<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUALITY FOOD CENTERS, INC.
(Exact name of co-registrant issuer as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
WASHINGTON 5411 91-1330075
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification number)
</TABLE>
<TABLE>
<S> <C> <C> <C>
HUGHES MARKETS, INC. CALIFORNIA 5411 95-1947206
KU ACQUISITION CORPORATION WASHINGTON 5411 91-1765648
QUALITY FOOD HOLDINGS, INC. DELAWARE -- PENDING
(Name of co-registrant (State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
guarantors) of incorporation or Classification Code Number) identification number)
organization)
10112 N.E. 10TH STREET,
BELLEVUE, WASHINGTON 98004
TELEPHONE NUMBER (206) 455-3761
(address, including zip code and telephone number, including
area code, of co-registrant issuer's principal executive offices)
</TABLE>
------------------------------
MARC W. EVANGER
VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY/TREASURER
QUALITY FOOD CENTERS, INC.
10112 N.E. 10TH STREET,
BELLEVUE, WASHINGTON 98004
(206) 455-3761
(Name, address, including zip code, and telephone number,
including area code, of agent of service)
------------------------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
JOHN B. TEHAN, ESQ.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
8.70% Series B Senior Subordinated Notes due
2007...................................... $150,000,000 100% $150,000,000 $45,454.55
Guarantees of 8.70% Series B Senior
Subordinated Notes due 2007 by Hughes
Markets, Inc., KU Acquisition Corporation
and Quality Food Holdings, Inc............ $150,000,000 100% $150,000,000 $0(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantees.
------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 20, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
PRELIMINARY PROSPECTUS
, 1997
[LOGO]
QUALITY FOOD CENTERS, INC.
[LOGO]
OFFER TO EXCHANGE $150,000,000 OF ITS
8.70% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR $150,000,000 OF ITS OUTSTANDING
8.70% SENIOR SUBORDINATED NOTES DUE 2007
--------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY, ON , 1997,
UNLESS EXTENDED.
----------------------------------
Quality Food Centers, Inc. (the "Company" or "QFC"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate of up to $150,000,000 principal amount of
8.70% Series B Senior Subordinated Notes due 2007 (the "Exchange Notes") of the
Company for an identical face amount of the issued and outstanding 8.70% Senior
Subordinated Notes due 2007 (the "Old Notes" and together with the Exchange
Notes, the "Notes") of the Company from the Holders (as defined) thereof. As of
the date of this Prospectus, there is $150,000,000 aggregate principal amount of
the Old Notes outstanding. The terms of the Exchange Notes are identical in all
material respects to the Old Notes, except that the Exchange Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and therefore will not bear legends restricting their transfer and will not
contain certain provisions providing for liquidated damages in respect of the
Old Notes under certain circumstances described in the Registration Rights
Agreement (as defined), which provisions will terminate as to all of the Notes
upon the consummation of the Exchange Offer.
The Exchange Notes will mature on March 15, 2007. Interest on the Exchange
Notes will be payable in cash semi-annually on March 15 and September 15 of each
year, commencing on September 15, 1997. The Company will not be required to make
any mandatory redemption or sinking fund payments with respect to the Exchange
Notes prior to maturity. The Exchange Notes will be redeemable at the option of
the Company, in whole or in part, on or after March 15, 2002, at the redemption
prices set forth herein, plus accrued and unpaid interest to the date of
redemption. However, at any time prior to March 15, 2000 the Company may redeem
up to 20% of the aggregate principal amount of the Exchange Notes originally
issued at a redemption price of 108% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of one or more public offerings of common stock of the Company, prior
to the Reorganization (as defined below), or, after the Reorganization, of
Parent (as defined below); provided that at least 80% of the aggregate principal
amount of the Exchange Notes originally issued remains outstanding immediately
after the occurrence of such redemption. Upon a Change of Control (as defined
herein), the Company will be required to make an offer to repurchase all
outstanding Exchange Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase. See "Description of Exchange
Notes--Certain Covenants--Repurchase of Notes Upon a Change of Control."
The Old Notes were issued to provide part of the financing necessary to pay
the total cash consideration in connection with QFC's recent acquisition of
Hughes Markets, Inc. ("Hughes") (the "Hughes Acquisition") and to refinance
QFC's bank indebtedness, including indebtedness incurred by QFC in connection
with its acquisition of Keith Uddenberg, Inc. (the "KUI Acquisition", and
collectively with the Hughes Acquisition, the "Acquisitions"). Concurrently with
the sale of the Old Notes, the Company entered into the New Credit Facility (as
defined herein) and issued shares of its Common Stock in a public offering (the
"Common Stock Offering") (the sale of the Old Notes, the New Credit Facility and
the Common Stock Offering being herein referred to as the "Financings"). See
"Use of Proceeds" and "The Acquisitions."
Following consummation of the Exchange Offer, the Company intends to seek
shareholder approval to change its corporate structure (the "Reorganization").
Subject to obtaining such shareholder approval, upon consummation of the
Reorganization, the surviving corporation in the KUI Acquisition ("KUI") will
remain a subsidiary of QFC, and each of QFC and Hughes will become a subsidiary
of Quality Food Holdings, Inc., a Delaware corporation ("Holding Company"),
which in turn will be a subsidiary of Quality Food, Inc., a Delaware corporation
("Parent"), and the current shareholders of QFC will thereupon become
shareholders of Parent. QFC will remain the obligor on the Exchange Notes
following any such Reorganization. Parent and Holding Company are both currently
subsidiaries of QFC. See "The Proposed Reorganization."
The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company. The Exchange Notes will be guaranteed (the
"Guarantees"), prior to the Reorganization, by all of the Company's existing and
future subsidiaries (excluding Parent and Unrestricted Subsidiaries and any
Non-Guarantor Foreign Subsidiaries (as such terms are defined herein) of the
Company) and, after the Reorganization, by Holding Company and all of its
existing and future subsidiaries (excluding QFC (which will remain the obligor
on the Exchange Notes) and Unrestricted Subsidiaries and any Non-Guarantor
Foreign Subsidiaries of Holding Company) (collectively, the "Guarantors").
Parent will not be a guarantor of the Exchange Notes either before or after any
Reorganization. The Guarantees will be subordinated in right of payment to all
existing and future Senior Debt of the Guarantors. As of March 22, 1997, the
Company and its consolidated subsidiaries had approximately $282.9 million of
outstanding Senior Debt, $250 million of which was secured debt outstanding
under the New Credit Facility. The Indenture (as defined herein) permits the
Company and the Guarantors to incur additional indebtedness, including Senior
Debt, subject to certain limitations. See "Description of Exchange Notes."
The Old Notes were sold on March 19, 1997 in a transaction not registered
under the Securities Act in reliance upon an exemption from the registration
requirements thereof. In general, the Old Notes may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act. The Exchange Notes
are being offered hereby in order to satisfy certain obligations of the Company
contained in the Registration Rights Agreement. Based on interpretations of
comments by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period ending on the earlier of (i) 180 days
after consummation of the Exchange Offer (subject to extension in certain
events) and (ii) the date on which all participating broker-dealers have sold
their Exchange Notes, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Old Notes are eligible for trading in the Private Offering, Resales and
Trading through Automated Linkages ("PORTAL") market.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date (as defined). Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay all of the expenses incident to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
AVAILABLE INFORMATION
QFC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy and information statements and other information with the SEC.
Such reports, proxy and information statements and other information filed by
QFC can be inspected and copied at the public reference facilities of the SEC,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as
well as at the following SEC Regional Offices: Seven World Trade Center, New
York, NY 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies can be obtained from the SEC by mail at
prescribed rates. Requests should be directed to the SEC's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants, such as QFC, that file
electronically with the SEC. The address of such site is http://www.sec.gov.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
(1) QFC's Annual Report on Form 10-K for the year ended December 28, 1996,
as amended by the Annual Reports on Form 10-K/A, dated March 31, 1997 and
May 16, 1997; and
(2) QFC's Quarterly Report on Form 10-Q for the twelve weeks ended March 22,
1997, as amended by the Quarterly Report on Form 10-Q/A, dated May 20,
1997.
All documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Copies of the above documents (excluding exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein) may be
obtained upon written or oral request without charge by each person to whom this
Prospectus is delivered from the Treasurer of QFC, 10112 N.E. 10th Street,
Bellevue, Washington 98004 (telephone number (206) 455-3761).
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE HEREIN
OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN. THIS SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION. UNLESS OTHERWISE EXPRESSLY
STATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM THE "COMPANY" REFERS TO
QFC AND ITS CONSOLIDATED SUBSIDIARIES (INCLUDING HUGHES AND KUI), (II) THE TERM
"QFC" REFERS TO QUALITY FOOD CENTERS, INC. PRIOR TO CONSUMMATION OF THE
ACQUISITIONS AND (III) THE TERM "KUI" REFERS TO KEITH UDDENBERG, INC. PRIOR TO
THE KUI ACQUISITION AND, THEREAFTER, TO THE SURVIVING CORPORATION IN THE KUI
ACQUISITION. EXCEPT AS OTHERWISE SPECIFIED, REFERENCES TO NUMBERS OF STORES
PRIOR TO CONSUMMATION OF THE ACQUISITIONS ARE AS OF DECEMBER 28, 1996 FOR EACH
OF QFC, HUGHES AND KUI. REFERENCES TO THE NUMBER OF STORES TO BE OPERATED BY THE
COMPANY ARE BASED ON THE DECEMBER 28, 1996 TOTALS, BUT GIVE EFFECT TO THE
ACQUISITIONS AND TO THE ANTICIPATED KUI STORE DIVESTITURES DISCUSSED HEREIN.
UNLESS OTHERWISE EXPRESSLY STATED OR THE CONTEXT OTHERWISE REQUIRES, (I)
REFERENCES TO SUPERMARKETS OR THE SUPERMARKET INDUSTRY EXCLUDE WAREHOUSE STORES,
CLUB STORES, DEEP DISCOUNT FOOD OPERATORS, CONVENIENCE STORES, SUPERCENTERS AND
SIMILAR FOOD RETAILERS, WHILE REFERENCES TO FOOD RETAILERS OR THE FOOD RETAILING
INDUSTRY INCLUDE SUCH WAREHOUSE STORES AND OTHER FOOD RETAILERS, (II) REFERENCES
TO THE "SEATTLE/ PUGET SOUND REGION" ARE REFERENCES TO KING, SNOHOMISH, PIERCE
AND KITSAP COUNTIES IN THE STATE OF WASHINGTON AND (III) REFERENCES TO "SOUTHERN
CALIFORNIA" ARE REFERENCES TO THE COUNTIES OF LOS ANGELES, ORANGE, RIVERSIDE,
SAN BERNARDINO, SANTA BARBARA AND VENTURA IN THE STATE OF CALIFORNIA AND EXCLUDE
SAN DIEGO COUNTY.
THE COMPANY
QFC is a leading operator of premium supermarkets in the Seattle/Puget Sound
region of the State of Washington having expanded its market share from
approximately 6% of total supermarket sales in 1986 to approximately 20% today,
according to management estimates and calculated on a pro forma basis after
giving effect to the KUI Acquisition and the anticipated divestiture of five KUI
stores (one of which has been sold to date). Since commencing operations in
1954, QFC has developed a modern store base in many prime locations, strong name
recognition and a reputation for superior quality and service. During the ten
fiscal years ended December 28, 1996, QFC's EBITDA margin has increased from
4.6% to 8.6% (7.9% for the 12 weeks ended March 22, 1997) which management
attributes primarily to the development of innovative merchandising strategies,
such as increased emphasis on higher margin specialty departments, combined with
enhanced cost controls. With the acquisition of Hughes, QFC has entered into new
markets beyond the Seattle/Puget Sound area and, with the KUI Acquisition, QFC
has continued to expand within the region as part of its overall strategy of
becoming a leading multi-regional operator of premium supermarkets. After giving
effect to the Hughes Acquisition, which closed on March 19, 1997, the Company
operates 84 stores in the Seattle/Puget Sound region as well as 57 "Hughes
Family Markets" stores in Southern California. On a pro forma basis after giving
effect to the Acquisitions, the Company would have had sales of approximately
$2.1 billion and EBITDA of approximately $117.4 million for the fiscal year
ended December 28, 1996.
Management believes that the Company's QFC stores offer customers superior
value by emphasizing an extensive selection of high quality perishable items,
excellent customer service, convenient store locations and hours, a variety of
specialty departments and competitive prices. QFC stores, which average
approximately 31,000 square feet in size, are open seven days a week, 24 hours a
day, and feature a number of specialty departments such as full service
delicatessens, fresh seafood departments, bakery departments with
coffee/espresso bars, and floral departments. Many QFC stores also offer natural
food sections, video rentals, fresh juice bars and pharmacies. In addition, QFC
has been an industry leader in leasing space within its stores to branded
specialty food operators, including STARBUCKS COFFEE, CINNABON WORLD FAMOUS
CINNAMON ROLLS AND NOAH'S NEW YORK BAGELS, as well as to full service banks such
as SEAFIRST BANK. QFC has recently significantly expanded its selection of
prepared foods and "home meal replacement" items which management believes
appeal to the increasing convenience orientation of consumers. Examples include
complete hot meals which are ready to serve, pre-cooked dinners which are ready
to heat and eat, "Chef's Express" gourmet entrees which are specially prepared
and ready to cook, and "Northwest Sandwich Bars"
3
<PAGE>
which feature a variety of pasta dishes, specialty and made-to-order hot and
cold sandwiches, pre-made salads and self-serve soup and salad bars. Management
believes that over the last five fiscal years, QFC has achieved EBITDA margins
well in excess of the average for the U.S. supermarket industry, which
management attributes primarily to QFC's superior merchandising and operating
practices combined with favorable customer demographics in the Seattle/Puget
Sound region.
After giving effect to the Hughes Acquisition, which closed on March 19,
1997, the Company owns and operates 57 premium supermarkets under the "Hughes
Family Markets" name in Southern California. Management believes that Hughes,
which commenced operations in 1952 with one store, has developed a strong
reputation in Southern California for providing high levels of customer service
together with a broad selection of high-quality meat, produce and other
perishables. Management estimates that Hughes' market share among Southern
California supermarkets (excluding San Diego county) was approximately 5% for
1995. Hughes' stores average approximately 37,000 square feet in size and are
generally located near desirable residential areas. Management believes that
Hughes has among the most modern store bases of any supermarket chain in
Southern California due in part to its ongoing store remodeling program. Hughes
supplies the majority of its stores' inventory from its own centrally located
600,000 square foot warehousing and distribution facility built in 1993. Hughes
also owns a 50% interest in Santee Dairies, Inc. ("Santee"), one of the largest
dairy plants in California, which provides dairy and other products to Hughes,
as well as to certain other third parties, under the well-known "Knudsen" and
other labels.
The KUI Acquisition, which closed on February 14, 1997, provides the Company
with desirable store locations primarily in the southern Puget Sound region and
the Olympic Peninsula of the State of Washington, areas in which QFC currently
has a limited presence. Management currently anticipates that it will retain 20
of the 25 stores acquired from KUI. Most of such stores will be converted to the
QFC name and format and remodeled in order to implement QFC's merchandising and
operating practices, although it is expected that the Company (through KUI) may
continue to operate certain of these stores under KUI's current "Stock Market"
name and format. In addition, management believes that the KUI Acquisition
provides the Company with additional critical mass in the Seattle/Puget Sound
region which should improve purchasing and distribution and create economies of
scale. After giving effect to the KUI Acquisition, including the anticipated
divesture of five KUI stores (one of which has been sold to date), management
estimates that QFC's market share among supermarkets in the Seattle/Puget Sound
region is approximately 20% today. See "The Acquisitions."
GROWTH STRATEGY
The Company's strategic objective is to become a leading multi-regional
operator of premium supermarkets in order to continue to achieve its goal of
controlled and profitable growth. To this end, the Company plans to capitalize
on its acquisition, merchandising and operating expertise to: (i) increase sales
and enhance margins in existing and newly acquired stores, (ii) realize the
benefits of the Hughes and KUI Acquisitions, (iii) acquire and build new stores
in its existing and contiguous markets and (iv) acquire supermarket chains in
attractive new markets. In order to facilitate this phase of the Company's
development, the Company has hired a new chief executive officer, senior vice
president for corporate development and senior vice president of marketing and
public affairs to pursue and integrate acquisitions at the holding company
level, thus allowing current senior management to remain focused on existing
operations. See "The Proposed Reorganization" and "Management."
INCREASE SALES AND ENHANCE MARGINS IN EXISTING AND NEWLY ACQUIRED
STORES. One of the Company's top priorities is to increase sales and enhance
margins in existing and newly acquired stores by: (i) emphasizing higher margin
specialty and convenience items, (ii) expanding sales of proprietary brands
(private label) and (iii) maintaining its high quality store base.
4
<PAGE>
- - EMPHASIZE HIGHER MARGIN SPECIALTY AND CONVENIENCE ITEMS. The Company intends
to further develop and implement specialty and convenience-oriented
departments at its stores, which management believes are important tools to
enhance margins, increase foot traffic and build customer loyalty. QFC has
been an industry leader in the development of higher margin products and
services, such as prepared foods and home meal replacement items, which are
geared toward the increasing convenience orientation of consumers.
Management believes that the increase in QFC's EBITDA margins over the past
ten fiscal years has been due in part to sales of items within these
departments, as well as to sales of its seafood, delicatessen, bakery,
floral and other specialty products.
- - EXPAND SALES OF PROPRIETARY BRANDS. QFC recently adopted a program designed
to increase its sales of proprietary brands, which typically carry higher
margins than comparable branded products and at the same time help promote
customer loyalty. After a long-term study of operating practices both in the
U.S. and abroad, QFC developed a three-tier proprietary brands philosophy
which is approximately two-thirds implemented. As a result of this effort,
QFC has increased the percentage of proprietary brand sales from less than
3% at the beginning of fiscal 1996 to approximately 8.5% at the end of
fiscal 1996. This percentage is well below the estimated 1995 supermarket
industry average, which management believes was approximately 15% of sales,
thus providing a significant opportunity for growth of proprietary brand
sales.
- - MAINTAIN ITS HIGH QUALITY STORE BASE. The Company believes that QFC and
Hughes stores are among the most modern and well-maintained in their
respective regions, due in part to their respective remodeling programs.
During the five fiscal years ended December 28, 1996, QFC remodeled or "re-
remodeled" 31 stores, of which 16 were acquired stores which were remodeled
as part of their conversion to the QFC format. Of the 20 stores expected to
be retained in the KUI Acquisition, 13 are presently expected to be
significantly remodeled to facilitate the implementation of QFC's grocery
merchandising and operating practices prior to their conversion to the QFC
name and format. While management believes that the Hughes stores are
generally in good condition, the Company plans to selectively remodel
certain Hughes stores in order to enhance the presentation and merchandising
of meat, seafood, delicatessen items and other perishables and to add or
enhance full-service and leased specialty departments.
REALIZE THE BENEFITS OF THE HUGHES AND KUI ACQUISITIONS. Management
believes that the acquisition of Hughes and KUI will provide the Company with a
number of benefits, including the following:
- - CROSS-FERTILIZATION OF OPERATING CAPABILITIES. Management believes that
significant opportunities exist to improve results of operations at acquired
stores through the implementation of QFC's merchandising and operating
practices. For example, management believes that the Hughes stores will
benefit from the adoption of certain merchandising practices successfully
implemented at QFC stores, including practices relating to the development
of higher margin specialty and convenience oriented departments. The Company
will also seek to expand the use of proprietary brands at Hughes by drawing
on QFC's own recently developed proprietary brands program. Similarly, the
Company expects its QFC stores to benefit from the experience of Hughes'
management in areas such as purchasing, distribution and category
management.
- - PURCHASING AND DISTRIBUTION-RELATED BENEFITS. Management anticipates that
certain benefits will accrue to the Company in the area of purchasing and
distribution as a result of both the Hughes and KUI Acquisitions. For
example, as a result of the KUI Acquisition, management believes that the
Company's larger size in the Seattle/Puget Sound region provides the Company
increased flexibility with regard to supply and distribution options and
should enhance its ability to negotiate lower prices from its suppliers.
Management also expects that the Company's Seattle/Puget Sound operations
will benefit from Hughes' experience in operating its own warehouse and
distribution center. Further, to the extent that the Company adds to its
store base in Southern California, it is expected that it will
5
<PAGE>
benefit from excess capacity at the Hughes distribution center, which
management estimates is currently operating at approximately 50% of
capacity.
- - COST SAVINGS AND VOLUME EFFICIENCIES. The Company expects to achieve cost
savings from the elimination of redundant administrative staff, the
consolidation of management information systems and a decreased reliance on
certain outside services as a result of the Acquisitions. In addition, the
Company expects to benefit from savings in the areas of store supplies,
store maintenance, and risk management, among other areas, as a result of
increased purchasing power and volume and operating efficiencies.
ACQUIRE AND BUILD NEW STORES IN ITS EXISTING AND CONTIGUOUS MARKETS. The
Company plans to continue to acquire, and to a lesser extent build, new stores
in its existing and contiguous markets. Management believes that in-market
acquisitions provide an efficient way for the Company to increase sales in its
markets without the resulting increase in overall supermarket capacity caused by
the construction of additional stores. During the past six years, QFC has
acquired and successfully integrated 30 stores from ten operators in the
Seattle/Puget Sound region, including 12 stores acquired from Olson's Food
Stores in 1995. The KUI Acquisition represents a continuation of this strategy
of expanding QFC's presence in its existing and contiguous markets. Over the
last several years, the Seattle/Puget Sound region has been one of the fastest
growing areas in the United States in terms of population, and the KUI
Acquisition not only expands the Company's presence in the region but also
broadens the Company's coverage of the southern portion of the region and the
Olympic Peninsula. See "Business--Market Overview--Seattle/Puget Sound." This
strategy also encompasses expanding into the northern part of the Puget Sound
region as well as into contiguous areas such as eastern Washington and Portland,
Oregon. The Company will seek to implement this strategy in its new Southern
California market as well.
ACQUIRE SUPERMARKET CHAINS IN ATTRACTIVE NEW MARKETS. The Company will
continue to actively seek growth opportunities outside its existing and
contiguous markets by pursuing the acquisition of supermarket chains which are
well-known within their respective markets, have strong growth potential and are
located in geographic areas exhibiting favorable economic and demographic
conditions. For example, Hughes has a reputation for high quality products and
customer service with stores located in Southern California, an area which the
Company believes has recently begun to exhibit growth in jobs and population and
a decrease in unemployment. See "Business--Market Overview--Southern
California." The acquisition of Hughes is the first step in the Company's plans
to become a leading multi-regional operator of premium supermarkets. Management
believes that there are a number of attractive acquisition opportunities in
desirable growth areas, and that these opportunities are attributable in part to
the fragmented nature of a large portion of the domestic supermarket industry.
THE ACQUISITIONS AND THE FINANCINGS
On February 14, 1997, QFC acquired Keith Uddenberg, Inc. for approximately
$35.3 million in cash and 904,646 shares of Common Stock. The cash portion of
the purchase price was financed, and approximately $23.8 million of then
existing KUI indebtedness was refinanced, with borrowings under QFC's Old Credit
Facility (as defined herein). QFC acquired Hughes on March 19, 1997 for
approximately $359.8 million cash, subject to certain adjustments. See "The
Acquisitions."
The Company required approximately $572.1 million in cash to: (i) finance
the Hughes Acquisition, (ii) refinance QFC's bank indebtedness (including the
$59.1 million of indebtedness incurred in connection with the KUI Acquisition)
and (iii) pay fees and expenses. Such funds were provided by: (i) the proceeds
from the Common Stock Offering, (ii) the proceeds from the sale of the Old Notes
and (iii) borrowings by the Company under an amended and restated $250 million
term loan facility (the "Term Loan Facility"). The Company also received an
additional $29.7 million to be used for general corporate purposes. See "Use of
Proceeds" and "Description of Certain Indebtedness."
6
<PAGE>
The following table sets forth the sources and uses of funds in connection
with the transactions described above.
<TABLE>
<CAPTION>
AMOUNT
-------------------
<S> <C>
(DOLLARS IN
MILLIONS)
SOURCES:
The Common Stock Offering(1)................................................................ $ 201.8
The sale of the Old Notes(2)................................................................ 150.0
Term Loan Facility.......................................................................... 250.0
------
Total Sources............................................................................. $ 601.8
------
------
USES:
Hughes purchase price....................................................................... $ 359.8
Refinancing of QFC bank debt(3)............................................................. 197.0
Fees and expenses........................................................................... 15.3
General corporate purposes.................................................................. 29.7
------
Total Uses................................................................................ $ 601.8
------
------
</TABLE>
- ------------------------
(1) Represents gross proceeds from the sale of 5,175,000 shares at a price of
$39 per share.
(2) Represents gross proceeds from the sale of the Old Notes.
(3) Includes $59.1 million of indebtedness which was incurred under the Old
Credit Facility to pay the $35.3 million cash portion of the KUI purchase
price and to refinance $23.8 million of previously existing KUI
indebtedness.
THE PROPOSED REORGANIZATION
Following consummation of the Exchange Offer, the Company intends to seek
shareholder approval to change its corporate structure (the "Reorganization").
Subject to obtaining such shareholder approval, upon consummation of the
Reorganization, KUI will remain a subsidiary of QFC, and each of QFC and Hughes
will become a subsidiary of Quality Food Holdings, Inc., a Delaware corporation
("Holding Company"), which in turn will be a subsidiary of Quality Food, Inc., a
Delaware corporation ("Parent"), and the current shareholders of QFC will
thereupon generally become shareholders of Parent. Parent and Holding Company
are both currently subsidiaries of QFC.
In connection with the Hughes Acquisition, the Company entered into the Term
Loan Facility, an amended and restated $125 million revolving credit facility
(the "Revolving Credit Facility") and a new $225 million reducing revolving
credit facility (the "Acquisition Facility" and, together with the Term Loan
Facility and the Revolving Credit Facility, the "New Credit Facility"). Although
QFC is initially the sole borrower under the New Credit Facility, in the event
the proposed Reorganization occurs it is expected that Holding Company will
become the borrower under both the Revolving Credit Facility and the Acquisition
Facility, while QFC will remain the borrower under the Term Loan Facility.
Hughes, KUI, Holding Company and Parent have initially guaranteed the Company's
borrowings under the New Credit Facility. QFC will remain the obligor on the
Exchange Notes after the Reorganization and each of Hughes, KUI and Holding
Company will continue to guarantee QFC's obligations thereunder. Parent will not
be a guarantor of the Exchange Notes either before or after the Reorganization.
See "The Proposed Reorganization" and "Description of Certain Indebtedness."
7
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $150,000,000 aggregate principal
amount of its new 8.70% Series B Senior Subordinated
Notes due 2007 (the "Exchange Notes") for a like
aggregate principal amount of its outstanding 8.70%
Senior Subordinated Notes due 2007 (the "Old Notes" and
together with the Exchange Notes, the "Notes"). The
terms of the Exchange Notes are identical in all
material respects (including principal amount, interest
rate and maturity) to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferrable by Holders (as defined) thereof (other
than as provided herein), and are not subject to any
covenant regarding registration under the Securities
Act. See "The Exchange Offer."
Interest Payments................. Interest on the Exchange Notes shall accrue from the
last interest payment date (March 15 or September 15) on
which interest was paid on the Notes so surrendered or,
if no interest has been paid on such Notes, from March
19, 1997 (the "Interest Payment Date").
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date;
Withdrawal of Tender.............. The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless the Exchange
Offer is extended, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended. Tenders may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer--Withdrawal
Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the fourth business day following the Expiration
Date.
Conditions to the Exchange
Offer............................. The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering Old
Notes............................. Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
any other required documentation to the Exchange Agent
(as defined) at the address set forth therein. See "The
Exchange Offer--Procedures for Tendering Old Notes" and
"Plan of Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax
purposes. See "Certain United States Federal Income Tax
Considerations."
Special Procedures for Beneficial
Owners............................ Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes........ The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery of Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated March 19, 1997 among the Company, the Guarantors,
and Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch & Co and BancAmerica Securities, Inc. (the
"Initial Purchasers") and, accordingly, there will be no
liquidated damages in respect of
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
the Old Notes pursuant to the terms of the Registration
Rights Agreement, and the holders of the Old Notes will
have no further registration or other rights under the
Registration Rights Agreement. Holders of the Old Notes
who do not tender their Old Notes in the Exchange Offer
will continue to hold such Old Notes and will be
entitled to all the rights and limitations applicable
thereto under the Indenture between the Company and
First Trust National Association relating to the Old
Notes and the Exchange Notes (the "Indenture"), except
for any such rights under the Registration Rights
Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and
the acceptance for exchange of all validly tendered Old
Notes pursuant to, the Exchange Offer. All untendered
Old Notes will continue to be subject to the
restrictions on transfer provided for in the Old Notes
and in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading
market for untendered Old Notes could be adversely
affected.
Consequence of Failure to
Exchange.......................... Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon as
a consequence of the offer or sale of the Old Notes
pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the
Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... First Trust National Association is serving as exchange
agent (the "Exchange Agent") in connection with the
Exchange Offer. See "The Exchange Offer--Exchange
Agent."
</TABLE>
10
<PAGE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Securities Offered.......... $150,000,000 aggregate principal amount of the Company's 8.70%
Series B Senior Subordinated Notes due 2007.
Maturity Date............... March 15, 2007.
Interest Payment Dates...... March 15 and September 15 of each year, commencing September
15, 1997.
Optional Redemption......... The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, on or after March 15, 2002, at
the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption. However, at any
time prior to March 15, 2000 the Company may redeem up to 20%
of the aggregate principal amount of the Exchange Notes
originally issued at a redemption price of 108% of the
principal amount thereof, plus accrued and unpaid interest to
the date of redemption, with the net cash proceeds of one or
more public offerings of common stock, prior to the
Reorganization, of the Company or, after the Reorganization,
of Parent; provided that at least 80% of the aggregate
principal amount of the Exchange Notes originally issued
remains outstanding immediately after the occurrence of such
redemption. See "Description of Exchange Notes--Optional
Redemption."
Guarantees.................. The Exchange Notes will be guaranteed on an unsecured senior
subordinated basis (the "Guarantees"), prior to the
Reorganization, by all of the Company's existing and future
subsidiaries (including Holding Company but excluding Parent
and Unrestricted Subsidiaries and any Non-Guarantor Foreign
Subsidiaries of the Company) and, after the Reorganization (if
consummated), by Holding Company and all of Holding Company's
existing and future subsidiaries (excluding QFC (which will
remain the obligor on the Exchange Notes) and Unrestricted
Subsidiaries and any Non-Guarantor Foreign Subsidiaries of
Holding Company) (collectively, the "Guarantors"). The
Guarantors are Holding Company, Hughes and KUI (the "Initial
Guarantors"). See "Description of Exchange Notes--Guarantees."
In the event that the Reorganization is consummated, Hughes
and QFC will become subsidiaries of Holding Company and KUI
will remain a subsidiary of QFC, and Holding Company, Hughes
and KUI will remain Guarantors of the Exchange Notes. However,
Parent will not be a guarantor of the Exchange Notes (either
before or after the Reorganization) and, if the Reorganization
occurs, Parent thereafter may establish or acquire
subsidiaries which, so long as they are not subsidiaries of
Holding Company, will also not be guarantors of the Exchange
Notes. Parent and Holding Company are currently subsidiaries
of QFC. See "The Proposed Reorganization" and "Risk
Factors--Absence of Restrictions on Parent Following
Reorganization."
Ranking..................... The Exchange Notes and the Guarantees will be general
unsecured obligations of the Company and the Guarantors,
respectively, subordinated in right of payment to all existing
and future Senior Debt (as defined) of the Company and the
Guarantors, as applicable,
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
including borrowings under the New Credit Facility and
guarantees of such borrowings. As of March 22, 1997, the
Company and its consolidated subsidiaries had approximately
$282.9 million of outstanding Senior Debt, $250 million of
which was secured debt outstanding under the New Credit
Facility. See "Description of Certain Indebtedness--New Credit
Facility" and "Description of Exchange Notes--Subordination."
