
------- ----------- --------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ (917) $ 13,579 $ -- $ 87,977
Accrued liabilities......................... (24) 4,869 66,972
Current portion long term debt.............. 2,662 (21,562)(d) 4,204
Current portion capital lease obligation.... 559
------- ----------- --------------- ----------------
TOTAL CURRENT LIABILITIES............... (941) 21,110 (21,562) 159,712
Deferred income taxes....................... 20,210
Other liabilities........................... 4,168 13,499
Long term debt.............................. (2,000) 21,621 247,279(d) 403,044
Capital lease obligation.................... 24,924
Preferred stock dividend.................... (3,328)
Minority interest...........................
Shareholders' equity........................ 942 4,951 (165,722)(g) 271,367
171,000(e)
35,960(f)
------- ----------- --------------- ----------------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY................................ $ (5,327) $ 51,850 $ 266,955 $ 892,756
------- ----------- --------------- ----------------
------- ----------- --------------- ----------------
</TABLE>
S-36
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL QFC HUGHES HISTORICAL KUI
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED HUGHES ENDED
DECEMBER 30, MARCH 3, PRO FORMA HUGHES PRO DECEMBER 30,
1995(a) 1996(a) ADJUSTMENTS(b) FORMA 1995(a)
---------------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Sales................................. $ 729,856 $1,147,447 $ (161,678) $ 985,769 $ 319,141
Cost of sales and related occupancy
expenses............................ 550,434 901,951 (139,446) 762,505 250,823
Marketing, general, and administrative
expenses............................ 136,644 215,234 (24,008) 191,226 70,441
---------------- ---------------- -------------- ----------- ----------------
Operating income (loss)............... 42,778 30,262 1,776 32,038 (2,123)
Interest income....................... 501 1,272 (602) 670 79
Interest expense...................... (9,639) (4,335) 50 (4,285) (1,939)
Other income (expense)................ (1,400)(r) 2,066
---------------- ---------------- -------------- ----------- ----------------
Earnings before income taxes.......... 32,240 27,199 1,224 28,423 (1,917)
Total taxes on income................. 12,023 11,382 471 11,853 (674)
---------------- ---------------- -------------- ----------- ----------------
Income before minority interest....... 20,217 15,817 753 16,570 (1,243)
---------------- ---------------- -------------- ----------- ----------------
Equity losses......................... (384) (384)
Minority interest in subsidiary
loss................................ 369 (369)
---------------- ---------------- -------------- ----------- ----------------
Net earnings (loss)................... $ 20,217 $ 16,186 $ -- $ 16,186 $ (1,243)
---------------- ---------------- -------------- ----------- ----------------
---------------- ---------------- -------------- ----------- ----------------
Earnings per share(t)................. $ 1.28
Weighted average shares outstanding... 15,830
EBITDA (s)............................ $ 59,567 $ 42,440 $ (1,077) $ 41,363 $ 3,409
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR QFC/HUGHES/KUI
ACQUISITIONS CONSOLIDATED
KUI PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(c) PRO FORMA OFFERINGS(d) (AS ADJUSTED)
-------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales................................. $ (12,761) $ 306,380 $ (36,287)(m) $ 1,985,718
Cost of sales and related occupancy
expenses............................ (11,405) 239,418 (29,936)(m) 1,522,421
Marketing, general, and administrative
expenses............................ (2,793) 67,648 (9,379)(m) 393,451
7,312(o)
-------------- ----------- --------------- ----------------
Operating income (loss)............... 1,437 (686) (4,284) 69,846
Interest income....................... 79 1,250
Interest expense...................... (1,939) (19,923)(p) (35,786)
Other income (expense)................ (522) 1,544 144
-------------- ----------- --------------- ----------------
Earnings before income taxes.......... 915 (1,002) (24,207) 35,454
Total taxes on income................. 311 (363) (6,420)(q) 17,093
-------------- ----------- --------------- ----------------
Income before minority interest....... 604 (639) (17,787) 18,361
-------------- ----------- --------------- ----------------
Equity losses......................... (384)
Minority interest in subsidiary
loss................................
-------------- ----------- --------------- ----------------
Net earnings (loss)................... $ 604 $ (639) $ (17,787) $ 17,977
-------------- ----------- --------------- ----------------
-------------- ----------- --------------- ----------------
Earnings per share(t)................. $ 0.85
Weighted average shares outstanding... 5,405 (e)(f) 21,235
EBITDA (s)............................ $ 706 $ 4,115 $ 2,408 $ 107,453
</TABLE>
S-37
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS FOR THE 36 WEEKS ENDED SEPTEMBER 7, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
QFC HUGHES KUI
36 WEEKS ENDED 9 MONTHS ENDED HUGHES 39 WEEKS ENDED
SEPTEMBER 7, SEPTEMBER 29, PRO FORMA HUGHES SEPTEMBER 28,
1996(a) 1996(a) ADJUSTMENTS(b) PRO FORMA 1996(a)
-------------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Sales......................................... $ 547,166 $ 884,734 $ (128,659) $ 756,075 $ 257,537
Cost of sales and related occupancy
expenses.................................... 410,549 686,621 (112,781) 573,840 199,675
Marketing, general, and administrative
expenses.................................... 103,850 172,730 (19,163) 153,567 54,539
-------------- -------------- -------------- ----------- --------------
Operating income (loss)....................... 32,767 25,383 3,285 28,668 3,323
Interest income............................... 301 848 (316) 532 20
Interest expense.............................. (6,901) (2,822) 116 (2,706) (1,291)
Other income (expense)........................ 605
-------------- -------------- -------------- ----------- --------------
Earnings before income taxes.................. 26,167 23,409 3,085 26,494 2,657
Total taxes on income......................... 9,372 10,846 356 11,202 926
-------------- -------------- -------------- ----------- --------------
Income before minority interest............... 16,795 12,563 2,729 15,292 1,731
-------------- -------------- -------------- ----------- --------------
Equity losses................................. (1,391) (1,391)
Minority interest in subsidiary loss.......... 1,338 (1,338)
-------------- -------------- -------------- ----------- --------------
Net earnings.................................. $ 16,795 $ 13,901 $ -- $ 13,901 $ 1,731
-------------- -------------- -------------- ----------- --------------
-------------- -------------- -------------- ----------- --------------
Earnings per share(t)......................... $ 1.14
Weighted average shares outstanding........... 14,766
EBITDA(s)..................................... $ 46,566 $ 37,480 $ 665 $ 38,145 $ 6,227
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR QFC/HUGHES/KUI
KUI ACQUISITIONS CONSOLIDATED
PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(c) PRO FORMA OFFERINGS(d) (AS ADJUSTED)
--------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales......................................... $ (9,292) $ 248,245 $ (32,486)(m) $ 1,519,000
Cost of sales and related occupancy
expenses.................................... (8,360) 191,315 (26,516)(m) 1,149,188
Marketing, general, and administrative
expenses.................................... (2,026) 52,513 (7,982)(m) 307,432
5,484 (o)
------- ----------- --------------- ----------------
Operating income (loss)....................... 1,094 4,417 (3,472) 62,380
Interest income............................... 20 853
Interest expense.............................. (1,291) (15,434) (p) (26,332)
Other income (expense)........................ (381) 224 224
------- ----------- --------------- ----------------
Earnings before income taxes.................. 713 3,370 (18,906) 37,125
Total taxes on income......................... 242 1,168 (5,100)(q) 16,642
------- ----------- --------------- ----------------
Income before minority interest............... 471 2,202 (13,806) 20,483
------- ----------- --------------- ----------------
Equity losses................................. (1,391)
Minority interest in subsidiary loss..........
------- ----------- --------------- ----------------
Net earnings.................................. $ 471 $ 2,202 $ (13,806) $ 19,092
------- ----------- --------------- ----------------
------- ----------- --------------- ----------------
Earnings per share(t)......................... $ 0.95
Weighted average shares outstanding........... 5,405 (e)(f) 20,171
EBITDA(s)..................................... $ 569 $ 6,796 $ 1,345 $ 92,852
</TABLE>
S-38
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS FOR THE 52 WEEKS ENDED SEPTEMBER 7, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
QFC HUGHES KUI
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
SEPTEMBER 7, SEPTEMBER 29, HUGHES PRO FORMA HUGHES SEPTEMBER 28,
1996(a) 1996(a) ADJUSTMENTS(b) PRO FORMA 1996(a)
------------------- -------------------- ----------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Sales....................... $ 786,488 $1,175,393 $ (169,782) $1,005,611 $ 339,580
Cost of sales and related
occupancy expenses........ 591,806 922,789 (147,553) 775,236 264,397
Marketing, general, and
administrative expenses... 148,018 219,096 (25,138) 193,958 72,920
---------- ----------- ----------------- ---------- ----------
Operating income............ 46,664 33,508 2,909 36,417 2,263
Interest income............. 376 776 (102) 674 32
Interest expense............ (10,655) (3,840) 63 (3,777) (1,767)
Other income (expense)...... 1,638
---------- ----------- ----------------- ---------- ----------
Earnings before income
taxes..................... 36,385 30,444 2,870 33,314 2,166
Total taxes on income....... 13,042 13,654 302 13,956 727
---------- ----------- ----------------- ---------- ----------
Income before minority
interest.................. 23,343 16,790 2,568 19,358 1,439
---------- ----------- ----------------- ---------- ----------
Equity losses............... (1,309) (1,309)
Minority interest in
subsidiary loss........... 1,259 (1,259)
---------- ----------- ----------------- ---------- ----------
Net earnings (loss)......... $ 23,343 $ 18,049 $ -- $ 18,049 $ 1,439
---------- ----------- ----------------- ---------- ----------
---------- ----------- ----------------- ---------- ----------
Earnings per share(t)....... $ 1.59
Weighted average shares
outstanding............... 14,694
EBITDA(s)................... $ 66,463 $ 48,926 $ (249) $ 48,677 $ 7,019
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR QFC/HUGHES/KUI
KUI ACQUISITIONS CONSOLIDATED
PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(c) PRO FORMA OFFERINGS(d) (AS ADJUSTED)
-------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales....................... $ (12,864) $ 326,716 $ (42,618)(m) $ 2,076,197
Cost of sales and related
occupancy expenses........ (11,436) 252,961 (33,961)(m) 1,586,042
Marketing, general, and
administrative expenses... (2,822) 70,098 (11,368)(m) 408,018
7,312(o)
-------------- ----------- --------------- ----------------
Operating income............ 1,394 3,657 (4,601) 82,137
Interest income............. 32 1,082
Interest expense............ (1,767) (19,079) (p) (35,278)
Other income (expense)...... (534) 1,104 1,104
-------------- ----------- --------------- ----------------
Earnings before income
taxes..................... 860 3,026 (23,680) 49,045
Total taxes on income....... 292 1,019 (6,220)(q) 21,797
-------------- ----------- --------------- ----------------
Income before minority
interest.................. 568 2,007 (17,460) 27,248
-------------- ----------- --------------- ----------------
Equity losses............... (1,309)
Minority interest in
subsidiary loss...........
-------------- ----------- --------------- ----------------
Net earnings (loss)......... $ 568 $ 2,007 $ (17,460) $ 25,939
-------------- ----------- --------------- ----------------
-------------- ----------- --------------- ----------------
Earnings per share(t)....... $ 1.29
Weighted average shares
outstanding............... 5,405 (e)(f) 20,099
EBITDA(s)................... $ 660 $ 7,679 $ 1,863 $ 124,682
</TABLE>
S-39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) QFC's fiscal year ends on the last Saturday in December, and its
reporting quarters consist of three 12-week quarters and a 16-week
quarter. The fiscal year ended December 30, 1995 was a 52-week year.
Hughes' fiscal year ends on the Sunday closest to the last day of
February. The fiscal year ended March 3, 1996 was a 53-week year. The
unaudited pro forma condensed consolidated balance sheet as of September
7, 1996, reflects Hughes' financial position as of September 29, 1996.
The unaudited pro forma condensed consolidated statement of earnings for
the 36 weeks ended September 7, 1996 reflects Hughes' results of
operations for the nine months ended September 29, 1996 (which covered
39 weeks).
KUI's fiscal year ends on the last Saturday in December, and each
quarter consists of a 13-week period. The fiscal year ended December 30,
1995 was a 52-week year. The unaudited pro forma condensed consolidated
balance sheet as of September 7, 1996, reflects KUI's financial position
as of September 28, 1996. The unaudited pro forma condensed consolidated
statement of earnings for the 36 weeks ended September 7, 1996 reflects
KUI's results of operations for the 39 weeks ended September 28, 1996.
The unaudited pro forma condensed consolidated statement of earnings for
the 52 weeks ended September 7, 1996 represents a 52-week period ended
September 7, 1996, September 29, 1996, and September 28, 1996 for QFC,
Hughes and KUI, respectively.
(b) Gives effect to the sale by Hughes to Stater of a 1% equity interest in
Santee, resulting in (i) Hughes (which previously owned 51% of Santee)
and Stater (which previously owned 49% of Santee) each becoming 50%
owners of Santee and (ii) 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.
(c) Gives effect to the elimination of certain assets and liabilities of
KUI, primarily related to non-grocery operations, and the elimination of
sales and certain expenses attributable to those assets and liabilities,
which were spun off by KUI prior to its acquisition by QFC.
(d) Gives effect to (i) the consummation of the Hughes Acquisition at an
assumed purchase price of $358.8 million equity value ($360.0 million
less $956,701 of shareholder loans and $209,670 preferred stock
redemption) (the "Hughes purchase price") and the allocation of the
purchase price to the acquired assets and liabilities including the
elimination of Hughes' shareholders equity in the amount of $160.8
million; and (ii) the consummation of the KUI Acquisition at a purchase
price of $95.6 million ($35.3 million paid in cash, $36.0 million paid
through the issuance of 904,646 shares of QFC Common Stock, and the
remaining $24.3 million paid through assumption of KUI indebtedness)
(the "KUI purchase price") and the allocation of the purchase price to
the acquired assets and liabilities, including the elimination of KUI's
shareholders equity in the amount of $5.0 million. The Hughes purchase
price is subject to certain adjustments, and the actual purchase price
may differ from such assumed purchase price, which would affect the
amount of financing required for the Hughes Acquisition.