Change of Control Offer..... Upon a Change of Control, the Company will be required to
offer to repurchase all outstanding Exchange Notes at 101% of
the principal amount thereof, plus accrued and unpaid interest
to the date of repurchase. See "Description of Exchange
Notes--Certain Covenants--Repurchase of Notes Upon a Change of
Control."
Certain Covenants........... The indenture under which the Exchange Notes will be issued
(the "Indenture") will contain certain covenants that limit,
subject to certain significant exceptions, the ability of,
prior to the Reorganization, the Company and its Subsidiaries
(as defined) and, following the Reorganization, Holding
Company and its Subsidiaries (including the Company) to, among
other things, incur additional Indebtedness (as defined
herein) and issue certain disqualified stock; pay dividends or
make certain other distributions; cause or permit to exist any
consensual restriction on the ability of certain parties to
pay dividends or make certain other distributions; layer
Indebtedness; create certain liens securing Indebtedness other
than Senior Debt; sell certain assets; enter into certain
transactions with affiliates; enter into certain mergers or
consolidations; or engage in certain new lines of business.
See "Description of Exchange Notes--Certain Covenants."
Absence of Market for
the Exchange Notes.......... The Exchange Notes will be a new issue of securities for which
there currently is no market. Although the Initial Purchasers
have informed the Company that they each currently intend to
make a market in the Exchange Notes, they are not obligated to
do so, and any such market making may be discontinued at any
time without notice. Accordingly, there can be no assurance as
to the development or liquidity of any market for the Exchange
Notes. The Company does not intend to apply for listing of the
Exchange Notes, on any securities exchange or for quotation
through the National Association of Securities Dealers
Automated Quotation System.
Risk Factors................ Prospective investors should carefully consider all the
information set forth and incorporated by reference herein
and, in particular, should evaluate the specific factors set
forth under "Risk Factors" before tendering Old Notes in the
Exchange Offer.
</TABLE>
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following table sets forth summary unaudited pro forma condensed
consolidated financial data of the Company for the fiscal year ended December
28, 1996 and for the 12 weeks ended March 22, 1997. The pro forma operating and
other data for the fiscal year ended December 28, 1996 combines the results of
operations of QFC for such fiscal year with the results of operations of Hughes
for its fiscal year ended March 2, 1997 and the results of operations of KUI for
its fiscal year ended December 28, 1996 and gives effect to each of the
following transactions as if such transactions had occurred on December 31,
1995: (i) the Hughes Acquisition and certain related transactions; (ii) KUI's
spin off of certain assets and liabilities, primarily related to non-grocery
operations, prior to the KUI Acquisition; (iii) the KUI Acquisition and certain
related transactions; (iv) the application of the net proceeds from the Common
Stock Offering and the sale of the Old Notes (the "Offerings") and borrowings
under the New Credit Facility to finance the Hughes Acquisition and to refinance
bank debt of QFC which was outstanding at the time of the Closing (including
indebtedness which was incurred in connection with the KUI Acquisition); and (v)
QFC's proposed divestiture of five of the recently acquired KUI stores (one of
which has been sold to date). The pro forma operating and other data for the 12
weeks ended March 22, 1997 combines results of operations of QFC for the 12
weeks ended March 22, 1997, including consolidated results of operations for KU
Acquisition Corporation ("KUA") and Hughes subsequent to the respective
acquistions, with the results of operations of Hughes for the period from
December 29, 1996 through March 18, 1997 and the results of operations of KUI
for the period from December 29, 1996 through February 14, 1997 and gives effect
to the transactions described above as if such transactions had occurred on
December 29, 1996.
The pro forma financial data set forth below are based upon a number of
assumptions and estimates, are subject to a number of uncertainties, and do not
purport to be indicative of the actual results of operations that would have
been achieved had the above described transactions in fact occurred on the dates
indicated, nor do they purport to be indicative of the results of operations
that may be achieved in the future. The following pro forma financial data
should be read in conjunction with "Unaudited Pro Forma Condensed Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements of
QFC, Hughes, KUI and KUA and related notes thereto included herein.
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 12 WEEKS ENDED
DECEMBER 28, 1996 MARCH 22, 1997
----------------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
OPERATING DATA:
Sales....................................................................... $ 2,099,756 $ 475,894
Gross Profit................................................................ 498,125 122,013
Marketing, General and Administrative Expenses.............................. 427,741 101,556
Operating Income............................................................ 70,384 20,457
Net Interest Expense(1)..................................................... 32,156 7,148
Net Earnings................................................................ 20,023 7,323
Earnings Per Share(2)....................................................... .95 .34
Ratio of Earnings to Fixed Charges(3)....................................... 1.8x 2.1x
OTHER DATA:
EBITDA(4)................................................................... $ 117,441 $ 32,946
EBITDA Margin(5)............................................................ 5.6% 6.9%
Depreciation and Amortization............................................... $ 48,228 $ 11,322
Ratio of EBITDA to Net Interest Expense..................................... 3.7x 4.6x
</TABLE>
- ------------------------------
(1) Net of interest income.
(2) Earnings per share have been calculated giving effect to (i) 5,175,000
shares sold in the Common Stock Offering and (ii) 904,646 shares issued in
connection with the KUI Acquisition.
(3) For purposes of these ratios, (i) earnings have been calculated by adding
interest expense and the estimated interest portion of rentals to earnings
before income taxes and (ii) fixed charges are comprised of interest expense
and the estimated interest portion of rentals.
(4) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and, if applicable,
equity earnings (losses) from subsidiaries, and non-recurring and
extraordinary items. EBITDA excludes union, pension and benefit credits of
$3.0 million and $0 recorded by Hughes for the fiscal year ended March 2,
1997 and the 12 weeks ended March 23, 1997 respectively. 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 generally
accepted accounting principles ("GAAP") and should not be considered as an
alternative to cash flow as a measure of liquidity or as an alternative to
net earnings as an indicator of operating performance. 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 its debt.
(5) EBITDA margin is calculated by dividing EBITDA by sales, in each case for
the applicable period.
14
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF QFC
The following table sets forth summary historical financial data of QFC as
of and for each of the five fiscal years in the period ended December 28, 1996
and as of and for the 12 weeks ended March 22, 1997 (including results of
operations for KUA and Hughes subsequent to the respective Acquisitions), and
March 23, 1996. Data as of and for each of the three fiscal years in the period
ended December 28, 1996 (except for data regarding stores open at the end of
period, Same Store Sales increase (decrease) and total square footage) have been
derived from audited financial statements of QFC, which are included herein.
Data as of and for each of two fiscal years ended December 26, 1992 and December
25, 1993 (except for data regarding stores open at the end of period, Same Store
Sales increase (decrease) and total square footage) have been derived from
audited financial statements of QFC which are not included herein. Data as of
and for the 12 weeks ended March 22, 1997 and March 23, 1996 have been derived
from unaudited financial statements of QFC, which are included herein and which,
in the opinion of management, include all necessary adjustments, consisting only
of normal recurring adjustments, necessary for fair presentation of the
information. Data as of and for the 12 weeks ended March 22, 1997 and March 23,
1996 do not purport to be indicative of results to be expected for the full
fiscal year. The following information is qualified by reference to, and should
be read in conjunction with, "Unaudited Pro Forma Condensed Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical statements of QFC and
related notes thereto included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12 WEEKS 12 WEEKS
ENDED ENDED
DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 23, MARCH 22,
1992 1993 1994(1) 1995(2) 1996 1996(2) 1997
------------- ------------ ------------ ------------ ------------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.................... $ 460,107 $ 518,260 $ 575,879 $ 729,856 $ 805,281 $ 176,627 $ 233,154
Gross Profit............. 116,989 131,365 145,168 179,422 201,334 43,314 58,241
Marketing, General and
Administrative
Expenses.............. 80,144 92,468 105,956 136,645 152,337 33,486 45,374
Operating Income......... 36,845 38,897 39,212 42,777 48,997 9,828 12,867
Interest Expense......... -- -- -- 9,639 9,890 2,588 2,777
Net Earnings............. 25,076 25,994 26,376 20,216 25,418 4,683 6,420
Earnings Per Share....... 1.28 1.33 1.34 1.28 1.71 .32 .40
Ratio of Earnings to
Fixed Charges(3)...... 22.7x 17.6x 15.7x 3.3x 3.4x 2.9x 3.3x
OTHER DATA:
EBITDA(4)................ $ 44,466 $ 48,205 $ 50,817 $ 59,567 $ 69,150 $ 14,473 $ 18,330
EBITDA Margin(5)......... 9.7% 9.3% 8.8% 8.2% 8.6% 8.2% 7.9%
Depreciation and
Amortization.......... $ 7,782 $ 9,283 $ 11,605 $ 16,169 $ 19,477 $ 4,545 $ 5,193
Capital Expenditures..... 26,800 43,000 28,200 89,100 32,556 8,482 5,101
Stores Open at End of
Period................ 33 38 45 62 64 62 146
Same Store Sales Increase
(Decrease)(6)......... 6.5% 4.0% 0.4% (1.5%) 3.3% 1.0% 4.2%
Total Square Footage..... 907,000 1,080,000 1,319,000 1,928,000 2,039,000 1,955,000 5,078,000
BALANCE SHEET DATA (AT END
OF PERIOD):
Net Working Capital
(Deficit)............. $ 18,722 $ 14,329 $ 23,776 $ 5,303 $ 3,457 $ (1,411) $ 48,730
Total Assets............. 150,974 181,275 207,914 282,878 304,017 287,049 1,004,175
Total Debt (including
current portion)...... -- -- -- 164,500 145,000 163,500 432,852
Shareholders' Equity..... 108,345 133,620 158,178 45,368 76,798 50,207 311,700
</TABLE>
- --------------------------
(1) Fiscal year ended December 31, 1994 was a 53 week fiscal year.
15
<PAGE>
(2) Fiscal year ended December 30, 1995 data include a one-time charge of $1.4
million, or $.09 per share, resulting from the Recapitalization (as defined
herein) completed in March 1995.
(3) For purposes of these ratios, (i) earnings have been calculated by adding
interest expense and the estimated interest portion of rentals to earnings
before income taxes and (ii) fixed charges are comprised of interest expense
and the estimated interest portion of rentals.
(4) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and, if applicable,
equity earnings (losses) from subsidiaries, union, pension and benefit
credits, and non-recurring and extraordinary items. EBITDA is a measure
commonly used in the grocery industry and is presented to assist in
understanding the Company's 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 cash flow as a measure of liquidity or as an
alternative to net earnings as an indicator of operating performance. 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 its
debt.
(5) EBITDA margin is calculated by dividing EBITDA by sales, in each case for
the applicable period.
(6) Same Store Sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1994.
16
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF HUGHES
The following table sets forth summary historical financial data of Hughes
and its consolidated subsidiaries as of and for the five fiscal years ended
March 2, 1997. Data as of and for the five fiscal years ended March 2, 1997
(except for data regarding stores open at end of period, Same Store Sales
increase (decrease) and total square footage) have been derived from
consolidated financial statements of Hughes audited by Arthur Andersen LLP,
independent certified public accountants. During each of the four years in the
period ended March 3, 1996, Santee was a 51%-owned subsidiary of Hughes. In
November 1996, Hughes sold a 1% interest in Santee, resulting in Santee ceasing
to be a consolidated subsidiary of Hughes during the fiscal year 1997. The
following information should be read in conjunction with "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Hughes and related notes thereto included
or herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, FEBRUARY 27, FEBRUARY 26, MARCH 3, MARCH 2,
1993 1994 1995 1996(1) 1997
------------ ------------ ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Sales............................................... $1,087,274 $1,083,709 $1,110,947 $1,147,447 $1,001,042
Gross Profit........................................ 225,024 229,084 226,085 245,496 229,987
Selling, General and Administrative Expenses........ 209,918 206,289 209,211 215,234 205,766
Operating Income.................................... 15,106 22,795 16,874 30,262 24,221
Interest Expense.................................... 1,149 4,598 4,664 4,335 3,937
Net Income.......................................... 8,677 11,224 8,374 16,184 9,963
OTHER DATA:
EBITDA(2)........................................... $ 33,379 $ 40,794 $ 36,929 $ 42,439 $ 39,201
EBITDA Margin(3).................................... 3.1% 3.8% 3.3% 3.7% 3.9%
Depreciation and Amortization....................... $ 17,504 $ 19,310 $ 21,313 $ 19,571 $ 17,748
Capital Expenditures................................ 57,862 31,701 36,063 19,633 29,409
Stores Open at End of Period........................ 51 51 53 54 56
Same Store Sales Increase (Decrease)(4)............. (1.7%) 0.7% 1.1% (1.4%) 0.5%
Total Square Footage................................ 1,855,000 1,858,000 1,942,000 1,986,000 2,085,000
BALANCE SHEET DATA (AT END OF PERIOD):
Net Working Capital................................. $ 8,192 $ 16,526 $ 8,628 $ 995 $ (7,526)
Total Assets........................................ 270,611 300,941 316,728 316,499 279,267
Total Debt (including current portion).............. 30,303 37,247 41,984 27,463 6,872
Shareholders' Equity................................ 121,077 131,289 137,975 151,544 160,350
</TABLE>
- --------------------------
(1) Fiscal year ended March 3, 1996 was a 53-week fiscal year.
(2) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and, if applicable,
equity earnings (losses) from subsidiaries, and non-recurring and
extraordinary items. EBITDA excludes union, pension and benefit credits of
$3.0 million, $7.2 million, $3.0 million and $1.2 million recorded by Hughes
for the fiscal year ended March 2, 1997, the fiscal year ended March 3,
1996, the fiscal year ended February 26, 1995 and the fiscal year ended
February 27, 1994, respectively. EBITDA is a measure commonly used in the
grocery industry and is presented to assist in understanding Hughes'
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 cash flow as a measure of liquidity or as an alternative to net earnings
as an indicator of operating performance. 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 its debt.
(3) EBITDA margin is calculated by dividing EBITDA by sales, in each case for
the applicable period.
(4) Same store sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1996.
17
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH AND INCORPORATED BY REFERENCE
HEREIN, HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION
IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE DECIDING TO TENDER OLD NOTES
IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE GENERALLY APPLICABLE
TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES. THE INFORMATION CONTAINED AND
INCORPORATED BY REFERENCE HEREIN CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS COULD CAUSE
RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE
ENVIRONMENT IN THE SUPERMARKET INDUSTRY IN GENERAL AND IN THE COMPANY'S SPECIFIC
MARKET AREAS, CHANGES IN PREVAILING INTEREST RATES AND THE AVAILABILITY OF
FINANCING, INFLATION, CHANGES IN COSTS OF GOODS AND SERVICES, ECONOMIC
CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREAS, LABOR
DISTURBANCES, DEMANDS PLACED ON MANAGEMENT BY THE SUBSTANTIAL INCREASE IN THE
SIZE OF THE COMPANY BECAUSE OF THE ACQUISITIONS, AND CHANGES IN THE COMPANY'S
ACQUISITION PLANS. IN ADDITION, SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY
DEPENDENT UPON ASSUMPTIONS, ESTIMATES AND DATA THAT MAY BE INCORRECT OR
IMPRECISE. ACCORDINGLY, ANY FORWARD-LOOKING STATEMENTS INCLUDED OR INCORPORATED
BY REFERENCE HEREIN DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR
CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO FORMA" OR
"ANTICIPATES," OR THE NEGATIVE THEREOF, OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes will be adversely affected.
RISKS RELATING TO ACQUISITION STRATEGY
At December 28, 1996, QFC had 64 stores in the Seattle/Puget Sound region of
the State of Washington. After giving effect to the Acquisitions and the
anticipated divestiture of certain KUI stores (one of which has been sold to
date), the Company will have a total of 140 stores in both the Seattle/Puget
Sound region and in Southern California. Although Hughes' management is expected
to remain intact and although QFC has recently added senior management, this
significant increase in the size of the Company's operations after the
Acquisitions will substantially increase the demands placed upon the Company's
management, including demands resulting from the need to integrate the
accounting systems, management information systems and other operations of
Hughes and KUI with those of QFC, and the Company is unable to predict the
effect of either Acquisition on its results of operations, including earnings
per share. In that regard, after giving effect to the Acquisitions, the
Financings and certain related
18
<PAGE>
transactions, the Company's pro forma earnings per share for the 12 weeks ended
March 22, 1997 and the fiscal year ended December 28, 1996 would have been lower
than the Company's historical earnings per share for those periods. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements." Failure to
effectively integrate the operations of the acquired businesses with those of
QFC could have a material adverse effect on the Company.
A substantial portion of QFC's growth over the last several years has been
attributable to acquisitions. Further, a principal component of the Company's
strategy is to continue to grow profitably and in a controlled manner in both
existing and new markets by acquiring new stores, acquiring other regional
supermarket chains and remodeling newly-acquired and existing stores. The
Company's future growth will be dependent upon a number of factors, including
the Company's ability to identify acceptable acquisition candidates, consummate
acquisitions on favorable terms, successfully integrate acquired businesses,
expand its customer base at existing and acquired locations and obtain financing
to support expansion. There can be no assurance that the Company will be
successful in implementing its acquisition strategy, that growth will continue
at historical levels or at all, or that any expansion will improve operating
results, although in order to facilitate this phase of its development the
Company has hired a new chief executive officer and a senior vice president for
corporate development to pursue and integrate acquisitions at a holding company
level, thus allowing current senior management to remain focused on existing
operations. The failure to identify, acquire and integrate acquired businesses
effectively could adversely affect the Company's operating prospects for future
growth.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. As of March 22, 1997, the Company and its
consolidated subsidiaries had an aggregate of $432.9 million of outstanding
consolidated indebtedness and consolidated shareholders' equity of $311.7
million. See "Capitalization." In addition, the Company intends to continue to
seek to acquire additional supermarket chains and supermarkets and, to the
extent that the Company acquires entities with existing debt or makes
acquisitions which are financed with the proceeds from borrowings, the Company's
outstanding indebtedness will increase, perhaps substantially.
The Company's high degree of leverage could have important consequences to
investors, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired in the future; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) certain of
the Company's borrowings are and will continue to be at variable rates of
interest (including borrowings under the New Credit Facility), which will expose
the Company to the risk of increased interest rates; (iv) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (v) the Company's substantial
degree of leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures and make it
more vulnerable to a downturn in general economic conditions or its business.
See "Description of Certain Indebtedness."
ABILITY TO SERVICE DEBT
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to economic conditions and
to financial, business and other factors beyond its control. If the Company's
cash flow and capital resources are insufficient to fund its debt service
obligations, the Company may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure its debt. There can be no assurance that the Company's operating
results, cash flow and capital resources will be sufficient for payment of its
indebtedness in the future. In the absence of such operating results and
resources, the Company could face substantial liquidity problems and might be
19
<PAGE>
required to dispose of material assets or operations to meet its debt service
and other obligations, and there can be no assurance as to the timing of such
sales or the proceeds that the Company could realize therefrom. In addition,
because the Company's obligations under the New Credit Facility will bear
interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. The Company will be required to make scheduled principal payments
under the New Credit Facility commencing in June 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
RESTRICTIVE DEBT COVENANTS; COMPLIANCE WITH DEBT INSTRUMENTS
The New Credit Facility and the Indenture relating to the Notes (the
"Indenture") will contain a number of significant covenants that, among other
things, will restrict the ability of the Company (and in the case of the New
Credit Facility, if the proposed Reorganization is consummated, Parent) and its
subsidiaries to dispose of assets, incur additional indebtedness, repay other
indebtedness, pay dividends, create liens on assets, enter into leases, make
investments, loans or advances, make acquisitions, engage in mergers or
consolidations, engage in certain transactions with affiliates and otherwise
restrict corporate activities. In addition, under the New Credit Facility, the
Company (and, if the proposed Reorganization is consummated, Parent) will be
required to comply with specified financial ratios and tests, including an
interest and rental expense coverage ratio, a total funded debt to EBITDA ratio,
a senior funded debt to EBITDA ratio and a minimum net worth test. Moreover, a
Change of Control (as defined in the Indenture relating to the Exchange Notes)
and similar events will constitute events of default under the New Credit
Facility. The New Credit Facility is initially secured by the capital stock of
Holding Company, Hughes and KUI and the pledge of certain intercompany
indebtedness and after the Reorganization (if it occurs), will be secured by the
capital stock of Holding Company, QFC, Hughes and KUI and the pledge of certain
intercompany indebtedness. See "Description of Certain Indebtedness." Likewise,
the instruments and agreements governing other indebtedness which the Company
and its subsidiaries may incur in the future may also contain covenants
restricting their activities or requiring compliance with specified financial
ratios and tests.
The Company's ability to remain in compliance with certain such agreements
and covenants will depend upon its results of operations and may be affected by
events beyond its control, including economic, financial and industry
conditions. Accordingly, there can be no assurance that the Company will remain
in compliance with such agreements and covenants. In the event of a default
under the New Credit Facility or the Indenture or under instruments or
agreements relating to any other indebtedness of the Company or its
subsidiaries, the holders of such indebtedness generally will be able to declare
all such indebtedness, together with accrued interest thereon, to be due and
payable immediately and, in the case of collateralized indebtedness, to proceed
against their collateral. In addition, default under one debt instrument could
in turn permit lenders under other debt instruments to declare borrowings
outstanding thereunder to be due and payable pursuant to cross-default clauses.
Moreover, upon the occurrence of an event of default under the New Credit
Facility, the commitment of the lenders thereunder to make further loans to the
Company could be terminated. Accordingly, the occurrence of a default under any
debt instrument could have a material adverse effect on the Company. See also
"--Risks Relating to Santee Dairies" below.
The Company anticipates that under the New Credit Facility, if the
Reorganization occurs, each of Parent and Holding Company will remain subject to
the restrictive covenants and agreements to which it was subject, prior to the
Reorganization, as a subsidiary of QFC. Likewise, the Company anticipates that,
following the Reorganization, the New Credit Facility will be secured by the
capital stock of Holding Company, QFC, Hughes and KUI and the pledge of certain
intercompany indebtedness. In addition, if the Reorganization occurs and Parent
and/or Holding Company thereafter incurs indebtedness, the foregoing discussion
would apply generally with respect to any such indebtedness.
20
<PAGE>
GEOGRAPHIC CONCENTRATION
All of QFC's and KUI's current stores are located in the Seattle/Puget Sound
region of the State of Washington and, following the consummation of the Hughes
Acquisition, a substantial percentage of the Company's business will be
conducted in Southern California. Southern California began to experience a
significant economic downturn in 1991, although management believes that the
region has recently begun a recovery. A significant economic downturn in
Southern California, or in the Seattle/Puget Sound region, in general, could
have a material adverse effect on the Company. See "Business--Market Overview."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse-style
stores, club stores, deep discount stores and "supercenters." Supermarket chains
and other food retailers generally compete on the basis of location, quality of
products, service, price, product variety and store condition. The Company
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate in light of existing conditions.
Accordingly, price reductions necessary to respond to competitive pressures may
from time to time adversely affect the Company's results of operations. Some of
the Company's competitors have substantially greater financial and other
resources than the Company and could use those resources to take steps which
could adversely affect the Company's competitive position and results of
operations. In that regard, during the fourth quarter of fiscal 1994 and through
fiscal 1995, the Company experienced an unusually large number of new store
openings and store remodelings by its competitors near its existing stores in
the Seattle/Puget Sound region, which resulted in reduced sales in certain of
the Company's stores. Fewer such openings occurred during fiscal 1996, although
the Company anticipates several competitive openings during 1997 and thereafter,
which could adversely affect the Company. The Company's ability to remain
competitive in its markets will in part depend on its ability to remodel and
update its stores in response to remodelings and new store openings by its
competitors, which in turn will require the continued availability of financing.
See "Business--Competition."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials (together,
"Environmental Laws"). In particular, under applicable Environmental Laws, the
Company may be responsible for remediation of environmental conditions and may
be subject to associated liabilities (including liabilities resulting from
lawsuits brought by private litigants) relating to its stores and the land on
which its stores are situated, regardless of whether the Company leases or owns
the stores or land in question and regardless of whether such environmental
conditions were created by the Company or by a prior owner or tenant. Although
the Company typically conducts a limited environmental review prior to acquiring
or leasing new stores or raw land, there can be no assurance that environmental
conditions relating to prior, existing or future stores or store sites
(including those acquired or to be acquired in the Acquisitions) will not have a
material adverse effect on the Company. See "Business-- Environmental Matters."
LABOR RELATIONS
Approximately 92% of the Company's employees are unionized. While QFC
believes that its relations with its employees are good and that the
relationship among Hughes and KUI and their respective employees have been good,
there can be no assurance that a labor dispute or disturbance will not occur in
21
<PAGE>
the future, which could have a material adverse effect on the Company.
Approximately 2.5% of the Company's employees are covered by collective
bargaining agreements which expire, or are subject to renegotiation, at various
times in 1997, including two labor contracts covering approximately 200
employees of Hughes which have expired and are under discussion with the
applicable unions. There can be no assurance that new agreements will be reached
on terms satisfactory to the Company or that labor costs will not increase,
perhaps substantially, as a result thereof. See "Business--Employees and Labor
Relations."
RISKS RELATING TO SANTEE DAIRIES
Hughes and Stater each own a 50% interest in Santee, which operates one of
the largest dairy plants in Southern California. In order to provide a
consistent source of milk, to accommodate expected expansion at both Hughes and
Stater, and in order to contain costs, Santee has begun construction of a new
dairy plant at an estimated total cost of approximately $100 million (including
production equipment and capitalized interest and other costs) and negotiations
are currently under way with certain parties to provide Santee with
approximately $80 million of long-term financing to fund construction costs. As
of the date hereof, the prospective lenders have orally agreed in principle to
certain primary terms of such long-term financing, including the applicable
interest rate and the Company has paid a non-refundable fee in connection
therewith. See "Description of Certain Indebtedness--Santee Dairies." However,
there can be no assurance that Santee will be able to obtain this long-term
financing on acceptable terms, or at all, and any failure to obtain such
financing could delay construction of the dairy and could have a material
adverse effect on the Company. In that regard, both Hughes and Stater may be
requested to provide credit support for any long-term financing which Santee may
arrange or otherwise enter into agreements or arrangements intended to assure
repayment of such indebtedness. Moreover, because the terms of the proposed
long-term financing have not been finalized, there can be no assurance that the
actual terms of any such financing will not differ materially from those
described herein. As a result, investors will be subject to risks and
uncertainties relating to such financing, including a risk that the definitive
terms thereof may be materially more burdensome to the Company or Santee than
those described herein.
Although it is estimated that, as of April 30, 1997, approximately 50% of
the aggregate budgeted capital expenditures for the construction of the new
dairy had been made, there can be no assurance that the new dairy can be
completed in a timely manner or for the amount currently budgeted, that Santee
will not experience delays or difficulties in the completion of construction of
or the commencement of operations at the new dairy, or that the new dairy will
perform in accordance with expectations. However, pursuant to the terms of the
construction contract for the new dairy, the contractor and the subcontractors
have warranted that for a period of two years they will correct, at their own
expense, any work which proves to be defective in workmanship and materials. Any
equipment incorporated into the new dairy at Santee's request is covered
exclusively by the warranties of the manufacturers. Further, a surety company
has posted a performance bond pursuant to which it has assumed the risk of
delivering a plant meeting the contracted specifications. If, however,
construction is delayed past April 1998 and Santee is required to remain a
tenant at its existing dairy plant, Santee will become subject to an additional
$164,000 per month in rent. Under the terms of the existing lease, Santee can
request an extension of an additional five months, after which time the lease
will terminate. Any termination of the lease at the existing dairy plant before
the new plant is operational would require that the Company seek other suppliers
of milk and similar products for its Hughes stores and could therefore have a
material adverse effect on the Company. In addition, pursuant to an agreement
with the City of Industry Urban-Development Agency in connection with the
construction of the new dairy plant, Santee must complete construction of the
new dairy plant by April 30, 1998 at a total value of at least $65 million. In
the event the new dairy plant is not completed by such date, Santee will become
obligated to pay real property taxes based on the difference between the value
of the dairy at April 30, 1998 and $65 million until the dairy is completed, or
for a maximum of ten years.
22
<PAGE>
In addition, over the past four years, Santee's operations have generated
net losses of approximately $6 million in the aggregate, primarily as a result
of increased rent expense resulting from the expected early termination of the
existing dairy lease and the accelerated depreciation of its leasehold interest
and equipment at the existing dairy. Although it is believed that the new dairy,
when fully operational, will lower Santee's costs of producing fluid milk and
other products, there can be no assurance that this will occur or that these
losses will not continue.
Santee is party to the Santee Credit Facilities (as defined herein), is
currently in default under certain of the financial covenants relating thereto,
and is presently negotiating with its lender to extend the Santee Credit
Facilities and to obtain appropriate waivers. Notwithstanding such default, its
lender has allowed Santee to continue to borrow under the Santee Revolver (as
defined herein). The Santee Bridge Loan (as defined herein) is expected to be
replaced by long-term dairy financing, if and when obtained by Santee. See
"Description of Certain Indebtedness--Santee Dairies." There can be no assurance
that Santee will be able to comply with the covenants and other restrictions in
its debt instruments in the future (including, without limitation, those imposed
by any long-term dairy financing), and a default under those instruments
generally would permit the lenders to accelerate the indebtedness thereunder and
to proceed against any collateral pledged as security for that indebtedness,
which could have a material adverse effect on the Company, particularly if the
Company has provided credit support or entered into other agreements or
arrangments intended to assure the repayment of Santee's indebtedness. It is
contemplated that any long-term financing obtained by Santee will be secured by
certain of its assets, including real property, equipment and machinery, and
will also be secured by the capital stock of Santee which is currently owned by
Hughes and Stater.
Hughes currently purchases substantially all of the fluid milk sold in its
supermarkets from Santee. If the supply of milk from Santee were to be
interrupted for a short period of time because of difficulties relating to the
new dairy currently under construction or otherwise, then Hughes may be able to
purchase milk for its stores from other suppliers, although at higher prices.
However, because there would be a lack of a consistent source of supply, any
long-term disruption could have a material adverse effect on the Company's
results of operations. Pursuant to the anticipated terms of product purchase
agreements expected to be entered into with Santee (the "Product Purchase
Agreements"), each of Hughes and Stater will be obligated to purchase all of its
fluid milk and other specified Santee-produced product requirements from Santee,
subject to certain exceptions. However, as of the date hereof, no Product
Purchase Agreements had been executed. Although such purchases are currently
being made at below market prices, it is expected that the terms of the
long-term financing for the new dairy will require that each of Hughes and
Stater will be required to pay increased prices to the extent necessary to
maintain Santee's debt service coverage ratio and fixed charge coverage ratio
above specified levels. As a result, there can be no assurance that the prices
paid by Hughes to Santee will not increase, perhaps substantially, which could
have a material adverse effect on the Company. In calendar 1996, Stater
purchased more than twice as much fluid milk from Santee than did Hughes. See
"Description of Certain Indebtedness--Santee Dairies."
As set forth under "Description of Certain Indebtedness--Santee Dairies," it
is expected that (i) the Santee Notes and/or the Product Purchase Agreements
will contain provisions requiring that a specified interest and rental expense
coverage ratio of the Company (or, if the proposed Reorganization is
consummated, Parent) be maintained and that each of Hughes and Stater maintain a
specified consolidated net worth and a specified fixed charge coverage ratio and
(ii) the Santee Notes will contain customary events of default, including events
of default triggered by the acceleration of debt of Holding Company and its
consolidated subsidiaries aggregating $15 million, the acceleration of debt of
Stater aggregating $10 million, a default by Hughes in respect of its
indebtedness (excluding guarantees of indebtedness of Holding Company and its
consolidated subsidiaries) aggregating $7.5 million, and a default under certain
provisions of the Product Purchase Agreements. If Stater were to so default, or
if indebtedness of Stater in such amount were to be accelerated, such
noncompliance or acceleration could
23
<PAGE>
result in increased prices for products and/or in the acceleration of the Santee
Notes. As a result, such increased prices and/or acceleration may be triggered
by events relating to Stater over which Hughes and Santee have no control and
could have a material adverse effect on the Company.
The ability of Santee to meet its debt service and other obligations will
require, among other things, the continued purchase of milk and other products
by Stater. The failure by Stater to fully perform its obligations to Santee
(including its obligations to purchase products and maintain compliance with
various financial and other covenants) could, among other things, require that
the Company provide funds to Santee to cover any shortfall, which could have a
material adverse effect on the Company. Moreover, there can be no assurance that
the Company would be able to provide funds to cover any such shortfall which
could result in a default under any long-term dairy financing which would
generally entitle the lenders thereunder to accelerate such indebtedness and to
foreclose upon the collateral for such indebtedness.
SUBORDINATION
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes will be subordinated to the prior payment
in full of all existing and future Senior Debt of the Company, including all
amounts owing under the New Credit Facility. As of March 22, 1997, the aggregate
amount of such Senior Debt of the Company (excluding its subsidiaries) was $250
million, all of which debt was secured debt outstanding under the New Credit
Facility. Similarly, the payment of amounts due under the Guarantees will be
subordinated to the prior payment in full of all existing and future Senior Debt
of the Guarantors, including all amounts owing pursuant to the Guarantors'
guarantees of amounts outstanding under the New Credit Facility. As of March 22,
1997, the aggregate amount of outstanding Senior Debt of the Guarantors was
approximately $282.9 million, of which $250 million were guarantees of the
Company's indebtedness under the New Credit Facility. Consequently, in the event
of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Company or any of the Guarantors, assets of the Company or
such Guarantor, as the case may be, will be available to pay obligations under
the Notes or the Guarantee of such Guarantor, as the case may be, only after all
of its Senior Debt has been paid in full, and there can be no assurance that
there will be sufficient assets to pay amounts due on all or any of the Notes or
Guarantees, as the case may be. In addition, under certain circumstances, the
Company and the Guarantors may be prohibited by the Indenture from paying
amounts due in respect of the Notes or the Guarantees, or from purchasing,
redeeming or otherwise acquiring Notes, if a payment or non-payment default
exists with respect to certain Senior Debt. See "Description of Exchange
Notes--Subordination" and "--Guarantees."
ABSENCE OF RESTRICTIONS ON PARENT FOLLOWING PROPOSED REORGANIZATION
If the Reorganization is consummated, QFC will become a subsidiary of
Holding Company, and Holding Company will remain a subsidiary of Parent. Parent
will not be a guarantor of the Notes, will not be a party to the Indenture under
which the Notes will be issued and therefore will not be subject to the
limitations on indebtedness or any of the other covenants and restrictions set
forth therein. Likewise, to the extent that, following the Reorganization,
Parent establishes or acquires subsidiaries which are not also subsidiaries of
Holding Company (i.e., subsidiaries which Parent does not own through Holding
Company), those subsidiaries also will not be guarantors of the Notes and also
will not be subject to any of the covenants or restrictions set forth in the
Indenture. Accordingly, the Indenture will not limit the amount of indebtedness
which may be incurred, or any other actions which may be taken, by Parent if the
Reorganization occurs, and there can be no assurance that actions or
circumstances relating to Parent occurring after the Reorganization will not
adversely affect the Company.
FRAUDULENT CONVEYANCE
The obligations of the Company under the Notes, and the application of the
net proceeds therefrom in connection with the Acquisitions and related
transactions, may be subject to review under various laws
24
<PAGE>
for the protection of creditors, including federal and state fraudulent
conveyance and fraudulent transfer laws, if a bankruptcy case or other lawsuit
(including in circumstances where bankruptcy is not involved) is commenced by or
on behalf of any creditor of the Company or a representative of any of the
Company's creditors. If a court in such a case or lawsuit were to find that, at
the time the Company issued the Notes or at the time of the Acquisitions and
related transactions, the Company (A) intended to hinder, delay or defraud any
existing or future creditor or (B) did not receive fair consideration or
reasonably equivalent value for issuing the Notes or in connection with the
Acquisitions and related transactions and the Company either (i) was insolvent
or rendered insolvent by reason thereof, (ii) was engaged or was about to engage
in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (iii) intended to or believed that it
would incur debts beyond its ability to pay such debts as they matured or became
due, such court could void the Company's obligations under the Notes,
subordinate the Notes to other indebtedness of the Company, direct that holders
of Notes return any amounts paid thereunder to the Company or to a fund for the
benefit of its creditors, or take other action detrimental to the holders of the
Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
will be considered insolvent at a particular time if the sum of its debts,
including contingent liabilities, at that time is greater than the then fair
value of its assets or if the fair saleable value of its assets at that time is
less than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. There can be no assurance,
however, as to what standard a court would apply to evaluate the parties' intent
or to determine whether the Company was insolvent at the time of, or rendered
insolvent upon consummation of, the Acquisitions and the Financings or that,
regardless of the standard, a court would not determine that the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Acquisitions and Financings.
The Company's obligations under the Notes will be guaranteed by the
Guarantors, and the Guarantees also may be subject to review under various laws
for the protection of creditors, including federal and state fraudulent
conveyance and fraudulent transfer laws, if a bankruptcy case or a lawsuit
(including in circumstances where bankruptcy is not involved) is commenced by or
on behalf of any creditor of a Guarantor or a representative of any such
creditors. In such a case, the analysis set forth above would generally apply,
except that the Guarantees could also be subject to the claim that, since the
Guarantees were incurred for the benefit of the Company (and only indirectly for
the benefit of the Guarantors), the obligations of the Guarantors thereunder
were incurred for less than reasonably equivalent value or fair consideration. A
court could void a Guarantor's obligation under its Guarantee, subordinate the
Guarantee to other indebtedness of a Guarantor, direct that holders of Notes
return any amounts paid under a Guarantee to the relevant Guarantor or to a fund
for the benefit of its creditors, or take other action detrimental to the
holders of the Notes.
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control (as defined under "Description of Exchange Notes"),
the Company will be required to offer to purchase all of the outstanding Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. The Change of Control purchase
feature of the Notes may in certain circumstances discourage or make more
difficult a sale or takeover of the Company. In particular, because a Change of
Control would constitute an event of default under the New Credit Facility, such
an event may cause an acceleration of the New Credit Facility and may require an
offer to repurchase certain other indebtedness, if any, of the Company and its
subsidiaries, in which case such indebtedness under the New Credit Facility
could be required, and other such indebtedness could be required, to be repaid
in full before repurchase of the Notes. See "Description of Certain
Indebtedness" and "Description of Exchange Notes--Certain Covenants--Repurchase
of Notes Upon a
25
<PAGE>
Change of Control." There can be no assurance that the Company will have funds
available to repurchase the Notes upon the occurrence of a Change of Control.
LACK OF PUBLIC MARKET
The Exchange Notes will be a new issue of securities for which there
currently is no market. Although the Initial Purchasers have informed the
Company that they each currently intend to make a market in the the Exchange
Notes, they are not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Notes; as to
the ability of holders of Exchange Notes to sell their Exchange Notes; or as to
the prices, if any, at which such holders may be able to sell their Exchange
Notes. In addition, such market making activity may be limited during the
pendency of the Exchange Offer or the effectiveness of a Shelf Registration
Statement in lieu thereof. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial offering price of the
Old Notes depending on many factors, including prevailing interest rates, the
markets for similar securities and the Company's results of operations. The Old
Notes are eligible for trading in the PORTAL market by "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act). The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange or
for quotation through the National Association of Securities Dealers Automated
Quotation System.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
26
<PAGE>
THE ACQUISITIONS
The statements made under this heading relating to the Hughes Acquisition
are summaries of the agreements described herein, do not purport to be complete
and are qualified in their entirety by reference to such agreements.
HUGHES MARKETS, INC.
HUGHES MERGER AGREEMENT. QFC, QHI Acquisition Corporation ("QHI"), a
California corporation and a then-wholly-owned subsidiary of QFC, and Hughes
Markets, Inc. ("Hughes"), a California corporation, entered into an Agreement
and Plan of Merger, dated as of November 20, 1996 (the "Hughes Merger
Agreement"), pursuant to which QHI was merged with and into Hughes on March 19,
1997 (the "Hughes Acquisition"), with Hughes continuing as the surviving
corporation. The aggregate consideration paid for all outstanding shares of
common stock of Hughes was approximately $359.8 million (the "Hughes Purchase
Price").
PRINCIPAL SHAREHOLDERS AGREEMENT. Pursuant to the agreement, dated as of
November 20, 1996, by and among QFC and certain shareholders of Hughes who then
held approximately 91% of the common stock of Hughes (such shareholders, the
"Principal Shareholders"; such agreement, the "Principal Shareholders
Agreement"), the Principal Shareholders agreed, among other things, (i) to give
their written consent to the Hughes Acquisition, to the execution and delivery
by Hughes of the Hughes Merger Agreement and the approval of the terms thereof
and to each of the other actions contemplated thereby and by the Principal
Shareholders Agreement; (ii) to vote all of their shares in favor of the Hughes
Merger Agreement and the transactions contemplated thereby at any meeting of
shareholders; and (iii) not to enter into any agreement to vote or to give their
written consent or any instructions inconsistent with clauses (i) or (ii). The
written consents of all Principal Shareholders approving the Hughes Merger
Agreement and the transactions contemplated thereby were delivered to QFC on
November 25, 1996.
SANTEE DAIRIES. Hughes and Stater are co-owners of Santee, which operates
one of the largest dairy plants in California. Prior to November 1996, Santee
was a 51%-owned subsidiary of Hughes, and the accounts of Santee were included
in the consolidated financial statements of Hughes. In November 1996, Hughes
sold a 1% interest in Santee to Stater (which previously owned 49% of Santee),
resulting in (i) Hughes and Stater each becoming 50% owners of Santee and (ii)
Santee ceasing to be a consolidated subsidiary of Hughes in the financial
statements for the fiscal year ended March 2, 1997. See "Risk Factors--Risks
Relating to Santee Dairies," "Business--Hughes Markets, Inc.--Santee Dairies"
and "Description of Certain Indebtedness--Santee Dairies."
KEITH UDDENBERG, INC.
On February 14, 1997, QFC acquired Keith Uddenberg, Inc. for approximately
$35.3 million in cash and 904,646 shares of Common Stock. The cash portion of
the purchase price was financed, and approximately $23.8 million of
then-existing KUI indebtedness was refinanced, with borrowings under QFC's Old
Credit Facility. Prior to the KUI Acquisition, Keith Uddenberg, Inc. distributed
to its shareholders, in a "spin-off" transaction, certain property, including
assets and liabilities unrelated to its grocery store business, real estate
owned by it and one grocery store. In addition, at the time of the KUI
Acquisition QFC entered into an Investors Rights Agreement granting to the
former KUI shareholders certain demand and piggyback registration rights.
FINANCING
The Company required approximately $572.1 million in cash to: (i) finance
the Hughes Acquisition, (ii) refinance QFC's bank indebtedness (including the
$59.1 million of indebtedness incurred in connection with the KUI Acquisition)
and (iii) pay fees and expenses. Such funds were provided by: (i) the proceeds
27
<PAGE>
from the Common Stock Offering, (ii) the proceeds from the sale of the Old Notes
and (iii) borrowings by the Company under an amended and restated $250 million
term loan facility (the "Term Loan Facility"). The Company also received an
additional $29.7 million to be used for general corporate purposes. See "Use of
Proceeds" and "Description of Certain Indebtedness."
The following table sets forth the sources and uses of funds in connection
with the transactions described above.
<TABLE>
<CAPTION>
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
<S> <C>
SOURCES:
The Common Stock Offering(1)............................................ $ 201.8
The sale of the Old Notes(2)............................................ 150.0
Term Loan Facility...................................................... 250.0
------
Total Sources......................................................... $ 601.8
------
------
USES:
Hughes purchase price................................................... $ 359.8
Refinancing of QFC bank debt(3)......................................... 197.0
Fees and expenses....................................................... 15.3
General corporate purposes.............................................. 29.7
------
Total Uses............................................................ $ 601.8
------
------
</TABLE>
- ------------------------
(1) Represents gross proceeds from the sale of 5,175,000 shares at a price of
$39 per share.
(2) Represents gross proceeds from the sale of the Old Notes.
(3) Includes $59.1 million of indebtedness which was incurred under the Old
Credit Facility to pay the $35.3 million cash portion of the KUI purchase
price and to refinance $23.8 million of previously existing KUI
indebtedness.
28
<PAGE>
THE PROPOSED REORGANIZATION
Following consummation of the Exchange Offer, the Company intends to seek
shareholder approval to change its corporate structure (the "Reorganization").
Subject to obtaining such shareholder approval, upon consummation of the
Reorganization, KUI will remain a subsidiary of QFC, and each of QFC and Hughes
will become a subsidiary of Quality Food Holdings, Inc., a Delaware corporation
("Holding Company"), which in turn will be a subsidiary of Quality Food, Inc., a
Delaware corporation ("Parent"), and the current shareholders of QFC will
thereupon generally become shareholders of Parent. Parent and Holding Company
are both currently subsidiaries of QFC.
The Reorganization is intended to facilitate the Company's strategy of
becoming a leading multi-regional operator of premium supermarkets. In order to
facilitate this phase of the Company's development, the Company has hired a new
chief executive officer, Christopher A. Sinclair, to pursue and integrate
acquisitions at a holding company level, thus allowing current senior management
to remain focused on existing operations. If the Reorganization is consummated,
Mr. Sinclair will be the chief executive officer of Parent and Holding Company,
while Dan Kourkoumelis will remain chief executive officer at QFC in charge of
the Company's Seattle/Puget Sound operations. Mr. Sinclair will be assisted by a
new senior vice president for corporate development and a new senior vice
president of marketing and public affairs. Roger Hughes will remain chief
executive officer at Hughes. See "Management."
The following charts depict the organizational structure of the Company: (i)
at closing of the Hughes Acquisition and the Financings and (ii) immediately
following the proposed Reorganization.
1. STRUCTURE AT THE CLOSING OF THE HUGHES ACQUISITION AND THE FINANCINGS
<TABLE>
<S> <C> <C>
QFC
(public company)
(Issuer of the Notes and
Borrower under the New
Credit Facility)
HUGHES QUALITY FOOD, INC. KUI
(Guarantor of the Notes (Guarantor of the New Guarantor of the Notes
and the New Credit Facility) and the New
Credit Facility) Credit Facility)
QUALITY FOOD
HOLDINGS, INC.
(Guarantor of the Notes
and the New
Credit Facility)
</TABLE>
29
<PAGE>
2. STRUCTURE IMMEDIATELY FOLLOWING PROPOSED REORGANIZATION
<TABLE>
<S> <C>
QUALITY FOOD, INC.
(public company)
(Guarantor of the
New Credit Facility)
QUALITY FOOD
HOLDINGS, INC.
(Guarantor of the Notes
Borrower under the Revolving
Credit Facility and the Acquisition
Facility and Guarantor of the
Term Loan Facility)
HUGHES QFC
(Guarantor of the Notes (Issuer of the Notes,
and the New Borrower under the Term
Credit Facility) Loan Facility and Guarantor
under the Revolving Credit
Facility and the Acquisition
Facility)
KUI
(Guarantor of the Notes
and the New
Credit Facility)
</TABLE>
30
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer. The Company used: (i) all of the $201.8 million of gross
proceeds from the Common Stock Offering, (ii) all of the $150 million of gross
proceeds from the sale of the Old Notes and (iii) $250.0 million of borrowings
under the Term Loan Facility to pay the $359.8 million Hughes purchase price, to
refinance $197.0 million of QFC bank indebtedness which was outstanding at the
time of the Closing (including $59.1 million of indebtedness which was incurred
in connection with the KUI Acquisition) and to pay $15.3 million in fees and
expenses. The remaining $29.7 million was to be used for general corporate
purposes.
Amounts outstanding under the Old Credit Facility accrued interest at a rate
of LIBOR plus 1.25% per annum. The $23.8 million of previously existing debt at
KUI, which was refinanced with the proceeds of borrowings under the Old Credit
Facility and which was refinanced at the Closing with borrowings under the Term
Loan Facility, accrued interest at a weighted average rate of 7.26% per annum.
31
<PAGE>
CAPITALIZATION
The following table sets forth the historical cash and cash equivalents and
capitalization of QFC at March 22, 1997. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements of QFC,
Hughes and KUI and related notes thereto included or incorporated by reference
herein.
<TABLE>
<CAPTION>
AT
MARCH 22, 1997
--------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Cash and Cash Equivalents..................................................... $ 66,349
--------------
--------------
Total Debt (including current portion):
Revolving Credit Facility(1)................................................ $ 0
Term Loan Facility.......................................................... 250,000
Senior Subordinated Notes due 2007.......................................... 150,000
Other Debt(2)............................................................... 32,852
--------------
Total Debt................................................................ 432,852
Shareholders' Equity:
Common Stock, $.001 par value, at stated value--60,000,000 shares
authorized; 20,827,000 shares issued and outstanding...................... 263,427
Retained Earnings........................................................... 48,273
--------------
Total Shareholders' Equity................................................ 311,700
--------------
Total Capitalization.......................................................... $ 744,592
--------------
--------------
</TABLE>
- ------------------------
(1) At March 22, 1997, the Company had $125 million of availability under an
amended and restated $125 million revolving credit facility (the "Revolving
Credit Facility") (less amounts allocated to letters of credit) and $225
million of availability under the Acquisition Facility. See "Description of
Certain Indebtedness--New Credit Facility."
(2) Represents $27.4 million of capitalized leases and $5.5 million of other
indebtedness which was acquired in connection with the Hughes Acquisition.
32
<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, and KUI and have been prepared to
illustrate the effects of the Acquisitions 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 28, 1996 gives effect to each of the following transactions
as if such transactions had been completed as of December 31, 1995: (i) the
Hughes Acquisition and certain related transactions; (ii) KUI's spin off of
certain assets and liabilities, primarily related to non-grocery operations,
prior to the KUI Acquisition; (iii) the KUI Acquisition and certain related
transactions; (iv) the application of the net proceeds from the Common Stock
Offering and the Notes Offering (the "Offerings") and borrowings under the New
Credit Facility to finance the Hughes Acquisition and to refinance bank debt of
QFC which was outstanding at the time of the Closing (including indebtedness
which was incurred in connection with the KUI Acquisition); and (v) QFC's
proposed divestiture of five recently acquired KUI stores (one of which has been
sold to date). The unaudited pro forma condensed consolidated statement of
earnings for the 12 weeks ended March 22, 1997 gives effect to the transactions
described above as if such transactions had been completed as of December 29,
1996.
The Acquisitions were accounted for using the purchase method of accounting.
The total purchase price of each of the Acquisitions was tentatively allocated
to the tangible and intangible assets and liabilities acquired based upon their
respective fair values.
The Pro Forma Financial Statements do not purport to present the actual
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 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 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; to date, one of these stores
has been sold. QFC has not entered into any definitive agreements to dispose of
the other stores it intends to divest. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the historical consolidated financial statements and notes thereto
of QFC, the historical consolidated financial statements and notes thereto of
Hughes, the historical financial statements and notes thereto of KUI, and the
historical financial statements and notes thereto of KUA, all of which are
included herein.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL QFC HUGHES HISTORICAL KUI
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 28, MARCH 2, DECEMBER 28,
1996(A) 1997(A) 1996(A)
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales............................................................ $ 805,281 $1,001,042 $ 348,915
Cost of sales and related occupancy expenses..................... 603,947 771,055 272,026
Marketing, general, and administrative expenses.................. 152,337 205,766 74,916
---------------- ---------------- ----------------
Operating income (loss).......................................... 48,997 24,221 1,973
Interest income.................................................. 467 777 32
Interest expense................................................. (9,890) (3,937) (1,714)
Other income (expense)........................................... (2,181) 989
---------------- ---------------- ----------------
Earnings before income taxes..................................... 39,574 18,880 1,280
Total taxes on income............................................ 14,156 8,917 442
---------------- ---------------- ----------------
Net earnings (loss).............................................. $ 25,418 $ 9,963 $ 838
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Earnings per share(l)............................................ $ 1.71
Weighted average shares outstanding.............................. 14,888
EBITDA (k)....................................................... $ 69,150 $ 39,201 $ 6,158
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR QFC/HUGHES/KUI
ACQUISITIONS CONSOLIDATED
KUI PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(B) PRO FORMA OFFERINGS(C) (AS ADJUSTED)
-------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales............................................................ $ (12,864) $ 336,051 $ (42,618)(d) $ 2,099,756
Cost of sales and related occupancy expenses..................... (11,436) 260,590 (33,961)(d) 1,601,631
Marketing, general, and administrative expenses.................. (2,822) 72,094 (11,368)(d) 427,272
8,443(e)
-------------- ----------- --------------- ----------------
Operating income (loss).......................................... 1,394 3,367 (5,732) 70,853
Interest income.................................................. 32 1,379(f) 2,655
Interest expense................................................. (1,714) (19,270)(g) (34,811)
Other income (expense)........................................... (534) 455 (1,726)
-------------- ----------- --------------- ----------------
Earnings before income taxes..................................... 860 2,140 (23,623) 36,502
Total taxes on income............................................ 292 734 (7,066)(h) 16,741
-------------- ----------- --------------- ----------------
Net earnings (loss).............................................. $ 568 $ 1,406 $ (16,557) $ 20,230
-------------- ----------- --------------- ----------------
-------------- ----------- --------------- ----------------
Earnings per share(l)............................................ $ .96
Weighted average shares outstanding.............................. 6,080(i (j) 20,968
EBITDA (k)....................................................... $ 1,060 $ 7,218 $ 1,863 $ 117,432
</TABLE>
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS FOR THE 12 WEEKS ENDED MARCH 22, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
HISTORICAL HUGHES KUI
QFC PERIOD FROM PERIOD FROM
12 WEEKS ENDED DECEMBER 29, 1996 DECEMBER 29, 1996
MARCH 22, THROUGH THROUGH
1997(A) MARCH 18, 1997 FEBRUARY 14, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales............................................................. $ 233,154 $ 211,425 $ 46,793
Cost of sales and related occupancy expenses...................... 174,913 158,392 33,817
Marketing, general, and administrative
expenses........................................................ 45,374 46,544 11,004
-------------- ----------------- -----------------
Operating income (loss)........................................... 12,867 6,489 1,972
Interest income................................................... 189 216 8
Interest expense.................................................. (2,777) (754) (212)
Other income (expense)............................................ (798) 703
-------------- ----------------- -----------------
Earnings before income taxes...................................... 10,279 5,153 2,471
Total taxes on income............................................. 3,859 2,437 860
-------------- ----------------- -----------------
Net earnings...................................................... $ 6,420 $ 2,716 $ 1,611
-------------- ----------------- -----------------
-------------- ----------------- -----------------
Earnings per share(l)............................................. $ .40
Weighted average shares outstanding............................... 16,017
EBITDA(k)......................................................... $ 18,330 $ 10,336 $ 3,219
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR QFC/HUGHES/KUI
KUI ACQUISITIONS CONSOLIDATED
PRO FORMA KUI AND PRO FORMA
ADJUSTMENTS(B) PRO FORMA OFFERINGS(C) (AS ADJUSTED)
--------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales............................................................. $ (1,492) $ 45,301 $ (13,986)(d) $ 475,894
Cost of sales and related occupancy expenses...................... (950) 32,867 (10,977)(d) 355,195
Marketing, general, and administrative
expenses........................................................ (655) 10,349 (2,837)(d) 101,379
1,949(e)
------- ----------- --------------- ----------------
Operating income (loss)........................................... 113 2,085 (2,121) 19,320
Interest income................................................... 8 318(f) 731
Interest expense.................................................. (212) (4,136)(g) (7,879)
Other income (expense)............................................ (7) (696) 102
------- ----------- --------------- ----------------
Earnings before income taxes...................................... 106 2,577 (5,939) 12,070
(1,685)
Total taxes on income............................................. 36 896 (h) 5,507
------- ----------- --------------- ----------------
Net earnings...................................................... $ 70 $ 1,681 (4,254) $ 6,563
------- ----------- --------------- ----------------
------- ----------- --------------- ----------------
Earnings per share(l)............................................. $ .31
Weighted average shares outstanding............................... 5,445(i)(j) 21,462
EBITDA(k)......................................................... $ 149 $ 3,368 $ (327) $ 31,707
</TABLE>
35
<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 28, 1996 was a 52-week year.
Hughes' fiscal year ends on the Sunday closest to the last day of
February. The fiscal year ended March 2, 1997 was a 52-week year.
KUI's fiscal year ends on the last Saturday in December. The fiscal year
ended December 28, 1996 was a 52-week year.
The results of operations for the 12 weeks ended March 22, 1997 combines
results of operations of QFC, including KUA and Hughes subsequent to the
respective acquisitions, with the results of operations of KUI for the
period from December 29, 1996 through February 14, 1997 and the results
of operations of Hughes for the period from December 29, 1996 through
March 18, 1997.
(b) 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.
(c) Gives effect to (i) the consummation of the Hughes Acquisition at a
purchase price of $359.8 million equity value ($360.0 million less
$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; and
(ii) the consummation of the KUI Acquisition at a purchase price of $71.3
million ($35.3 million paid in cash, $36.0 million paid through the
issuance of 904,646 shares of QFC Common Stock) (the "KUI purchase
price") and the allocation of the purchase price to the acquired assets
and liabilities.
Also gives effect to the financing of these Acquisitions through the
receipt of (i) $192.2 million of total net proceeds from the Common Stock
Offering; (ii) $59.1 million of borrowings under the Old Credit Facility
to finance the $35.3 million cash portion of the KUI purchase price and
to repay the $23.8 million in debt assumed in the KUI Acquisition; (iii)
$248.0 million estimated total net proceeds under the assumed terms of
the New Credit Facility; and (iv) $146.3 million estimated total net
proceeds from the Notes Offering. Related deferred financing and other
fees were $5.7 million ($2.0 million under the New Credit Facility and
$3.7 million under the Notes Offering). These fees will be amortized
based on the life of the related debt.
Using the net proceeds from the above described borrowings, management
repaid borrowings of $197.0 million.
(d) Management intends to divest five of the recently acquired KUI stores.
To date, one such store has been sold. 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 the other
stores it intends to divest, and the actual proceeds from the divestiture
of these stores will likely differ from the assumed amount reflected
herein.
(e) Gives effect to the additional depreciation and amortization expense
resulting from the allocations of the purchase prices for KUI and Hughes
to the assets acquired, including an increase in property, plant, and
equipment, leasehold interest, and identifiable intangible assets to
their estimated fair market values and the recording of goodwill
associated with the acquisitions. Goodwill is amortized over 40 years.
36
<PAGE>
(f) Reflects an adjustment to interest income arising from residual cash
balances obtained from the borrowings described in note (c) above after
consummating the Acquisitions described in note (c) above. It was assumed
that such excess cash balances would generate interest income at 5.5%.
(g) Reflects the adjustment to interest expense arising from (i) the
borrowings described in note (c) above, a weighted average rate of
approximately 7.21% per annum for borrowings under the New Credit
Facility and the sale of the Old Notes, (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.
(h) Gives effect to the adjustment for federal and state income taxes at a
blended statutory rate of 38%, adjusted for non-deductible goodwill
amortization, of approximately $4.8 million for the year ended December
28, 1996, and $1.1 million for the 12 weeks ended March 22, 1997 and the
impact of including QFC's historical operating results within a unitary
tax filing in the state of California.
(i) Gives effect to the issuance of 5,175,000 shares of QFC Common Stock in
the Common Stock Offering at the public offering price of $39 per share,
net of issuance costs of $9.6 million, for net proceeds of $192.2
million.
(j) 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.
(k) 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 $3.0 million for the year ended December 28, 1996 and
$0 for the 12 weeks ended March 22, 1997. 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.
(l) 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 (k) above.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA OF QFC
The following table sets forth summary historical financial data of QFC as
of and for each of the five fiscal years in the period ended December 28, 1996
and as of and for the 12 weeks ended March 22, 1997 and March 23, 1996. Data as
of and for each of the three fiscal years in the period ended December 28, 1996
(except for data regarding stores open at the end of period, Same Store Sales
increase (decrease) and total square footage) have been derived from audited
financial statements of QFC, audited by Deloitte & Touche LLP, independent
auditors, which are included herein. Data as of and for each of two fiscal years
ended December 26, 1992 and December 25, 1993 (except for data regarding stores
open at the end of period, Same Store Sales increase (decrease) and total square
footage) have been derived from audited financial statements of QFC which are
not included herein. Data as of and for the 12 weeks ended March 22, 1997 and
March 23, 1996 have been derived from unaudited financial statements of QFC,
which are included herein and which, in the opinion of management, include all
necessary adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of the information. Data as of and for the 12
weeks ended March 22, 1997 and March 23, 1996 do not purport to be indicative of
results to be expected for the full fiscal year. The following information is
qualified by reference to, and should be read in conjunction with, "Unaudited
Pro Forma Condensed Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical statements of QFC and related notes thereto included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12 WEEKS
ENDED
DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 23,
1992 1993 1994(1) 1995(2) 1996 1996(2)
------------- ------------ ------------ ------------ ------------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales................................ $ 460,107 $ 518,260 $ 575,879 $ 729,856 $ 805,281 $ 176,627
Gross Profit......................... 116,989 131,365 145,168 179,422 201,334 43,314
Marketing, General and Administrative
Expenses........................... 80,144 92,468 105,956 136,645 152,337 33,486
Operating Income..................... 36,845 38,897 39,212 42,777 48,997 9,828
Interest Expense..................... -- -- -- 9,639 9,890 2,588
Net Earnings......................... 25,076 25,994 26,376 20,216 25,418 4,683
Earnings Per Share................... 1.28 1.33 1.34 1.28 1.71 .32
Ratio of Earnings to Fixed
Charges(3)......................... 22.7x 17.6x 15.7x 3.3x 3.4x 2.9x
OTHER DATA:
EBITDA(4)............................ $ 44,466 $ 48,205 $ 50,817 $ 59,567 $ 69,150 $ 14,473
EBITDA Margin(5)..................... 9.7% 9.3% 8.8% 8.2% 8.6% 8.2%
Depreciation and Amortization........ $ 7,782 $ 9,283 $ 11,605 $ 16,169 $ 19,477 $ 4,545
Capital Expenditures................. 26,800 43,000 28,200 89,100 32,556 8,482
Stores Open at End of Period......... 33 38 45 62 64 62
Same Store Sales Increase
(Decrease)(6)...................... 6.5% 4.0% 0.4% (1.5%) 3.3% 1.0%
Total Square Footage................. 907,000 1,080,000 1,319,000 1,928,000 2,039,000 1,955,000
BALANCE SHEET DATA (AT END OF PERIOD):
Net Working Capital (Deficit)........ $ 18,722 $ 14,329 $ 23,776 $ 5,303 $ 3,457 $ (1,411)
Total Assets......................... 150,974 181,275 207,914 282,878 304,017 287,049
Total Debt (including current
portion)........................... -- -- -- 164,500 145,000 163,500
Shareholders' Equity................. 108,345 133,620 158,178 45,368 76,798 50,207
<CAPTION>
<S> <C>
12 WEEKS
ENDED
MARCH 22,
1997
---------
<S> <C>
OPERATING DATA:
Sales................................ $ 233,154
Gross Profit......................... 58,241
Marketing, General and Administrative
Expenses........................... 45,374
Operating Income..................... 12,867
Interest Expense..................... 2,777
Net Earnings......................... 6,420
Earnings Per Share................... .40
Ratio of Earnings to Fixed
Charges(3)......................... 3.3x
OTHER DATA:
EBITDA(4)............................ $ 18,330
EBITDA Margin(5)..................... 7.9%
Depreciation and Amortization........ $ 5,193
Capital Expenditures................. 5,101
Stores Open at End of Period......... 146
Same Store Sales Increase
(Decrease)(6)...................... 4.2%
Total Square Footage................. 5,078,000
BALANCE SHEET DATA (AT END OF PERIOD):
Net Working Capital (Deficit)........ $ 48,730
Total Assets......................... 1,004,175
Total Debt (including current
portion)........................... 432,852
Shareholders' Equity................. 311,700
</TABLE>
- --------------------------
(1) Fiscal year ended December 31, 1994 was a 53 week fiscal year.