Also gives effect to the financing of these Acquisitions (as shown in
the tables below) through the assumed receipt of (i) $171.0 million of
estimated total net proceeds from the Common Stock Offering; (ii) $59.6
million of borrowings under QFC's existing credit facility (the
"Current Credit Facility") to finance the $35.3 million cash portion of
the KUI purchase price and to repay the $24.3 million in debt assumed
in the KUI Acquisition; (iii) $272.0 million estimated total net
proceeds under the assumed terms of the New Credit Facility; and
(iv) $121.5 million estimated total net proceeds from the Notes
Offering. Related deferred financing and other fees are estimated to be
$6.5 million ($3.0 million under the New Credit Facility and $3.5
million under the Notes Offering). These fees will be
S-40
<PAGE>
amortized based on the life of the related debt. QFC is currently
negotiating the terms of the New Credit Facility with its bank group,
and the availability of borrowings thereunder is subject to QFC and
the banks entering into such new facility, and the interest rate on and
other terms of such borrowings, is subject to negotiation. Likewise the
interest rate on the Notes, as well as the amount of Notes that may be
issued, will be subject to market conditions at the time. Accordingly,
the interest rate on borrowings under the New Credit Facility and the
Notes will likely differ from the assumed interest rate which has been
used for the purposes of the Pro Forma Financial Statements (see
note (p) below), and the principal amount of the Notes issued also may
differ.
Using the net proceeds from the above described borrowings, management
intends to repay borrowings of $209.6 million, which it is anticipated
will be outstanding under the Current Credit Facility at Closing, as
reflected in the tables below.
Adjustments to cash:
Net proceeds from Common Stock Offering.................... $ 171,000
Net proceeds under New Credit Facility..................... 272,000
Net proceeds from Notes Offering........................... 121,500
Borrowings under Current Credit Facility................... 59,600
Repayment of borrowings under Current Credit Facility...... (209,600)
Hughes purchase price...................................... (358,834)
Cash portion of KUI purchase price......................... (35,349)
Repayment of KUI debt...................................... (24,283)
----------
Net adjustment to cash................................. $ (3,966)
----------
----------
Adjustments to the current portion of long-term debt:
Repayment of borrowings under Current Credit Facility...... $ (18,900)
Repayment of KUI debt...................................... (2,662)
----------
Net adjustment to current portion of long-term debt.... $ (21,562)
----------
----------
Adjustments to long-term debt:
Borrowings under New Credit Facility....................... $ 275,000
Borrowings from Notes Offering............................. 125,000
Borrrowings under Current Credit Facility.................. 59,600
Repayment of borrowings under Current Credit Facility...... (190,700)
Repayment of KUI debt...................................... (21,621)
----------
Net adjustment to long-term debt....................... $ 247,279
----------
----------
The actual type, amount and cost of financing are subject to market
conditions and may differ from the assumed financing structure reflected
herein.
(e) Gives effect to the issuance of 4,500,000 shares of QFC Common Stock in
the Common Stock Offering at an assumed public offering price of $40.00
per share, net of estimated issuance costs of $9.0 million, for net
proceeds of $171.0 million. 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 may differ, and
the price per share will likely differ, from the assumed amounts set
forth in this footnote.
(f) Gives effect to the issuance of 904,646 shares of QFC Common Stock at a
market value of $39.75 per share to KUI shareholders as partial
consideration for the KUI Acquisition.
S-41
<PAGE>
(g) Gives effect to the elimination of the Hughes and KUI shareholders'
equity, in the amounts shown below:
Hughes shareholders' equity................................ $ 160,771
KUI shareholders' equity................................... 4,951
---------
$ 165,722
---------
---------
(h) Gives effect to the elimination of Hughes and KUI historical LIFO
reserves, in the amounts shown below:
Elimination of Hughes historical LIFO reserves............. $ 17,068
Elimination of KUI historical LIFO reserves................ 6,798
---------
$ 23,866
---------
---------
(i) Gives effect to the estimated write-up to estimated fair value of Hughes
buildings, fixtures and equipment, in the amount of $20.0 million and
KUI land in the amount of $3.0 million, as of the dates of the
respective Acquisitions.
(j) Gives effect to the estimated write-up to estimated fair value of
Hughes and KUI leasehold interest as of the dates of the respective
Acquisitions, in the amounts shown below:
Estimated write-up of Hughes leasehold interest............ $ 55,000
Estimated write-up of KUI leasehold interest............... 20,000
---------
$ 75,000
---------
---------
(k) Gives effect to the excess of the estimated Hughes and KUI purchase
prices over the respective fair value of the net tangible assets
acquired as of the dates of the respective Acquisitions, in the amounts
shown below:
Estimated Hughes goodwill................................. $ 105,995
Estimated KUI goodwill.................................... 30,630
---------
$ 136,625
---------
---------
(l) Gives effect to the estimated write-up to estimated fair value of KUI's
investment in Associated Grocers as of the date of the KUI Acquisition,
in the amount of $5.9 million.
(m) Management intends to divest five of the recently acquired KUI stores.
The estimated value of such assets is $9.6 million and has been
reflected in the pro forma balance sheet as assets held for sale. The
pro forma statements of earnings give effect to the proposed
divestiture of these five stores as if it had occurred at the beginning
of the periods presented, and reflect the elimination of these stores
from results of operations for those periods. QFC has not entered into
any agreements to sell any of these stores, and the actual proceeds
from the divestiture of these stores will likely differ from the
assumed amount reflected herein.
(n) Gives effect to $2.5 million accrual of Hughes' 50% share of the
discounted present value of management's estimated exit costs expected
to be incurred for the closure of the existing Santee dairy plant at
such time as the new dairy is operational.
(o) Gives effect to the additional depreciation and amortization expense
resulting from the allocations of the purchase price for KUI and the
estimated purchase price of Hughes to the assets acquired, including an
increase in property, plant, and equipment, leasehold interest, and
S-42
<PAGE>
identifiable intangible assets to their estimated fair market values and
the recording of goodwill associated with the acquisitions. Goodwill is
amortized over 40 years.
(p) Reflects the adjustment to interest expense arising from (i) the
estimated borrowings described in note (d) above, assuming a weighted
average rate of approximately 7.34% per annum for borrowings under the
New Credit Facility and the Notes Offering, (ii) the corresponding
adjustments to the amortization of related deferred financing fees and
other fees, and (iii) the reduction in historic interest expense of QFC
and KUI, resulting from the refinancing of outstanding debt. A 0.125%
increase in the assumed weighted average interest rate would represent
additional interest expense of $500,000 for the year ended December 30,
1995, $375,000 for the 36 weeks ended September 7, 1996 and $500,000 for
the 52 weeks ended September 7, 1996. The actual interest rate on the
Notes and borrowings under the New Credit Facility, and the aggregate
principal amount of the Notes which may be issued, will depend upon
market conditions at the time and, in the case of the New Credit
Facility, is subject to negotiations with QFC's bank group, and the
actual interest rate on the Notes and the New Credit Facility will
likely differ, and the principal amount of the Notes may differ, from
the amounts assumed in these footnotes.
(q) Gives effect to the adjustment for federal and state income taxes at a
blended statutory rate of 38%, adjusted for non-deductible depreciation
and amortization, estimated to be approximately $7.3 million for the
year ended December 30, 1995, $5.5 million for the 36 weeks ended
September 7, 1996 and $7.3 million for the 52 weeks ended
September 7, 1996 and the impact of including QFC's historical operating
results within a unitary tax filing in the state of California.
(r) No effect has been given to eliminate the $1.4 million non-recurring
charge, which was incurred in connection with QFC's recapitalization
during the first quarter of 1995.
(s) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and if applicable,
equity in earnings/losses of unconsolidated subsidiaries, and
non-recurring and extraordinary items. EBITDA excludes union, pension
and benefit credits of $7.2 million for the year ended
December 30, 1995, $5.1 million for the 36 weeks ended September 7, 1996
and $7.7 million for the 52 weeks ended September 7, 1996. EBITDA is a
measure commonly used in the grocery industry and is presented to assist
in understanding the Company's pro forma operating results. EBITDA is
not intended to represent cash flow from operations as defined by GAAP
and should not be considered as an alternative to net earnings, as an
indicator of operating performance or an alternative to cash flow as a
measure of liquidity. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for
measuring the Company's ability to service debt.
(t) Earnings per share is based on the weighted average number of shares of
Common Stock outstanding during the period after consideration of the
dilutive effect, if any, of stock options granted. Pro forma (as
adjusted) earnings per share gives effect to the adjustments described
in footnotes (b) through (q) above.
S-43
<PAGE>
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
Board of Directors
Keith Uddenberg, Inc.
Gig Harbor, Washington
We have audited the accompanying balance sheets of Keith Uddenberg, Inc. (the
Company) as of December 31, 1994, and December 30, 1995, and the related
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Keith Uddenberg, Inc. as of December 31,
1994 and December 30, 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 10, 1997
(February 14, 1997, as to Notes 1, 3, 9 and 10)
<PAGE>
KEITH UDDENBERG, INC.
BALANCE SHEETS
DECEMBER 31, 1994, DECEMBER 30, 1995, AND SEPTEMBER 28, 1996 (unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, December 30, September 28,
ASSETS 1994 1995 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 2,797,933 $ 3,894,377 $ 1,865,284
Accounts receivable (no allowance
deemed necessary)
Trade 1,827,205 2,327,849 2,699,866
Affiliated supplier 645,083 645,083 2,490,554
Inventories (Note 2) 10,561,335 11,377,977 11,522,825
Federal income taxes receivable 220,500 191,896
Other current assets 198,314 252,516 280,500
------------ ------------ ------------
Total current assets 16,250,370 18,689,698 18,859,029
PROPERTY AND EQUIPMENT:
Land 2,363,853 2,415,183 2,415,183
Buildings and building improvements 6,005,392 5,954,062 6,025,329
Fixtures and equipment 37,863,851 41,841,882 44,146,096
Leasehold improvements 2,261,142 2,565,719 2,576,144
Vehicles 534,488 589,221 555,948
Construction in progress 1,046,752 3,716,903 4,017,066
------------ ------------ ------------
50,075,478 57,082,970 59,735,766
Less accumulated depreciation (24,656,404) (27,475,399) (29,530,799)
------------ ------------ ------------
25,419,074 29,607,571 30,204,967
Real estate and improvements - Nonstore
operations 1,283,555 1,040,445 1,036,370
Less accumulated depreciation (205,077) (165,126) (171,432)
------------ ------------ ------------
Total property and equipment, net 26,497,552 30,482,890 31,069,905
INVESTMENTS AND OTHER ASSETS:
Investment in affiliated supplier 3,523,392 4,212,385 5,170,385
Notes receivable 1,094,402 366,540 524,178
Assets under contract of sale to related party 183,279 183,279
Deferred income taxes 785,000 1,424,166 1,012,231
Other assets 318,340 358,300 358,300
------------ ------------ ------------
Total investments and other assets 5,721,134 6,544,670 7,248,373
------------ ------------ ------------
TOTAL $ 48,469,056 $ 55,717,258 $ 57,177,307
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, December 30, September 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1995 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable
Trade 5,706,505 5,728,923 6,341,419
Affiliated supplier 6,671,558 8,016,149 8,155,333
Accrued payroll and related benefits 1,618,301 1,838,312 2,149,259
Accrued business and sales taxes 877,009 999,159 1,198,002
Other accrued expenses 1,519,325 1,400,945 1,205,571
Deferred income taxes 18,949 101,000
Federal income taxes payable 239,763
Current portion of long-term debt
Other 3,601,080 3,913,352 2,332,581
Affiliated supplier 278,758 304,746 329,070
------------ ------------ ------------
Total current liabilities 20,272,536 22,220,535 22,051,998
DEFERRED INCOME 655,000 573,000
ACCRUED LEASE OBLIGATION 2,917,000 3,483,000 3,595,000
LONG-TERM DEBT, less current portion
Other 12,594,427 21,519,889 19,759,225
Affiliated supplier 5,684,494 2,233,365 3,861,311
------------ ------------ ------------
18,278,921 23,753,254 23,620,536
NOTE PAYABLE TO SHAREHOLDER 100,000
DIVIDENDS PAYABLE ON PREFERRED STOCK 1,487,958 2,381,875 3,328,319
COMMITMENTS AND CONTINGENCIES
(Notes 7, 9, and 10)
SHAREHOLDERS' EQUITY:
Cumulative preferred stock, Series A, no
par value - Authorized, 15,000 shares;
issued and outstanding, 11,542 shares 1,000 1,000 1,000
Common stock, no par value - Authorized,
50,000 shares; issued and outstanding,
12,830 shares 148,580 148,580 148,580
Retained earnings 5,263,061 3,074,014 3,858,874
------------ ------------ ------------
Total shareholders' equity 5,412,641 3,223,594 4,008,454
------------ ------------ ------------
TOTAL $ 48,469,056 $ 55,717,258 $ 57,177,307
============ ============ ============
</TABLE>
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, AND
DECEMBER 30, 1995, AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 (unaudited) AND SEPTEMBER 28, 1996 (unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, December 30, September 30, September 28,
1994 1995 1995 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES $ 292,669,924 $ 319,141,108 $ 237,098,371 $ 257,537,144
COST OF SALES AND RELATED
OCCUPANCY EXPENSES, net of patronage
dividend from affiliated supplier
of $2,903,170, $2,220,473,
$1,657,127, and $2,266,151 230,952,363 250,823,306 186,101,220 199,675,149
------------- ------------- ------------- -------------
Gross margin 61,717,561 68,317,802 50,997,151 57,861,995
OPERATING EXPENSES 62,201,707 70,440,769 52,059,596 54,539,291
------------- ------------- ------------- -------------
Operating margin (484,146) (2,122,967) (1,062,445) 3,322,704
OTHER INCOME (EXPENSE):
Nonstore operations 587,294 665,541 437,525 468,297
Gain on disposal of land and equipment, net 395,450 68,365 77,846 27,491
Gain on sale of investment in affiliated supplier 71,119 1,261,407 464,760
Interest expense, net of interest income of $107,458,
$79,268, $67,488, and $20,246 (1,209,384) (1,859,779) (1,395,792) (1,271,041)
Other 26,079 70,769 52,809 109,498
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (613,588) (1,916,664) (1,425,297) 2,656,949
INCOME TAX BENEFIT (EXPENSE) 273,500 674,061 475,302 (925,645)
------------- ------------- ------------- -------------
NET INCOME (LOSS) (340,088) (1,242,603) (949,995) 1,731,304
PREFERRED STOCK DIVIDENDS (946,444) (946,444) (946,444) (946,444)
------------- ------------- ------------- -------------
INCOME (LOSS) AVAILABLE FOR COMMON SHAREHOLDERS $ (1,286,532) $ (2,189,047) $ (1,896,439) $ 784,860