(2) Fiscal year ended December 30, 1995 data includes a one-time charge of $1.4
million, or $.09 per share, resulting from the Recapitalization (as defined
herein) completed in March 1995.
(3) For purposes of these ratios, (i) earnings have been calculated by adding
interest expense and the estimated interest portion of rentals to earnings
before income taxes and (ii) fixed charges are comprised of interest expense
and the estimated interest portion of rentals.
(4) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and, if applicable,
equity earnings (losses) from subsidiaries, and non-recurring and
extraordinary items. EBITDA is a measure commonly used in the grocery
industry and is presented to assist in understanding the Company's operating
results. EBITDA is not intended to represent cash flow from operations as
38
<PAGE>
defined by GAAP and should not be considered as an alternative to cash flow
as a measure of liquidity or as an alternative to net earnings as an
indicator of operating performance. 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 its debt.
(5) EBITDA margin is calculated by dividing EBITDA by sales, in each case for
the applicable period.
(6) Same Store Sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1994.
39
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF HUGHES
The following table sets forth summary historical financial data of Hughes
and its consolidated subsidiaries as of and for the five fiscal years ended
March 2, 1997. Data as of and for the five fiscal years ended March 2, 1997
(except for data regarding stores open at end of period, Same Store Sales
increase (decrease) and total square footage) have been derived from
consolidated financial statements of Hughes audited by Arthur Andersen LLP,
independent certified public accountants. During each of the four years in the
period ended March 3, 1996, Santee was a 51%-owned subsidiary of Hughes. In
November 1996, Hughes sold a 1% interest in Santee, resulting in Santee ceasing
to be a consolidated subsidiary of Hughes during the fiscal year 1997. The
following information should be read in conjunction with "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Hughes and related notes thereto included
herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, FEBRUARY 27, FEBRUARY 26, MARCH 3, MARCH 2,
1993 1994 1995 1996(1) 1997
------------ ------------ ------------ ----------- ---------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Sales............................................... $1,087,274 $1,083,709 $1,110,947 $1,147,447 $1,001,042
Gross Profit........................................ 225,024 229,084 226,085 245,496 229,987
Selling, General and Administrative Expenses........ 209,918 206,289 209,211 215,234 205,766
Operating Income.................................... 15,106 22,795 16,874 30,262 24,221
Interest Expense.................................... 1,149 4,598 4,664 4,335 3,937
Net Income.......................................... 8,677 11,224 8,374 16,184 9,963
OTHER DATA:
EBITDA(2)........................................... $ 33,379 $ 40,794 $ 36,929 $ 42,439 $ 39,201
EBITDA Margin(3).................................... 3.1% 3.8% 3.3% 3.7% 3.9%
Depreciation and Amortization....................... $ 17,504 $ 19,310 $ 21,313 $ 19,571 $ 17,748
Capital Expenditures................................ 57,862 31,701 36,063 19,633 29,409
Stores Open at End of Period........................ 51 51 53 54 56
Same Store Sales Increase (Decrease)(4)............. (1.7%) 0.7% 1.1% (1.4%) 0.5%
Total Square Footage................................ 1,855,000 1,858,000 1,942,000 1,986,000 2,085,000
BALANCE SHEET DATA (AT END OF PERIOD):
Net Working Capital................................. $ 8,192 $ 16,526 $ 8,628 $ 995 $ (7,526)
Total Assets........................................ 270,611 300,941 316,728 316,499 279,267
Total Debt (including current portion).............. 30,303 37,247 41,984 27,463 6,872
Shareholders' Equity................................ 121,077 131,289 137,975 151,544 160,350
</TABLE>
- ------------------------------
(1) Fiscal year ended March 3, 1996 was a 53-week fiscal year.
(2) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization, LIFO inventory charges, and, if applicable,
equity earnings (losses) from subsidiaries, and non-recurring and
extraordinary items. EBITDA excludes union, pension and benefit credits of
$3.0 million, $7.2 million, $3.0 million and $1.2 million recorded by Hughes
for the fiscal year ended March 2, 1997, the fiscal year ended March 3,
1996, the fiscal year ended February 26, 1995 and the fiscal year ended
February 27, 1994, respectively. EBITDA is a measure commonly used in the
grocery industry and is presented to assist in understanding Hughes'
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 cash flow as a measure of liquidity or as an alternative to net earnings
as an indicator of operating performance. 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 its debt.
(3) EBITDA margin is calculated by dividing EBITDA by sales, in each case for
the applicable period.
(4) Same Store Sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1996.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As a result of the Acquisitions, the Company operates 84 stores in the
Seattle/Puget Sound region as well as 57 "Hughes Family Markets" stores in
Southern California. The Acquisitions have more than doubled the size of the
Company, and managing the Company and integrating the acquired businesses will
present a new challenge to management. In order to facilitate this phase of the
Company's development, the Company has hired a new chief executive officer,
senior vice president for corporate development and senior vice president of
marketing and public affairs to pursue and integrate acquisitions at a holding
company level, thus allowing current senior management to remain focused on
existing operations. See "Risk Factors--Risks Relating to Acquisition Strategy."
Because of the magnitude of the Acquisitions, the Company's operations after
consummation of the Acquisitions will not be comparable to QFC's or Hughes'
historical operations prior thereto. Each of the Hughes Acquisition and the KUI
Acquisition will be accounted for under the "purchase" method of accounting. The
Company's capitalization has also changed, reflecting the issuance of shares as
well as a significant increase in long-term debt and a related increase in
interest expense. The results of operations for the twelve weeks ended March 22,
1997 include the results of operations of the acquired KUI stores for five weeks
and Hughes stores for five days and the effects of the related financings for
four days.
On March 2, 1995 the principal operations of Olson's Food Stores, Inc. were
merged into QFC (the "Olson's Merger"), including assets and liabilities related
to 12 of its grocery stores and its interest in certain grocery stores in
various stages of development, and its rights to several other future sites. The
Olson's Merger was effected through an acquisition of 100% of the outstanding
voting securities of Olson's for $18.0 million cash, 752,941 shares of QFC
Common Stock, which as of March 2, 1995 had a value of $18.1 million, and the
assumption by QFC of approximately $24.0 million of indebtedness of Olson's. The
merger was accounted for under the "purchase" method of accounting.
QFC completed a recapitalization in March 1995 (the "Recapitalization"). As
part of the Recapitalization, QFC purchased 7 million shares of its Common Stock
through a self-tender offer at a price of $25 per share. In addition, QFC sold 1
million shares of its Common Stock to Zell Chilmark at $25 per share on March
29, 1995. Zell Chilmark also acquired 2.975 million shares from QFC's chairman
and former chief executive officer in a separate transaction on January 16,
1996. In March 1995, QFC borrowed approximately $174 million under the Current
Credit Facility to finance (i) the $24 million of long-term debt assumed in the
Olson's Merger and (ii) the repurchase of its Common Stock pursuant to the self-
tender offer. Due to these developments, QFC's financial statements for 1995 and
subsequent periods have changed significantly, reflecting lower cash balances, a
significant reduction in shareholders' equity and increase in long-term debt,
and a related reduction in interest income and increase in interest expense.
Further, during the first quarter of fiscal 1995, QFC recorded a one-time charge
of $1.4 million for nondeductible expenses associated with the Recapitalization.
The remaining $2.9 million of expenses paid in connection with the
Recapitalization were recorded as a direct reduction to shareholders' equity.
Set forth below is (i) a discussion of the financial condition and results
of operations of QFC for the 12 weeks ended March 22, 1997 and the three fiscal
years ended December 28, 1996 and (ii) a discussion of the financial condition
and results of operations of Hughes for each of the three fiscal years in the
period ended March 2, 1997.
QUALITY FOOD CENTERS, INC.
QFC's fiscal year generally consists of three 12-week quarters and one
16-week quarter, although fiscal year 1994 comprised 53 weeks of operations.
41
<PAGE>
QFC's sales and operating income have increased each year since QFC's
initial public offering in 1987, driven primarily by acquisitions and opening of
new stores and the expansion and remodeling of existing stores. In addition,
management believes that, for the fiscal year ended December 30, 1995, QFC's
EBITDA margin, and its operating income as a percentage of sales, were well in
excess of the average for the supermarket industry. The following table provides
information pertaining to QFC's sales increases over the three fiscal years
ended December 28, 1996 and over the 12 weeks ended March 22, 1997.
<TABLE>
<CAPTION>
CHANGE FROM PRIOR FISCAL YEAR
-------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED CHANGE FROM
DECEMBER 31, DECEMBER 30, DECEMBER 28, 12 WEEKS ENDED MARCH 23, 1996 TO
1994 1995 1996 12 WEEKS ENDED MARCH 22, 1997
----------------- ----------------- ----------------- -----------------------------------
<S> <C> <C> <C> <C>
Total sales increase................ 11.1% 26.7% 10.3% 32.0%
Store square footage increase....... 22.1% 46.2% 5.7% 59.5%
Same Store Sales increase
(decrease)(1)..................... 0.4% (1.5%) 3.3% 4.2%
</TABLE>
- ------------------------
(1) Same Store Sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1994.
QFC's sales increases during 1994-1995 and for the 12 weeks ended March 22,
1997 were lower than the increases in store square footage because the majority
of square footage added was from new and acquired stores open for a partial
year, which stores' sales per square foot were significantly lower than newly
remodeled or older, more mature stores.
Sales per square foot of selling space were $543, $548 and $619 in fiscal
1996, 1995 and 1994. This trend, and the decrease in same store sales during
fiscal 1995 and only modest increase in 1994, were the result of several
factors, including: (i) new, larger and less mature stores became a more
significant part of the Company's sales, (ii) older stores were maturing to a
level where substantial sales growth was more difficult and (iii) the Company
experienced food price deflation combined with a softer regional economy in 1995
and 1994. In addition to these factors, the decreases in 1995 were largely due
to lower sales in certain existing stores resulting from the Company's
competitors opening, replacing or remodeling an unusually large number of stores
located near the Company's stores during the fourth quarter of 1994 and
throughout 1995, combined with 1994 sales that were higher than normal in the
affected stores due to the closure of certain of these competitors' stores while
they were being remodeled or replaced. In addition, the Company followed a
strategy of opening stores in certain locations intended to enhance the
Company's competitive position and protect its market share but that reduced
sales in its nearby existing stores.
Management believes that same store sales should remain positive in 1997.
Further, modest or no inflation is anticipated for the remainder of 1997 and the
regional economies are projected to remain healthy.
Sales per square foot of selling space was $507 for the 12 weeks ended March
22, 1997, as compared to $528 for the 12 weeks ended March 23, 1996, in each
case on an annualized basis. Over the 12 weeks ended March 22, 1997, the
Company's same store sales (which, for such period, exclude sales in stores
opened or acquired during the previous 12 weeks) increased by approximately
4.2%. This increase in same store sales was due to improved merchandising and
strong sales in remodeled and replacement stores while the Company experienced
no food price inflation. These factors were offset in part by lower sales in
certain existing stores due to the opening and remodeling of competitors' stores
located near QFC stores. In addition, sales growth has been impacted by new and
acquired stores, which have lower sales volumes, becoming a more significant
part of the Company's sales, the maturing of older stores to a level where
substantial sales growth is more difficult, and the Company's strategy of
opening and acquiring stores in certain locations that enhance the Company's
competitive position and protect its market share but reduce sales in nearby
existing stores.
The Company added, through both acquisitions and new store openings, seven
stores in fiscal 1994, 17 stores (12 of which were acquired in the Olson's
Merger) in 1995 and two stores in 1996.
42
<PAGE>
The table below sets forth items in QFC's statements of earnings as a
percentage of sales:
<TABLE>
<CAPTION>
12 WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 23,
1994 1995 1996 1996
--------------- --------------- --------------- -------------
Sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of Sales and Related Occupancy Expenses.......... 74.8 75.4 75.0 75.4
----- ----- ----- -----
Gross Margin.......................................... 25.2 24.6 25.0 24.6
Marketing, General and Administrative Expenses........ 18.4 18.7 18.9 19.0
----- ----- ----- -----
Operating Income...................................... 6.8 5.9 6.1 5.6
Interest Income....................................... 0.2 0.1 0.1 0.1
Interest Expense...................................... -- (1.3) (1.3) (1.5)
Other Expense......................................... -- (0.2) -- --
----- ----- ----- -----
Earnings Before Income Taxes.......................... 7.0 4.5 4.9 4.2
Taxes on Income....................................... 2.4 1.7 1.7 1.5
----- ----- ----- -----
Net Earnings.......................................... 4.6% 2.8% 3.2% 2.7%
----- ----- ----- -----
----- ----- ----- -----
EBITDA Margin......................................... 8.8% 8.2% 8.6% 8.2%
<CAPTION>
<S> <C>
MARCH 22,
1997
-------------
Sales................................................. 100.0%
Cost of Sales and Related Occupancy Expenses.......... 75.0
-----
Gross Margin.......................................... 25.0
Marketing, General and Administrative Expenses........ 19.5
-----
Operating Income...................................... 5.5
Interest Income....................................... 0.1
Interest Expense...................................... (1.2)
Other Expense......................................... --
-----
Earnings Before Income Taxes.......................... 4.4
Taxes on Income....................................... 1.6
-----
Net Earnings.......................................... 2.8%
-----
-----
EBITDA Margin......................................... 7.9%
</TABLE>
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED MARCH 22, 1997 COMPARED TO TWELVE WEEKS ENDED MARCH 23, 1996
SALES
Sales for the 12 weeks ended March 22, 1997 increased approximately $56.5
million, or 32.0%, compared with the same period in 1996. The increase in total
sales reflects the acquisition of the 25 KUI stores for five weeks, the 57
Hughes stores for five days, sales from the two Food Giant stores acquired in
October 1996 and an increase in same store sales of approximately 4.2% for the
quarter.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
The Company's cost of sales and related occupancy expenses improved to 75.0%
of sales for the first quarter of 1997 from 75.4% for the first quarter of 1996
due to improved buying and merchandising, a greater mix of sales in higher
margin service departments in the QFC stores and lower occupancy expenses as a
percentage of sales offset, in part, by lower margins in the stores acquired
during the quarter.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses increased to 19.5% of sales
for the first quarter of 1997 from 19.0% of sales for the first quarter of 1996
attributable to contractual rate increases from union contracts effective in May
and August of 1996 and a 10% increase in the union benefit contributions rate
effective in July 1996 as well as additional expenses associated with the
initial integration of the acquired stores.
OPERATING INCOME
As a result of the above factors, operating margins declined slightly to
5.5% of sales for the first quarter of 1997 compared to 5.6% of sales for the
comparable period in 1996, which, combined with the 32.0% increase in sales,
produced a 30.9% increase in operating income for the quarter.
INTEREST INCOME
Interest income increased to $189,000 in the first quarter of 1997, compared
to $72,000 in the same period in 1996, reflecting the increase in the Company's
cash balances and higher interest rates.
43
<PAGE>
INTEREST EXPENSE
The $189,000 increase in interest expense for the first quarter of 1997
reflects four days interest on the additional debt incurred in connection with
the Acquisitions offset by lower debt balances than in the comparable year prior
to such borrowings. Interest expense is net of approximately $212,000 and
$177,000 of interest capitalized in connection with store construction and
remodeling costs incurred during the 12 weeks ended March 22, 1997 and March 23,
1996, respectively.
INCOME TAXES
The Company's effective federal income tax rate increased from 36.0% in 1996
to 37.5% in 1997 due to an increase in non-deductible goodwill resulting from
the Acquisitions. The difference between the Company's effective income tax rate
and the federal statutory rate for the first quarter of 1997 was primarily due
to non-deductible amortization of goodwill that was acquired through various
acquisitions by the Company, including the Acquisitions. As a result of the
Acquisitions, a portion of the Company's incomes will be taxable in the state of
California, which, combined with the non-deductible goodwill amortization, will
result in an estimated effective tax rate of approximately 43%.
NET EARNINGS
The increase in operating income offset by the increase in the effective tax
rate resulted in an increase in net earnings for the 12 weeks ended March 22,
1997 to $6.4 million compared with $4.7 million in the first quarter of 1996.
Earnings per share were 40 cents on 16,017,000 weighted average shares
outstanding, compared with 32 cents on 14,554,000 weighted average shares
outstanding for the first quarter of 1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995;
FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
SALES
Sales for 1996 were $805.3 million, an increase of $75.4 million, or 10.3%,
reflecting a full 52-weeks of sales from the 17 stores added in 1995, higher
sales in stores remodeled during the year, sales from the two stores acquired in
mid-October and the 3.3% increase in same store sales. The improvement in same
store sales from 1995 to 1996 reflects improved merchandising, strong sales
increases in two replacement stores, higher sales in remodeled stores and strong
sales in certain stores that were affected by the opening and remodeling of
nearby competitive stores in prior years.
Sales for 1995 were $729.9 million, an increase of $154 million, or 26.7%.
Excluding the impact of the 53rd week in 1994, sales would have increased 29%.
This large sales gain was due primarily to the acquisition of 16 stores in March
1995 and construction of one new store in November 1995.
Sales for 1994 reached $575.9 million, an increase of $57.6 million, or
11.1%, reflecting the addition of seven stores and the additional week due to
1994 being a 53-week year.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses decreased to 75.0% of sales for
1996, as compared to 75.4% for 1995. The improvement in cost of sales and
related occupancy expenses was primarily a result of improved buying and
merchandising and a greater mix of sales in higher margin service departments,
which more than offset higher occupancy expenses resulting from the 1995
acquisitions and construction of new stores. The Company's 1996 charge for its
last-in, first-out (LIFO) inventory method was equal to its 1995 charge of $0.6
million.
44
<PAGE>
The 0.6% of sales increase in 1995 was primarily due to lower initial
margins and higher occupancy expenses in the new and acquired stores due to the
larger square footage and higher rent structure in the newer stores. Also, due
to the slight inflation during the fourth quarter of 1995, the Company recorded
a $0.6 million LIFO charge, whereas the adjustment for LIFO inventory resulted
in no change in cost of sales in 1994.
The slight increase in cost of sales in 1994 was due primarily to (i)
promotional pricing for the opening of new and remodeled stores, (ii) ongoing
competitive pricing and (iii) rising occupancy costs, including depreciation and
amortization resulting from new and remodeled stores. The impact of these
factors on gross margin over the three fiscal years ended December 30, 1995 was
largely mitigated by a larger portion of sales coming from higher margin service
departments, more effective merchandising and buying, and reduced inventory
shrinkage due to improved systems and controls.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses (operating expenses)
increased to 18.9% of sales, as compared to 18.7% of sales for 1995. The
increase in expenses is primarily attributable to contractual rate increases
from union contracts effective in May and August of 1996, additional labor for
preparation of higher margin products, and a 10% increase in the union benefit
contributions rate effective in July 1996. During 1996, the Company also
incurred a full year of amortization of intangibles created in connection with
1995 acquisitions as well as additional startup and promotional expenses
incurred in connection with remodels completed during the year.
Marketing, general and administrative expenses as a percent of sales,
increased 0.3% of sales to 18.7% in 1995 after a 0.6% of sales increase in 1994.
These increases resulted from various factors. While sales in these years
reflected continued deflation, rates for certain operating expenses, such as
store labor and utilities, continued to increase and the decline in sales in
stores affected by competitive openings resulted in deleveraging of operating
expenses. Also, lower sales per square foot and higher expenses associated with
new stores had an impact on operating expenses. Operating expenses in 1995 also
include an additional $1.7 million in amortization arising from intangibles
created in connection with 1995 acquisitions. These expense increases were
partially offset during the fourth quarter when the Company's chairman received
stock options in lieu of a management fee, which would have been approximately
$0.5 million.
OPERATING INCOME
Operating income increased over the previous year by 14.5% in 1996 and 9.1%
in 1995, after an increase of less than 1% from 1993 to 1994. Operating margins
increased to 6.1% of sales in 1996 as compared to 5.9% of sales in 1995 and 6.8%
of sales in 1994. The increase in 1996 reflects the 10.3% increase in sales and
the improvement in cost of sales. The decline in 1995 was due to higher cost of
sales and occupancy expenses and higher operating expenses, as described above.
INTEREST
Interest income decreased by 6.8% for 1996 compared to 1995, and 46.3% in
1995 as compared to 1994, reflecting lower cash balances due to the
recapitalization completed in March 1995.
Interest expense of $9.9 million for 1996 and $9.6 million for 1995 reflects
interest on the debt assumed (and refinanced) in the Olson's merger and debt
incurred in connection with the recapitalization. Interest expense was net of
approximately $1.3 million and $0.2 million of interest capitalized in
connection with store construction and remodeling costs incurred during 1996 and
1995, respectively. The Company had no borrowings or related interest in 1994.
45
<PAGE>
OTHER EXPENSE
The Company incurred a one-time charge of $1.4 million in 1995 for fees paid
in connection with its recapitalization. The remaining costs of approximately
$2.9 million incurred in connection with the recapitalization were recorded as a
reduction in shareholders' equity.
INCOME TAXES
The Company's effective federal income tax rate decreased to 35.8% in 1996,
as compared to an effective tax rate of 37.3% for 1995, as a result of the
non-deductible one-time charge of $1.4 million recorded as other expense in
1995. The difference between the Company's effective income tax rate and the
federal statutory rate for 1996 was primarily due to the non-deductible
amortization of goodwill and certain other assets that were recorded in
connection with the Olson's merger. The 1994 effective rate was 34.3%.
NET EARNINGS
Net earnings for 1996 increased by 25.7% to $25.4 million, as compared to
$20.2 million for 1995. The increase was due to (i) the 14.5% increase in
operating income, (ii) the $1.4 million decrease in other expense and (iii) the
decrease in the effective tax rate offset by higher interest expense. Earnings
per share were $1.71 per share on 14.9 million weighted average shares
outstanding, as compared to $1.28 per share on 15.8 million weighted average
shares outstanding for 1995.
While 1995 operating income was higher than in 1994, net earnings declined
from $26.4 million to $20.2 million due to an increase in net interest expense
of $10 million, the higher effective tax rate and the $1.4 million one-time
charge incurred in connection with the recapitalization. Reflecting the new
capital structure following the recapitalization, weighted average shares
outstanding declined from 19.7 million in 1994 to 15.8 million in 1995. Earnings
per share were $1.28 for 1995 compared with $1.34 in 1994. Excluding the $1.4
million one-time charge, net earnings and earnings per share in 1995 would have
been $21.6 million and $1.36, respectively.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share," was recently
issued and is effective for the Company's fiscal year ending December 27, 1997.
This Statement requires a change in the presentation of earnings per share.
Early adoption of this statement is not permitted. Management believes that the
impact of the adoption of this Statement on the financial statements, taken as a
whole, will not be material.
INFLATION
The Company's sales for the first quarter of 1997 and 1996 reflected no food
price inflation or deflation.
During 1996, the Company experienced food price inflation of less than 1.0%.
In 1995, the Company's sales reflected food price deflation of nearly 1% in the
first two quarters, flat prices in the third quarter, and after more than four
years of deflation, food price inflation of approximately 0.5% during the fourth
quarter. During 1994 the Company's sales reflected food price deflation of
approximately 1.4%.
46
<PAGE>
HUGHES MARKETS, INC.
Hughes' fiscal year ends on the Sunday closest to the last day of February.
Fiscal year 1996 was a 53 week year while fiscal 1997 and fiscal 1995 covered 52
weeks.
For each of the three fiscal years ended March 3, 1996, Santee was a
51%-owned subsidiary of Hughes, and the accounts of Santee were included in
Hughes' consolidated financial statements for those periods. In November 1996,
Hughes sold a 1% equity interest in Santee to Stater (which previously owned 49%
of Santee), resulting in (i) Hughes and Stater each becoming 50% owners of
Santee and (ii) Santee ceasing to be a consolidated subsidiary of Hughes. As a
result, for fiscal 1997 and subsequent periods, Santee will not be included in
Hughes' consolidated financial statements but will be accounted for using the
equity method of accounting.
Over the three fiscal years ended March 2, 1997, sales increases were driven
primarily by the addition of new stores and the remodeling of existing stores.
<TABLE>
<CAPTION>
CHANGE FROM PRIOR FISCAL YEAR
---------------------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 26, MARCH 3, YEAR ENDED
1995 1996 MARCH 2, 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
Total sales increase...................................................... 2.5% 3.3% 1.5%
Store square footage increase............................................. 4.5% 2.3% 5.0%
Same store sales increase (decrease)(1)................................... 1.1% (1.4%) 0.5%
</TABLE>
- ------------------------
(1) Same Store Sales exclude sales in stores opened or acquired during the
previous 12 months and the 53rd week of fiscal 1996.
Hughes' sales increases during fiscal year 1995 and fiscal year 1997 were
lower than the increases in store square footage because the majority of square
footage added was from new stores open for a partial year, which stores' sales
per square foot were significantly lower than newly remodeled or older, more
mature stores.
Sales per square foot of selling space were $813, $802 (excluding the 53rd
week of fiscal 1996) and $791 in fiscal 1995, 1996 and 1997, respectively. This
trend and the decrease in same store sales in fiscal 1996 was the result of
several factors, including (i) new, larger and less mature stores became a more
significant part of Hughes' sales, (ii) older stores were maturing to a level
where substantial sales growth was more difficult and (iii) Hughes experienced
lower sales in certain existing stores due to Hughes' competitors opening,
replacing or remodeling a number of stores located near Hughes' stores. Same
store sales increased in fiscal 1997 due to the closure of an underperforming
store in 1996, the timing of new store openings and improvement in the Southern
California economy.
47
<PAGE>
The table below sets forth items in Hughes' consolidated statements of
income as a percentage of sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
<S> <C> <C> <C>
FEBRUARY 26, MARCH 3, MARCH 2,
1995 1996 1997
--------------- ----------- -----------
Sales......................................................................... 100.0% 100.0% 100.0%
Cost of Sales, including Distribution and Occupancy Expenses.................. 79.6 78.6 77.0
----- ----- -----
Gross Margin.................................................................. 20.4 21.4 23.0
Selling, General & Administrative Expenses.................................... 18.8 18.8 20.6
----- ----- -----
Operating Income.............................................................. 1.6 2.6 2.4
Interest Income............................................................... 0.1 0.2 0.1
Interest Expense.............................................................. (0.4) (0.4) (0.4)
----- ----- -----
Earnings Before Income Taxes and Minority Interest............................ 1.3 2.4 2.1
Income Taxes.................................................................. 0.6 1.0 0.9
Minority Interest in Subsidiary Loss.......................................... 0.1 -- --
Equity in Loss of Unconsolidated Subsidiary................................... -- -- 0.2
----- ----- -----
Net Income.................................................................... 0.8% 1.4% 1.0%
----- ----- -----
----- ----- -----
EBITDA Margin................................................................. 3.3% 3.7% 3.9%
</TABLE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 2, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 3, 1996
SALES
Sales for the fiscal year ended March 2, 1997 increased $15.3 million, or
1.5%, as compared to the fiscal 1996 (excluding Santee). Excluding the 53rd week
of 1996, sales for the fiscal year ended March 2, 1997 increased 3.5%. This
increase reflected a same store sales increase of 0.5% and the impact of the net
addition of two new stores during fiscal 1997. Two remodels were completed in
fiscal 1997 and four remodels were completed in fiscal 1996. In addition, fiscal
1997 included a full year of sales from a new store opened in September 1995.
COST OF SALES, INCLUDING DISTRIBUTION AND OCCUPANCY EXPENSES
Cost of sales, including distribution and occupancy expenses, was 77.0% of
sales for fiscal 1997 as compared to 77.4% of sales in fiscal 1996 (excluding
Santee). The slight improvement was primarily the result of improved buying and
an increase in the proportion of higher margin products in the overall sales
mix. In addition, Hughes' management believes that recent improvements in the
Southern California economy contributed to this improvement. See
"Business--Market Overview." Offsetting a portion of these improvements was an
increase in the last-in-first-out ("LIFO") adjustment of approximately $0.4
million, together with higher occupancy expenses related to new stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 20.6% of sales for
fiscal 1997 as compared to 19.4% of sales for the comparable period in fiscal
1996 (excluding Santee). This increase in expenses was due to: (i) reduced
benefit credits related to the Southern California UFCW and Food Employers Joint
Pension Trust Fund and Benefit Fund (the "Food Employers Funds") ($3.0 million
of credits for fiscal 1997, as compared to $7.2 million of credits for fiscal
1996); (ii) an increase in insurance expense of $4.6 million due to a revision
in Hughes' estimates of self insurance liabilities; and (iii) approximately $1.3
million in write-offs relating to the closure of a store and abandonment of
another future store location.
48
<PAGE>
Excluding the effect of these three items (which total $10.1 million), operating
expenses would have been appoximately 19.6% of sales. The Food Employers Funds
were overfunded principally due to large contributions by employers, higher than
normal investment returns and cost containment of certain medical benefits. As a
result, the Food Employers Funds gave credits to employers in the form of
suspended contributions.
OPERATING INCOME
Operating income was $24.2 million in fiscal 1997, a decrease of $7.8
million from fiscal 1996 (excluding Santee). The decrease was due to the
increase in selling, general and administrative expenses described above.
Excluding the $10.1 million in non-operating items from 1996, operating income
would have been $34.3 million, or 3.4% of sales.
INTEREST INCOME
Interest income decreased approximately $0.5 million for fiscal 1997 as
compared to fiscal 1996, reflecting lower average cash balances due to the
repayment of debt, the making of capital expenditures, the purchase of $4.8
million of Santee preferred stock and advances of $5.4 million to Santee. See
"Risk Factors--Risks Relating to Santee Dairies."
INTEREST EXPENSE
Interest expense decreased by approximately $0.4 million for fiscal 1997 as
compared to fiscal 1996 reflecting lower average debt levels. Long-term debt,
including the current portion thereof, was $6.9 million at March 2, 1997, as
compared to $27.5 million at March 3, 1996.
INCOME TAXES
Hughes' income tax expense reflects the federal statutory rate of 35%
combined with the state of California's rate of 9.3% for a blended rate of
approximately 41%. Hughes' consolidated effective tax rate for 1996 was higher
than this level because no federal benefit and only a partial state benefit was
allowed due to recurring losses at Santee. Hughes' effective income tax rate was
42% in fiscal 1997 and fiscal 1996.
INTEREST IN SUBSIDIARY LOSS
In fiscal 1996, Hughes owned 51% of Santee and its operating results were
consolidated. Santee incurred $4.4 million in total operating losses in fiscal
1997 as compared to $0.8 million in fiscal 1996, due to increased occupancy
costs and lower margins, as a result of increased rent expense resulting from
the expected early termination of the existing dairy lease and the accelerated
depreciation of its leasehold interest and equipment at the existing dairy
plant, as well as raw material costs outpacing sales price increases to
customers. Therefore, the 49% minority ownership in Santee's losses was added
back to Hughes' income in 1996, resulting in a net impact of $0.4 million loss
on Hughes' results of operations. Due to the sale of 1% of its interest in
Santee in fiscal 1997, Hughes no longer consolidates Santee, and its 50%
interest in Santee's loss was $2.2 million in fiscal 1997. See "Risk
Factors--Risks Relating to Santee Dairies."
NET INCOME
Net income totaled $10.0 million for fiscal 1997, as compared to $16.2
million for fiscal 1996. This decrease was due to lower operating income and
larger losses by Santee.
49
<PAGE>
FISCAL YEAR ENDED MARCH 3, 1996 COMPARED TO FISCAL YEAR ENDED FEBRUARY 26, 1995
SALES
Sales for fiscal 1996 were $1.1 billion, an increase of $37 million, or
3.3%, as compared to fiscal 1995. Excluding the impact of the 53rd week in 1996,
sales would have been $1,129 million, a 2% increase over fiscal 1995. The
overall sales increase in fiscal 1996 as compared to fiscal 1995 was due
primarily to the impact of one new store and four remodels during the year. Same
store sales decreased 1.4% in fiscal 1996 due primarily to Hughes' competitors
opening, replacing or remodeling a number of stores located near Hughes' stores.
Santee's sales (14% of consolidated sales in fiscal 1996) were 3% higher in
fiscal 1996 as compared to fiscal 1995 (14% of consolidated sales in fiscal
1995), primarily due to the pass through of a portion of raw milk cost increases
to its customers and substantial increases in co-pack and bulk dairy sales.
COST OF SALES, INCLUDING DISTRIBUTION AND OCCUPANCY EXPENSES
Cost of sales, including distribution and occupancy expenses, were 78.6% of
sales in fiscal 1996, as compared to 79.6% of sales in fiscal 1995. The
improvement was in part the result of improved buying and an increase in the
proportion of higher margin products in the overall sales mix. Offsetting some
of these improvements were higher occupancy expenses related to new stores.
Hughes' cost of sales also benefited from a positive LIFO provision of $0.2
million in fiscal 1996, as compared to $1.8 million charge in fiscal 1995.
Santee's cost of sales, as a percentage of its sales, rose approximately 1% in
fiscal 1996 as compared to fiscal 1995, primarily reflecting a substantial unit
increase in lower margin co-pack and bulk lines of business and increased raw
milk costs which Santee could not fully recover through increased selling
prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 18.8% of sales in each of
fiscal 1996 and 1995. Included in the 1996 expenses were higher store labor,
profit sharing and advertising expenses, as compared to fiscal 1995. Offsetting
these expense increases were lower pension and benefit expenses ($7.2 million
and $3.0 million of benefit credits were recorded in fiscal 1996 and 1995,
respectively). Excluding these benefit credits, selling, general and
administrative expenses would have been 19.4% and 19.1% of sales in fiscal years
1996 and 1995, respectively.
OPERATING INCOME
Operating income was $30.3 million in fiscal 1996, an increase of 79% as
compared to fiscal 1995. This reflected a sales increase of 3.3% and an increase
in operating margins to 2.6% of sales from 1.6% of sales in fiscal 1995, which
was attributable primarily to higher gross profit margins and lower employee
benefit expenses.
INTEREST INCOME
Interest income was $1.3 million and $1.1 million in fiscal 1996 and 1995,
respectively. The increases have been due to increasing average cash balances.
INTEREST EXPENSE
Interest expense remained stable, at approximately 0.4% of sales, in each of
fiscal 1996 and 1995.
50
<PAGE>
INCOME TAXES
Hughes' effective income tax rates were 42% and 43% in fiscal 1996 and 1995,
respectively. These rates are higher than Hughes' blended federal and state
corporate tax rate of approximately 41% because of continued operating losses at
Santee for which no tax benefit has been recorded at this time.
MINORITY INTEREST IN SUBSIDIARY LOSS
During fiscal 1996 and 1995, Hughes owned 51% of Santee and, therefore, the
49% minority ownership in Santee's losses was added back to Hughes' income. The
49% minority share of Santee's operating losses were $0.4 million and $0.7
million in fiscal 1996 and 1995, respectively. The operating losses were due
primarily to depreciation expense relating to its leasehold interest and
equipment at the existing dairy plant.
NET INCOME
Net income totaled $16.2 million and $8.4 million in fiscal 1996 and 1995,
respectively. Higher operating income resulted in the 93% increase in net income
in fiscal 1996 as compared to fiscal 1995. The lower net income in fiscal 1995
was due to lower operating income, higher losses at Santee and the higher
effective tax rate offset in part by higher interest income.
INFLATION
Hughes' sales for the fiscal years ended March 2, 1997 and March 3, 1996
reflected minimal food price inflation or deflation.
51
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principle source of liquidity has been cash generated from
operations and its revolving credit facility. On March 19, 1997, the Company
completed (i) the sale of 5,175,000 shares of the Company's common stock to the
public for net proceeds of $192.2 million, (ii) the private placement of the Old
Notes for net proceeds of $146.3 million, and (iii) entered into and borrowed
under the New Credit Facility resulting in net proceeds of $248.0 million. The
Company utilized $359.8 million of the proceeds to finance the Hughes
Acquisition and $197.0 million to refinance the Company's bank indebtedness
outstanding at the time of the financings (including $59.1 million incurred in
connection with the KUI Acquisition), leaving approximately $29.7 million of
cash for general corporate purposes. This amount, together with cash provided by
operations of $20.0 million, more than offset capital expenditures and other
investing activities during the 12 weeks ended March 22, 1997, and resulted in
an increase in cash and cash equivalents of $51.8 million during the quarter to
$66.3 million. The ratio of current assets to current liabilities at March 22,
1997 improved to 1.27 to 1, compared with 1.05 to 1 at December 28, 1996.
The Company's expansion, remodeling and new store activities for the period
from 1987 through March 22, 1997 are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
NEW OR
MAJOR ACQUIRED SQUARE FEET CAPITAL
FISCAL YEAR REMODELS(1) STORES ADDED EXPENDITURES(2)
- ------------- ------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
1987....... 2 -- 8,000 5,700
1988....... 5 -- 16,000 7,600
1989....... 2 2 85,000 9,900
1990....... 3 3 107,000 16,600
1991....... 3 3 127,000 25,900
1992....... 6 3 137,000 26,800
1993....... 3 5 173,000 43,000
1994....... 4 7 239,000 28,200
1995....... 7 17 609,000 89,100
1996....... 13 2 111,000 32,500
1997 1 82 3,039,000 436,600
--- --- ----------- ---------------
49 124 4,651,000 $ 722,400
--- --- ----------- ---------------
--- --- ----------- ---------------
</TABLE>
- ------------------------
(1) Includes replacement stores.
(2) Capital expenditures include the purchase of land (including real estate
held for investment), fixtures, equipment and leasehold improvements, as
well as the purchase of leasehold interests, other property rights, goodwill
and covenants not to compete and include $71.3 million for the KUI
Acquisition and $359.8 million for the Hughes Acquisition.
With the Acquisitions, 1997 has been the Company's most active year to date
in terms of growth. In addition, on April 30, 1997, the Company opened its
45,000 square foot Harvard Market QFC store located in Seattle, Washington. QFC
also continues to invest in its existing stores to keep them up-to-date. In
addition to the remodeling of one of the two Food Giant stores the Company
acquired in 1996, the Company's fiscal 1997 remodel plans currently include 12
of its QFC stores and 13 of the stores it acquired in the KUI Acquisition. The
Company has entered into lease agreements for two QFC stores to be built in the
Portland, Oregon area, which are expected to be opened in early 1998 and has
also entered into agreements for two sites in the Olympia, Washington area. The
Company will own its store pads and plans to open the Olympia QFC stores in 1998
as well. In addition, the Company has signed an agreement to acquire a store in
Port Hadlock, located in the Western Puget Sound region of Washington state from
a local independent retailer. The Company has secured a number of other sites
that are still in the entitlement process or subject to other contingencies and
is actively pursuing other new store locations and acquisition opportunities.
The Company has sold one of the stores it acquired from KUI and is actively
52
<PAGE>
marketing four other KUI stores. The Company's plans in southern California for
the remainder of 1997 currently include one new store, two replacement stores
and two major store remodels.
The Company owns the real estate at 11 of its 146 store facilities currently
in operation. The Company owns the strip shopping centers where two of these
stores are located; however, the real estate operations of these centers are
currently insignificant to the Company's results of operations. The shopping
centers are for sale; however, the Company plans to retain ownership of its
store buildings and pads. The remaining stores are leased under long-term
operating leases. As part of the Hughes Acquisition, the Company also owns a
600,000 square foot distribution facility in Irwindale, California.
As part of the Hughes Acquisition, the Company acquired a 50% interest in
Santee, one of the largest dairy plants in California. Santee has begun
construction of a new dairy plant in order to provide a consistent source of
milk, accommodate expected expansion and contain operating costs. The total
estimated cost of constructing the new Santee dairy is approximately $100.0
million (including production equipment and capitalized interest and other
costs). The new dairy is scheduled to be completed in December 1997 and be
operational by March 1998. Approximately 50% of the aggregate budgeted capital
expenditures have been made. See "Risk Factors--Risks Relating to Santee
Dairies." Negotiations are currently under way with certain parties to provide
Santee with approximately $80.0 million of senior secured notes to finance
construction costs. The prospective lenders have orally agreed in principle to
certain primary terms of such long-term financing, including the applicable
interest rate and have been paid a non-refundable fee in connection therewith.
There is no assurance, however, that Santee will be able to obtain this
long-term financing on acceptable terms, or at all. See "Risk Factors--Risks
Relating to Santee Dairies" and "Description of Certain Indebtedness--Santee
Dairies." In that regard, the Company and Stater may be required to provide
certain credit support for any long-term financing which Santee may arrange or
otherwise enter into agreements intended to assure repayment of such
indebtedness. Santee is currently in default under certain of the financial
covenants relating to the Santee Credit Facilities, and is negotiating with its
lender to extend the Santee Credit Facilities and to obtain the appropriate
waivers. Notwithstanding such default, its lender has allowed Santee to continue
to borrow under the Santee Credit Facilities without a formal waiver.
Excluding the KUI and Hughes Acquisitions, capital expenditures, which
include the purchase of land, fixtures, equipment and leasehold improvements, as
well as the purchase of leasehold interests, other property rights, goodwill and
covenants not to compete, are projected to be approximately $75.0 million in
1997 in order to remodel existing stores and to acquire and open new stores in
the Pacific Northwest and Southern California. However, the Company will
continue to seek attractive acquisitions of other regional supermarkets and
supermarket chains, as well as additional stores and store sites and actual
capital expenditures may increase significantly to the extent that these
opportunities arise and the Company is able to obtain financing for these
acquisitions. Accordingly, the Company is unable to predict with certainty its
capital expenditure budget for 1997 or any future period.
The Company has discontinued the payment of cash dividends on its common
stock and presently intends to retain available funds to finance the growth and
operations of its businesses.
The New Credit Facility consists of (i) a $250 million term loan facility
(the "Term Loan Facility"), (ii) a $125 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $225 million reducing revolving credit
facility (the "Acquisition Facility"). Principal repayments under the Term Loan
Facility are due in quarterly installments from June 30, 1998 through the final
maturity of the New Credit Facility in March of 2004, and the Company will be
required to repay borrowings under the Term Loan Facility with the proceeds from
certain asset sales and, under certain circumstances, with cash flow in excess
of certain specified amounts. The Revolving Credit Facility is available for
working capital and other general corporate purposes, including permitted
acquisitions, and any outstanding amounts thereunder will become due on March
31, 2004. The Acquisition Facility is expected to be used to consummate
permitted acquisitions and will become due on March 31, 2004. In addition, the
maximum amount of
53
<PAGE>
available borrowings under the Acquisition Facility will decline by $25 million
each year (subject to certain possible adjustments) commencing March 31, 2000,
and the borrower thereunder will be required to repay borrowings thereunder to
the extent that they exceed the reduced amount of the Acquisition Facility.
Additionally, the Revolving Credit Facility and the Acquisition Facility may be
used to make investments in Santee (including guarantees of indebtedness of
Santee) in an amount not to exceed $80 million to finance construction of
Santee's new dairy. The Company borrowed $248.0 million under the Term Loan
Facility on the Closing Date. See "The Acquisitions--Financing." At the
Company's option, the interest rate per annum applicable to the New Credit
Facility will either be (1) the greater of one of the bank agents' reference
rate or 0.5% above the federal funds rate, in each case plus a margin (0%
initially) or (2) IBOR plus a margin (0.875% initially), in each case with
margin adjustments dependent on the borrower's senior funded debt to EBITDA
ratio from time to time. See "Description of Certain Indebtedness--New Credit
Facility."
The Company is currently in compliance with all financial covenants
contained in both the New Credit Facility and the Old Notes.
The Company anticipates that cash on hand, cash flow from operations and
borrowings under the New Credit Facility will be sufficient to provide financing
for the $75 million of capital expenditures which is currently budgeted through
the end of fiscal 1997. However, to the extent that the Company pursues
additional acquisitions or seeks to make additional expenditures or to the
extent that Santee is unable to obtain the required financing for its new dairy,
the Company may be required to seek additional sources of financing, which may
include additional borrowings or sales of its common stock and there can be no
assurance that the Company will be able to obtain such additional financing on
acceptable terms or at all. In December 1996, the Company filed a universal
shelf registration statement with the SEC registering for sale to the public, an
aggregate of $500.0 million of securities, under which, after the common stock
offering described above, $298.2 million of common stock, preferred stock and
debt securities may be sold. The Company has from time to time issued shares of
common stock for all or a portion of the purchase price of acquisitions (as it
did for a portion of the Olson's Merger in 1995 and as it did in the KUI
Acquisition) and may do so again in the future.
54
<PAGE>
BUSINESS
THE INFORMATION CONTAINED HEREIN INCLUDES CERTAIN DEMOGRAPHIC AND ECONOMIC
INFORMATION FOR SOUTHERN CALIFORNIA AND THE SEATTLE/PUGET SOUND REGION, AND ALSO
INCLUDES CERTAIN DATA REGARDING THE U.S. FOOD RETAILING INDUSTRY AND CERTAIN
FOOD RETAILERS. ALTHOUGH QFC HAS OBTAINED SUCH INFORMATION FROM SOURCES IT
BELIEVES ARE RELIABLE, IT HAS NOT INDEPENDENTLY VERIFIED ANY SUCH INFORMATION
AND THERE CAN BE NO ASSURANCE AS TO ITS ACCURACY. IN ADDITION, HISTORICAL
INCREASES IN POPULATION OR JOBS OR DECREASES IN UNEMPLOYMENT IN ANY AREA DO NOT
PURPORT TO BE INDICATIVE OF WHETHER POPULATION, JOBS OR UNEMPLOYMENT WILL
INCREASE OR DECREASE IN THE FUTURE. FURTHER, BECAUSE COMPETITORS OF QFC, HUGHES
AND KUI GENERALLY DO NOT MAKE AVAILABLE INFORMATION REGARDING THEIR SALES IN
THESE SPECIFIC REGIONS, MARKET SHARE INFORMATION IS SUBJECT TO A NUMBER OF
ESTIMATES AND ASSUMPTIONS AND THERE CAN BE NO ASSURANCE AS TO ITS ACCURACY.
GENERAL
QFC is a leading operator of premium supermarkets in the Seattle/Puget Sound
region of the State of Washington having expanded its market share from
approximately 6% of total supermarket sales in 1986 to approximately 20% today,
according to management estimates and calculated on a pro forma basis after
giving affect to the KUI Acquisition and the anticipated divestiture of five KUI
stores. Since commencing operations in 1954, QFC has developed a modern store
base in many prime locations, strong name recognition and a reputation for
superior quality and service. During the ten fiscal years ended December 28,
1996, QFC's EBITDA margin has increased from 4.6% to 8.6% (7.9% for the 12 weeks
ended March 22, 1997) which management attributes primarily to the development
of innovative merchandising strategies, such as increased emphasis on higher
margin specialty departments, combined with enhanced cost controls. With the
acquisition of Hughes, QFC is entering into new markets beyond the Seattle/Puget
Sound area and, with the KUI Acquisition, QFC has continued to expand within the
region as part of its overall strategy of becoming a leading multi-regional
operator of premium supermarkets. After giving effect to the Hughes Acquisition,
which closed on March 19, 1997, the Company operates 84 stores in the
Seattle/Puget Sound region as well as 57 "Hughes Family Markets" stores in
Southern California. On a pro forma basis after giving effect to the
Acquisitions, the Company would have had sales of approximately $2.1 billion and
EBITDA of approximately $117.4 million for the fiscal year ended December 28,
1996.
Management believes that the Company's QFC stores offer customers superior
value by emphasizing an extensive selection of high quality perishable items,
excellent customer service, convenient store locations and hours, a variety of
specialty departments and competitive prices. QFC stores, which average
approximately 31,000 square feet in size, are open seven days a week, 24 hours a
day, and feature a number of specialty departments such as full service
delicatessens, store seafood departments, bakery departments with
coffee/espresso bars, and floral departments. Many QFC stores also offer natural
food sections, video rentals, fresh juice bars and pharmacies. In addition, QFC
has been an industry leader in leasing space within its stores to branded
specialty food operators, including STARBUCKS COFFEE, CINNABON WORLD FAMOUS
CINNAMON ROLLS and NOAH'S NEW YORK BAGELS, as well as to full service banks such
as SEAFIRST BANK. QFC has recently significantly expanded its selection of
prepared foods and "home meal replacement" items which management believes
appeal to the increasing convenience orientation of consumers. Examples include
complete hot meals which are ready to serve, pre-cooked dinners which are ready
to heat and eat, "Chef's Express" gourmet entrees which are specially prepared
and ready to cook, and "Northwest Sandwich Bars" which feature a variety of
pasta dishes, specialty and made-to-order hot and cold sandwiches, pre-made
salads and self-serve soup and salad bars. Management believes that over the
last five fiscal years, QFC has achieved EBITDA margins well in excess of the
average for the U.S. supermarket industry, which management attributes primarily
to QFC's superior merchandising and operating practices combined with favorable
customer demographics in the Seattle/Puget Sound region.
After giving effect to the Hughes Acquisition, which closed on March 19,
1997, the Company owns and operates 57 premium supermarkets under the "Hughes
Family Markets" name in Southern California. Management believes that Hughes,
which commenced operations in 1952 with one store, has developed a
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strong reputation in Southern California for providing high levels of customer
service together with a broad selection of high-quality meat, produce and other
perishables. Management estimates that Hughes' market share among Southern
California supermarkets (excluding San Diego county) was approximately 5% for
1995. Hughes' stores average approximately 37,000 square feet in size and are
generally located near desirable residential areas. Management believes that
Hughes has among the most modern store bases of any supermarket chain in
Southern California (defined to exclude San Diego county) due in part to its
ongoing store remodeling program. Hughes supplies the majority of its stores'
inventory from its own centrally located 600,000 square foot warehousing and
distribution facility built in 1993. Hughes also owns a 50% interest in Santee,
one of the largest dairy plants in California, which provides dairy and other
products to Hughes, as well as to certain other third parties, under the
well-known "Knudsen" and other labels.
The KUI Acquisition, which closed on February 14, 1997, provides the Company
with desirable store locations primarily in the southern Puget Sound region and
the Olympic Peninsula of the State of Washington, areas in which QFC currently
has a limited presence. Management currently anticipates that it will retain 20
of the 25 stores acquired from KUI. Most of such stores will be converted to the
QFC name and format and remodeled in order to implement QFC's merchandising and
operating practices, although it is expected that the Company (through KUI) may
continue to operate certain of these stores under KUI's current "Stock Market"
name and format. In addition, management believes that the KUI Acquisition
provides the Company with additional critical mass in the Seattle/Puget Sound
region which should improve purchasing and distribution and help create
economies of scale. After giving effect to the KUI Acquisition, including the
anticipated divesture of five KUI stores (one of which has been sold to date),
management estimates that QFC's market share among supermarkets in the
Seattle/Puget Sound region is approximately 20% today. See "The Acquisitions."
GROWTH STRATEGY
The Company's strategic objective is to become a leading multi-regional
operator of premium supermarkets in order to continue to achieve its goal of
controlled and profitable growth. To this end, the Company plans to capitalize
on its acquisition, merchandising and operating expertise to: (i) increase sales
and enhance margins in existing and newly acquired stores, (ii) realize the
benefits of the Hughes and KUI Acquisitions, (iii) acquire and build new stores
in its existing and contiguous markets and (iv) acquire supermarket chains in
attractive new markets. In order to facilitate this phase of the Company's
development, the Company has hired a new chief executive officer, senior vice
president for corporate development and senior vice president of marketing and
public affairs to pursue and integrate acquisitions at a holding company level,
thus allowing current senior management to remain focused on existing
operations. See "The Proposed Reorganization" and "Management." See "Risk
Factors--Risks Relating to Acquisition Strategy" for a discussion of certain
uncertainties pertaining to the Company's strategy.
INCREASE SALES AND ENHANCE MARGINS IN EXISTING AND NEWLY ACQUIRED STORES.
One of the Company's top priorities is to increase sales and enhance margins
in existing and newly acquired stores by: (i) emphasizing higher margin
specialty and convenience items, (ii) expanding sales of proprietary brands
(private label) and (iii) maintaining its high quality store base.
- EMPHASIZE HIGHER MARGIN SPECIALTY AND CONVENIENCE ITEMS. The Company
intends to further develop and implement specialty and
convenience-oriented departments at its stores, which management believes
are important tools to enhance margins, increase foot traffic and build
customer loyalty. QFC has been an industry leader in the development of
higher margin products and services, such as prepared foods and home meal
replacement items, which are geared toward the increasing convenience
orientation of consumers. Management believes that the increase in QFC's
EBITDA margins over the past ten fiscal years has been due in part to
sales of items within these
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departments, as well as to sales of its seafood, delicatessen, bakery,
floral and other specialty products.
- EXPAND SALES OF PROPRIETARY BRANDS. QFC recently adopted a program
designed to increase its sales of proprietary brands, which typically
carry higher margins than comparable branded products and at the same time
help promote customer loyalty. After a long-term study of operating
practices both in the U.S. and abroad, QFC developed a three-tier
proprietary brands philosophy which is approximately two-thirds
implemented. As a result of this effort, QFC has increased the percentage
of proprietary brand sales from less than 3% of grocery sales at the
beginning of fiscal 1996 to approximately 8.5% of grocery sales at the end
of fiscal 1996. This percentage is well below the estimated 1995
supermarket industry average, which management believes was approximately
15% of sales, thus providing a significant opportunity for growth of
proprietary brand sales.
- MAINTAIN ITS HIGH QUALITY STORE BASE. The Company believes that QFC and
Hughes stores are among the most modern and well-maintained in their
respective regions, due in part to their respective remodeling programs.
During the five fiscal years ended December 28, 1996, QFC remodeled or
"re-remodeled" 31 stores, of which 16 were acquired stores which were
remodeled as part of their conversion to the QFC format. Of the 20 stores
expected to be retained in the KUI Acquisition, 13 are presently expected
to be significantly remodeled to facilitate the implementation of QFC's
merchandising and operating practices prior to their conversion to the QFC
name and format. While management believes that the Hughes stores are
generally in good condition, the Company plans to selectively remodel
certain Hughes stores in order to enhance the presentation and
merchandising of meat, seafood, delicatessen items and other perishables
and to add or enhance full-service and leased specialty departments.
REALIZE THE BENEFITS OF THE HUGHES AND KUI ACQUISITIONS.
Management believes that the acquisition of Hughes and KUI will provide the
Company with a number of benefits, including the following:
- CROSS-FERTILIZATION OF OPERATING CAPABILITIES. Management believes that
significant opportunities exist to improve results of operations at
acquired stores through the implementation of QFC's merchandising and
operating practices. For example, management believes that the Hughes
stores will benefit from the adoption of certain merchandising practices
successfully implemented at QFC stores, including practices relating to
the development of higher margin specialty and convenience oriented
departments. The Company will also seek to expand the use of proprietary
brands at Hughes by drawing on QFC's own recently developed proprietary
brands program. Similarly, the Company expects its QFC stores to benefit
from the experience of Hughes' management in areas such as purchasing,
distribution and category management.
- PURCHASING AND DISTRIBUTION-RELATED BENEFITS. Management anticipates that
certain benefits will accrue to the Company in the area of purchasing and
distribution as a result of both the Hughes and KUI Acquisitions. For
example, as a result of the KUI Acquisition, management believes that the
Company's larger size in the Seattle/Puget Sound region provides the
Company increased flexibility with regard to supply and distribution
options and should enhance its ability to negotiate lower prices from its
suppliers. Management also expects that the Company's Seattle/Puget Sound
operations will benefit from Hughes' experience in operating its own
warehouse and distribution center. Further, to the extent that the Company
adds to its store base in Southern California, it is expected that it will
benefit from excess capacity at the Hughes distribution center, which
management estimates is currently operating at approximately 50% of
capacity.
- COST SAVINGS AND VOLUME EFFICIENCIES. The Company expects to achieve cost
savings from the elimination of redundant administrative staff, the
consolidation of management information systems and a decreased reliance
on certain outside services as a result of the Acquisitions. In addition,
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the Company expects to benefit from savings in the areas of store
supplies, store maintenance, and risk management, among other areas, as a
result of increased purchasing power and volume and operating
efficiencies.
ACQUIRE AND BUILD NEW STORES IN ITS EXISTING AND CONTIGUOUS MARKETS.
The Company plans to continue to acquire, and to a lesser extent build, new
stores in its existing and contiguous markets. Management believes that
in-market acquisitions provide an efficient way for the Company to increase
sales in its markets without the resulting increase in overall supermarket
capacity caused by the construction of additional stores. During the past six
years, QFC has acquired and successfully integrated 30 stores from ten operators
in the Seattle/Puget Sound region, including 12 stores acquired from Olson's
Food Stores in 1995. The KUI Acquisition represents a continuation of this
strategy of expanding QFC's presence in its existing and contiguous markets.
Over the last several years the Seattle/ Puget Sound region has been one of the
fastest growing areas in the United States in terms of population, and the KUI
Acquisition not only expands the Company's presence in the region but also
broadens the Company's coverage of the southern portion of the region and the
Olympic Peninsula. See "--Market Overview--Seattle/Puget Sound." This strategy
also encompasses expanding into the northern part of the Puget Sound region as
well as into contiguous areas such as eastern Washington and Portland, Oregon.
The Company will seek to implement this strategy in its new Southern California
market as well.
ACQUIRE SUPERMARKET CHAINS IN ATTRACTIVE NEW MARKETS.
The Company will continue to actively seek growth opportunities outside its
existing and contiguous markets by pursuing the acquisition of supermarket
chains which are well-known within their respective markets, have strong growth
potential and are located in geographic areas exhibiting favorable economic and
demographic conditions. For example, Hughes has a reputation for high quality
products and customer service with stores located in Southern California, an
area which the Company believes has recently begun to exhibit growth in jobs and
population and a decrease in unemployment. See "--Market Overview--Southern
California." The acquisition of Hughes is the first step in the Company's plans
to become a leading multi-regional operator of premium supermarkets. Management
believes that there are a number of attractive acquisition opportunities in
desirable growth areas, and that these opportunities are attributable in part to
the fragmented nature of a large portion of the domestic supermarket industry.
INDUSTRY OVERVIEW
The food retailing industry in the United States includes national and
regional supermarket chains, independent and specialty grocers, traditional
convenience food stores and newer "alternative format" food stores, including
warehouse club stores, deep discount food operators and supercenters. Management
believes that a large portion of the U.S. supermarket industry is highly
fragmented. In particular, according to industry reports, the top ten operators
of supermarkets (excluding convenience and grocery stores with annual sales of
less than $2 million and also excluding warehouse stores, club stores, deep food
discounters and supercenters) accounted for approximately 30% of the
approximately $312 billion of 1995 domestic supermarket sales, while no
supermarket operator outside of the top five accounted for more than 3% of such
sales. According to industry reports, approximately 150 supermarkets had sales
of $250 million or higher in 1995. Recently, the food retailing industry has
been experiencing consolidation as larger supermarket chains acquire smaller
independent competitors within their markets as well as supermarket chains in
different geographic markets. According to the PROGRESSIVE GROCER ANNUAL REPORT
published in April 1996, high-volume chain supermarkets accounted for 77% of
1995 supermarket sales, as compared to only 62% in 1975. Management believes
that the supermarket industry will continue to consolidate and that the Company
is well positioned to take advantage of this consolidation through the
acquisition of competitors within the Seattle/Puget Sound region and Southern
California, as well as supermarket chains in other geographic markets considered
attractive by management.
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Management believes that, in recent years, the trend toward increased
convenience has led to an increase in eating away from home and the purchase of
prepared meals for home consumption. According to the U.S. Department of
Commerce, retail sales for "eating and drinking" establishments increased by
6.2% per annum from 1986 to 1995, significantly higher than the 3.7% annual
growth experienced by "food stores" during the same period. In response to this
trend, supermarkets have expanded their frozen food selections, full service
specialty departments such as delicatessens, and home meal replacement products,
each of which provide convenience-oriented consumers with an alternative to
restaurants and fast food establishments. Home meal replacement items vary by
supermarket chain but can include hot meals which are ready to serve, pre-cooked
dinners which are ready to re-heat, pre-seasoned meals which must be cooked,
pre-made or custom sandwiches, sushi, pre-made salads, soups and self-serve
salad bars. Management believes that QFC is a leader in terms of the selection
and quality of the meal replacement products it offers and that these higher
margin products promote increased store traffic and customer loyalty, as well as
higher sales and margins.
MARKET OVERVIEW
SEATTLE/PUGET SOUND
According to data compiled by Conway Pedersen Economics, Inc. ("Conway
Pedersen"), an economic consulting firm, the Seattle/Puget Sound region has
expanded more rapidly than the nation over the past ten years. According to
Conway Pedersen, the population of the region has grown 10.3% since 1990 to an
estimated 3.1 million by 1996 and is forecasted to continue growing
approximately 2% per annum through 1998. In addition, according to Conway
Pedersen, the area had one of the highest per capita household incomes in the
United States in 1995 and was recently chosen the "number one" place to live and
work by FORTUNE magazine. According to Conway Pedersen, job growth for 1996 is
expected to exceed 3.0% as Boeing, the area's largest employer, has renewed
hiring plans in response to the recent increase in demand for commercial
aircraft. This compares to job growth as reported by Conway Pedersen of 1.9% in
1995 and forecasted future growth exceeding 3.0% per annum through the year
1998. According to Conway Pedersen, unemployment has also declined to its lowest
level in five years, which was expected to reach 4.8% by the end of 1996, as
compared to approximately 6.7% in 1992. In addition to the aerospace industry,
key industries include computer software, bio-technology, financial services,
healthcare service and international trade.
SOUTHERN CALIFORNIA
According to data compiled by the UCLA Business Forecasting Project (the
"UCLA Forecast"), Southern California (defined to include the counties of Los
Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara and
Ventura) had an estimated 1996 population of more than 18.8 million people or
more than 50% of the total population of California. According to the UCLA
Forecast, job growth in the region was approximately 2.3% for the 12 months
ended October 31, 1996. In addition, the UCLA Forecast indicates that, at
October 31, 1996, the unemployment rate in California was approximately 7.3%,
down from approximately 9.4% in 1993, and is forecasted to continue declining to
below 6.0% by 1998. In addition to aerospace and defense, key industries include
entertainment, financial services, healthcare services, international trade and
tourism. According to Regional Financial Associates, Inc. ("RFA"), an economic
consulting firm, the region's motion picture industry accounted for nearly
130,000 jobs as of mid-1996, more than double the number employed in the
industry in mid-1986. Tourism is also an important source of jobs for the region
with over 22 million overnight visitors having spent an estimated $10 billion in
1995 according to RFA. Recently, the most rapidly growing areas in Southern
California in terms of population and job growth have included those surrounding
Los Angeles, such as Riverside, San Bernardino, Orange and Ventura counties
according to RFA.
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QUALITY FOOD CENTERS, INC.
Unless otherwise expressly stated or the context otherwise requires, the
discussion set forth under "Business--Quality Food Centers, Inc." relates solely
to the stores owned and the business conducted by QFC prior to the Acquisitions,
and does not include stores owned and businesses conducted by Hughes or KUI.
MERCHANDISING
QFC's merchandising goals are to attract new customers, become the primary
source for its customers' weekly grocery needs and capture a greater portion of
their supermarket spending. In order to achieve these goals, QFC's merchandising
strategy emphasizes: (i) superior customer service, (ii) a wide variety of high
quality meat, seafood, produce and other perishables, (iii) high quality
convenience-oriented specialty departments and services and (iv) a broad
assortment of higher-margin proprietary brands. Management believes that QFC's
strengths in merchandising, combined with its competitive pricing, have earned
QFC stores a reputation for providing superior "value" to their customers and
have resulted in a loyal customer base.