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (100.28) $ (170.62) $ (147.81) $ 61.17
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,830 12,830 12,830 12,830
</TABLE>
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, AND DECEMBER 30, 1995,
AND NINE MONTHS ENDED SEPTEMBER 28, 1996 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Cumulative
Preferred stock, Common stock,
Series A no par value
-------- ------------
Retained
Shares Amount Shares Amount earnings Total
------ ------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1994 11,542 $ 1,000 12,830 $ 148,580 $ 6,549,593 $ 6,699,173
Net loss (340,088) (340,088)
Preferred stock
dividends (946,444) (946,444)
------ ----------- ------ ----------- ----------- -----------
BALANCE,
December 31,
1994 11,542 1,000 12,830 148,580 5,263,061 5,412,641
Net loss (1,242,603) (1,242,603)
Preferred stock
dividends (946,444) (946,444)
------ ----------- ------ ----------- ----------- -----------
BALANCE,
December 30,
1995 11,542 1,000 12,830 148,580 3,074,014 3,223,594
Net income
(unaudited) 1,731,304 1,731,304
Preferred stock
dividends
(unaudited) (946,444) (946,444)
------ ----------- ------ ----------- ----------- -----------
BALANCE,
September 28,
1996 (unaudited) 11,542 $ 1,000 12,830 $ 148,580 $ 3,858,874 $ 4,008,454
====== =========== ====== =========== =========== ===========
</TABLE>
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, AND
DECEMBER 30, 1995, AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 (unaudited) AND SEPTEMBER 28, 1996 (unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, December 30, September 30, September 28,
1994 1995 1995 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (340,088) $ (1,242,603) $ (949,995) $ 1,731,304
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,820,084 3,326,599 2,542,547 2,148,917
Gain on sale of investment in affiliated supplier (71,119) (1,261,407) (464,760)
Gain on disposal of land and equipment, net (395,450) (68,365) (77,846) (27,491)
Noncash patronage dividends received from affiliated
supplier (735,823) (1,012,321) (1,012,321) (958,000)
Deferred income taxes (53,000) (612,217) (189,552) 493,986
Cash provided (used) by changes in operating assets and
liabilities:
Accounts receivable (830,009) (500,644) (1,376,374) (2,217,488)
Inventories (688,337) (816,642) (663,880) (144,848)
Income taxes receivable 31,500 28,604 17,198 191,896
Other current assets 120 (90,361) (333,195) 45,399
Other assets (33,432) (39,960) (30,006)
Accounts payable 817,227 1,367,009 2,448,350 751,680
Accrued liabilities 181,749 223,781 (292,377) 314,416
Income taxes payable 239,763
Deferred income 655,000 (82,000)
Accrued lease obligation 469,000 566,000 404,000 112,000
------------ ------------ ------------ ------------
Net cash provided by operating activities 2,172,422 522,473 21,789 2,599,534
INVESTING ACTIVITIES:
Capital expenditures, net (7,439,967) (7,426,851) (6,958,124) (2,708,441)
Proceeds from notes receivable 30,509 756,021 25,103 2,095
Issuance of notes receivable (233,116)
Proceeds from sale of investment in affiliated supplier 1,000,039 1,584,735 585,079
------------ ------------ ------------ ------------
Net cash used by investing activities (6,409,419) (5,086,095) (6,347,942) (2,939,462)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 25,384,318 45,153,571 36,033,032 15,831,134
Principal payments of long-term debt (21,490,929) (39,340,978) (29,294,321) (17,520,299)
Principal payments of note payable to shareholder (200,000) (100,000) (100,000)
Proceeds from issuance of note payable to shareholder 300,000
Payment of preferred stock dividends (20,000) (52,527)
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities 3,973,389 5,660,066 6,638,711 (1,689,165)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (263,608) 1,096,444 312,558 (2,029,093)
CASH:
Beginning of period 3,061,541 2,797,933 2,797,933 3,894,377
------------ ------------ ------------ ------------
End of period $ 2,797,933 $ 3,894,377 $ 3,110,491 $ 1,865,284
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 1,317,624 $ 1,928,445 $ 1,564,628 $ 1,484,592
Cash received for income tax refund 90,294 90,294
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING TRANSACTIONS:
Nonstore real estate exchanged for assets under
contract of sale to related party 183,279
</TABLE>
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, AND
DECEMBER 30, 1995, AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 (unaudited) AND SEPTEMBER 28, 1996 (unaudited)
================================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: Keith Uddenberg, Inc. (the Company) owns and operates retail
grocery stores, variety stores, a hardware store, a bowling alley, and
shopping centers. All operations are in the state of Washington.
Fiscal year end: The Company operates using a 52- or 53-week period ending
on the last Saturday in December. The year ended December 31, 1994,
reflects a 53-week period, while results of operations for the fiscal year
ended December 30, 1995, consists of a 52-week period. Results of
operations for the nine-month periods ended September 30, 1995, and
September 28, 1996, consist of 39-week periods.
Interim financial information: The interim financial information as of
September 28, 1996 and for the nine months ended September 30, 1995
and September 28, 1996 is unaudited, and was prepared by the Company in
a manner consistent with the audited financial statements and pursuant
to the rules and requirements of the Securities and Exchange
Commission. This unaudited interim financial information, in
management's opinion, reflects all adjustments which are of a normal
recurring nature and which are necessary to present fairly the results
of the periods presented. The results of operations for the nine-month
period ended September 28, 1996, are not necessarily indicative of the
results to be expected for the entire year.
Inventories: Inventories are stated at the lower of cost, as determined by
the last-in, first-out method, or market.
Property and equipment: Property and equipment are stated at cost and are
depreciated over the estimated useful lives of the assets. Depreciation of
purchased assets is computed using straight-line and accelerated methods.
Applicable useful lives are as follows:
Buildings and building improvements 25 - 40 years
Fixtures and equipment 5 - 10 years
Leasehold improvements 10 - 30 years
Vehicles 3 - 5 years
In 1995, the Company changed its method of depreciation for certain newly
acquired equipment from an accelerated to straight-line method as it
believes the straight-line method will more accurately reflect the timing
of economic benefits received from such assets. The effect of this change
results in a $482,000 reduction in 1995 depreciation expense and $318,000
increase in net income after taxes from what such amounts would have been
had the former method been applied to newly acquired assets.
In 1995, the Company revised the estimated useful life applicable to
certain equipment placed in service in 1994 from seven years to ten years
as it believes the longer period more closely approximates service lives.
The effect of this change results in a $397,000 reduction in 1995
depreciation expense and $262,000 increase in net income after taxes.
<PAGE>
Construction in progress includes costs associated with acquiring land,
buildings, fixtures, and equipment while a store is under construction.
When a store opens, all costs are then transferred to the appropriate
property account. Capitalized interest related to the development of
certain properties totalled $8,000 and $219,000 during the years ended
December 31, 1994 and December 30, 1995, respectively. The carrying value
of property and equipment is reviewed on a regular basis.
Preopening costs: Costs incurred in connection with the start-up and
promotion of new store openings and major store remodels are expensed as
incurred.
Income taxes: The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are recorded
for the temporary differences between the financial reporting bases and
tax bases of the Company's assets and liabilities. These deferred taxes
are measured by the provisions of currently enacted tax laws. Management
believes that it is more likely than not that the Company will generate
sufficient taxable income to allow the realization of the deferred tax
asset.
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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Financial instruments fair value: The carrying value of cash and notes
receivable reflected in the balance sheet at December 31, 1994 and
December 30, 1995, reasonably approximates the fair value of these
financial instruments.
The investment in affiliated supplier is stated at cost. At December 31,
1994, and December 30, 1995, the fair value of the investment in
affiliated supplier, as determined by the net book value of the affiliated
supplier, was approximately $10,535,134 and $10,376,000, respectively.
Redemption of these investment shares is restricted by the bylaws of
the affiliated supplier and is not to exceed 5% of its outstanding capital
shares (10% with Board approval) on an annual basis. Requests for
redemptions exceeding this amount would be granted on a pro rate basis.
Fair value of long-term obligations, based on current interest rates,
approximates historical cost at December 31, 1994 and December 30, 1995,
due to the frequent repricing of the instruments.
Earnings (loss) per share: Earnings (loss) per share of common stock is
based upon the weighted average number of common stock outstanding during
the periods. There were no common stock equivalents outstanding during the
periods.
Reclassifications: Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform with the 1996 presentation.
NOTE 2: INVENTORIES
Inventories are valued utilizing the last-in, first-out (LIFO) method. The LIFO
method results in a better matching of costs and revenues by recognizing current
merchandise costs in cost of sales instead of in ending inventories, which is
the practice under the first-in, first-out (FIFO) method. Information related to
the FIFO method may be useful in comparing operating results to those companies
not on LIFO. On a supplemental basis, had inventories been accounted for using
the FIFO valuation method, inventories and shareholders' equity on a pretax
basis would have increased by $6,510,000 and $6,648,000 as of December 31, 1994,
and December 30, 1995, and earnings on a pretax basis for the years then ended
would have increased by $109,000 and $138,000, respectively.
<PAGE>
NOTE 3: BORROWING ARRANGEMENTS
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, December 30, September 28,
1994 1995 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Long-term debt refinanced subsequent to
period end 11,976,725 $ -- $ 1,881,134
Note payable at $58,198 per month, including
interest at financial institution's option
rate (7.1% at September 28, 1996), matures
through October 1, 2001 9,500,000 9,500,000
Note payable at $74,721 per month, including
interest at financial institution's option
rate (7.03% at September 28, 1996), matures
October 2000 3,615,699 3,125,321
Note payable at $37,233 per month, including
interest at financial institution's option
rate (7.03% at September 28, 1996), matures
May 2005 2,986,560 2,806,463
Note payable at $52,132 per month, including
interest at financial institution's option
rate (6.92% at September 28, 1996), matures
June 2000 2,956,302 2,557,935 2,222,469
Note payable to affiliated supplier at $34,137
per month, including interest at financial
institution's option rate (8.25% at
September 28, 1996), matures August 2000 2,526,359 2,322,659 2,154,822
Revolving line of credit due August 1, 1996
(7.38% at December 30, 1995) 2,000,000
Note payable at $8,202 per month, interest
only at financial institution's option rate
(7.03% at September 28, 1996), matures
August 1997 1,400,000 1,400,000
Revolving line of credit due September 30,
1997 (7.13% at September 28, 1996) 1,700,000 1,250,000 1,200,000
Note payable at $9,869 per month, including
interest at financial institution's option
rate (9.25% at September 28, 1996), matures
March 1999 813,226 773,969 739,164
---------- ---------- ----------
Balance, carried forward 19,972,612 26,406,822 25,029,373
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, December 30, September 28,
1994 1995 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Balance, brought forward $19,972,612 $26,406,822 $25,029,373
Note payable at $7,000 per month, including
interest at 9%, matures October 2008 637,090 616,679
Note payable at $5,000 per month, including
interest at 9%, matures September 2006 410,835 393,164
Note payable at $87,563 per month, including
Interest at financial institution's option
rate (8.5% at December 30, 1995), matures
July 1996 1,231,167 197,167
Note payable to affiliated supplier at $7,979
per month, including interest at 7.75% matures
June 1998 290,510 215,452 154,452
Other notes payable, maturing through 2005 664,470 103,986 88,546
----------- ----------- -----------
22,158,759 27,971,352 26,282,187
Less Current Portion
Other (3,601,080) (3,913,352) (2,332,581)
Affiliated supplier (278,758) (304,746) (329,070)
----------- ----------- -----------
$18,278,921 $23,753,254 $23,620,536
=========== =========== ===========
</TABLE>
The Company has available a line of credit of $3,000,000 with a financial
institution available through September 30, 1997, of which $1,700,000 and
$1,250,000 was outstanding at December 31, 1994, and December 30, 1995,
respectively, and included in long-term debt based on the terms of the financing
agreement. Interest on advances under the line of credit is calculated at the
financial institution's prime rate or LIBOR plus 1.375%. The line of credit is
personally guaranteed by the Company's president.
The Company had available a revolving line of credit of $2,000,000 with a
financial institution available through August 1, 1996, of which $2,000,000
was outstanding at December 30, 1995. Subsequent to year end $500,000 of the
outstanding amount was refinanced and is included in long-term debt based on
the terms of the financing agreement. Amounts outstanding under the revolving
line of credit bear interest at the financial institution's prime rate or
option rate plus 1.375%. The revolving line of credit is personally
guaranteed by the Company's president.
At December 30, 1995, inventory, land, buildings, and equipment with a net
depreciated cost of approximately $22,947,000 have been pledged as collateral on
the above notes payable. In addition, certain of the above notes have been
personally guaranteed by the Company's president.
There are certain restrictive debt covenant requirements contained within the
loan agreements, including maintenance of certain financial ratios and minimum
tangible net worth. As of December 30, 1995, the Company was in compliance with
all debt covenants except the debt to cash flow covenant, for which a waiver was
obtained.
In November 1996, the Company entered into an agreement with a financial
institution which enables the Company to borrow up to $4,000,000 on a revolving
line of credit that bears variable interest at the financial institution's prime
rate or fixed interest at LIBOR plus 1.50%. The revolving line of credit is
available through November 18, 1997, at which time it converts to a term note
that matures November 18, 2003. Subsequent to September 28, 1996, the Company
utilized the revolving line of credit to refinance $1,881,134 of short-term
debt to affiliated supplier.
<PAGE>
Maturities of long-term debt at December 30, 1995, are as follows:
Year ending
1996 $ 4,218,098
1997 6,579,332
1998 3,544,477
1999 4,511,991
2000 4,681,863
Thereafter 4,435,591
-----------
$27,971,352
===========
NOTE 4: PREFERRED STOCK
Holders of the Company's preferred stock are entitled to receive semiannual
dividends in the amount of $41 per share which are cumulative. Upon liquidation
of the Company, the holders of preferred shares are entitled to receive $1,000
per share plus all accrued and unpaid dividends.