SUPERIOR CUSTOMER SERVICE. Management believes that QFC's commitment to
superior customer service distinguishes it from much of its competition. In
addition to its stores remaining open 24 hours a day, seven days a week, QFC's
operating practices have been designed to emphasize customer convenience and
satisfaction. Employees typically attend department specific training classes at
QFC's training center located at its headquarters and also generally receive
follow-up in-store training. QFC employees are trained to actively address
customer needs by asking shoppers whether they need help and then by locating,
recommending and selecting merchandise for their customers. For example,
employees in QFC's meat and seafood departments, in addition to offering
specialized service in those areas, are trained to assist customers with cooking
instructions and recipes and direct them to employees in other departments, such
as wine specialists found in selected stores, for additional needs. QFC product
preparation areas in these departments are open to promote such interaction with
customers. QFC also emphasizes a broad selection of product choices and brands
within any given food category in an effort to foster "one-stop shopping." Each
store's staff is encouraged to be friendly, which often results in employees
knowing their regular customers by name. QFC's flagship University Village store
in Seattle offers a child center with trained child-care personnel. Each store's
checkout stands are custom designed to speed the checkout process and
incorporate computerized scanning and other systems to aid in the checkout
process. QFC also accepts credit and debit cards for the convenience of its
customers, checkout clerks unload items from the cart to the checkout stand and
courtesy clerks are available to assist shoppers with their grocery bags after
checkout.
WIDE VARIETY OF HIGH QUALITY MEAT, SEAFOOD, PRODUCE AND OTHER
PERISHABLES. Offering a wide variety of consistently high quality meat, seafood
and produce to its customers is a fundamental tenet of QFC's merchandising
strategy. Management believes that its reputation for providing among the
freshest and widest varieties of these major groups of perishables, displayed in
a clean and visually appealing presentation, is a major attraction for its
customers. QFC provides carefully trimmed "choice" USDA beef, high quality pork
and Washington-grown poultry. QFC has also recently introduced a high-end
branded beef known as "premier choice" as well as kosher meats and poultry in
selected stores prepared at QFC's USDA-approved processing facility. Management
believes that its seafood departments have a reputation for providing among the
finest quality and widest selection of seafood and shellfish in the
Seattle/Puget Sound area. As part of this emphasis on quality, QFC has full-time
employees stationed in its primary seafood supplier's facility to pre-screen
seafood products before they are shipped to QFC. QFC's in-store produce
employees are trained to eliminate items that do not meet QFC standards and to
carefully trim, hand stack and attend to the display and presentation of the
produce. In an effort to provide specialty salads and other products of
consistently high quality in every QFC deli department, many deli items are
prepared in QFC's central commissary which has improved quality, consistency and
shelf life. Instead of
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baking in each store, several bakeries in the Seattle/Puget Sound area deliver
fresh baked goods daily to QFC's stores, which management believes allows QFC to
sell higher quality and a wider variety of baked goods with greater product
consistency than if these products were baked on-site.
HIGH QUALITY CONVENIENCE-ORIENTED SPECIALTY DEPARTMENTS AND SERVICES. QFC
provides a broad variety of products and services through its specialty
departments which have been designed to appeal to the increasing convenience
orientation of supermarket customers. For example, in the past year, QFC has
placed significant emphasis on prepared foods and "home meal replacement" items.
Such items include complete hot meals, such as prime rib, london broil and
salmon dinners, which are ready to serve, pre-cooked dinners which are ready to
heat and eat, and "Chef's Express" gourmet entrees which are specially prepared
and ready to cook. QFC stores also offer "grab and go" salads, "Northwest
Sandwich Bars" which feature hot pasta dishes, soups and specialty and
made-to-order hot and cold sandwiches and coffee and espresso bars. Certain
stores also offer fresh juice bars, natural foods departments and sushi
selections. All stores offer photo-processing, floral departments and automated
bank-teller machines for added convenience, while video rentals and pharmacies
are offered at some of QFC's stores. In addition, QFC currently leases or
sub-leases space at a number of its stores to STARBUCKS COFFEE, CINNABON WORLD
FAMOUS CINNAMON ROLLS and NOAH'S NEW YORK BAGELS, as well as to full service
banks such as SEAFIRST BANK.
BROAD ASSORTMENT OF HIGHER-MARGIN PROPRIETARY BRANDS. QFC has recently
developed a comprehensive three-tier proprietary brands program, which includes
"SIGNATURE" brands, "ENDORSED" brands, and "PRICE FIGHTER" brands. This program,
which was developed to help improve sales and margins and build customer
loyalty, is almost fully implemented, with approximately two-thirds of the total
number of expected store brand stock keeping units ("SKUs") having been
introduced. QFC's "SIGNATURE" brand products include premium quality items
produced expressly for QFC and sold under a variety of names, such as CASTLEBURY
ice cream and yogurt and Northern Cove chowders, as well as other local brands
such as CUCINA! CUCINA! Italian foods for which QFC is the only supermarket
distributor in the Seattle/Puget Sound region. The second tier, called
"ENDORSED" brands includes a variety of high quality items, such as QFC's BAKER
VALLEY FARMS dairy brand, that bear the QFC "satisfaction guaranteed" seal of
endorsement. The "PRICE FIGHTER" brands are marketed under the Heritage Farm
label and are designed to replace items previously provided by QFC's wholesalers
with a wide selection of higher quality products that are positioned as national
brand equivalents at lower prices. QFC's proprietary brands program currently
includes approximately 700 SKUs, many of which are recent additions. QFC's
proprietary brands business at the end of fiscal 1996 accounted for
approximately 8.5% of grocery sales whereas, according to industry reports, the
estimated 1995 supermarket industry average was approximately 15%, thus
providing significant opportunity for the continued growth of store brand sales.
STORE BASE AND DEVELOPMENT
Management believes that QFC has developed a modern and well-maintained base
of stores in many prime locations in the Seattle/Puget Sound area. QFC currently
operates 64 supermarkets, generally in or nearby desirable residential areas.
Management currently anticipates that it will retain approximately 20 of the
25 stores acquired in the KUI Acquisition and sell or otherwise divest the
others. Of the 20 KUI stores expected to be retained, 13 are expected to be
converted to the QFC name and format and thus significantly remodeled as part of
the Company's plan to implement QFC's merchandising and operating practices in
its new stores. It is presently expected that the Company will continue to
operate the remaining stores under KUI's current "Stock Market" name and format.
During the five fiscal years ended December 28, 1996, QFC invested
approximately $217 million in capital expenditures, which have been primarily
allocated toward acquiring and building new stores and expanding and remodeling
or "re-remodeling" existing stores. During such period, QFC acquired or opened
34 new stores and remodeled or "re-remodeled" 31 existing stores. QFC remains
committed to
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keeping its existing stores in top condition with the latest customer
conveniences, information systems, merchandise, departments and decor.
While most of its newer stores are larger and while QFC expects the average
size of its stores to grow as stores are remodeled and expanded, QFC intends to
remain flexible in terms of the size of its new and acquired stores. At the end
of 1996, the total square footage of all 64 stores was approximately 2,100,000
square feet with an average store size of approximately 31,000 square feet, and
a range in size from 14,000 to 66,000 square feet. QFC increased its total
square footage by 22%, 46% and 6% in fiscal 1994, 1995 and 1996, respectively.
The following table sets forth certain information with respect to store size.
<TABLE>
<CAPTION>
NUMBER OF STORES AT
DECEMBER 28, 1996
-----------------------
<S> <C>
Store Size:
Less than 20,000 square feet.......................................... 9
Between 20,000 and 30,000 square feet................................. 21
Between 30,000 and 40,000 square feet................................. 23
Between 40,000 and 50,000 square feet................................. 8
Over 50,000 square feet............................................... 3
--
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</TABLE>
The following table sets forth additional information concerning QFC stores
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30,
1992 1993 1994 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period................... 30 33 38 45
Newly constructed................... 1 3 1 1
Acquired............................ 2 2 6 16
Closed.............................. 0 0 0 0
-- -- -- --
End of period......................... 33 38 45 62
REMODELS................................ 5 3 2 5
RE-REMODELS(1).......................... 1 0 2 2
<CAPTION>
DECEMBER 28,
1996
-----------------
<S> <C>
TOTAL STORES:
Beginning of period................... 62
Newly constructed................... 0
Acquired............................ 2
Closed.............................. 0
--
End of period......................... 64
REMODELS................................ 5
RE-REMODELS(1).......................... 8
</TABLE>
- ------------------------
(1) "Re-remodeled" stores are stores that have been remodeled within five years
of a prior remodeling.
The Company's plans to expand and remodel its existing stores and to add new
stores are reviewed continually and are subject to change. QFC has been highly
selective in acquiring store sites and attempts to take advantage of market
research and its extensive knowledge of the Seattle/Puget Sound region in
evaluating opportunities. In conducting market research for store sites, QFC
typically evaluates population shifts, demographic conditions, zoning changes,
traffic patterns, new construction and the proximity of competitors' stores in
an effort to determine a future store's sales potential. The Company's ability
to expand and remodel existing stores and to open new stores, however, is
subject to many factors, including successful negotiation of new leases or
amendments to existing leases, successful site acquisition and the availability
of financing on acceptable terms, and may be limited by zoning, environmental
and other governmental regulations. See "Risk Factors--Risks Relating to
Acquisition Strategy."
PURCHASING AND DISTRIBUTION
QFC does not maintain independent distribution facilities and instead
purchases the majority of its groceries, meat and some seafood, deli and produce
from wholesale suppliers. QFC's merchandise is ordered on a store-by-store
basis, although product selection is typically approved and monitored by a
central buying group consisting of merchandise managers for various
classifications of products. The central buying group also responds to customer
requests and input from store managers regarding new products and merchandising
ideas using category management principles and allocates shelf space to
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products with the assistance of QFC's schematic department which uses
state-of-the-art shelf allocation software to help determine the efficient shelf
layouts.
QFC's major wholesale supplier is West Coast Grocery Company ("West Coast"),
a subsidiary of Super Valu Stores, Inc. QFC purchased approximately $211.5
million of products from West Coast during fiscal 1996, accounting for 35.0% of
QFC's cost of sales and related occupancy expense during the year. Beginning
with the Olson's Merger in March 1995, QFC began using Associated Grocers
("Associated") as its major wholesale supplier for the 12 stores that were
previously operated by Olson's. Associated is a cooperative wholesale supplier
located in Seattle, Washington. QFC purchased approximately $57.5 million of
products from Associated during fiscal 1996, accounting for 9.5% of QFC's cost
of sales and related occupancy expense during the year. Currently, 49 of QFC's
stores buy from West Coast and 15 from Associated. In addition, certain
products, such as beer, wine, soda and certain snack foods, are purchased from
other manufacturers or distributors which, as do West Coast and Associated,
deliver directly to QFC's stores. QFC also maintains a central commissary where
certain items, such as hot and cold salads, sauces and dressings, and certain
"Chef's Express" ingredients, are prepared primarily for QFC's deli departments.
In addition, kosher meat and poultry are prepared in QFC's USDA-approved
processing facility. QFC also periodically purchases higher turnover products
directly from the manufacturer that would otherwise be supplied by West Coast or
Associated.
The stores acquired in the KUI Acquisition currently purchase products from
Associated. According to information made publicly available by Associated, KUI
was Associated's largest customer, having accounted for approximately 19% of
Associated's sales for Associated's fiscal year ended September 30, 1996. As a
result of the KUI Acquisition, QFC currently owns 22% of the non-voting equity
of Associated.
MANAGEMENT INFORMATION SYSTEMS
Although QFC already makes extensive use of management information systems,
management remains committed to the further development and use of information
systems as a tool to enhance results of operations. QFC continues the migration
from its mainframe host computer to a client-server based architecture to meet
its long-term needs and convert to open systems technology. Management expects
that QFC's new item and category management system (which tracks and analyzes
sales data), coupled with expanded point-of-sale capabilities and a new pricing
system under development, will enable it to improve its operations through
category management and by improving pricing and promotional strategies.
In 1993, QFC installed personal computer-based point-of-sale hardware and
software in every checkout lane of every store. QFC utilizes a private voice and
data network and an electronic payment system that processes customer purchases
by debit and credit cards. In 1996, QFC implemented a check authorization
system, which is integrated into QFC's point-of-sale hardware and software. QFC
also has a direct store delivery system for non-perishable deliveries, which
integrates the receipt of goods at the store with accounting and merchandising
at QFC's main office. This integrated system offers QFC timely information and
greater efficiency and control over product receipts, merchandising and accounts
payable functions. QFC processes product orders, direct store deliveries and
store accounting functions on personal computers in each store which are
integrated with centralized corporate systems. In addition, custom software and
laser printers are used to create shelf tags, attractive signs and customized
promotional materials on-site at each store. Electronic Data Interchange ("EDI")
is used extensively to transmit various business documents to and from QFC's
suppliers. QFC also installed a company-wide electronic mail system in 1996.
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Management anticipates that over time, each of the KUI stores to be retained
by the Company will be converted to QFC's management information system.
MARKETING AND PROMOTION
QFC advertises primarily through newspapers, television and radio, as well
as billboards and busboards. QFC also promotes products through the use of
direct mail circulars, which it can produce in-house, and which are distributed
every Wednesday, as well as through in-store "demonstrations," tastings and
hand-outs. QFC's television and radio ads are primarily image based, promoting
the quality of its products, employees and customer service, while its print
advertising is primarily price/item-based.
QFC also promotes its products through special seasonal promotions during
the periods leading up to such holidays as Easter, Thanksgiving and Christmas.
In addition, QFC typically advertises the opening of new stores and the
re-opening of major remodeled stores and often conducts special promotions and
events in connection with these openings and re-openings.
QFC also has an in-house product demonstrations staff, which provides
product demonstrations and free samples in its stores. QFC is actively involved
in the community which it serves in order to be a good corporate citizen as well
as to build customer loyalty, and plays a role in many local events.
For the year ended December 28, 1996, QFC spent approximately 55% of its
marketing budget on newsprint advertisements such as newspaper inserts and
circulars, approximately 27% for television and radio advertising and
approximately 15% on special events such as new store opening promotions. The
remainder of the budget was used for direct mail for special promotions.
COMPETITION
The retail supermarket business is highly competitive. QFC and KUI compete
primarily with national and regional supermarket chains and other food
retailers, principally Safeway, Albertson's and Fred Meyer, and with smaller
chains and independent stores as well as wholesale club formats, such as Price/
Costco, and specialty and convenience food stores.
The principal areas of competition include store location; product selection
and quality; convenience and cleanliness; employee friendliness and service;
price; and management information enabling timely product selection, pricing and
promotion decisions. QFC seeks to address each of these factors, emphasizing
superior service, high quality perishables, the use of technology, and favorable
store locations. Competitive pricing is implemented by reviewing competitors'
prices on a regular basis through observation and independent surveys and
adjusting prices as management deems appropriate. Certain of these strategies
are also used by QFC's competitors, some of which have substantially greater
financial and other resources than QFC. The Company will seek to address these
factors in a similar fashion at the KUI stores it intends to retain.
During the fourth quarter of 1994 and throughout 1995, QFC experienced an
unusually large number of new store openings or store remodelings by its
competitors near its existing stores, which resulted in reduced sales in certain
of QFC's stores. Fewer such openings occurred during 1996. See "Risk Factors--
Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
EMPLOYEES AND LABOR RELATIONS
QFC had approximately 4,400 employees at the end of fiscal 1996. Of these,
approximately 4,100 were covered by an aggregate of seven collective bargaining
agreements which expire in the period from May 3, 1998 to December 1, 1998.
QFC's most significant union is the United Food and Commercial Workers Union
Local No. 1105, of which 2,900 QFC employees are members; this contract expires
on May 3, 1998. QFC has not had a work stoppage in over 20 years and believes
its labor relations are good. However,
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there can be no assurance that work stoppages or other labor matters will not
adversely effect the Company in the future. See "Risk Factors--Labor Relations."
KUI had approximately 1,700 employees at the end of fiscal 1996. Of these,
approximately 1,500 were covered by an aggregate of 14 collective bargaining
agreements which expire in the period from May 31, 1997 to June 9, 1999. KUI's
largest union is the United Food and Commercial Workers Union Local No. 367, of
which 900 KUI employees are currently members under contracts which expire from
May 3, 1998 to November 29, 1998. QFC believes that KUI has had a good
relationship with its employees. However, there can be no assurance that work
stoppages or other labor matters relating to the stores acquired from KUI will
not adversely affect the Company in the future. See "Risk Factors--Labor
Relations."
The Company believes that a substantial majority of the employees of
supermarket chains in the Seattle/Puget Sound region, including QFC's and KUI's,
are members of these collective bargaining units.
PROPERTIES
At March 22, 1997, QFC leased 58 of its 64 supermarkets and its
administrative facilities under non-cancelable operating leases with various
terms expiring through December 2053, including renewal periods. The average
remaining term of QFC's leases (including all renewal options) is approximately
31 years, with only two of these leases subject to expiration within five years.
Of the 20 stores expected to be retained in the KUI Acquisition, 18 will be
leased and two will be owned. The average remaining term of the leases of these
18 KUI stores (including renewal options) is approximately 32 years and only one
of such leases (expiring in April 1997) is subject to expiration within five
years.
QFC typically renegotiates a store lease prior to committing to a major
store remodel. The leases generally provide for minimum rental amounts, with
contingent rental payments based on a percentage of gross sales, plus real
estate tax payments and reimbursement of certain common-area maintenance costs.
QFC owns most of the equipment, furniture and fixtures at its retail and
administrative locations and has made leasehold improvements at most locations.
QFC may seek to increase its ownership of future store locations in
instances where management believes that it can better control occupancy
expenses through ownership. At March 22, 1997, QFC owned the real estate at six
of its store facilities in operation, two of which were part of small shopping
centers owned by QFC. The real estate operations of this center are currently
not material to QFC's results of operations. During 1995, QFC sold one of the
shopping centers it previously operated, in 1996 it sold another, and the one
remaining center is currently for sale. QFC retained ownership of its store
buildings and pads in the centers that were sold, and intends to do so in the
remaining center to be sold as well. There are no mortgages on QFC's owned
stores.
QFC has entered into option agreements for, and purchased, real estate
within its existing Seattle/ Puget Sound market areas where it plans to locate
stores in the future. Certain of these store locations are in the entitlement
process or subject to other contingencies.
SEASONALITY
No material portion of QFC's or KUI's business is affected by seasonal
fluctuations, except that sales are generally stronger surrounding holidays,
especially from Thanksgiving through New Year's Day. In addition, QFC's fiscal
quarters consist of three 12-week quarters and a 16-week fourth quarter.
However, 1994 was a 53-week fiscal year, with a 17-week fourth quarter.
ENVIRONMENTAL MATTERS
QFC and KUI are subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs
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of cleaning up, and certain damages resulting from, sites of past spills,
disposal or other releases of hazardous materials (together, "Environmental
Laws"). In particular, under applicable Environmental Laws, QFC and KUI may be
responsible for remediation of environmental conditions and may be subject to
associated liabilities (including liabilities resulting from lawsuits brought by
private litigants) relating to their stores and the land on which their stores
are situated, regardless of whether QFC or KUI lease or own the stores or land
in question and regardless of whether such environmental conditions were created
by QFC or KUI or by a prior owner or tenant.
QFC believes that it currently conducts its business, and in the past has
operated its business, in substantial compliance with applicable Environmental
Laws and regulations. In addition, compliance with federal, state and local laws
enacted for protection of the environment has had no material effect on QFC.
However, there can be no assurance that environmental conditions relating to
prior, existing or future QFC or KUI stores or store sites will not have a
material adverse effect on the Company. See "Risk Factors--Environmental
Matters."
In connection with the KUI Acquisition, QFC reviewed existing reports and
retained environmental consultants to conduct certain investigations of the
operations of KUI. Phase I environmental site assessments were conducted on the
KUI stores and store sites. These Phase I environmental site assessments did not
reveal any environmental matter that is likely to have a material adverse effect
on the Company.
LEGAL PROCEEDINGS
The Company (including QFC, Hughes and KUI) is currently involved in a
number of legal proceedings which have arisen in the ordinary course of
business. Management believes these proceedings will not, in the aggregate, have
a material adverse effect on the Company. However, the Company is unable to
predict whether the outcome of such actions may or may not have a material
adverse effect on the Company's results of operations in a particular future
period as the timing and amount of any resolution of such actions and their
relationship to future results of operations are not known.
HUGHES MARKETS, INC.
MERCHANDISING
Hughes' merchandising strategy emphasizes: (i) superior customer service,
(ii) a wide selection of high quality products, (iii) competitive pricing and
promotions and (iv) the development of proprietary brands.
SUPERIOR CUSTOMER SERVICE. The foundation of Hughes' merchandising strategy
is its commitment to providing superior service and convenience. Each Hughes
store monitors customer satisfaction in an effort to respond to its customers'
shopping needs. Each store's checkout lanes are supplied with postage-paid
comment cards which are reviewed and typically answered personally in writing or
by phone. Hughes also employs an outside firm to monitor customer service and
relations. Hughes' employees typically undergo in-store training which stresses
customer service and relations, such as offering to specially order a particular
product for a customer in the event it is not available in a store. As part of
this commitment to its customers, Hughes stores are generally open 24 hours a
day, seven days a week, and offer a wide variety of services, departments and
products. All Hughes stores offer photo-processing services and automated teller
machines. 50 Hughes stores have on-site bakeries, 40 of which supply all of
their own baked goods, 50 stores have full-service delicatessens, 52 stores have
full service fish departments and the majority of the stores offer floral
departments and fresh salad bars. 21 Hughes stores have in-store banking
services.
WIDE SELECTION OF HIGH QUALITY PRODUCTS. Hughes has built a reputation for
offering a wide variety of consistently high quality products, with a focus on
perishables such as meat and produce. Hughes stores carry only "USDA Choice"
beef and American lamb and veal and other high quality pork and poultry items,
while its full service seafood departments feature U.S. Department of Commerce
inspected seafood
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items. Hughes also strives to be a leader in providing fresh produce to its
customers and today enjoys a reputation for offering a wide variety of high
quality produce. For example, Hughes has state-of-the-art, pressurized banana
ripening rooms at its Irwindale, California distribution facility which help
ensure greater consistency of color, and provide a shorter ripening cycle and
longer shelf-life than conventional ripening rooms. In the past year, Hughes has
also placed significant emphasis on prepared specialty foods. Under the label
"Home Meal Solutions," Hughes stores sell complete meals, such as pork
spareribs, lasagna, and whole rotisserie chicken dinners. Home Meal Solutions
include pre-cooked dinners which are ready to heat and eat and specially
prepared entrees which are pre-seasoned and ready to cook. Hughes stores also
offer kids' meals and specialty and made-to-order hot and cold sandwiches.
Certain stores also offer self-serve salad, soup and hot buffet bars, and
freshly prepared sushi. Management intends to further develop and implement
specialty and convenience-oriented departments at Hughes stores, which it
believes can be important tools to enhance margins, increase foot traffic and
build customer loyalty. Hughes carries a large variety of certain product
groups, such as kosher, Mexican and Asian foods that are adjusted on a
store-by-store basis to match local demographics.
COMPETITIVE PRICING AND PROMOTIONS. The Company believes that Hughes
provides its customers with competitive prices in a variety of ways. Hughes has
designed and implemented specific programs to promote customer loyalty through
competitive pricing, including a "double coupon" program introduced in the
greater Los Angeles area and a "red tag" program in which red tags extend from
shelves to draw shoppers to special value items, certain of which are tied in to
Hughes' radio advertisements and direct mail promotions. In addition, Hughes
offers a 5% discount on eligible purchases to senior citizens through its Hughes
"Senior Discount" card. Hughes also honors competitors' coupons, and often gives
discounts on equivalent products in cases where Hughes does not carry a
particular item.
DEVELOPMENT OF PROPRIETARY BRANDS. Although Hughes has in the past focused
primarily on national brands, the Company believes that the recent addition of
proprietary brand items has contributed to sales while also increasing customer
loyalty. Hughes currently uses a two-tier proprietary brand program which
includes the "Hughes" label, designed to compete with the national brands on
price and quality, and the "Premier" label which Hughes attaches to its premium
quality items. Hughes currently carries 449 SKUs under its proprietary brand
program and management intends to increase that number in the future.
STORE BASE AND DEVELOPMENT
Hughes has grown primarily through site acquisition and development by
focusing initially on the San Fernando Valley region of California and then on
other selected parts of the Los Angeles area. Because Hughes began its store
expansion in Los Angeles more than 40 years ago, it has been able to develop a
stable base in Los Angeles County where newer competitors are limited by such
barriers to entry as the high cost of real estate and significant zoning
restraints. Hughes has pursued expansion from its base in Los Angeles County by
selectively entering other markets in Southern California. For example, in 1979
Hughes entered the Orange County market by acquiring five stores and has since
built its presence in Orange County to thirteen stores. Hughes entered the
Riverside and San Bernardino markets in 1984 and now has three and seven stores,
respectively, in those markets. Hughes also currently operates four stores in
Ventura County. Hughes management has been highly selective when choosing a site
for a new store, typically requiring a minimum population and demographic
profile before acquiring the site.
The Company believes that its modern store base has been a significant
element in its success. Hughes has invested approximately $161 million in
capital expenditures during the most recent five fiscal years, which have been
primarily allocated toward acquiring and building new stores and expanding or
remodeling existing stores. During that period, Hughes has added over 380,000
square feet through the construction of 14 stores and through expansion of
certain existing stores. At December 31, 1996, the total square footage of all
56 Hughes stores was approximately 2,085,000 square feet with an average store
size of 37,000 square feet, and a range in size of 22,000 to 55,000 square feet.
Hughes increased its total square footage by 0.2%, 4.5% and 2.3% in fiscal 1994,
1995 and 1996, respectively.
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The following table sets forth certain information with respect to Hughes'
store size:
<TABLE>
<CAPTION>
NUMBER OF STORES AT
MARCH 22, 1997
-----------------------
<S> <C>
Store size:
Between 20,000 and 30,000 square feet..................................... 5
Between 30,000 and 40,000 square feet..................................... 36
Between 40,000 and 50,000 square feet..................................... 14
Over 50,000 square feet................................................... 2
--
57
</TABLE>
Hughes also seeks to refurbish its stores approximately every five to eight
years. Over the last seven full fiscal years Hughes has remodeled 28 stores and
approximately 69% of the total square footage of Hughes' stores is either newly
constructed or was remodeled during the last seven years.
The following table sets forth additional information concerning Hughes
stores for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 27, FEBRUARY 26, MARCH 3,
1993 1994 1995 1996
----------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
TOTAL STORES
Beginning of period........................ 52 51 51 53
Newly constructed........................ 0 0 2 1
Acquired................................. 0 0 0 0
Closed................................... 1 0 0 0
-- -- -- --
End of period.............................. 51 51 53 54
REMODELS..................................... 3 6 4 4
<CAPTION>
MARCH 3, 1997
THROUGH
MARCH 2, MARCH 22,
1997 1997
----------------- -------------
<S> <C> <C>
TOTAL STORES
Beginning of period........................ 54 56
Newly constructed........................ 3 1
Acquired................................. 0 0
Closed................................... 1 0
-- --
End of period.............................. 56 57
REMODELS..................................... 2 0
</TABLE>
PURCHASING AND DISTRIBUTION
Until the early 1980s, Hughes purchased most of its products from
wholesalers. Since that time, Hughes has moved toward direct purchases from
suppliers and self-distribution, leasing a 200,000 square foot dry goods
warehouse in 1983. In 1993, in order to provide for future expansion in the
region and to provide self-distribution capacity for a wider range of products,
Hughes relocated into a 600,000 square foot distribution facility in Irwindale,
California that it designed, constructed and currently owns. The Company
believes that this distribution center is currently operating at approximately
50% of its full capacity. The current distribution facility is centrally located
an average of 44 miles from Hughes' stores and is serviced by a fleet of 36
tractors and approximately 70 trailers, including approximately 60 refrigerated
trailers, all of which are owned by Hughes.
The distribution facility allows Hughes to centralize purchasing, which the
Company believes results in certain advantages. For example, centralized
purchasing allows Hughes to take advantage of the benefits of purchasing large
quantities, including volume discounts. The Company also believes that
centralization enables Hughes to help ensure that its quality standards are
applied uniformly and reduces vendor distribution costs by enabling Hughes to
pick up merchandise directly from its suppliers. In addition, Hughes uses
computerized inventory control and ordering systems for items that are supplied
through the distribution facility in order to enhance productivity and
efficiency. Warehouse supplied items are purchased under a central buying
arrangement designed to promote cost-effective buying, quality control and ample
inventory. The Company believes the move toward increased self-distribution has
had a positive impact on Hughes' gross margins.
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Hughes purchases its merchandise directly from manufacturers as well as from
distributors. In fiscal 1996, Hughes purchased $68.9 million of goods
(approximately 8% of its cost of sales, including distribution and occupancy
expenses) from Certified Grocers ("Certified"), a member-owned cooperative.
Hughes uses Certified primarily for purchases of items it does not carry in its
warehouse, such as frozen foods, ice cream, and certain low turnover items.
Recently, Hughes has focused on implementing a category management program
pursuant to which it will review all aspects of a product category, from
promotional sales to shelf space allocation. Working with enhanced technology
intended to better manage data from checkout lane scanners, together with an
outside consultant, Hughes intends to improve purchasing decisions, gain greater
inventory control and implement "just-in-time" delivery programs. It is expected
that this category management program will lead to closer relationships and
programs with its suppliers. The Company believes that category management and
managing product categories as individual business units can be important tools
to enhance gross margins.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that a high level of computerization is essential to
maintaining and improving Hughes' competitive position and is committed to the
further development and use of information systems as a tool to enhance results
of operations. For example, Hughes uses computerized information systems,
including its IBM ES-9000-411 mainframe computer, to process transactions and to
provide information relating to (1) ordering, purchasing and billing and (2)
reports on sales, inventories, gross profits, payroll, payables and expenses
which are integrated with financial reports which enable management to better
monitor results of operations. Hughes also uses a private voice and data network
for communications and a LAN system which ties its stores, headquarters and
warehouse to the mainframe computer. Hughes also uses an electronic payment
system which enables customers to pay with debit and credit cards. Hughes also
has a direct store delivery system for non-perishable deliveries which
integrates the receipt of goods at the store with accounting and merchandising
at Hughes' main offices. In addition, Hughes is installing new computer-based
point-of-sale hardware and software in the checkout lanes of each of its
supermarkets. As of January 31, 1997, this new technology had been installed in
26 stores, and is scheduled to be installed in the remaining Hughes stores by
the end of 1997.
MARKETING AND PROMOTION
Hughes advertises through a variety of means, including newspapers,
television and radio. In 1996, the Company began to place a greater emphasis on
the use of direct mail circulars, which it believes are particularly effective
because they enable Hughes to directly target potential customers living within
its stores' marketing area. In addition, Hughes is able to produce these direct
mail circulars in-house which enables it to more effectively control production
costs. In the seven months ended September 29, 1996, approximately 31% of
Hughes' advertising expenditures was spent on newspaper advertising, 22% was
spent on television and radio advertising and 47% was spent on direct mail
circulars.
In addition, Hughes' in-store marketing includes third party product
demonstrations and free product samples. As part of its ongoing efforts to build
customer loyalty and be a good corporate citizen, Hughes and its employees are
also involved in the communities that they serve and participate in a number of
special events.
COMPETITION
The retail supermarket business in Southern California is highly
competitive. Hughes competes primarily with national and regional supermarket
chains, including Ralphs/Food 4 Less, Vons/Pavilions, Lucky, Stater and
Albertson's, with smaller chains and independent stores as well as wholesale
club formats, such as Price/Costco, and specialty and convenience stores.
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The principal areas of competition include store location; product location
and quality; convenience and cleanliness; employee friendliness and service;
price; and management information enabling timely product selection, pricing and
promotion decisions. Hughes seeks to address each of these factors, emphasizing
superior customer service, high quality perishables, competitive prices, the use
of technology and favorable store locations. Competitive pricing is implemented
by reviewing competitors' prices on a regular basis through observation and
independent surveys and adjusting prices as management deems appropriate.