Preferred stock dividends payable totalling $1,530,230 at December 30, 1995, are
subject to a subordination agreement with the Company's lenders for purposes of
determining compliance with a minimum tangible net worth debt covenant.
NOTE 5: INCOME TAXES
A reconciliation of the federal statutory tax rate to the Company's effective
income tax rate for the fiscal years ended December 31, 1994, and December 30,
1995, is as follows:
1994 1995
---- ----
Statutory rate 34 % 34 %
Tax credits 16 2
Other, net (5) (1)
-- --
Effective rate 45 % 35 %
== ==
The income tax benefit for the fiscal years ended December 31, 1994, and
December 30, 1995, consists of the following:
1994 1995
---- ----
Current $220,500 $ 61,844
Deferred 53,000 612,217
-------- --------
$273,500 $674,061
======== ========
<PAGE>
The components of the benefit for deferred income taxes at December 31, 1994,
and December 30, 1995, are:
1994 1995
---- ----
Tax credits $ 98,789 $ 181,294
Patronage dividend receivable (90,317)
Depreciation (88,412) (217,802)
Accrued lease obligation 159,460 219,640
Deferred gain on property sale 134,545
Deferred income (26,520) 294,540
-------- ---------
$ 53,000 $ 612,217
======== =========
At December 30, 1995, deferred income taxes consisted of the following:
Current:
Accrued compensation $ 69,379
Patronage dividend receivable (219,328)
Deferred income 131,000
----------
$ (18,949)
==========
Noncurrent:
Accrued lease obligation $1,184,220
Depreciation (397,382)
Tax credits 280,083
Deferred gain on property sale 134,545
Deferred income 222,700
----------
$1,424,166
==========
At December 30, 1995, the Company has targeted jobs tax credits, totalling
$257,717, expiring through 2005 and alternative minimum tax credits, totalling
$22,366, that are available to offset future tax liabilities.
NOTE 6: RETIREMENT PLANS
The Company participates in a union administered multi-employer defined benefit
pension plan for employees covered by collective bargaining agreements. The
Company's expense for contributions under this plan in 1994 and 1995
approximated $1,188,000 and $1,375,000, respectively.
The Company also maintains a defined contribution profit sharing plan which
includes employees not covered by collective bargaining agreements who meet
certain service requirements. Contributions are made annually at the discretion
of the Board of Directors. No contribution was made for 1994 or 1995.
NOTE 7: LEASING ARRANGEMENTS
The Company leases most of its store facilities under noncancellable operating
leases expiring through 2020. Total rent expense was $5,644,916 and $6,995,767,
respectively, during the years ended December 31, 1994, and December 30, 1995,
including contingent rentals of $152,293 and $79,233, respectively, based on
sales volume. Many of the leases contain renewal provisions at the Company's
option. Certain leases provide for increasing rents which are accounted for on a
straight-line basis over the lease term with the difference reported
<PAGE>
as an accrued lease obligation. Minimum rental commitments under noncancellable
operating lease agreements as of December 30, 1995, are as follows:
Year ending
-----------
1996 $ 6,655,636
1997 7,298,056
1998 7,133,204
1999 7,154,144
2000 7,145,746
Thereafter 81,796,346
------------
$117,183,132
============
The Company is the lessor of certain property under operating lease
arrangements. A majority of these properties are leased to related parties.
Total rental income from these leases was approximately $302,000 and $540,000,
during the years ended December 31, 1994, and December 30, 1995, respectively.
Most of these leases contain renewal options. Minimum rental income from
operating lease commitments under noncancellable lease agreements as of December
30, 1995, are as follows:
Year ending
-----------
1996 $ 420,972
1997 365,826
1998 298,792
1999 221,770
2000 100,103
Thereafter 518,000
----------
$1,925,463
==========
NOTE 8: RELATED PARTY TRANSACTIONS
During both 1994 and 1995, the Company incurred expenses totalling $93,000 for
rental of facilities from entities in which the Company's president is a
principal owner.
At December 30, 1995, other current assets include a $125,000 receivable from
the Company's president.
In 1995, the Company agreed to sell certain properties to the Company's
president. The sales price for the properties totalled $580,000, of which
$1,000 was received in cash and $579,000 represents a note receivable from
the president that bears interest at 6.4%, matures in December 2010, and
requires annual payments of principal and interest totalling $43,697. Due to
the small amount of downpayment received, the Company has deferred
recognition of the $395,721 difference between the selling price and the
carrying value on the sale and will account for the sale as proceeds are
received. The book value of property sold, less cash proceeds received, is
recorded as assets under contract of sale to related party at December 30,
1995.
The Company is a shareholder in, and the Company's president is a director of
the Company's principal supplier of inventories (the affiliated supplier).
The affiliated supplier also provides a variety of financial and marketing
services. Included in transactions with the affiliated supplier for the
fiscal years 1994 and 1995 were inventory purchases of approximately
$181,706,900 and $178,213,000 and rent expense under operating leases of
$3,428,349 and $3,692,185, respectively.
<PAGE>
A substantial portion of the earnings of the affiliated supplier are
distributed annually to its shareholders as patronage dividends, in the form
of cash or additional stock of the affiliated supplier. Such dividends are
based on gross purchases and are subject to specified limits. During the
fiscal years 1994 and 1995, patronage dividends totalling $2,903,170 and
$2,220,473, respectively, includes a patronage dividend receivable of
$645,083 which is included in accounts receivable and based on gross
purchases during the fourth quarter of 1994 and 1995.
At December 31, 1994, and December 30, 1995, notes payable includes
$5,963,252 and $2,538,111, respectively, representing financing provided by
the affiliated supplier and a wholly owned subsidiary of the affiliated
supplier.
NOTE 9: PURCHASE COMMITMENTS
In 1995, the Company entered into an exclusive purchase agreement with a
vendor under which it has agreed to purchase all of its requirements for a
certain product line. The Company initially committed to purchase a minimum
of $5,000,000 of this product over an estimated five-year period in exchange
for approximately $1,925,000 of cash and free goods to be received from the
vendor. The benefit of cash and free goods received is recognized as a
reduction of cost of goods sold on a percentage-of-completion basis as the
purchase commitment is fulfilled. At September 28, 1996, approximately
$3,800,000 of the initial purchase commitment remains. Cash and free goods
received in advance of amounts earned are included in current other accrued
expenses or long-term deferred income and totaled $174,000, $1,040,000, and
$716,000, (unaudited) at December 31, 1994, December 30, 1995, and September
28, 1996, respectively.
NOTE 10: SUBSEQUENT EVENTS
On February 14, 1997, the Company and Quality Food Centers, Inc.(QFC)
completed their previously announced merger for a total purchase price of
approximately $71,000,000 in cash and QFC common stock, subject to final
adjustments.
The Internal Revenue Service is currently examining the Company's federal income
tax return for 1994. While no formal adjustments have been proposed, the Company
believes that any such adjustments would not have a material impact on the
financial statements.
<PAGE>
Exhibit 99.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in Registration Statements Nos. 33-32878, 33-84202, 33-38736,
33-69514, and 333-19913 of Quality Food Centers, Inc. on Form S-8 and
Registration Statement No. 333-18567 of Quality Food Centers, Inc. on Form
S-3 of our report for Hughes Markets, Inc. and subsidiaries dated May 10,
1996, appearing in the Current Report on Form 8-K/A of Quality Food Centers,
Inc. and to all references to our firm included in Registration Statement No.
333-18567 on Form S-3.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
February 18, 1997
<PAGE>
Exhibit 99.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos. 33-
32878, 33-84202, 33-38736, 333-19913 and 33-69514 of Quality Food Centers, Inc.
on Form S-8 and Registration Statement No. 333-18567 of Quality Food Centers,
Inc. on Form S-3 of our report dated February 10, 1997, (February 14, 1997 as to
Notes 1, 3, 9 and 10) relating to the financial statements of Keith Uddenberg,
Inc. appearing in the Current Report on Form 8-K/A of Quality Food Centers,
Inc., dated February 18, 1997, and to the reference to us under the heading
"Experts" in the Prospectus Supplement, which is part of Registration Statement
No. 333-18567 on Form S-3.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 18, 1997
<PAGE>
EXHIBIT 99.6
INVESTORS RIGHTS AGREEMENT
This Investors Rights Agreement is made as of February 14, 1997, by and
among Quality Food Centers, Inc., a Washington corporation (the "Company"), and
the persons that are signatories hereto (the "Investors").
RECITALS
A. Simultaneously herewith, the Company is acquiring Keith Uddenberg,
Inc. by merger (the "Merger") pursuant to an Agreement and Plan of Merger dated
as of December 18, 1996 (the "Merger Agreement").
B. Pursuant to the Merger Agreement, the Company is issuing to the
Investors on the date hereof certain shares (the "Shares") of its common stock,
par value $.001 per share ("QFC Common Stock").
C. It is a condition precedent to the obligations of Keith Uddenberg,
Inc. to consummate the transactions contemplated by the Merger Agreement that
the parties enter into this Agreement.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission.
"HOLDER" shall mean any holder of Registrable Securities and any
person holding such securities to whom the rights under this Agreement have been
transferred in accordance with Section 2.9 hereof.
"INITIATING HOLDERS" shall mean any Holder or Holders who in the
aggregate hold at least 50% of the Registrable Securities first issued in
connection with the Merger.
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"REGISTRABLE SECURITIES" means (i) the Shares and (ii) any QFC Common
Stock or other securities of the Company issued or issuable with respect to or
in exchange for or in replacement of the Shares upon any stock split, stock
dividend, recapitalization, or similar event; provided, however, that those
securities subject to that certain Pledge Agreement dated as of February 14,
1997, for the benefit of the Company, which securities constitute Collateral (as
therein defined), shall be excluded from the definition of Registrable
Securities until such time as the Collateral shall revert to the Grantor (as
therein defined) pursuant to the terms thereof; provided further, however, that
the Shares or other securities shall only be treated as Registrable Securities
for the purposes of Section 2 hereof if and so long as they have not been sold
pursuant to Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, or otherwise to or through a
broker or dealer or underwriter in a public distribution or a public securities
transaction.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, except as otherwise
stated below, incurred by the Company in complying with Section 2 hereof,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration. For purposes of this
Agreement, the term "Registration Expenses" shall also include the fees and
disbursements of one special counsel for the Holders.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the selling Holders, fees and disbursements of counsel for any of the selling
Holders other than as set forth in the definition of Registration Expenses
above, and any other expenses that are not Registration Expenses and that are
incurred by the selling Holders.
2. REGISTRATION RIGHTS
2.1 COMPANY REGISTRATION
(a) NOTICE OF REGISTRATION. If at any time or from time to time, the
Company shall determine to register any of its equity securities, either for its
own account or the account of a security holder or holders, other than (i) a
registration relating to employee benefit plans, or (ii) a registration relating
to a Commission Rule 145 transaction, the Company will:
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(i) promptly give to each Holder written notice thereof; and
(ii) subject to Sections 2.1(b) and 2.4 hereof, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 20 days after
receipt of such written notice from the Company, by any Holder.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.1(a) hereof. In such event the right of any Holder to
registration pursuant to this Section 2.1 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 2.1, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities and other securities to be distributed through such
underwriting, with shares to be offered by the Company having priority over
shares to be offered by Holders of Registrable Securities. The Company shall so
advise all Holders distributing their securities through such underwriting of
such limitation, and the number of shares of Registrable Securities, if any,
that may be included in the registration (and underwriting if any) shall be
allocated among all Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities requested by such Holders to be
included in such Registration Statement. To facilitate the allocation of shares
in accordance with the above provisions, the Company may round the number of
shares allocated to any Holder to the nearest 100 shares.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.1 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.3 hereof.
2.2 DEMAND REGISTRATION
(a) If, at any time not earlier than sixty days prior to the second
anniversary of the closing date of the Merger, an Initiating Holder or
Initiating Holders request that the Company file a registration statement on
Form S-3 for a public offering of Registrable Securities, the Company shall,
subject to Section 2.4 hereof, cause such Registrable Securities to be so
registered for the offering and cause such Registrable Securities to be
qualified in such
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jurisdictions as the Initiating Holder or Holders may reasonably request. The
Company shall use its best efforts to cause such shelf registration to be
maintained effective for at least 90 days.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 2.2: (i) for more than two
registrations; (ii) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act; (iii) during the period starting with the date 60 days prior to the
Company's estimated date of filing of, and ending on the date 120 days
immediately following, the effective date of any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan), provided
that the Company is actively employing in good faith all reasonable efforts to
cause such registration statement be become effective, or (iv) if the Company
shall furnish to such Holders a certificate signed by the President of the
Company stating that the Company has reasonably determined that it should
postpone for a specified period of time not to exceed 180 days (a "Blackout
Period") any action pursuant to this Section 2.2, including, without limitation,
the preparation and/or filing of a registration statement or prospectus or any
amendments or supplements to any registration statement or prospectus. Upon
delivery of such a certificate to the Holders by the Company, each of the
Holders covenants that he, she or it shall (X) keep the fact of the notice
strictly confidential, (Y) promptly halt any offer, sale, trading or transfer by
him, her or it and his, her or it affiliates of any QFC Common Stock for the
duration of the Blackout Period set forth in the certificate or until the
Blackout Period is earlier terminated by the Company and (Z) promptly halt any
use or distribution of the registration statement and prospectus by him, her or
its and his, her or its affiliates for the duration of the Blackout Period or
until such Blackout Period is earlier terminated by the Company. The Company
shall not be entitled to deliver a certificate and impose a Blackout Period more
than once in any twelve month period.
(c) The registration statement filed at the request of Holders
pursuant to this Section 2.2 may include other securities of the Company, with
respect to which registration rights have been granted, and may include
securities of the Company being sold for the account of the Company.
(d) If the registration pursuant to this Section 2.2 is for an
underwritten offering, the provisions of Section 2.1(b) shall apply to such
registration.
2.3 EXPENSES OF REGISTRATION
All Registration Expenses incurred in connection with registrations
pursuant to Sections 2.1 and 2.2 shall be borne by the Company. All Selling
Expenses relating to securities registered on behalf of the Holders shall be
borne by the Holders of securities included in such registration pro rata,
severally and not jointly, among each other on the basis of the number of shares
so registered.