Certain of these strategies are also used by Hughes' competitors, some of which
have substantially greater financial and other resources than Hughes.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1996, Hughes had approximately 5,000 employees, of which
approximately 30% were full-time and 70% were part-time employees. Approximately
300 of Hughes' employees worked in Hughes' distribution center and approximately
4,600 were unionized employees. Hughes' most significant union contract is with
the United Food and Commercial Warehouse Workers Union which covers
approximately 4,100 of Hughes' retail clerks and which is due to expire in
October 1999. The remaining collective bargaining agreements, which cover
approximately 300 employees, expire at various dates in the period from
September 1998 to October 1999. Two labor contracts, covering a total of
approximately 200 employees, have recently expired and Hughes presently is in
discussion with the applicable unions and anticipates that satisfactory
contracts will be negotiated. Hughes has not had a work stoppage in over 10
years and believes its labor relations are good. However, there can be no
assurance that work stoppages or other labor matters will not adversely affect
the Company in the future.
PROPERTIES
Hughes currently operates a total of 57 stores in Southern California.
Thirty stores are located in Los Angeles County, 13 in Orange County, seven in
San Bernardino County, four in Ventura County and three in Riverside County. Of
these 57 stores, 54 stores are leased, including five stores that are leased to
partnerships in which ownership interests are held by various members of the
Hughes family. The Company believes that these leases are on terms not less
favorable to Hughes than could have been obtained had the properties been leased
from unrelated parties. Hughes' leases generally provide for a 25 year initial
term and for contingent rent based on sales. At December 31, 1996, the average
remaining term on Hughes' leases, including unexercised options to extend, was
approximately 25 years. Two of these leases are due to expire in the next five
years.
In addition, Hughes directly owns three of its stores. At December 31, 1996,
mortgages on these stores totalled approximately $1 million. Hughes also owns
its 600,000 square foot distribution facility and its headquarters, both of
which are located on a 38 acre parcel of land in Irwindale, California.
SEASONALITY
No material portion of Hughes' business is affected by seasonal
fluctuations, except that sales are generally stronger surrounding holidays,
especially from Thanksgiving through New Year's Day. In addition, Hughes' fiscal
year ends on the Sunday closest to the last day of February and generally
consists of 52 weeks. However, fiscal year 1996 was a 53 week year. As a result
of its acquisition by QFC, Hughes will change its fiscal year to conform with
QFC's.
ENVIRONMENTAL MATTERS
Under applicable Environmental Laws, Hughes may be responsible for
remediation of environmental conditions and may be subject to associated
liabilities (including liabilities resulting from lawsuits brought by private
litigants) relating to its stores and the land on which its stores are situated,
regardless of whether
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<PAGE>
Hughes leases or owns the stores or land in question and regardless of whether
such environmental conditions were created by Hughes or by a prior owner or
tenant.
Hughes believes it currently conducts its business, and in the past has
conducted its business, in substantial compliance with applicable Environmental
Laws and regulations. In addition, compliance with federal, state and local laws
enacted for protection of the environment has had no material effect on Hughes.
However, in May 1997, the State of California brought an action against Santee
alleging that Santee has disposed of hazardous waste (certain materials outside
allowable pH levels) in violation of Section 25189.5(b) of the California Health
and Safety Code. Although Santee has taken steps to fully resolve this matter,
the Company believes that a fine will be sought in connection therewith. The
Company believes that such fine, in any, will not have a material adverse effect
on the Company.
In connection with the Hughes Acquisition, QFC reviewed existing reports and
retained environmental consultants to conduct an environmental audit of Hughes'
operations in order to identify conditions that could have material adverse
effects on the Company. Phase I environmental site assessments were conducted on
the Hughes stores and store sites. These Phase I site assessments did not reveal
any environmental matter that is likely to have a material adverse effect on the
Company.
SANTEE DAIRIES
Each of Hughes and Stater owns a 50% interest in Santee, which operates one
of the largest dairy plants in California. Santee processes, packages and
distributes fluid whole, 2%, 1% and skim milk, as well as orange juice, fruit
drinks and certain cultured products under the KNUDSEN, FOREMOST and certain
store brand names. While the Company believes that all of Santee's products have
a reputation for high quality, Santee promotes KNUDSEN as its premium label.
Santee is the exclusive licensee of the KNUDSEN trademark from Kraft for fluid
milk, juices and certain cultured items in the Southern California market. In
addition, Santee is the exclusive licensee from Foremost Farms, USA, of the
FOREMOST trademark for fluid milk in Southern California. Santee also processes,
packages and distributes Hershey chocolate milk under license and processes and
packages orange juice for Sunkist. In calendar 1995, Santee processed
approximately 70 million gallons of fluid products, including approximately 54
million gallons of fluid milk and in calendar 1996 processed approximately 73
million gallons of fluid products and approximately 54 million gallons of fluid
milk. During calendar 1996, Santee sold an aggregate of approximately 60% of its
fluid product volume to its owners, Hughes and Stater. During calendar 1996,
Stater purchased more than twice as much fluid milk from Santee than did Hughes.
Santee also sells to various non-owner grocery supermarkets, independent food
distributors, military bases and food service providers in Southern California
and surrounding areas.
Santee's existing dairy plant was built in 1914 at its current location. Due
to the age of the plant, Santee has been required to make significant
expenditures for repairs and maintenance over the past several years. Despite
these investments, operating costs have continued to rise. In order to provide a
consistent source of milk to accommodate expected expansion at both Hughes and
Stater, and in order to contain costs, Santee has begun construction of a new
dairy plant in the City of Industry, California. The Company believes that the
new facility, which is expected to be fully operational by March 1998, will
increase Santee's capacity to process milk from approximately 250,000 gallons
per day to approximately 350,000 gallons per day, with the ability to expand
capacity to approximately 500,000 gallons per day. Hughes expects that the new
facility, when fully operational, will also lower Santee's costs of producing
fluid milk and other products, and that automation at the new facility will
permit Santee to operate two daily shifts instead of three, thus reducing its
labor costs.
Construction costs of the new dairy are estimated to be approximately $100
million, including production equipment and capitalized interest and other
costs. However, there can be no assurance that the cost of the new dairy will
not exceed this amount. To provide the funds necessary to finance the
construction, Santee is seeking to issue $80 million of secured senior notes
(the "Santee Notes") in a
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private placement, the primary terms of which have been orally agreed to in
principle and in connection with which the prospective lenders have been paid a
non-refundable fee. In addition, it is expected that Hughes and Stater will
agree to purchase their fluid milk requirements from Santee on terms that would
require that each of Hughes and Stater pay increased milk prices to the extent
necessary to maintain Santee's debt coverage ratio and fixed charge coverage
ratio above specified levels. See "Risk Factors-- Risks Relating to Santee
Dairies" and "Description of Certain Indebtedness--Santee Dairies."
It is expected that Santee, Stater and Hughes will enter into a limited
liability company operating agreement (the "Operating Agreement") pursuant to
which a limited liability company, 50% owned by each of Stater and Hughes will
be formed to own the stock of Santee (the "LLC"). The Operating Agreement is
expected to describe certain matters requiring super-majority voting. In
addition, the Operating Agreement is expected to provide a right of first
refusal to the LLC (or, if the LLC does not exercise such right, to the other
member of the LLC) in the event of a transfer of membership interests by either
Hughes or Stater, subject to certain exceptions. The Operating Agreement also is
expected to provide that in the event either Hughes or Stater offers to purchase
all of the membership interests held by the other, the offeree member shall have
the option either to accept such offer or to purchase the membership interests
of the party making such offer on substantially equivalent terms and conditions.
Santee had approximately 500 employees as of the end of 1996, of which
approximately 400 were unionized. According to Hughes' management, Santee has
not experienced a work stoppage since Hughes made its investment in Santee in
1986 and believes its labor relations are good. However, there can be no
assurance that work stoppages or other labor matters will not adversely affect
Santee in the future.
Santee's other 50% owner, Stater, a subsidiary of Stater Bros. Holdings,
Inc., is a leading Southern California supermarket chain, operating
approximately 110 supermarkets located primarily in the Inland Empire region of
Southern California (consisting primarily of Riverside and San Bernardino
Counties, but also including parts of Orange, Kern and Los Angeles counties). In
calendar 1996, Stater purchased more than twice as much fluid milk from Santee
than did Hughes. According to publicly available information, Stater had
approximately $1.7 billion of sales and $59.8 million of EBITDA for the fiscal
year ended September 29, 1996.
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<PAGE>
MANAGEMENT
The executive officers and directors of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --------- -----------------------------------------------------------
<S> <C> <C>
Stuart M. Sloan 53 Chairman of the Board
Christopher A. Sinclair 46 President, Chief Executive Officer and Director(1)
Dan Kourkoumelis 45 President, Chief Executive Officer and Director(1)
Marc W. Evanger 42 Vice President, Chief Financial Officer and
Secretary/Treasurer
Frederick Meils 55 Senior Vice President, Corporate Development
William P. Ketcham 46 Senior Vice President, Marketing and Public Affairs
John W. Creighton, Jr. 64 Director
Maurice F. Olson 52 Director
Marc H. Rapaport 40 Director
Sheli Z. Rosenberg 55 Director
Ronald A. Weinstein 55 Director
Samuel Zell 55 Director
</TABLE>
- ------------------------------
(1) If the anticipated Reorganization is consummated, Mr. Sinclair will become
President and Chief Executive Officer of Parent and Holding Company while
Mr. Kourkoumelis will remain President and Chief Executive Officer of QFC.
Roger Hughes will remain chief executive officer of Hughes.
It is expected that Roger Hughes will be nominated for a seat on the Board
of Directors of the Company at the next annual meeting of shareholders of the
Company.
QFC's Articles of Incorporation (the "Articles") provide that the Board of
Directors is divided into three classes: Class I, Class II and Class III. Each
Class is as nearly equal in number as possible. Unless a director has been
appointed to fill a vacancy or to fill a position that was created by increasing
the number of directors, each director serves for a term ending at the third
annual shareholders' meeting following the annual meeting at which such director
was elected. Each director serves until such director's successor is elected and
qualified or until such director's earlier death, resignation or removal. The
terms of Class I directors expire at the 1997 annual meeting, the terms of Class
II directors expire at the 1998 annual meeting, and the terms of Class III
directors expire at the 1999 annual meeting.
Two designees of Zell Chilmark (Mr. Zell and Mrs. Rosenberg) are members of
QFC's Board of Directors in accordance with the terms of the Recapitalization
and Stock Purchase and Sale Agreement dated as of January 14, 1995 (the
"Recapitalization Agreement") among QFC, Stuart M. Sloan and Zell Chilmark. A
Standstill Agreement dated as of January 14, 1995 between QFC and Zell Chilmark
(the "Zell Chilmark Standstill Agreement") provides that (i) Zell Chilmark will
continue to have two designees on QFC's Board as long as Zell Chilmark
beneficially owns at least 10% of the outstanding Common Stock; (ii) QFC will
not increase the size of its Board beyond nine members as long as Zell Chilmark
is entitled to two Board designees; and (iii) with certain exceptions, Zell
Chilmark will vote its Common Stock for the election or removal of directors of
QFC either (a) in accordance with the recommendations of a majority of QFC's
disinterested directors or (b) in the same proportion as the other shareholders
vote on such matter. The Zell Chilmark Standstill Agreement also imposes
limitations on how Zell Chilmark may vote its Common Stock with respect to any
matter that would relate to a possible change in control of
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<PAGE>
QFC. Additional provisions of the Zell Chilmark Standstill Agreement are
described below under "Principal Shareholders."
Stuart M. Sloan became a director of QFC in 1985 and has been Chairman of
the Board since June 1986. Mr. Sloan served as Chief Executive Officer of QFC
from June 1986 to February 1987 and again from April 1991 to September 1996. Mr.
Sloan is the founder and a principal of Sloan Capital Companies, a private
investment company. Mr. Sloan serves as a director of Anixter International,
Inc., TeleTech Holdings, Inc. and Cucina! Cucina!, Inc. Mr. Sloan is a Class II
director.
Christopher A. Sinclair has been a director and President and Chief
Executive Officer of QFC since September 1996. From 1984 to July 1996, Mr.
Sinclair served as a senior executive officer of Pepsico, Inc. and most recently
served as Chairman and Chief Executive Officer of PepsiCola Company. Prior to
1984, Mr. Sinclair was a marketing executive with General Foods, Frito-Lay and
Newsweek. Mr. Sinclair is a director of Mattel, Inc., Perdue Farms, Inc. and
Woolworth Corporation. Mr. Sinclair is a Class II director.
Dan Kourkoumelis became a director of QFC in April 1991. He joined QFC as a
courtesy clerk in 1967 and his experience includes several ranks of store
management and executive positions. Mr. Kourkoumelis was appointed Executive
Vice President in 1983, Chief Operating Officer in 1987, President in 1989 and
Chief Executive Officer in 1996. Mr. Kourkoumelis is a member of the Board of
Directors of the Western Association of Food Chains and Washington Food Industry
and serves as a director of Associated Grocers, Incorporated and Expeditors
International of Washington, Inc. Mr. Kourkoumelis is a Class III director.
Marc W. Evanger joined QFC in 1984 as Controller. From 1978 to 1984, he was
employed by Price Waterhouse as a Certified Public Accountant in audit,
consulting, corporate tax planning and merger assignments. His prior experience
included three years with QFC as a retail clerk. He was appointed Vice President
in March 1986, Chief Financial Officer in February 1987 and Corporate Secretary
and Treasurer in February 1988.
Frederick S. Meils has been Senior Vice President for Corporate Development
of QFC since January 1997. From 1971 to 1996, Mr. Meils was employed by Pepsico,
Inc. and most recently served as Executive Vice President of Pepsi-Cola
International. From 1989 to 1994, Mr. Meils served as President, Pepsi-Cola
International Western Europe and from 1985 to 1989, he served as Executive Vice
President, Pepsi-Cola North America. From 1983 to 1985, he also served as
President, Pepsi-Cola International Philippines. Prior to 1985, Mr. Meils served
as Senior Vice President of Finance, Pepsi-Cola International, Vice President of
Financial Planning, Pepsico, Inc. and Vice President of Manufacturing,
Pepsi-Cola North America.
William P. Ketcham has served as Senior Vice President of Marketing and
Public Affairs for QFC since March 1997. Prior to joining QFC, Mr. Ketcham was
Vice President, Marketing for Frito-Lay International, where he performed in a
similar capacity for 40 different business units. He spent ten years at ESPN
where he was Senior Vice President of Network Marketing, and seven years with
General Foods in Product Management and Corporate Planning.
John W. Creighton, Jr. became a director of QFC in December 1989. He has
served since 1988 as President and a director, and since August 1991 as Chief
Executive Officer, of Weyerhaeuser Company, a forest products company. Mr.
Creighton serves as a director of NHP, Inc., Portland General Corporation and
Unocal. Mr. Creighton is a Class I director.
Maurice F. Olson became a director of QFC in March 1995. Mr. Olson was
formerly Chairman and Chief Executive Officer of Olson's Food Stores, Inc. Mr.
Olson is the controlling member of Olson Management Group, LLC, a real estate
development and management company, and a member of the Board of Directors of
Associated Grocers, Incorporated. Mr. Olson is a Class II director.
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<PAGE>
Marc H. Rapaport became a director of QFC in May 1996. Mr. Rapaport is
currently Chairman and lead investor of LA Soccer Partners, L.P. He was a
co-founder of the Capital Division of Jefferies and Company, Inc. in 1990 and
served as Executive Vice President and director of corporate finance until 1994.
Prior to 1990, Mr. Rapaport served as Executive Vice President and co-director
of Domestic Capital Markets at Drexel Burnham Lambert. Mr. Rapaport is a member
of the Board of Governors of Cedars-Sinai Hospital. Mr. Rapaport is a Class I
director.
Sheli Z. Rosenberg has been President and Chief Executive Officer since
November 1994 of Equity Group Investments, Inc. and its subsidiary Equity
Financial and Management Company, both privately owned real estate and corporate
investment and management firms; and has been an executive officer and director
for more than the past five years of both of these companies; has been Chairman
of the Board of the law firm of Rosenberg & Liebentritt, P.C. since 1980; is a
director of Anixter International Inc., Capsure Holdings Corp., Sealy
Corporation, Falcon Building Products, Inc., American Classic Voyages Co., Revco
D.S., Inc. and Jacor Communications, Inc.; is a trustee of Equity Residential
Properties Trust; was an executive officer and director until October 4, 1991 of
Madison Management Group, Inc. which filed a petition under Chapter 11 of the
Bankruptcy Code in November 1991; and has been Vice President of First Capital
Benefit Administrators, Inc., which filed a petition under the federal
bankruptcy laws in January 1995. Mrs. Rosenberg is a Class III director.
Ronald A. Weinstein served as a director of QFC from June 1986 to March 1987
and became a director again in February 1988. He was a principal of Sloan
Capital Companies, a private investment company, from 1984 to July 1991. From
February 1989 until April 1991, Mr. Weinstein served as Executive Vice President
of Merchandising at Egghead, Inc., a reseller of microcomputer software. Mr.
Weinstein serves as Chairman of B & B Auto Parts, Inc. and is a director of
Molbak's, Inc. and Coinstar, Inc. Mr. Weinstein is a Class III director.
Samuel Zell became a director of QFC on March 29, 1995. Mr. Zell is, and
since 1981 has been, Chairman of the Board of Equity Financial and Management
Company and, since 1986 has been, Chairman of the Board of Equity Group
Investments, Inc.; is, and since mid-1990 has been, one of two individuals who
control the general partners of the general partner of Zell Chilmark; is, and
since 1985 has been, Chairman of the Board of Anixter International Inc., a
company engaged in the distribution of wiring systems products; from 1987 has
served as Chairman of the Board and Chief Executive Officer of Capsure Holdings
Corp., a company engaged in the business of specialty property and casualty
insurance; is, and since 1992 has been, Co-Chairman of Revco D.S., Inc., a
company that operates a chain of retail drug stores; and from August 1993 to the
present has been Chairman of the Board of American Classic Voyages Co., a
provider of overnight cruises in the United States; is, and since 1993 has been,
Chairman of the Board of Equity Residential Properties Trust, a
self-administered, self-managed equity real estate investment trust; and from
1993 to March 1995 was Co-Chairman, and from March 1995 to the present has been,
Chairman of the Board and Chief Executive Officer of Manufactured Home
Communities, Inc., a self-administered and self-managed equity real estate
investment trust which owns and operates properties in 16 states and since 1996
has been a non-executive director of Ramco Energy PLC, an independent oil
company based in the United Kingdom. Mr. Zell is also a member of the board of
directors of Sealy Corporation. Prior to October 4, 1991, Mr. Zell was President
of Madison Management Group, Inc., which filed a petition under Chapter 11 of
the Bankruptcy Code on November 8, 1991. Mr. Zell is a Class I director.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The only outstanding voting securities of QFC are shares of Common Stock,
which are entitled to one vote per share. At March 22, 1997, there were issued
and outstanding 20,826,765 shares of Common Stock.
The following table sets forth information, as of March 22, 1997, with
respect to all shareholders known by QFC to be the beneficial owners of more
than five percent of its outstanding shares of Common Stock. It also shows
beneficial ownership for each director and executive officer. Except as noted
below, each person has sole voting and investment power with respect to the
shares shown as of such date.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT OF
OF BENEFICIAL SHARES
NAME AND ADDRESS(1) OWNERSHIP(2) OUTSTANDING
- ---------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Stuart M. Sloan(3).............................................. 1,857,882 8.54%
Christopher A. Sinclair......................................... 500,000 2.30
Ronald A. Weinstein............................................. 297,776 1.36
Maurice F. Olson................................................ 600,825 2.76
Zell/Chilmark Fund L.P.(4)(5)................................... 3,975,000 18.28
Samuel Zell(4)(5)............................................... 3,982,884 18.31
Sheli Z. Rosenberg(4)(5)........................................ 3,980,550 18.30
Dan Kourkoumelis................................................ 138,123 *
John W. Creighton, Jr........................................... 15,292 *
Marc H. Rapaport................................................ 1,217 *
Marc W. Evanger................................................. 90,251 *
Frederick Meils................................................. 0 0
William P. Ketcham.............................................. 0 0
All executive officers and directors as
a group (12 persons).......................................... 7,449,800 34.43
</TABLE>
- ------------------------
* Denotes less than one percent.
(1) The business address of each holder identified as the beneficial owner of
more than five percent of the Common Stock other than Zell Chilmark, Mr.
Zell and Mrs. Rosenberg is 10112 N.E. 10th Street, Bellevue, Washington
98004. The business address of Zell Chilmark, Mr. Zell and Mrs. Rosenberg is
Two North Riverside Plaza, Chicago, Illinois 60606.
(2) Includes shares that may be acquired within 60 days through the exercise of
stock options, as follows: Mr. Sloan, 158,900 shares; Mr. Sinclair, 500,000
shares; Mr. Weinstein, 13,217 shares; Mr. Olson, 7,884 shares; Mr.
Kourkoumelis, 131,985 shares; Mr. Zell, 7,884 shares; Mr. Creighton, 11,417
shares; Mrs. Rosenberg, 4,550 shares; Mr. Rapaport, 1,217 shares; Mr.
Evanger, 85,484 shares; Mr. Meils, 0 shares; Mr. Ketcham, 0 shares; and all
executive officers and directors as a group, 911,903 shares.
(3) In connection with the Recapitalization, Mr. Sloan and QFC entered into a
Standstill Agreement dated as of January 14, 1995 (the "Sloan Standstill
Agreement") pursuant to which Mr. Sloan agreed that he will not take any of
the following actions, subject to specified limited exceptions: (a) sell or
otherwise dispose of any Common Stock prior to March 29, 1997 (except (i)
for the sale by Mr. Sloan to Zell Chilmark of 2,975,000 shares of Common
Stock (which occurred on January 16, 1996), (ii) in response to certain
tender or exchange offers and (iii) for charitable bequests of Common Stock
in an aggregate amount not exceeding 200,000 shares); (b) form, join or
participate in any other way in a partnership, voting trust or other "group"
(as such term is defined under Section 13(d) of the Exchange Act), or enter
into any agreement or arrangement or otherwise act in concert with any other
person, for the purpose of acquiring, holding, voting or disposing of Common
Stock; (c) engage in any material transactions with QFC without the approval
of a majority of QFC's disinterested directors; or (d) engage in certain
specified takeover actions or take any other actions, alone or in concert
with any other person, to seek control of QFC or otherwise seek to
circumvent any of the foregoing limitations.
(4) By virtue of their positions with the entities that indirectly control the
general partner of Zell Chilmark, Mr. Zell and Mrs. Rosenberg may be deemed
to beneficially own the shares of Common Stock beneficially owned by Zell
Chilmark. Mr. Zell and Mrs. Rosenberg disclaim beneficial ownership of such
shares.
(5) Pursuant to the Zell Chilmark Standstill Agreement, Zell Chilmark has agreed
that it and certain of its affiliates will not take any of the following
actions without the approval of a majority of QFC's disinterested directors,
subject to specified limited
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
exceptions: (a) increase their ownership of Common Stock (or securities
convertible into or exchangeable for Common Stock or other options or rights
to acquire Common Stock) prior to June 30, 2000 beyond 30%; (b) sell or
otherwise dispose of any Common Stock prior to March 1997; (c) sell or
otherwise dispose of any Common Stock during the two-year period following
March 1997 to any person or group that would own (to Zell Chilmark's
knowledge) more than 5% of the outstanding Common Stock after such transfer;
(d) form, join or participate in any other way in a partnership, voting
trust or other "group" (as such term is defined under Section 13(d) of the
Exchange Act), or enter into any agreement or arrangement or otherwise act
in concert with any other person, for the purpose of acquiring, holding,
voting or disposing of Common Stock; (e) engage in certain specified
takeover actions or take any other actions, alone or in concert with any
other person, to seek control of QFC or otherwise seek to circumvent any of
the foregoing limitations; or (f) engage in any material transaction with
QFC.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of certain existing and anticipated provisions of
certain indebtedness of the Company and Santee does not purport to be complete,
and is subject to, and is qualified in its entirety by reference to, the forms
of such instruments, copies of which may be obtained as described under
"Available Information."
NEW CREDIT FACILITY
The New Credit Facility consists of (i) a $250 million term loan facility
(the "Term Loan Facility"), (ii) a $125 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $225 million reducing revolving credit
facility (the "Acquisition Facility"). Principal repayments under the Term Loan
Facility will be due in quarterly installments from June 30, 1998 through the
final maturity of the New Credit Facility in March 2004, and the Company will be
required to repay borrowings under the Term Loan Facility with the proceeds from
certain asset sales and, under certain circumstances, with cash flow in excess
of certain specified amounts. The Revolving Credit Facility will be available
for working capital and other general corporate purposes, including permitted
acquisitions and any outstanding amounts thereunder will become due on March 31,
2004. The Acquisition Facility is expected to be used to consummate permitted
acquisitions and will become due on March 31, 2004. In addition, the maximum
amount of available borrowings under the Acquisition Facility will decline by
$25 million each year (subject to certain possible adjustments) commencing March
31, 2000, and the borrower thereunder will be required to repay borrowings
thereunder to the extent that they exceed the reduced amount of the Acquisition
Facility. Additionally, the Revolving Credit Facility and the Acquisition
Facility may be used to make investments in Santee (including guarantees of
indebtedness of Santee) in an amount not to exceed $80 million to finance
construction of Santee's new dairy. At the Company's option, the interest rate
per annum applicable to the New Credit Facility will either be (1) the greater
of one of the bank agents' reference rate, or 0.5% above the federal funds rate,
in each case plus a margin (0% initially) or (2) IBOR plus a margin (0.875%
initially), in each case with margin adjustments dependent on the borrower's
senior funded debt to EBITDA ratio from time to time. Although QFC will
initially be the sole borrower under the New Credit Facility, in the event the
proposed Reorganization occurs it is expected that Holding Company will become
the borrower under both the Revolving Credit Facility and the Acquisition
Facility, while QFC will remain the borrower under the Term Loan Facility.
Hughes, KUI, Holding Company and Parent have initially guaranteed QFC's
borrowings under the New Credit Facility. After the Reorganization (if
consummated), borrowings by QFC under the Term Loan Facility are expected to be
guaranteed by Parent, Holding Company and all of Holding Company's existing and
future subsidiaries (excluding QFC and certain foreign subsidiaries and certain
insignificant subsidiaries), and borrowings by Holding Company under the
Revolving Credit Facility and the Acquisition Facility are expected to be
guaranteed by Parent, QFC and all of Holding Company's other existing and future
subsidiaries (excluding certain foreign subsidiaries and certain insignificant
subsidiaries).
Borrowings and other obligations of the borrowers under the New Credit
Facility, and the guarantees thereof, will be general unsubordinated obligations
of the borrowers and the guarantors and will constitute Senior Debt for purposes
of the Indenture pursuant to which the Notes will be issued. Borrowings and
other obligations under the New Credit Facility and the guarantees thereof will
be secured, prior to the Reorganization, by a pledge of the capital stock of
Holding Company, Hughes and KUI and certain intercompany indebtedness and, after
the Reorganization (if consummated), by a pledge of the capital stock of Holding
Company, QFC, Hughes and KUI and certain intercompany indebtedness, in each case
together with proceeds and products thereof. The New Credit Facility contains a
number of significant covenants that, among other things, will restrict the
ability of QFC (and after the Reorganization, if consummated, Parent) and its
subsidiaries to incur additional indebtedness and incur liens on their assets,
in each case subject to specified exceptions, impose specified financial tests
as a precondition to QFC (and after the Reorganization, if consummated, Parent)
and its subsidiaries' acquisition of other businesses and
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<PAGE>
limit QFC (and after the Reorganization, if consummated, Parent) and its
subsidiaries from making certain restricted payments (including dividends and
repurchases of stock), subject in certain circumstances to specified financial
tests. In addition, Parent and its subsidiaries will be required to comply with
specified financial ratios and tests, including an interest and rental expense
coverage ratio, a total funded debt to EBITDA ratio, a senior funded debt to
EBITDA ratio and a minimum net worth test. See "Risk Factors-- Restrictive Debt
Covenants; Compliance with Debt Instruments."
The New Credit Facility contains customary events of default, including (1)
a default triggered by a default in the payment of outstanding indebtedness in
excess of $15 million which permits the acceleration thereof, (2) any person or
group shall acquire beneficial ownership of 20% or more of the Company (or after
the Reorganization, Parent) and such amount shall be a greater percentage than
that beneficially owned by Zell Chilmark and its affiliates, (3) a majority of
the Board of Directors of the Parent shall not be continuing directors and (4) a
"Change of Control" as defined in the Indenture relating to the Notes. Upon the
occurrence of an event of default, lenders holding at least 50% in principal
amount of the outstanding borrowings and commitments would be able to declare
all borrowings under the New Credit Facility to be due and payable and upon the
occurrence of an event of default triggered by certain events of bankruptcy,
insolvency or reorganization, such borrowings would ipso facto become due and
payable. Upon such an acceleration, the lenders would also be able to seek to
liquidate the collateral pledged as security for the New Credit Facility and
enforce the related guarantees.
SANTEE DAIRIES
THE SANTEE NOTES.
Negotiations are currently under way with certain parties to provide Santee
with long-term debt financing which will be used to construct a new dairy plant
at Santee. It is currently expected that the debt financing will take the form
of $80 million aggregate principal amount of senior secured notes due 2007 sold
by Santee to several insurance companies (the "Santee Notes"). As of the date
hereof, the prospective lenders have orally agreed in principle to the primary
terms of the Santee Notes, including the applicable interest rate and have been
paid a non-refundable fee in connection therewith. However, there can be no
assurance that Santee will be able to issue the Santee Notes on the terms
described below or at all, and the actual terms of any such financing could
differ materially from those described herein. Likewise, there can be no
assurance that Santee will be able to sell the Santee Notes or obtain other
long-term financing for the new dairy, which could have a material adverse
effect on the Company. See "Risk Factors--Risks Relating to Santee Dairies."
It is expected that the Santee Notes will bear interest at a fixed rate,
will mature in 2007 and will be subject to quarterly principal repayments
commencing in the ninth fiscal quarter after issuance. In the event that the new
dairy is not completed and capable of commercial operation in accordance with
agreed upon production levels and economic efficiencies by a specified date, it
is expected that each holder of the Santee Notes will have the right to require
Santee to prepay such holder's Santee Notes, together with a "make-whole
amount." In addition, it is expected that the Santee Notes will be redeemable at
the option of Santee at any time at par plus accrued interest, plus a
"make-whole amount."
It is expected that the Santee Notes will be secured by collateral including
(i) the assignment of certain Product Purchase Agreements to be entered into
between Santee and Stater and between Santee and Hughes, (ii) the assignment of
raw milk and other supply agreements (to the extent such agreements exist),
(iii) a lien on the real property, equipment and machinery of Santee, (iv) the
assignment of licenses, permits, operating rights, trademarks and patents of
Santee and (v) a pledge by Hughes and Stater (or the LLC) of the capital stock
of Santee.
The Santee Notes are also expected to contain a number of significant
covenants including (i) a limitation on indebtedness covenant, (ii) a minimum
net worth test, (iii) a debt service ratio covenant, (iv) a fixed charge
coverage ratio covenant, (v) a restricted payments covenant, (vi) a limitation
on liens
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<PAGE>
covenant, (vii) a limitation on sale/leaseback transactions covenant and (viii)
a merger and consolidation covenant, among others. Further, the Santee Notes are
expected to contain provisions prohibiting a change of control of Santee unless
the Santee Notes held by each holder of Santee Notes that so elects are
repurchased, at a price equal to par, plus accrued interest, plus a "make-whole
amount."
It is expected that (i) the Santee Notes and/or the Product Purchase
Agreements will contain provisions requiring that a specified interest and
rental expense coverage ratio of the Company (or if the proposed Reorganization
is consummated, Parent) be maintained and that each of Hughes and Stater
maintain a specified consolidated net worth and a specified fixed charge
coverage ratio and (ii) the Santee Notes will contain customary events of
default, including events of default triggered by the acceleration of debt of
Holding Company and its consolidated subsidiaries aggregating $15 million, the
acceleration of debt of Stater aggregating $10 million, a default by Hughes in
respect of its indebtedness (excluding guarantees of indebtedness of Holding
Company and its consolidated subsidiaries) aggregating $7.5 million, and a
default under certain provisions of the Product Purchase Agreements. If Stater
were to so default, or if indebtedness of Stater in such amount were to be
accelerated, such noncompliance or acceleration could result in increased prices
for products and/or in the acceleration of the Santee Notes. As a result, such
increased prices and/or acceleration may be triggered by events relating to
Stater over which Hughes and Santee have no control and could have a material
adverse effect on the Company.