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2.4 CONTINUITY OF INTEREST
Notwithstanding anything to the contrary stated herein, no Holder may
dispose of any of the Registrable Securities within two years following the
closing date of the Merger, unless the Holder (at such Holder's expense)
delivers to the Company an opinion of legal counsel reasonably satisfactory to
the Company that such transfer will not violate the continuity of shareholder
interest requirement set forth in Treasury Regulation Section 1.368-1. Any
Holder desiring to dispose of any Registrable Securities pursuant to Section 2
hereof or otherwise shall provide written notice to the Company, not less than
30 days prior to the intended date of disposition, specifying the number of
Registrable Securities which such Holder proposes to dispose.
2.5 REGISTRATION PROCEDURES
In the case of each registration effected by the Company pursuant to this
Section 2, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense the Company will:
(a) Prepare and file with the Commission a registration statement on
Form S-3 with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least 90 days or,
if earlier, until the distribution described in the registration statement has
been completed;
(b) Prepare and file with the Commission during the period specified
in Section 2.5(a) such amendments and supplements to such registration statement
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement; and
(c) Furnish to the Holders participating in such registration and to
any underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as the Holders and such underwriters may reasonably
request in order to facilitate the public offering of such securities.
2.6 INDEMNIFICATION
(a) The Company will indemnify each Holder and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration has been effected pursuant to this Section 2,
and each underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
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including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of the Securities Act or any other applicable
federal and state securities laws or any rules or regulations promulgated
thereunder in connection with any such registration, qualification or
compliance, and the Company will reimburse each such Holder, each of its
officers, directors, partners, and legal counsel and each person controlling
such Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder, controlling person or
underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other Holder, each of its officers and directors, and each person controlling
such Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such Holders,
and such directors, officers, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and stated to be specifically for use therein. Notwithstanding the foregoing,
the liability of each Holder under this subsection (b) shall be limited to the
proportion of any such loss, claim, damage, liability or expense which is equal
to the proportion that the public offering price of the shares sold by such
Holder under such registration statement bears to the total public offering
price of all securities sold thereunder, but not to exceed the gross proceeds
received by such Holder from the sale of Registrable Securities covered by such
registration statement.
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(c) Each party entitled to indemnification under this Section 2.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 2 unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate and different defenses but shall bear the expense of such defense
nevertheless. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Notwithstanding the other provisions of
this Agreement, no Indemnifying Party shall be obligated to indemnify any
Indemnified Party for amounts paid by the Indemnified Party in settlement of any
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Indemnifying Party (which consent has not been unreasonably
withheld).
(d) If the indemnification provided for in paragraphs (a) through (c)
of this Section 2.6 is unavailable or insufficient to hold harmless an
Indemnified Party under such paragraphs in respect of any losses, claims,
damages, liabilities, expenses or actions in respect thereof referred to
therein, then each Indemnifying Party shall in lieu of indemnifying such
Indemnified Party contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages, liabilities or actions in
such proportion as appropriate to reflect the relative fault of the Company, on
the one hand, and the underwriters and the Holder of such Registrable
Securities, on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities, expenses or actions in
respect thereof as well as any other relevant equitable considerations,
including the failure to give any notice under paragraph (c). The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact relates to information
supplied by the Company, on the one hand, or the underwriters or the Holders of
such Registrable Securities, on the other, and to the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and each of the Holders agrees that it would
not be just and equitable if contributions pursuant to this paragraph were
determined by pro rata allocation (even if all of the Holders of such
Registrable Securities
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were treated as one entity for such purpose) or by any other method of
allocation which did not take account of the equitable considerations referred
to above in this paragraph. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, liabilities or action in respect
thereof, referred to above in this paragraph, shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph, no Holder shall be required to
contribute any amount in excess of the lesser of (i) the proportion that the
public offering price of shares sold by such Holder under such registration
statement bears to the total public offering price of all securities sold
thereunder, but not to exceed the gross proceeds received by such Holder for the
sale of Registrable Securities covered by such registration statement and
(ii) the amount of any damages which they would have otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission. No person
guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of
the Securities Act), shall be entitled to contribution from any person who is
not guilty of such fraudulent misrepresentation.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement (if
any) entered into in connection with an underwritten public offering of the
Registrable Securities are in conflict with the foregoing provisions, the
provisions in such underwriting agreement shall control.
2.7 INFORMATION BY HOLDER
The Holder or Holders of Registrable Securities included in any
registration shall furnish to the Company such information regarding such Holder
or Holders, the Registrable Securities held by them and the distribution
proposed by such Holder or Holders as the Company may reasonably request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 2.
2.8 RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) At all times make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Exchange Act of 1934, as
amended;
(c) So long as a Holder owns any Registrable Securities, furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the
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reporting requirements of said Rule 144, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
2.9 TRANSFER OF REGISTRATION RIGHTS
The rights to cause the Company to register securities granted Holders
under this Section 2 may only be assigned to the estate of a Holder, provided
that such transfer may otherwise be effected in accordance with applicable
securities laws and written notice of the transfer is given to the Company at
the time of or within a reasonable time after such transfer, stating the, name
and address of the transferee and identifying the Registrable Securities with
respect to which such registration rights are being transferred, and provided,
further, that the transferee of such rights agrees in writing to be bound by the
terms of this Agreement as if such transferee were a party hereto.
2.10 STANDOFF AGREEMENT
As long as the Holders own more than one percent of the outstanding shares
of QFC Common Stock, each Holder agrees, in connection with registered public
offerings of the Company's securities, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of or otherwise dispose of any Registrable
Securities (other than those included in the registration) without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed 180 days) from the effective date of such
registration as may be requested by the underwriters, provided, that the
officers and directors of the Company who beneficially own more than one percent
(1%) of the equity securities of the Company also agree to such restrictions.
2.11 TERMINATION OF REGISTRATION RIGHTS
The rights granted under this Section 2 shall terminate on the earlier of
the third anniversary of the date of this Agreement or such time as all shares
of Registrable Securities held by the Holders may be sold under Rule 144 during
any 90-day period.
2.12 DELAY OF REGISTRATION
No Holder or Holders shall have any right to take any action to restrain,
enjoin, or otherwise delay any registration as a result of any controversy that
might arise with respect to the interpretation or implementation of this Section
2.
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3. CERTAIN SECURITIES MATTERS
(a) Each Investor acknowledges that the shares of QFC Common Stock to be
received pursuant to the Merger Agreement have not been registered under the
Securities Act and have not been registered or qualified under the securities
laws of any state of the United States, and that such shares must be held
indefinitely unless subsequently registered under the Securities Act and the
applicable state securities laws or unless an exemption from such registration
is available.
(b) Each Investor acknowledges and agrees that the certificates
representing such shares will bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR
INDIRECTLY, NOR MAY THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE
CORPORATION, WITHOUT REGISTRATION OF SUCH SECURITIES UNDER ALL
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR COMPLIANCE WITH AN
APPLICABLE EXEMPTION THEREFROM, SUCH COMPLIANCE, AT THE OPTION OF THE
CORPORATION, TO BE EVIDENCED BY AN OPINION OF SHAREHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR
ASSIGNMENT."
(c) Each Investor represents and warrants to the Company that: (i) such
Investor is acquiring such shares for investment for his, her or its own
account, not as a nominee or agent for or for the account of any other person,
and not with the view to, or for resale in connection with, any distribution
thereof; (ii) such Investor has sufficient experience in evaluating and
investing in private transactions of securities in companies similar to the
Company so that such Investor is capable of evaluating the merits and risks of
its investment in the Company and has the capacity to protect his, her or its
own interests and (iii) such Investor has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and has also had an opportunity to ask questions of the Company's
officers.
4. MISCELLANEOUS
4.1 WAIVERS AND AMENDMENTS
With the written consent of the Company and Holders of a majority of
Registrable Securities outstanding, the obligations of the Company and the
rights of the Holders of Registrable Securities under this Agreement may be
waived (either generally or in a particular
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instance, and either for a specified period of time or indefinitely), and with
the same consent the Company, when authorized by resolution of its Board of
Directors, may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement. Neither this Agreement nor any provisions hereof may be
changed, waived, discharged or terminated orally, but only by a signed statement
in writing.
4.2 GOVERNING LAW
This Agreement shall be governed in all respects by the laws of the State
of Washington as such laws are applied to agreements between Washington
residents entered into and to be performed entirely within Washington.
4.3 SUCCESSORS AND ASSIGNS
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors, assigns, heirs,
executors and administrators of the parties hereto.
4.4 ENTIRE AGREEMENT
This Agreement constitutes the full and entire understanding and agreement
between the parties with regard to the subject hereof.
4.5 NOTICES
All notices and other communications required or permitted hereunder shall
be effective upon receipt and shall be in writing and may be delivered in
person, by telecopy, electronic mail, overnight delivery service or U.S. mail,
in which event it may be mailed by first class, postage prepaid, addressed
(a) if to a Holder, c/o A. Keith Uddenberg, KKLD, Inc., Gig Harbor, WA 98335,
or at such other address as the Holder shall have furnished to the Company, or
(b) if to the Company, at 10112 N.E. 10th Street, Bellevue, WA 98004,
Attention: President, or at such other address as shall have furnished to the
Holders in writing.
4.6 TITLES AND SUBTITLES
The titles of the paragraphs and subparagraphs of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
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<PAGE>
4.7 LITIGATION; PREVAILING PARTY
In the event of any litigation between the Company and the Investors with
regard to this Agreement, the prevailing party shall be entitled to
reimbursement from the nonprevailing party for all reasonable fees and expenses
of counsel for the prevailing party.
4.8 NOMINEES
Securities registered in the name of a nominee for a Holder shall, for
purposes of this Agreement, be treated as being owned by such Holder.
4.9 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the foregoing Investors Rights Agreement is hereby
executed as of the date first above written.
QUALITY FOOD CENTERS, INC.
By: /s/ Christopher A. Sinclair
-----------------------------
Title: President, CEO
------------------------
/s/ A. Keith Uddenberg
----------------------------------
A. KEITH UDDENBERG
/s/ Eugenia M. Uddenberg
----------------------------------
EUGENIA M. UDDENBERG
/s/ Lori Dee Schacht
----------------------------------
LORI DEE SCHACHT, as trustee of the
Anna Mae Schacht Trust
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<PAGE>
/s/ Lori Dee Schacht
----------------------------------
LORI DEE SCHACHT, as trustee of the
Lori Dee Schacht Trust
/s/ Ray Graves
----------------------------------
RAY GRAVES, as trustee of the
Lori Dee Schacht Trust
/s/ Greg Dewar
----------------------------------
GREG DEWAR, as trustee of the
Richard Keith Uddenberg Trust
/s/ Richard Keith Uddenberg
----------------------------------
RICHARD KEITH UDDENBERG, as trustee
of the Richard Keith Uddenberg Trust
/s/ Lori Dee Schacht
----------------------------------
LORI DEE SCHACHT, as trustee of the
Richard Keith Uddenberg Trust
/s/ Debbie Louise Little
----------------------------------
DEBBIE LOUISE LITTLE, as trustee of
the Debbie Louise Little Trust
/s/ Lori Dee Schacht
----------------------------------
LORI DEE SCHACHT, as trustee of the
Debbie Louise Little Trust
/s/ Ray Graves
----------------------------------
RAY GRAVES, as trustee of the
Debbie Louise Little Trust
-13-
<PAGE>
SPOUSAL CONSENT
The undersigned is the wife of Mark R. Schacht, one of the Investors
named above. The undersigned confirms that all actions taken by her husband in
connection with the above are taken for the benefit of their marital community
and are binding upon and effective against their marital community.
Nothing contained herein will be deemed to impose individual liability
on the undersigned or to subject the separate property (except to the extent
such separate property was community property as of the date hereof) owned by
the undersigned from time to time to the liability created under any agreement.
Lori Dee Schacht
----------------------------------
LORI DEE SCHACHT
<PAGE>
EXHIBIT 99.7
EMPLOYMENT AGREEMENT
Agreement (this "Agreement") made as of September 1, 1996 by and between
QUALITY FOOD CENTERS, INC., a Washington corporation (the "Company"), and Marc
Evanger ("Executive").
R E C I T A L S:
1. The Company desires to employ Executive to further the business
purposes of the Company; and
2. Executive desires to be employed by the Company on the terms provided
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as its Chief
Operating Officer, and Executive accepts such employment, upon the terms and
conditions set forth in this Agreement, for the period beginning on the date
hereof and ending as provided in Section 4 hereof (the "Employment Period").
2. POSITION AND DUTIES. During the Employment Period, Executive shall
diligently and faithfully perform the duties of Chief Operating Officer of the
Company and shall perform the attendant responsibilities thereto, including the
general supervision, oversight and management of the day-to-day operations of
the Company, as well as such other responsibilities as the board of directors of
the Company (the "Board") may from time to time direct. Executive shall devote
substantially all his business time and attention (except for permitted vacation
periods and periods of illness or other incapacity) to the business and affairs
of the Company and, to the extent necessary to discharge the responsibilities
assigned to Executive hereunder, shall use his reasonable best efforts to
perform faithfully and efficiently such responsibilities. Executive shall
report only to the Chief Executive Officer of the Company and the Board. The
parties hereby acknowledge that it is the present intention of the Company to
adopt a holding company structure such that the Company would become a wholly-
owned subsidiary of another corporation ("Holdco"), and the parties hereby agree
that if such a holding company structure is adopted, this Agreement shall
continue in full force and effect, and, from the effective date of any such
transaction until the termination of the Employment Period for any reason in
accordance with the terms hereof, (a) Executive shall diligently and faithfully
perform the duties of President and Chief Executive Officer of the Company and
shall perform the attendant responsibilities thereto, as well as such other
responsibilities as the Board and the board of directors of Holdco may from time
to time direct, and (b) Executive shall report only to the Board and the board
of directors and Chief Executive Officer of Holdco.
3. SALARY AND BENEFITS
(a) During the Employment Period, Executive's base salary (the "Salary")
shall be not less than $154,498 per annum. The Salary shall be payable in
regular installments in accordance with the general payroll practices of the
Company. The Company's Compensation Committee shall review Executive's Salary
hereunder from time to time, but not less frequently than each Company fiscal
year and, in its discretion, may adjust such Salary in such amount as
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it deems appropriate for any future year of this Agreement; provided, however,
that the specified rate of Salary hereunder shall not be reduced below $154,498.
(b) In addition to the Salary, Executive shall be entitled to the
following benefits during the Employment Period:
(i) participation in all benefit plans provided by the Company
generally to senior executive officers of the Company (other than incentive
compensation, bonus, deferred compensation or similar compensation plans,
if any), including, but not limited to, such amount of paid vacation as is
permitted for other senior executive officers of the Company; and
(ii) participation in such incentive compensation, bonus, deferred
compensation or similar compensation plans, if any, as the Board may from
time to time determine.
4. TERM.
(a) The Employment Period shall commence on the date hereof and shall end
on September 1, 1999 (the "Expiration Date"); provided that (i) the Employment
Period shall terminate prior to the Expiration Date upon Executive's death, or
the inability of Executive to perform his normal services to the Company
required hereunder for a period of ninety (90) consecutive days due to a
condition resulting from any physical or mental illness or disability (as
reasonably determined by the Board in its good faith judgment) (hereinafter,
"Permanent Disability"), (ii) the Employment Period may be terminated by the
Company at any time prior to the Expiration Date upon five (5) business days
prior written notice for Cause (as defined below) or upon thirty (30) days prior
written notice without Cause, and (iii) the Employment Period may be terminated
by Executive at any time prior to the Expiration Date upon thirty (30) days
prior written notice, whether or not a Constructive Termination or Change in
Control (each as defined below) shall have occurred.
(b) Upon termination of the Employment Period for any reason, except as
otherwise herein expressly provided, Executive shall not be entitled to receive
Salary or other amounts or benefits for periods after the termination of the
Employment Period.
(c) In the event the Employment Period is terminated (i) by Executive due
to a Constructive Termination, (ii) by the Company within one hundred and eighty
(180) days after a Change in Control, (iii) by the Company other than for Cause,
or (iv) due to the death or Permanent Disability of Executive, then, except as
otherwise herein provided, (A) the Company shall pay to Executive payments equal
to Executive's then current Salary, plus bonus amounts ("Bonus") equal to the
lesser of (x) the amount of bonus compensation actually paid to Executive by
Company for the bonus period immediatley preceding such termination of
employment, and (y) the average of the amount of bonus compensation actually
paid to Executive by Company for the two (2) bonus periods immediatley preceding
such termination of employment (the "Severance Payments") at the same times that
installments of Salary and Bonus would be due to Executive hereunder if the
Employment Period had not been terminated, for a period of twenty-four (24)
months after the date of such termination, and (B) Executive shall immediately
vest in all options to purchase shares of the Company's capital stock then held
by Executive, regardless of the vesting schedule otherwise applicable to such
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options under the option plan and/or agreement under which such options were
granted. During such period the Company shall continue to provide to Executive
(at no cost to Executive other than the costs being borne by Executive
immediately prior to such termination) all fringe benefits, including but not
limited to, insurance, being provided or required to be provided to Executive at
the time of such termination. Notwithstanding any provision of this Agreement
to the contrary, the Company's obligation pursuant to this Section 4(c) to make
the Severance Payments, if any, and to provide such benefits, if any, to
Executive shall immediately terminate and be of no further force and effect from
and after the date on which a breach of Section 6 or Section 7 hereof shall have
occurred, and Executive shall not be entitled to any such Severance Payments
and/or benefits from and after such date.
(d) For purposes of this Agreement, "Cause" shall mean (i) the commission
of a felony or a crime involving moral turpitude or the commission of any other
act involving embezzlement or fraud, (ii) gross negligence, reckless disregard,
or willful misconduct by Executive in the performance of his duties hereunder;
(iii) the violation of any statutory or common duty of loyalty to the Company,
or (iv) violation of Section 6 or Section 7 of this Agreement.
(e) For purposes of this Agreement "Constructive Termination" shall mean
(i) the assignment of Executive primarily to duties and responsibilities that
are substantially inconsistent with his authority, duties and responsibilities
as Chief Operating Officer of the Company and that are normally assigned to an
employee of lesser rank, regardless of whether such assignment is accompanied by
a change in title or reporting responsibility or (ii) the relocation of
Executive by the Company to a primary work location which is more than one
hundred (100) miles from the Company's present location, as set forth in Section
14 hereof.
(f) For purposes of this Agreement, "Change in Control" shall mean that
any "person" (as the term "person" is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
other than Zell/Chilmark Fund, L.P. ("Z/C") or an entity or entities owned,
controlled by or under common control with Z/C (collectively, the "Z/C
Entities"), shall at any time be the "beneficial owner" (within the meaning of
Rule 13d-3 under the Exchange Act) of more of (A) the common stock of the
Company, or (B) the total voting power of all shares of capital stock of the
Company, than the Z/C Entities.
5. EXPENSES. During the Employment Period, the Company shall reimburse
Executive for all business travel and expenses reasonably necessary and
appropriate for the performance of his duties hereunder, provided that Executive
submits receipts or other expense records to the Company in accordance with the
general reimbursement policy then in effect for executives and other employees
of the Company.
6. CONFIDENTIALITY. Executive acknowledges and agrees that, as a result
of the performance of his duties hereunder and his performance of duties prior
to the date hereof, he has and/or will develop, make use of, acquire and have
access to knowledge of a special, unique, non-public or proprietary nature
relating to the Company, including, without limitation, pricing and marketing
strategy and customer and supplier lists and information (collectively,
"Confidential Information") and that such Confidential Information constitutes
valuable, special and unique property to the Company. As a material inducement
to the Company's entering into this Agreement, Executive covenants and agrees
that he will not, at any time during or after the term of this Agreement,
directly or indirectly, use, divulge or disclose (other than as required by
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<PAGE>
law), in any manner or for any purpose whatsoever, any Confidential Information,
other than for the sole benefit of the Company. Executive shall use his best
efforts to take all measures necessary to prevent any person from directly or
indirectly using, divulging or disclosing such Confidential Information.
Executive shall, upon termination of the Employment Period for any reason,
immediately surrender and turn over to the Company any and all books, reports,
accounts, records, correspondence and other information constituting or
incorporating Confidential Information that are in his possession, without
retaining any copy, summary or extract thereof on any storage medium whatsoever.
7. COVENANTS NOT TO COMPETE.
(a) As a material inducement to the Company's entering into this
Agreement, Executive hereby covenants and agrees that, during the period
beginning on the date hereof and ending on the date which is twenty-four (24)
months after the date of termination of the Employment Period, he shall not,
directly or indirectly:
(i) engage in, or have any interest in any person, firm,
corporation, partnership or business that engages in, any business
which is competitive with any business in which (A) the Company is
engaged at any time during the Employment Period and (B) Executive is
directly involved in the performance of his duties hereunder;
(ii) divert or attempt to divert or take advantage of or attempt
to take advantage of any business or opportunities of any type
whatsoever which are similar to the business of the Company or the
opportunities in which the Company is engaged during the Employment
Period;
(iii) solicit or attempt to solicit any existing or future
customers, clients or suppliers of the Company, except to the extent
that such solicitation or attempted solicitation concerns business
activities which are unrelated to any and all businesses and/or
opportunities in which the Company is engaged at any time during the
Employment Period; or
(iv) induce or attempt to induce any employee of the Company to
leave or terminate such employment (collectively, such restrictions
shall hereinafter be referred to as the "Covenants Not To Compete").
(b) The Covenants Not To Compete shall in no way restrict the right of
Executive to own, in the aggregate, not more than five percent (5%) of the
equity securities of any corporation whose equity securities are listed on a
national securities exchange or regularly traded in the over-the-counter market
and for which quotations are available on the NASDAQ System. Any holding
acquired in reliance on the provisions of this Section 7(b) and in compliance
with the limitations hereof shall not be deemed to be in violation of the
Covenants Not To Compete if subsequent to its acquisition any such equity
securities are no longer listed on a national securities exchange or no longer
regularly traded in the over-the-counter market and quoted on the NASDAQ System.
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<PAGE>
(c) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because the term is too long,
all parties hereto expressly understand and agree that for the purpose of such
proceeding, such term shall be deemed reduced to the extent necessary to permit
the enforcement of the Covenants Not To Compete.
(d) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because it is more extensive
(whether as to geographic area, scope of business or otherwise) than necessary
to effectuate the purpose of this Agreement, all parties expressly understand
and agree that for the purposes of such proceeding, such limitation shall be
deemed reduced to the extent necessary to permit the enforcement of the
Covenants Not To Compete.
8. ATTORNEY'S FEES. In the event of a lawsuit or other proceeding to
enforce the terms hereof, the other party or parties hereto shall reimburse the
prevailing party upon demand for attorney's fees and disbursements reasonably
incurred by such prevailing party in connection with such lawsuit or proceeding,
as well as all associated court costs.
9. ASSIGNMENT. No party to this Agreement may assign or transfer any
obligation hereunder without the written consent of the other parties; provided,
that Company may, at its sole option, assign and transfer all of its rights and
obligations hereunder to an entity which owns, as of the date of such assignment
and transfer, one hundred percent (100%) of the issued and outstanding capital
stock of the Company. Subject to the foregoing, this Agreement shall inure to
the benefit of and shall be binding upon the parties and their respective heirs,
successors and assigns.
10. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
12. CAPTIONS. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement will be enforced and construed
as if no caption had been used in this Agreement.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Washington, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Washington or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of Washington; provided,
that if at any time the rights and obligations of Company under this Agreement
are assigned and transferred in accordance with the terms hereof to a
corporation incorporated under, or if prior to any such assignment the Company
is re-incorporated under, the laws of a State other than the State of Washington
(hereinafter the
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"Assignee State"), this Agreement shall, from and after the effective date of
any such assignment and transfer (or re-incorporation, as the case may be), be
governed by the domestic laws of such Assignee State, without giving effect to
any choice of law or conflict of law provision or rule (whether of such Assignee
State or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than such Assignee State.
14. NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid), telecopied to the recipient (with hard copy to follow) or mailed to
the recipient by certified or registered mail, return receipt requested and
postage prepaid; provided, however, that if any such notice is received other
than on a regular business day before 4:00 p.m., such notice will be deemed
given as of the next succeeding regular business day. Such notices, demands and
other communications shall be sent to the Executive and the Company at the
addresses indicated below:
NOTICES TO THE COMPANY:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, Washington 98009
Attn: Christopher A. Sinclair, President and Chief Executive Officer
Telecopy No.: 206/462-2214
with a copy to:
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 600
Chicago, Illinois 60606
Attn: Sheli Z. Rosenberg
Telecopy No.: 312-454-0531
NOTICES TO THE EXECUTIVE:
Marc Evanger
4506 192nd Avenue, S.E.
Issaquah, WA 98027
Telecopy No.:______________
with a copy to:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, WA 98009
Attn: Jane Thomas
Telecopy No.: 206/462-2217
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or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
15. COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
16. SURVIVAL. Sections 4, 6, 7 and 8 of this Agreement shall survive and
continue in full force and effect in accordance with their terms notwithstanding
any termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
QUALITY FOOD CENTERS, INC.
/s/ Stuart M. Sloan
---------------------------
By: Stuart M. Sloan
Its: Chairman
EXECUTIVE
/s/ Marc W. Evanger
---------------------------
Marc Evanger
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EMPLOYMENT AGREEMENT
Agreement (this "Agreement") made as of September 1, 1996 by and between
QUALITY FOOD CENTERS, INC., a Washington corporation (the "Company"), and Dan
Kourkoumelis ("Executive").
R E C I T A L S:
1. The Company desires to employ Executive to further the business
purposes of the Company; and
2. Executive desires to be employed by the Company on the terms provided
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as its Chief
Operating Officer, and Executive accepts such employment, upon the terms and
conditions set forth in this Agreement, for the period beginning on the date
hereof and ending as provided in Section 4 hereof (the "Employment Period").
2. POSITION AND DUTIES. During the Employment Period, Executive shall
diligently and faithfully perform the duties of Chief Operating Officer of the
Company and shall perform the attendant responsibilities thereto, including the
general supervision, oversight and management of the day-to-day operations of
the Company, as well as such other responsibilities as the board of directors of
the Company (the "Board") may from time to time direct. Executive shall devote
substantially all his business time and attention (except for permitted vacation
periods and periods of illness or other incapacity) to the business and affairs
of the Company and, to the extent necessary to discharge the responsibilities
assigned to Executive hereunder, shall use his reasonable best efforts to
perform faithfully and efficiently such responsibilities. Executive shall
report only to the Chief Executive Officer of the Company and the Board. The
parties hereby acknowledge that it is the present intention of the Company to
adopt a holding company structure such that the Company would become a
wholly-owned subsidiary of another corporation ("Holdco"), and the parties
hereby agree that if such a holding company structure is adopted, this Agreement
shall continue in full force and effect, and, from the effective date of any
such transaction until the termination of the Employment Period for any reason
in accordance with the terms hereof, (a) Executive shall diligently and
faithfully perform the duties of President and Chief Executive Officer of the
Company and shall perform the attendant responsibilities thereto, as well as
such other responsibilities as the Board and the board of directors of Holdco
may from time to time direct, and (b) Executive shall report only to the Board
and the board of directors and Chief Executive Officer of Holdco.
3. SALARY AND BENEFITS
(a) During the Employment Period, Executive's base salary (the "Salary")
shall be not less than $283,246 per annum. The Salary shall be payable in
regular installments in accordance with the general payroll practices of the
Company. The Company's Compensation
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Committee shall review Executive's Salary hereunder from time to time, but not
less frequently than each Company fiscal year and, in its discretion, may adjust
such Salary in such amount as it deems appropriate for any future year of this
Agreement; provided, however, that the specified rate of Salary hereunder shall
not be reduced below $283,246.
(b) In addition to the Salary, Executive shall be entitled to the
following benefits during the Employment Period:
(i) participation in all benefit plans provided by the Company
generally to senior executive officers of the Company (other than incentive
compensation, bonus, deferred compensation or similar compensation plans,
if any), including, but not limited to, such amount of paid vacation as is
permitted for other senior executive officers of the Company; and
(ii) participation in such incentive compensation, bonus, deferred
compensation or similar compensation plans, if any, as the Board may from
time to time determine.
4. TERM.
(a) The Employment Period shall commence on the date hereof and shall end
on September 1, 1999 (the "Expiration Date"); provided that (i) the Employment
Period shall terminate prior to the Expiration Date upon Executive's death, or
the inability of Executive to perform his normal services to the Company
required hereunder for a period of ninety (90) consecutive days due to a
condition resulting from any physical or mental illness or disability (as
reasonably determined by the Board in its good faith judgment) (hereinafter,
"Permanent Disability"), (ii) the Employment Period may be terminated by the
Company at any time prior to the Expiration Date upon five (5) business days
prior written notice for Cause (as defined below) or upon thirty (30) days prior
written notice without Cause, and (iii) the Employment Period may be terminated
by Executive at any time prior to the Expiration Date upon thirty (30) days
prior written notice, whether or not a Constructive Termination or Change in
Control (each as defined below) shall have occurred.
(b) Upon termination of the Employment Period for any reason, except as
otherwise herein expressly provided, Executive shall not be entitled to receive
Salary or other amounts or benefits for periods after the termination of the
Employment Period.
(c) In the event the Employment Period is terminated (i) by Executive due
to a Constructive Termination, (ii) by the Company within one hundred and eighty
(180) days after a Change in Control, (iii) by the Company other than for Cause,
or (iv) due to the death or Permanent Disability of Executive, then, except as
otherwise herein provided, (A) the Company shall pay to Executive payments equal
to Executive's then current Salary, plus bonus amounts ("Bonus") equal to the
lesser of (x) the amount of bonus compensation actually paid to Executive by
Company for the bonus period immediatley preceding such termination of
employment, and (y) the average of the amount of bonus compensation actually
paid to Executive by Company for the two (2) bonus periods immediatley preceding
such termination of employment (the "Severance Payments") at the same times that
installments of Salary and Bonus would be due to Executive hereunder if the
Employment Period had not been terminated, for a period of twenty-four (24)
months after the date of such termination, and (B)
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Executive shall immediately vest in all options to purchase shares of the
Company's capital stock then held by Executive, regardless of the vesting
schedule otherwise applicable to such options under the option plan and/or
agreement under which such options were granted. During such period the Company
shall continue to provide to Executive (at no cost to Executive other than the
costs being borne by Executive immediately prior to such termination) all fringe
benefits, including but not limited to, insurance, being provided or required to
be provided to Executive at the time of such termination. Notwithstanding any
provision of this Agreement to the contrary, the Company's obligation pursuant
to this Section 4(c) to make the Severance Payments, if any, and to provide such
benefits, if any, to Executive shall immediately terminate and be of no further
force and effect from and after the date on which a breach of Section 6 or
Section 7 hereof shall have occurred, and Executive shall not be entitled to any
such Severance Payments and/or benefits from and after such date.
(d) For purposes of this Agreement, "Cause" shall mean (i) the commission
of a felony or a crime involving moral turpitude or the commission of any other
act involving embezzlement or fraud, (ii) gross negligence, reckless disregard,
or willful misconduct by Executive in the performance of his duties hereunder;
(iii) the violation of any statutory or common duty of loyalty to the Company,
or (iv) violation of Section 6 or Section 7 of this Agreement.
(e) For purposes of this Agreement "Constructive Termination" shall mean
(i) the assignment of Executive primarily to duties and responsibilities that
are substantially inconsistent with his authority, duties and responsibilities
as Chief Operating Officer of the Company and that are normally assigned to an
employee of lesser rank, regardless of whether such assignment is accompanied by
a change in title or reporting responsibility or (ii) the relocation of
Executive by the Company to a primary work location which is more than one
hundred (100) miles from the Company's present location, as set forth in Section
14 hereof.
(f) For purposes of this Agreement, "Change in Control" shall mean that
any "person" (as the term "person" is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
other than Zell/Chilmark Fund, L.P. ("Z/C") or an entity or entities owned,
controlled by or under common control with Z/C (collectively, the "Z/C
Entities"), shall at any time be the "beneficial owner" (within the meaning of
Rule 13d-3 under the Exchange Act) of more of (A) the common stock of the
Company, or (B) the total voting power of all shares of capital stock of the
Company, than the Z/C Entities.
5. EXPENSES. During the Employment Period, the Company shall reimburse
Executive for all business travel and expenses reasonably necessary and
appropriate for the performance of his duties hereunder, provided that Executive
submits receipts or other expense records to the Company in accordance with the
general reimbursement policy then in effect for executives and other employees
of the Company.
6. CONFIDENTIALITY. Executive acknowledges and agrees that, as a result
of the performance of his duties hereunder and his performance of duties prior
to the date hereof, he has and/or will develop, make use of, acquire and have
access to knowledge of a special, unique, non-public or proprietary nature
relating to the Company, including, without limitation, pricing and marketing
strategy and customer and supplier lists and information (collectively,
"Confidential Information") and that such Confidential Information constitutes
valuable, special and unique property to the Company. As a material inducement
to the Company's entering into
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this Agreement, Executive covenants and agrees that he will not, at any time
during or after the term of this Agreement, directly or indirectly, use, divulge
or disclose (other than as required by law), in any manner or for any purpose
whatsoever, any Confidential Information, other than for the sole benefit of the
Company. Executive shall use his best efforts to take all measures necessary to
prevent any person from directly or indirectly using, divulging or disclosing
such Confidential Information.
Executive shall, upon termination of the Employment Period for any reason,
immediately surrender and turn over to the Company any and all books, reports,
accounts, records, correspondence and other information constituting or
incorporating Confidential Information that are in his possession, without
retaining any copy, summary or extract thereof on any storage medium whatsoever.
7. COVENANTS NOT TO COMPETE.
(a) As a material inducement to the Company's entering into this
Agreement, Executive hereby covenants and agrees that, during the period
beginning on the date hereof and ending on the date which is twenty-four (24)
months after the date of termination of the Employment Period, he shall not,
directly or indirectly:
(i) engage in, or have any interest in any person, firm,
corporation, partnership or business that engages in, any business
which is competitive with any business in which (A) the Company is
engaged at any time during the Employment Period and (B) Executive is
directly involved in the performance of his duties hereunder;
(ii) divert or attempt to divert or take advantage of or attempt
to take advantage of any business or opportunities of any type
whatsoever which are similar to the business of the Company or the
opportunities in which the Company is engaged during the Employment
Period;
(iii) solicit or attempt to solicit any existing or future
customers, clients or suppliers of the Company, except to the extent
that such solicitation or attempted solicitation concerns business
activities which are unrelated to any and all businesses and/or
opportunities in which the Company is engaged at any time during the
Employment Period; or
(iv) induce or attempt to induce any employee of the Company to
leave or terminate such employment (collectively, such restrictions
shall hereinafter be referred to as the "Covenants Not To Compete").
(b) The Covenants Not To Compete shall in no way restrict the right of
Executive to own, in the aggregate, not more than five percent (5%) of the
equity securities of any corporation whose equity securities are listed on a
national securities exchange or regularly traded in the over-the-counter market
and for which quotations are available on the NASDAQ System. Any holding
acquired in reliance on the provisions of this Section 7(b) and in compliance
with the limitations hereof shall not be deemed to be in violation of the
Covenants Not To Compete if subsequent to its acquisition any such equity
securities are no longer listed
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on a national securities exchange or no longer regularly traded in the
over-the-counter market and quoted on the NASDAQ System.
(c) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because the term is too long,
all parties hereto expressly understand and agree that for the purpose of such
proceeding, such term shall be deemed reduced to the extent necessary to permit
the enforcement of the Covenants Not To Compete.
(d) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because it is more extensive
(whether as to geographic area, scope of business or otherwise) than necessary
to effectuate the purpose of this Agreement, all parties expressly understand
and agree that for the purposes of such proceeding, such limitation shall be
deemed reduced to the extent necessary to permit the enforcement of the
Covenants Not To Compete.
8. ATTORNEY'S FEES. In the event of a lawsuit or other proceeding to
enforce the terms hereof, the other party or parties hereto shall reimburse the
prevailing party upon demand for attorney's fees and disbursements reasonably
incurred by such prevailing party in connection with such lawsuit or proceeding,
as well as all associated court costs.
9. ASSIGNMENT. No party to this Agreement may assign or transfer any
obligation hereunder without the written consent of the other parties; provided,
that Company may, at its sole option, assign and transfer all of its rights and
obligations hereunder to an entity which owns, as of the date of such assignment
and transfer, one hundred percent (100%) of the issued and outstanding capital
stock of the Company. Subject to the foregoing, this Agreement shall inure to
the benefit of and shall be binding upon the parties and their respective heirs,
successors and assigns.
10. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
12. CAPTIONS. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement will be enforced and construed
as if no caption had been used in this Agreement.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Washington, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Washington or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of Washington; provided,
that if at any time the rights and obligations of Company under this Agreement
are assigned and transferred in accordance with the terms hereof to a
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corporation incorporated under, or if prior to any such assignment the Company
is re-incorporated under, the laws of a State other than the State of Washington
(hereinafter the "Assignee State"), this Agreement shall, from and after the
effective date of any such assignment and transfer (or re-incorporation, as the
case may be), be governed by the domestic laws of such Assignee State, without
giving effect to any choice of law or conflict of law provision or rule (whether
of such Assignee State or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than such Assignee State.
14. NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid), telecopied to the recipient (with hard copy to follow) or mailed to
the recipient by certified or registered mail, return receipt requested and
postage prepaid; provided, however, that if any such notice is received other
than on a regular business day before 4:00 p.m., such notice will be deemed
given as of the next succeeding regular business day. Such notices, demands and
other communications shall be sent to the Executive and the Company at the
addresses indicated below:
NOTICES TO THE COMPANY:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, Washington 98009
Attn: Christopher A. Sinclair, President and Chief Executive Officer
Telecopy No.: 206/462-2214
with a copy to:
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 600
Chicago, Illinois 60606
Attn: Sheli Z. Rosenberg
Telecopy No.: 312-454-0531
NOTICES TO THE EXECUTIVE:
Dan Kourkoumelis
6016 N.E. Bothell Way
#F-144
Seattle, WA 98155
Telecopy No.: _______________
with a copy to:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, WA 98009
Attn: Jane Thomas
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Telecopy No.: 206/462-2214
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
15. COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
16. SURVIVAL. Sections 4, 6, 7 and 8 of this Agreement shall survive and
continue in full force and effect in accordance with their terms notwithstanding
any termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
QUALITY FOOD CENTERS, INC.
/s/ Stuart M. Sloan
___________________________
By: Stuart M. Sloan
Its: Chairman
EXECUTIVE
/s/ Dan Kourkoumelis
___________________________
Dan Kourkoumelis
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EMPLOYMENT AGREEMENT
Agreement (this "Agreement") made as of September 16, 1996 by and between
QUALITY FOOD CENTERS, INC., a Washington corporation (the "Company"), and
Christopher A. Sinclair ("Executive").
R E C I T A L S:
1. The Company desires to employ Executive to further the business
purposes of the Company; and
2. Executive desires to be employed by the Company on the terms provided
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as its President and
Chief Executive Officer, and Executive accepts such employment, upon the terms
and conditions set forth in this Agreement, for the period beginning on the date
hereof and ending as provided in Section 5 hereof (the "Employment Period").
2. POSITION AND DUTIES. During the Employment Period, Executive shall
diligently and faithfully perform the duties of President and Chief Executive
Officer of the Company and shall perform the attendant responsibilities thereto,
as well as such other responsibilities as the board of directors of the Company
(the "Board") may from time to time direct. Executive shall devote substantially
all his business time and attention (except for permitted vacation periods and
periods of illness or other incapacity) to the business and affairs of the
Company and, to the extent necessary to discharge the responsibilities assigned
to Executive hereunder, shall use his reasonable best efforts to perform
faithfully and efficiently such responsibilities. Executive shall report only
to the Board. The parties hereby acknowledge that it is the present intention of
the Company to adopt a holding company structure such that the Company would
become a wholly-owned subsidiary of another corporation ("Holdco"), and the
parties hereby agree that if such a holding company structure is adopted, this
Agreement shall be assigned and transferred to Holdco in accordance with Section
10 hereof and, from and after the effective date of such assignment and
transfer, (a) Executive shall diligently and faithfully perform the duties of
President and Chief Executive Officer of Holdco and shall perform the attendant
responsibilities thereto, as well as such other responsibilities as the board of
directors of Holdco may from time to time direct, (b) Executive shall report
only to the board of directors of Holdco, and (c) all references herein to
Company shall be a reference to Holdco.
3. SALARY; BONUS; BENEFITS
(a) SALARY. During the Employment Period, Executive's base salary (the
"Salary") shall be not less than $600,000 per annum. The Salary shall be payable
in regular installments in accordance with the general payroll practices of the
Company. The Company's Compensation Committee shall review Executive's Salary
hereunder from time to time, but not less frequently than each Company fiscal
year and, in its discretion, may adjust such Salary in
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such amount as it deems appropriate for any future year of this Agreement;
provided, however, that the specified rate of Salary hereunder shall not be
reduced below $600,000.
(b) BONUS. Executive shall be eligible for an annual bonus ("Bonus") in
addition to Salary, which Bonus shall be based on criteria established from time
to time by the Company's Compensation Committee; provided, that a target Bonus
(hereinafter a "Target Bonus") equal to fifty-percent (50%) of the Salary set
forth in Section 3(a) hereof shall apply during the initial twelve (12) month
period hereunder, and the Target Bonus for each subsequent twelve (12) month
period hereunder (if and only if a Termination has not occurred prior to the
beginning of such twelve (12) month period) shall be an amount equal to fifty
percent (50%) of the Salary applicable to the immediately preceding twelve (12)
month period hereunder; provided, further, that the actual amount of Bonus
payable with respect to any twelve (12) month period hereunder shall be
determined based on criteria established from time to time by the Company's
Compensation Committee, and no Bonus shall be payable to Executive hereunder for
any twelve (12) month period unless, and then only to the extent, the criteria
established by the Compensation Committee for such period are actually met;
provided, further, that in the event the Compensation Committee fails to
establish Bonus criteria applicable to any twelve (12) month period hereunder,
then Executive shall be entitled to a Bonus for such twelve (12) month period in
an amount equal to the lesser of (i) fifty percent (50%) of the Salary
applicable to the immediately preceding twelve (12) month period hereunder, and
(ii) the amount of the Bonus actually paid to Executive for such immediately
preceding twelve (12) month period.
(c) BENEFITS. In addition to the Salary and other benefits expressly
described herein, Executive shall be entitled during the Employment Period to
participate in all benefit plans provided by the Company generally to senior
executive officers of the Company (other than incentive compensation, bonus,
deferred compensation or similar compensation plans, if any), including, but not
limited to, such amount of paid vacation as is permitted for other senior
executive officers of the Company.
4. STOCK OPTIONS.
(a) INITIAL GRANT. Concurrently with the execution and delivery of
this Agreement, Company has granted to Executive options (the "Initial Options")
to purchase a total of 500,000 shares of the Company's common stock, $.001 par
value per share ("Common Stock"), on the terms and conditions set forth in that
certain Stock Option Agreement between Company and Executive, a copy of which is
attached hereto as EXHIBIT A. As more particularly described in the Stock
Option Agreement, Executive will vest in the Initial Options at such time as the
market price for the Common Stock, as reported by the NASDAQ National Market
System, meets or exceeds Forty Dollars ($40) per share for any consecutive ten
(10) trading day period subsequent to the date hereof (subject to immediate
vesting in the event of a Termination which falls within the categories
described in Section 5(c) hereof).
(b) SUBSEQUENT GRANTS. On and as of each of the first and second
anniversary of the date hereof during the term of this Agreement, if as of such
date a Termination (as hereinafter defined) has not occurred, Company shall
grant to Executive on such date additional options to purchase not less than
that number of shares of the Company's Common Stock which is equal to the
quotient of (i) the product of (A) the sum of the Salary plus Target Bonus
applicable to the immediately preceding twelve (12) month period hereunder,
multiplied by (B) three (3), divided by (ii) an amount equal to the greater of
(Y) the market price
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for the Common Stock, as reported by the NASDAQ National Market System, for the
ten (10) trading day period immediately prior to the effective date of such
grant, and (Z) the market price for the Common Stock, as reported by the NASDAQ
National Market System for the effective date of such grant (or the last trading
day immediately prior to the effective date of such grant if the effective date
is not a trading day). Such options shall be granted on such terms and subject
to such conditions as the Company's Compensation Committee shall establish in
its discretion; provided, that (i) all such options shall be granted under
either the Company's 1993 Executive Stock Option Plan and/or the Company's 1987
Incentive Stock Option Plan, (ii) Executive shall vest in such options ratably
over the five (5) year period beginning on the applicable date of grant (subject
to immediate vesting in the event of a Termination which falls within the
categories described in Section 5(c) hereof), and (iii) such options shall
expire ten (10) years after the applicable date of grant.
5. TERM.
(a) The Employment Period shall commence on the date hereof and shall end
on September 16, 1999 (the "Expiration Date"); provided that (i) the Employment
Period shall terminate prior to the Expiration Date upon Executive's death, or
the inability of Executive to perform his normal services to the Company
required hereunder for a period of ninety (90) consecutive days due to a
condition resulting from any physical or mental illness or disability (as
reasonably determined by the Board in its good faith judgment), (ii) the
Employment Period may be terminated by the Company at any time prior to the
Expiration Date upon five (5) business days prior written notice for Cause (as
defined below) or upon thirty (30) days prior written notice without Cause, and
(iii) the Employment Period may be terminated by Executive at any time prior to
the Expiration Date upon thirty (30) days prior written notice, whether or not a
Material Change of Duties or Change of Control (each as defined below) shall
have occurred.
(b) Upon termination of the Employment Period for any reason (any such
event, a "Termination"), except as otherwise provided in Section 5(c) hereof,
Executive shall not be entitled to receive Salary, Bonus or other amounts or
benefits for periods after the termination of the Employment Period.
(c) In the event the Employment Period is terminated (i) by Executive due
to a Material Change of Duties, (ii) by the Company or Executive within ninety
(90) days after a Change of Control, or (iii) by the Company other than for
Cause, then, except as otherwise herein provided, the following provisions shall
apply:
(1) the Company shall pay to Executive, to the extent not already
paid to Executive, (A) payments equal to Executive's then current Salary, at the
same times that installments of Salary would be due to Executive hereunder if
the Employment Period had not been terminated, for a period beginning on the
date of such Termination and ending on the Expiration Date (the "Severance
Period"), and (B) the Target Bonus applicable to the twelve (12) month period in
which such Termination occurs, within ninety (90) days after the effective date
of such Termination (all such payments described in the preceding clauses (A)
and (B) hereinafter "Severance Payments"); provided, that Company may in its
sole discretion pay all Severance Payments in a single lump sum within thirty
(30) days after the effective date of such Termination; and
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<PAGE>
(2) during the Severance Period, the Company shall continue to
provide to Executive (at no cost to Executive other than the costs being borne
by Executive immediately prior to Termination) all fringe benefits, including
but not limited to, insurance, being provided or required to be provided to
Executive at the time of Termination.
Notwithstanding any provision of this Agreement to the contrary, the
Company's obligation pursuant to this Section 5(c) to make the Severance
Payments, if any, and to provide such benefits, if any, to Executive shall
immediately terminate and be of no further force and effect from and after the
date on which a breach of Section 7 or Section 8 hereof shall have occurred, and
Executive shall not be entitled to any such Severance Payments and/or benefits
from and after such date.
(d) For purposes of this Agreement, "Cause" shall mean (i) repeated
failure or refusal to carry out the reasonable directions of the Board (or the
board of directors of Holdco, as the case may be) consistent with Executive's
duties as an officer and employee of the Company and/or Holdco, as the case may
be, (ii) a material act or omission involving willful misconduct or gross
negligence in the performance of Executive's duties, (iii) conviction of a
felony which could reasonably cause, in the determination of the Board (or the
board of directors of Holdco, as the case may be), substantial damage to the
business, assets, or reputation of the Company, Holdco and/or any of their
subsidiaries, (iv) the violation of any statutory or common law duty of loyalty
to the Company, Holdco and/or any of their subsidiaries, or (v) violation of
Section 7 or Section 8 of this Agreement.
(e) For purposes of this Agreement "Material Change of Duties" shall mean
the assignment of Executive to duties and responsibilities that are
substantially inconsistent with his authority, duties and responsibilities as
President and Chief Executive Officer of the Company or Holdco, as the case may
be, and that are normally assigned to an employee of lesser rank, regardless of
whether such assignment is accompanied by a change in title or reporting
responsibility.
(f) For purposes of this Agreement, "Change of Control" shall have
occurred at such time as a majority of the Board (which term shall for the
purposes of this Section 5(f) shall be deemed to include a reference to the
board of directors of Holdco, if and when applicable) do not constitute
"Continuing Directors", as such term is defined in the Articles of Incorporation
of the Company in effect as of the date hereof (applying the principles of such
term to the board of directors of Holdco if and when applicable).
6. EXPENSES. During the Employment Period, the Company shall reimburse
Executive for all business travel and expenses reasonably necessary and
appropriate for the performance of his duties hereunder, provided that Executive
submits receipts or other expense records to the Company in accordance with the
general reimbursement policy then in effect for executives and other employees
of the Company.
7. CONFIDENTIALITY. Executive acknowledges and agrees that, as a result
of the performance of his duties hereunder and his performance of duties prior
to the date hereof, he has and/or will develop, make use of, acquire and have
access to knowledge of a special, unique, non-public or proprietary nature
relating to the Company, including, without limitation, pricing and marketing
strategy and customer and supplier lists and information (collectively,
"Confidential Information") and that such Confidential Information constitutes
valuable, special
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and unique property to the Company. As a material inducement to the Company's
entering into this Agreement, Executive covenants and agrees that he will not,
at any time during or after the term of this Agreement, directly or indirectly,
use, divulge or disclose (other than as required by law), in any manner or for
any purpose whatsoever, any Confidential Information, other than for the sole
benefit of the Company. Executive shall use his best efforts to take all
measures necessary to prevent any person from directly or indirectly using,
divulging or disclosing such Confidential Information.
Executive shall, upon termination of the Employment Period for any reason,
immediately surrender and turn over to the Company any and all books, reports,
accounts, records, correspondence and other information constituting or
incorporating Confidential Information that are in his possession, without
retaining any copy, summary or extract thereof on any storage medium whatsoever.
8. COVENANTS NOT TO COMPETE.
(a) As a material inducement to the Company's entering into this
Agreement, Executive hereby covenants and agrees that, during the Covenant
Period (as defined below), he shall not, directly or indirectly:
(i) engage in, or have any interest in any person, firm,
corporation, partnership or business that engages in, any business
which is competitive with any business in which (A) the Company is
engaged at any time during the Employment Period and (B) Executive is
directly involved in the performance of his duties hereunder;
(ii) divert or attempt to divert or take advantage of or attempt
to take advantage of any business or opportunities of any type
whatsoever which are similar to the business of the Company or the
opportunities in which the Company is engaged during the Employment
Period;
(iii) solicit or attempt to solicit any existing or future
customers, clients or suppliers of the Company, except to the extent
that such solicitation or attempted solicitation concerns business
activities which are unrelated to any and all businesses and/or
opportunities in which the Company is engaged at any time during the
Employment Period; or
(iv) induce or attempt to induce any employee of the Company to
leave or terminate such employment (collectively, such restrictions
shall hereinafter be referred to as the "Covenants Not To Compete").
As used herein, the term "Covenant Period" shall mean the period beginning
on the date hereof and ending (xx) in the event of a Termination which does not
fall within the categories described in Section 5(c) hereof, twenty-four (24)
months after the date of such Termination, and (yy) in the event of a
Termination which falls within the categories described in Section 5(c) hereof
or if no Termination occurs prior to the Expiration Date, twenty-four (24)
months after the Expiration Date.
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(b) The Covenants Not To Compete shall in no way restrict the right of
Executive to own, in the aggregate, not more than five percent (5%) of the
equity securities of any corporation whose equity securities are listed on a
national securities exchange or regularly traded in the over-the-counter market
and for which quotations are available on the NASDAQ System. Any holding
acquired in reliance on the provisions of this Section 7(b) and in compliance
with the limitations hereof shall not be deemed to be in violation of the
Covenants Not To Compete if subsequent to its acquisition any such equity
securities are no longer listed on a national securities exchange or no longer
regularly traded in the over-the-counter market and quoted on the NASDAQ System.
(c) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because the term is too long,
all parties hereto expressly understand and agree that for the purpose of such
proceeding, such term shall be deemed reduced to the extent necessary to permit
the enforcement of the Covenants Not To Compete.
(d) If, in any judicial proceeding, a court shall refuse to enforce the
Covenants Not To Compete, or any portion thereof, because it is more extensive
(whether as to geographic area, scope of business or otherwise) than necessary
to effectuate the purpose of this Agreement, all parties expressly understand
and agree that for the purposes of such proceeding, such limitation shall be
deemed reduced to the extent necessary to permit the enforcement of the
Covenants Not To Compete.
9. ATTORNEY'S FEES. In the event of a lawsuit or other proceeding to
enforce the terms hereof, the other party or parties hereto shall reimburse the
prevailing party upon demand for attorney's fees and disbursements reasonably
incurred by such prevailing party in connection with such lawsuit or proceeding,
as well as all associated court costs.
10. ASSIGNMENT. No party to this Agreement may assign or transfer any
obligation hereunder without the written consent of the other parties; provided,
that Company may assign and transfer all of its rights and obligations hereunder
to an entity which owns, as of the date of such assignment and transfer, one
hundred percent (100%) of the issued and outstanding capital stock of the
Company, and, from and after the effective date of such assignment and transfer,
any reference herein to Company shall from and after the effective date of such
assignment and transfer be a reference to such entity. Subject to the
foregoing, this Agreement shall inure to the benefit of and shall be binding
upon the parties and their respective heirs, successors and assigns.
11. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
13. CAPTIONS. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize
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<PAGE>
or in any way affect any provision of this Agreement, and all provisions of this
Agreement will be enforced and construed as if no caption had been used in this
Agreement.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Washington, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Washington or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of Washington; provided,
that if at any time the rights and obligations of Company under this Agreement
are assigned and transferred in accordance with the terms hereof to a
corporation incorporated under, or if prior to any such assignment the Company
is re-incorporated under, the laws of a State other than the State of
Washington (hereinafter the "Assignee State"), this Agreement shall, from and
after the effective date of such assignment and transfer (or re-incorporation,
as the case may be), be governed by the domestic laws of such Assignee State,
without giving effect to any choice of law or conflict of law provision or rule
(whether of such Assignee State or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than such Assignee State.
15. NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid), telecopied to the recipient (with hard copy to follow) or mailed to
the recipient by certified or registered mail, return receipt requested and
postage prepaid; provided, however, that if any such notice is received other
than on a regular business day before 4:00 p.m., such notice will be deemed
given as of the next succeeding regular business day. Such notices, demands and
other communications shall be sent to the Executive and the Company at the
addresses indicated below:
NOTICES TO THE COMPANY:
Quality Food Centers, Inc.
10112 N.E. 10th Street
Bellevue, Washington 98009
Attn: Stuart M. Sloan, Chairman and Chief Executive Officer
Facsimile No.: (206) 462-2162
with a copy to:
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 600
Chicago, Illinois 60606
Attn: Sheli Z. Rosenberg
Facsimile No.: 312-454-0531
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NOTICES TO THE EXECUTIVE:
Christopher A. Sinclair
565 Stanwich Road
Greenwich, Connecticut 06831
Facsimile No.: (203) 629-2360
with a copy to:
Mike Harris
Ivey, Barnum & O'Mara, LLC
170 Mason Street
Greenwich, Connecticut 06830-6692
Facsimile No.: (203) 661-9462
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
16. COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
17. SURVIVAL. Sections 5, 7, 8 and 9 of this Agreement shall survive and
continue in full force and effect in accordance with their terms notwithstanding
any termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
QUALITY FOOD CENTERS, INC.
/s/ Stuart M. Sloan
___________________________
By: Stuart M. Sloan
Its: Chairman
EXECUTIVE
/s/ Christopher A. Sinclair
___________________________
Christopher A. Sinclair
8