It is expected that, upon the occurrence of a default in the payment of
interest or principal or make-whole payment, any holder of a Santee Note may
declare such note due and payable and that upon the occurrence of any other
event of default, lenders holding a specified percentage in principal amount of
the Santee Notes will be entitled to declare all of the Santee Notes to be due
and payable and, upon the occurrence of an event of default triggered by certain
events of bankruptcy or insolvency, the Santee Notes will ipso facto become due
and payable. It is expected that upon acceleration of the Santee Notes, the
lenders will be entitled to foreclose upon the collateral pledged to secure the
Santee Notes.
It is expected that each of Hughes and Stater will enter into a Product
Purchase Agreement with Santee in connection with the Santee Notes. The Product
Purchase Agreements are expected to provide that each of Hughes and Stater will
be obligated to purchase all of its fluid milk and specified Santee-produced
products from Santee, subject to certain exceptions, and that each of Hughes and
Stater will be required to pay increased prices to the extent necessary to
maintain Santee's debt service coverage ratio and fixed charge coverage ratio
above specified levels.
SANTEE LINES OF CREDIT.
At March 31, 1997, Santee was party to (i) a $6 million credit facility
consisting of a $3.5 million revolver for working capital purposes (the "Santee
Revolver") and a $2.5 million letter of credit supporting workers' compensation
claims, (ii) a $5 million loan to cover construction costs for the new dairy
until permanent financing is established (the "Santee Bridge Loan No. 1"), (iii)
a $5.2 million loan to cover additional construction costs for the new dairy
until permanent financing is established (the "Santee Bridge Loan No. 2," and
collectively with the Santee Bridge Loan No. 1, the "Santee Bridge Loan") and
(iv) a $3.5 million letter of credit supporting a $3.5 million rental payment
due in April 1998 upon expiration of Santee's lease at the existing dairy
(collectively, the "Santee Credit Facilities"). At March 31, 1997, $2.2 million
was outstanding under the Santee Revolver (although balances fluctuate during
each month based on raw milk requirements), $300,000 was outstanding under the
workers' compensation letter of credit, $5 million was outstanding under the
Santee Bridge Loan No. 1, $3.6 million was outstanding under the Santee Bridge
Loan No. 2 and $3.5 million was outstanding under the letter of credit facility.
Santee is currently in default under certain of the financial covenants relating
to the Santee Credit Facilities, and is presently negotiating with its lender to
extend the Santee Credit Facilities. Notwithstanding such default, its lender
has allowed Santee to continue to borrow under the Santee Revolver. The Santee
Bridge Loan is expected to be replaced by long-term dairy financing, if and when
obtained by
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Santee. The Santee Credit Facilities are secured by a lien on Santee's accounts
receivable, inventory and general intangibles.
Santee is also in the process of arranging short-term interim financing for
certain payments under its construction contract for the new dairy until such
time as it is able to obtain long-term financing. Santee currently owes
approximately $3.4 million for work performed in April of 1997 and expects
payments for May of 1997 to be approximately $4.5 million. Such amounts may be
financed through a new bridge facility with Santee's existing or a new lender,
loans and/or advances from the Company, Hughes and/or Stater or amounts
available under the Santee Revolver. There can be no assurance that Santee will
be successful in arranging such interim financing and any failure to make the
required payment would cause a default under the construction contract for the
new dairy, which could have a material adverse effect on the Company.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $150 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $150 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all holders
of Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on March 19, 1997 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company and
the Guarantors entered into the Registration Rights Agreement, which requires
the Company and the Guarantors to use their reasonable best efforts to file with
the Commission a registration statement relating to the Exchange Offer not later
than 90 days after the date of issuance of the Old Notes, and to use their
reasonable best efforts to cause the registration statement relating to the
Exchange Offer to become effective under the Securities Act not later than 180
days after the date of issuance of the Old Notes. If, for any reason, the
Exchange Offer is not consummated by the earlier of (i) 60 days after the
effective date of the Exchange Offer Registration Statement and (ii) 240 days
after the Issue Date, the Company and the Guarantors will be required to file a
"shelf" registration statement covering resales of the Notes (the "Shelf
Registration Statement") under which the holders of the Notes will be entitled
to offer and sell the Notes from time to time without restrictions or
limitations under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
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otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. See "--Resale of Exchange Notes." Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from March 19, 1997.
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Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "--Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
The method of delivery of Old Notes, Letters of Transmittal and all other
required documents is at the election and risk of the holders. If such delivery
is by mail, it is recommended that registered mail properly insured, with return
receipt requested, be used. In all cases, sufficient time should be allowed to
insure timely delivery. No Old Notes or Letters of Transmittal should be sent to
the Company.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to
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be reissued) in the name of the registered holder (which term, for the purposes
described herein, shall include any participant in The Depository Trust Company
(also referred to as a "book-entry transfer facility") whose name appears on a
security listing as the owner of Old Notes), the signature of such signer need
not be guaranteed. In any other case, the tendered Old Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder, and the signature on the
endorsement or instrument of transfer must be guaranteed by a bank, broker,
dealer, credit union, savings association, clearing agency or other institution
(each an "Eligible Institution") that is a member of a recognized signature
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature in the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
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All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Notes or transfer
ownership of such Old Notes on the account books maintained by a book-entry
transfer facility. The Transferor further agrees that
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acceptance of any tendered Old Notes by the Company and the issuance of Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Registration Rights Agreement. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period ending on the earlier of (i) 180 days
after consummation of the Exchange Offer (subject to extension in certain
events) and (ii) the date on which all participating broker-dealers have sold
their Exchange Notes make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may
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be retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" above at any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(b) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
(d) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(e) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be
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offered for resale, resold and otherwise transferred by holders thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of
such holders' business and such holders have no arrangement with any person
to participate in the distribution of such Exchange Notes.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
First Trust National Association has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
100 Wall Street 100 Wall Street
Suite 2000 Suite 2000
New York, New York 10005 New York, New York 10005
</TABLE>
BY FACSIMILE:
(212) 514-7431
Attn.: Cathy Donohue
Telephone: (212) 361-2546
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
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DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $345,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities
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or other trading activities, must acknowledge in the Letter of Transmittal that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
DESCRIPTION OF EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under an indenture dated as of March 19, 1997 (the "Indenture") between
the Company, as issuer, the Guarantors, and First Trust National Association, as
trustee (the "Trustee"). The terms of the Exchange Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
Each of the Indenture and the Registration Rights Agreement is an exhibit to the
Registration Statement of which this Prospectus is a part.
On March 19, 1997, the Company issued $150 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
Old Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
The following summaries of certain provisions of the Exchange Notes, the
Indenture and the Registration Rights Agreement are summaries only, do not
purport to be complete and are qualified in their entirety by reference to all
of the provisions of the Exchange Notes, the Indenture and the Registration
Rights Agreement. Capitalized terms used herein and not otherwise defined shall
have the meanings assigned to them in the Indenture or the Registration Rights
Agreement, as applicable. Wherever particular provisions of the Exchange Notes,
the Indenture or the Registration Rights Agreement are referred to in this
summary, such provisions are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference. As used in this section, the term "Company" means Quality Food
Centers, Inc., excluding its subsidiaries unless otherwise expressly stated or
unless the context shall otherwise require.
GENERAL
The Exchange Notes will be unsecured, general obligations of the Company,
subordinate in right of payment to all existing and future Senior Debt of the
Company, and senior or pari passu in right of payment to all existing and future
subordinated Indebtedness of the Company. The Exchange Notes will be limited in
aggregate principal amount to $150,000,000. The Exchange Notes will be jointly
and severally
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guaranteed (the "Guarantees") on a senior subordinated basis by each of the
Company's present and future Subsidiaries (other than Parent and Non-Guarantor
Foreign Subsidiaries of the Company) and, following the Reorganization, by the
Holding Company and each of its present and future Subsidiaries other than the
Company and Non-Guarantor Foreign Subsidiaries of the Holding Company
(collectively, the "Guarantors"). The obligations of each Guarantor under its
guarantee, however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law. The term "Subsidiaries" as
used herein or in the Indenture, however, does not include any Unrestricted
Subsidiaries or Santee. The Exchange Notes will be issued only in fully
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Exchange Notes will mature on March 15, 2007. The Exchange Notes will
bear interest at the rate per annum stated on the cover page hereof from the
Issue Date or from the most recent Interest Payment Date (as defined below) to
which interest has been paid or provided for, payable semi-annually on March 15
and September 15 of each year (each, an "Interest Payment Date"), commencing
September 15, 1997, to the persons in whose names such Exchange Notes are
registered at the close of business on the March 1 or September 1 (each, a
"Record Date") immediately preceding such Interest Payment Date. Interest will
be calculated on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in the Borough of Manhattan, The City
of New York. At the option of the Company, payment of interest may be made by
check mailed to the Holders of the Exchange Notes at the addresses set forth
upon the registry books of the Company. No service charge will be made for any
registration of transfer or exchange of Exchange Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. The Company's initial office or agency
for the foregoing purposes will be the corporate trust agency of the Trustee in
New York, New York, currently located at First Trust of New York, National
Association, 100 Wall Street, New York, New York 10005.
SUBORDINATION
The Exchange Notes and the Guarantees will be general, unsecured obligations
of the Company and the Guarantors, respectively, subordinated in right of
payment to all existing and future Senior Debt of the Company and the
Guarantors, as applicable. As of March 22, 1997, the Company (excluding its
consolidated subsidiaries) had approximately $250 million of outstanding Senior
Debt, all of which was secured debt outstanding under the New Credit Agreement.
The Indenture provides that no payment (by set-off or otherwise but
excluding distributions of Junior Securities) may be made by or on behalf of the
Company or any Guarantor, as applicable, on account of the principal of,
premium, if any, or interest on, or Liquidated Damages, if any, in respect of,
the Exchange Notes (including any repurchases of Exchange Notes), or on account
of the redemption provisions of the Exchange Notes (i) upon the maturity of any
Senior Debt of the Company or such Guarantor, as applicable, by lapse of time,
acceleration (unless waived or rescinded) or otherwise, unless and until all
such Senior Debt is first paid in full in cash or Cash Equivalents (or, except
in the case of Senior Debt under any Credit Agreement, such payment is duly
provided for), or (ii) in the event of default in the payment of any principal
of, premium, if any, or interest on any Senior Debt of the Company or such
Guarantor, as applicable, when it becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration or otherwise (a "Payment
Default"), unless and until such Payment Default has been cured or waived or
otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Designated Senior Debt to declare such Designated
Senior Debt to be due and payable and (ii) written notice of such event of
default being given to the Company and the Trustee by the relevant Senior Bank
Representative or the holders of an aggregate of at least $25,000,000 aggregate
principal
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amount outstanding of any other Designated Senior Debt or their representative
(a "Payment Notice"), then, unless and until such event of default has been
cured or waived or otherwise has ceased to exist, no payment (by set-off or
otherwise) may be made by or on behalf of the Company, if the Company is an
obligor under such Designated Senior Debt, or any Guarantor which is an obligor
under such Designated Senior Debt, on account of the principal of, premium, if
any, or interest on, or Liquidated Damages, if any, in respect of, the Exchange
Notes (including any repurchases of any of the Exchange Notes), or on account of
the redemption provisions of the Exchange Notes. Notwithstanding the foregoing,
unless the Designated Senior Debt in respect of which such event of default
exists has been declared due and payable in its entirety within a period of 179
days after the Payment Notice is delivered as set forth above (the "Payment
Blockage Period") (and such declaration has not been rescinded or waived), at
the end of the Payment Blockage Period, the Company and the Guarantors shall be
required to pay all sums not paid to the Holders of the Exchange Notes during
the Payment Blockage Period due to the foregoing prohibitions and to resume all
other payments as and when due on the Exchange Notes. Any number of Payment
Notices may be given; provided, however, that (i) not more than one Payment
Notice shall be given within a period of any 360 consecutive days, and (ii) no
event of default that existed upon the date of such Payment Notice or the
commencement of such Payment Blockage Period (whether or not such event of
default is on the same issue of Designated Senior Debt) shall be made the basis
for the commencement of any other Payment Blockage Period, unless such event of
default has been cured or waived for a period of not less than 90 consecutive
days.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Guarantor shall be received by the
Trustee or the Holders at a time when such payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in trust
for the benefit of the holders of such Senior Debt, and shall be paid or
delivered by the Trustee or such Holders, as the case may be, to the holders of
such Senior Debt remaining unpaid or unprovided for or to their representative
or representatives, or to the trustee or trustees under any indenture pursuant
to which any instruments evidencing any of such Senior Debt may have been
issued, ratably according to the aggregate amounts remaining unpaid on account
of such Senior Debt held or represented by each, for application to the payment
of all such Senior Debt remaining unpaid, to the extent necessary to pay or to
provide for the payment of all such Senior Debt in full in cash or Cash
Equivalents after giving effect to any concurrent payment or distribution to the
holders of such Senior Debt.
Upon any distribution of assets of the Company or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Debt of the Company or such Guarantor, as applicable, will
first be entitled (x) in the case of Senior Debt under any Credit Agreement, to
receive payment in full in cash or Cash Equivalents or (y) in the case of any
other Senior Debt, to receive payment in full in cash or Cash Equivalents (or
have such payment duly provided for) or otherwise to the extent holders of such
Senior Debt accept satisfaction of amounts due by settlement in other than cash
or Cash Equivalents before the Holders are entitled to receive any payment on
account of the principal of, premium, if any, or interest on, or Liquidated
Damages, if any, in respect of, the Exchange Notes (other than distributions of
Junior Securities); (ii) any payment or distribution of assets of the Company or
such Guarantor, as applicable, of any kind or character from any source, whether
in cash, property or securities (other than Junior Securities), to which the
Holders or the Trustee on behalf of the Holders would be entitled (by set-off or
otherwise), except for the subordination provisions contained in the Indenture,
will be paid by the liquidating trustee or agent or other person making such a
payment or distribution directly to the holders of such Senior Debt or their
representative to the extent necessary to make payment in full (or have such
payment duly provided for) on all such Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Debt; and (iii) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company or any Guarantor (other than
Junior Securities) shall be received by the Trustee or
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the Holders at a time when such payment or distribution is prohibited by the
foregoing provisions, such payment or distribution shall be held in trust for
the benefit of the holders of such Senior Debt, and shall be paid or delivered
by the Trustee or such Holders, as the case may be, to the holders of such
Senior Debt remaining unpaid or unprovided for or to their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Debt may have been issued,
ratably according to the aggregate amounts remaining unpaid on account of such
Senior Debt held or represented by each, for application to the payment of all
such Senior Debt remaining unpaid, to the extent necessary to pay all such
Senior Debt in full in cash or Cash Equivalents after giving effect to any
concurrent payment or distribution to the holders of such Senior Debt.
No provision contained in the Indenture or the Exchange Notes will affect
the obligation of the Company and the Guarantors, which is absolute and
unconditional, to pay when due the principal of, premium, if any, and interest
on, and Liquidated Damages, if any, in respect of, the Exchange Notes. The
subordination provisions of the Indenture and the Exchange Notes will not
prevent the occurrence of any Default or Event of Default under the Indenture or
limit the rights of the Trustee or any Holder, subject to the provisions
described above, to pursue any other rights or remedies with respect to the
Exchange Notes. Such subordination provisions will not be applicable following
Legal Defeasance or Covenant Defeasance with respect to the Exchange Notes.
By reason of such subordination provisions, in the event of any distribution
of assets of the Company or a Guarantor upon dissolution, winding up,
liquidation, reorganization or other similar proceedings of the Company or such
Guarantor, as applicable, (i) holders of Senior Debt will be entitled to be paid
in full before payments may be made on the Exchange Notes and the Holders of
Exchange Notes will be required to pay over their share of such distribution to
the holders of Senior Debt until such Senior Debt is paid in full and (ii)
creditors of the Company who are neither Holders of Exchange Notes nor holders
of Senior Debt may recover less, ratably, than holders of Senior Debt and may
recover more, ratably, than the Holders of the Exchange Notes. Furthermore, such
subordination may result in a reduction or elimination of payments to the
Holders of Exchange Notes.
GUARANTEES
The Company's obligations under the Exchange Notes will be unconditionally
guaranteed, jointly and severally, by the Guarantors on a senior subordinated
basis. The Guarantees will be subordinated, to the same extent that the Exchange
Notes are subordinated to Senior Debt of the Company, to the prior payment in
full of all Senior Debt of the respective Guarantors. As of March 22 1997, the
aggregate amount of Senior Debt of the Guarantors was approximately $282.9
million, of which $250 million were guarantees of the Company's indebtedness
under the New Credit Agreement. The obligations of each Guarantor under its
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable federal or state law. See "Risk Factors--Fraudulent Conveyance."
The Indenture will provide that any person which becomes a Subsidiary of the
Subject Entity after the Issue Date is required to become a Guarantor (unless
such Subsidiary is designated as an Unrestricted Subsidiary or is a
Non-Guarantor Foreign Subsidiary). See "Certain Covenants--Additional
Guarantors" and the definitions of Foreign Subsidiary and Unrestricted
Subsidiary under "Certain Definitions."
The Indenture will provide that, except for transactions made in accordance
with the provisions described in the immediately following paragraph, no
Guarantor will, directly or indirectly, consolidate with or merge with or into
any other person unless (i) either (a) if such transaction is a merger, such
Guarantor shall be the surviving person of such merger or (b) the person formed
by such consolidation or into which such Guarantor is merged (any such surviving
person referred to in this clause (b) being hereinafter called the "Surviving
Person") shall be a corporation (or, if such Guarantor is not a corporation,
such person shall be either a corporation or the same type of entity as such
Guarantor) organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia (or, if such Guarantor is
a Guarantor Foreign Subsidiary, the Surviving Person may be organized
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and existing under the laws of a foreign country or other foreign jurisdiction)
which (except in the case of a merger of such Guarantor into the Subject Entity)
is or, concurrently with such merger or consolidation, becomes a Subsidiary of
the Subject Entity and expressly assumes, by a supplemental indenture executed
and delivered to the Trustee in form reasonably satisfactory to the Trustee, all
of the obligations of such Guarantor under its Guarantee and the Indenture; (ii)
no Default or Event of Default shall exist or shall occur immediately after
giving effect to such transaction on a pro forma basis (including, without
limitation, after giving effect to any Indebtedness Incurred or to be Incurred
in connection with such transaction); (iii) immediately after giving effect to
such transaction on a pro forma basis (including, without limitation, any
Indebtedness Incurred or to be Incurred in connection with such transaction),
the Subject Entity would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in the second
paragraph under "Certain Covenants--Limitation on Additional Indebtedness and
Disqualified Capital Stock"; (iv) if such transaction shall occur in connection
with or at any time from and after the Reorganization, immediately after giving
effect to such transaction the Company shall be a Wholly-Owned Subsidiary of the
Holding Company; and (v) the Subject Entity shall deliver, or cause to be
delivered, to the Trustee the officers' certificate and opinion of counsel
called for by the Indenture; provided that the condition set forth in clause
(i)(b) of this sentence requiring that the Surviving Person enter into a
supplemental indenture and the conditions set forth in clause (iii) of this
sentence shall not apply to the merger of any Guarantor into the Company or with
or into another Guarantor. Upon any consolidation or merger of any Guarantor in
accordance with the foregoing, the successor person formed by such consolidation
or into which such Guarantor is merged shall (unless such successor person is
the Company or another Guarantor) succeed to, and be substituted for, and may
exercise every right and power of, such Guarantor under the Indenture and its
Guarantee, with the same effect as if such successor person had been named
therein as a Guarantor, and in any such case (including the merger of a
Guarantor into another Guarantor or the Company), the predecessor person shall
be released from all obligations under its Guarantee and the Indenture.
The Indenture will provide that any Guarantor may convey, sell, transfer,
assign or dispose of (other than by merger or consolidation) any property or
assets of such Guarantor (whether or not constituting all or substantially all
of the assets of such Guarantor) to any person, provided that such conveyance,
sale, transfer, assignment or other disposition complies with the provisions
described below under "Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" and is not otherwise prohibited by the Indenture. The
Indenture will provide that (x) in the event of a merger or consolidation of a
Subsidiary Guarantor with or into a person which is not the Subject Entity or a
Subsidiary Guarantor (and which person does not become a Subsidiary Guarantor
concurrently with such transaction), or (y) in the event of a transaction
(including, without limitation, the sale or disposition of Capital Stock of a
Subsidiary Guarantor) not prohibited by the Indenture which results in a
Subsidiary Guarantor no longer being a Subsidiary of the Subject Entity, and
which, in any case described in clause (x) or (y) of this sentence, is otherwise
made in compliance with the Indenture, the Company may elect to obtain the
release of such Subsidiary Guarantor (and all Subsidiaries of such Subsidiary
Guarantor) from all of their respective obligations under their Guarantees and
the Indenture (in which case any such merger or consolidation need not comply
with the immediately preceding paragraph); provided that (i) prior to such
transaction, the Subject Entity shall have delivered an officers' certificate to
the Trustee stating that such transaction will be effected in accordance with
the provisions of this paragraph in order to obtain the release of such
Subsidiary Guarantor, (ii) such transaction is made in accordance with the
provisions described under "Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock," (iii) if such transaction is a merger or consolidation of a
Subsidiary Guarantor into a Non-Guarantor Foreign Subsidiary, such transaction
shall be deemed an Investment and must comply with the covenant described below
under "Certain Covenants -- Limitation on Restricted Payments," and (iv) except
in the case of a merger with or into a Non-Guarantor Foreign Subsidiary, such
release shall occur only if all obligations of such Subsidiary Guarantor and its
Subsidiaries and Unrestricted Subsidiaries, if any, under guarantees of, and
under all pledges of assets or other Liens which secure, Indebtedness of the
Subject Entity or any of its other Subsidiaries or Unrestricted Subsidiaries
shall also terminate. Upon any merger, consolidation or sale or
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other disposition of Capital Stock of any Subsidiary Guarantor made in
compliance with the immediately preceding sentence, such Subsidiary Guarantor
and all of its Subsidiaries shall be released from all of their obligations
under their Guarantees and the Indenture.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Exchange Notes prior to
March 15, 2002, except as provided in the immediately following paragraph. The
Exchange Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after March 15, 2002, upon not less than 30 days nor
more than 60 days notice to each Holder of Exchange Notes to be redeemed, at the
following redemption prices (expressed as percentages of the principal amount)
if redeemed during the 12-month period commencing on March 15 of the years
indicated below, together with accrued and unpaid interest thereon to the
Redemption Date (subject to the right of Holders of record at the close of
business on a Record Date to receive interest due on an Interest Payment Date
that is on or prior to such Redemption Date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
2002.................................................................... 104.35%
2003.................................................................... 102.90%
2004.................................................................... 101.45%
2005 and thereafter..................................................... 100.00%
</TABLE>
Notwithstanding the foregoing, prior to March 15, 2000, the Company may
redeem up to 20% of the aggregate principal amount of the Exchange Notes
originally issued at a redemption price of 108% of the principal amount thereof,
plus accrued and unpaid interest thereon to the Redemption Date, with the net
cash proceeds of one or more public Equity Offerings of common stock, prior to
the Reorganization, of the Company or, after the Reorganization, of the Parent;
provided that at least 80% of the aggregate principal amount of the Exchange
Notes originally issued remains outstanding immediately after the occurrence of
such redemption; and provided, further, that if Exchange Notes are redeemed with
the net proceeds from the sale of common stock of Parent, the Subject Entity
shall have received cash from the Parent, as a capital contribution or as the
net proceeds from the issuance and sale to the Parent of common stock of the
Subject Entity, in an amount at least equal to the aggregate principal amount of
the Exchange Notes so redeemed.
In the case of a partial redemption, the Trustee shall select the Exchange
Notes or portions thereof for redemption on a PRO RATA basis, by lot or in such
other manner it deems appropriate and fair. The Exchange Notes may be redeemed
in part in multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount to be
redeemed and must state that on and after the date of redemption, upon surrender
of such Note, a new Note or Exchange Notes in a principal amount equal to the
unredeemed portion thereof will be issued. On and after the date of redemption,
interest will cease to accrue on the Exchange Notes or portions thereof called
for redemption.
The Exchange Notes will not have the benefit of any sinking fund.
The New Credit Agreement will limit, and other instruments and agreements
relating to or evidencing indebtedness which the Company or the Guarantors may
incur in the future may limit or prohibit, the optional redemption of the
Exchange Notes.
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CERTAIN COVENANTS
REPURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
The Indenture will provide that, in the event that a Change of Control
occurs, each Holder of Exchange Notes will have the right, at such Holder's
option, pursuant to an irrevocable and unconditional offer by the Company (the
"Change of Control Offer"), to require the Company to repurchase all or any part
of such Holder's Exchange Notes (provided, that the principal amount repurchased
must be $1,000 or an integral multiple thereof) on a date (the "Change of
Control Purchase Date"), selected by the Company, that is no later than 45
Business Days after the occurrence of such Change of Control, at a cash price
(the "Change of Control Purchase Price") equal to 101% of the principal amount
thereof, together with accrued interest to the Change of Control Purchase Date.
The Change of Control Offer shall commence within 15 Business Days following a
Change of Control and shall remain open for not less than 20 Business Days
following its commencement (the "Change of Control Offer Period"). Upon
expiration of the Change of Control Offer Period, the Company shall purchase all
Exchange Notes properly tendered in response to the Change of Control Offer.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company or, from and after the date of the Reorganization, of the
Company, the Holding Company or the Parent with or into any person, or any sale,
transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of the Company or, from and after the date of
the Reorganization, of the Company, the Holding Company or the Parent, in one
transaction or a series of related transactions, if, immediately after giving
effect to such transaction or series of transactions, any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable), other than any Excluded Person, is or becomes
the Beneficial Owner, directly or indirectly, of more than 50% of the total
voting power in the aggregate of all classes of Capital Stock of the Company or,
from and after the date of the Reorganization, of the Company, the Holding
Company or the Parent then outstanding normally entitled to vote in the election
of directors, managers or trustees, as applicable, of the transferee or
surviving entity, (ii) any "person" or "group," other than any Excluded Person,
is or becomes the Beneficial Owner, directly or indirectly, of more than 50% of
the total voting power in the aggregate of all classes of Capital Stock of the
Company then outstanding normally entitled to vote in elections of directors,
(iii) from and after the date of the Reorganization, any "person" or "group",
other than any Excluded Person, is or becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the total voting power in the aggregate of all
classes of Capital Stock of the Holding Company or the Parent then outstanding
normally entitled to vote in the election of directors, managers or trustees, as
applicable, or (iv) at any time during any period of 12 consecutive months,
individuals who at the beginning of any such 12-month period constituted the
board of directors of the Company or, from and after the date of the
Reorganization, the board of directors of the Parent (together, in each case,
with any new directors whose election by such board or whose nomination for
election by the shareholders was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the board of
directors of the Company or the Parent, as applicable, then in office.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Exchange Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (ii) deposit with the Paying Agent cash
sufficient to pay the Change of Control Purchase Price (together with accrued
and unpaid interest) of all Exchange Notes so tendered and (iii) deliver to the
Trustee Exchange Notes so accepted together with an officers' certificate
listing the Exchange Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to the Holders of Exchange Notes so accepted
(or, in the case of Exchange Notes held in book-entry form through the
Depositary, will deliver in accordance with the Depositary's procedures as then
in effect) payment in an amount equal to the Change of Control Purchase Price
(together with accrued and unpaid interest), and the Trustee will promptly
authenticate and mail or deliver to such Holders (or deliver in accordance with
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the Depositary's procedures, as the case may be) a new Note in an authorized
denomination equal in principal amount to any unpurchased portion of any Note
surrendered. Any Exchange Notes not so accepted will be promptly mailed or
delivered by the Company to the Holders thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Purchase Date.
The Change of Control purchase feature of the Exchange Notes may make more
difficult or discourage a takeover of the Company, and, thus, the removal of
incumbent management. However, the provisions of the Indenture relating to a
Change of Control in and of themselves may not afford Holders of the Exchange
Notes protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company, the Parent
or the Holding Company that may adversely affect such Holders.
The phrase "all or substantially all" of the assets of the Company or, if
applicable, the Parent or the Holding Company will likely be interpreted under
applicable state law and will be dependent upon particular facts and
circumstances. As a result, there may be a degree of uncertainty in ascertaining
whether a sale or transfer of "all or substantially all" of the assets of the
Company or, if applicable, the Parent or the Holding Company has occurred.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and all other applicable Federal and state securities laws and any
provisions of the Indenture which conflict with such laws shall be deemed to be
superseded by the provisions of such laws.
The New Credit Agreement will limit, and other instruments and agreements
relating to or evidencing indebtedness which the Company or the Guarantors may
incur in the future may limit or prohibit, the purchase of Exchange Notes in
response to a Change in Control Offer. Furthermore, a Change in Control and
certain similar events will constitute an event of default under the New Credit
Agreement, and could constitute an event of default under other instruments and
agreements relating to indebtedness which the Company or the Guarantors may
incur in the future. Following such an event of default, the lenders under the
New Credit Agreement would, and the lenders under such other instruments or
agreements may, have the right to require the immediate repayment of the
indebtedness thereunder in full, and might have the right to require such
repayment prior to the Change of Control Purchase Date. In addition, failure by
the Company to repurchase all Exchange Notes tendered to it in connection with a
Change of Control will constitute an immediate Event of Default under the
Indenture, which could result in the acceleration of other indebtedness pursuant
to cross-default clauses in instruments and agreements relating to indebtedness.
Moreover, the Company's ability to purchase Exchange Notes upon a Change in
Control will be limited by its then available financial resources and, if those
resources are insufficient, its ability to arrange financing to effect those
purchases. There can be no assurance that the Company will have sufficient funds
to repurchase the Exchange Notes upon a Change in Control or that it will be
able to arrange financing for that purpose.
LIMITATION ON ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, issue,
create, assume, guarantee, incur, become directly or indirectly liable with
respect to (including as a result of an Acquisition), or otherwise become
responsible for, contingently or otherwise (individually and collectively, to
"Incur" or, as appropriate, an "Incurrence"), any Indebtedness or any
Disqualified Capital Stock (including Acquired Indebtedness), except for
Permitted Indebtedness.
Notwithstanding the foregoing, if (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a PRO FORMA basis to, the Incurrence of such Indebtedness or
Disqualified Capital Stock and (ii) on the date of such Incurrence (the
"Incurrence Date"), the Consolidated Interest Coverage Ratio of the Subject
Entity for the Reference Period
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immediately preceding the Incurrence Date, after giving effect on a PRO FORMA
basis to the Incurrence of such Indebtedness or Disqualified Capital Stock and,
to the extent set forth in the definition of Consolidated Interest Coverage
Ratio, the use of proceeds thereof, would be at least 2.0 to 1 (the "Debt
Incurrence Ratio"), then the Subject Entity and its Subsidiaries may Incur such
Indebtedness or Disqualified Capital Stock.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Subsidiary of the Subject Entity or is merged with or into or
consolidated with the Subject Entity or any of its Subsidiaries shall be deemed
to have been Incurred at the time such Person becomes such a Subsidiary of the
Subject Entity or is merged with or into or consolidated with the Subject Entity
or any of its Subsidiaries, as applicable.
Notwithstanding anything to the contrary contained in the Indenture, the
Subject Entity and its Subsidiaries each may guarantee Indebtedness of the
Subject Entity or any Subsidiary of the Subject Entity that is permitted to be
Incurred under the Indenture; provided that if such Indebtedness is subordinated
in right of payment to any other Indebtedness of the obligor, then such
guarantee shall be subordinated to Indebtedness of such guarantor to the same
extent; and provided, further, that if the Subject Entity or any of its Domestic
Subsidiaries or Guarantor Foreign Subsidiaries shall guarantee Indebtedness of
any Non-Guarantor Foreign Subsidiary of the Subject Entity, such guarantee must
comply with the covenant described under "--Limitation on Restricted Payments."
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a PRO
FORMA basis, (1) a Default or an Event of Default shall have occurred and be
continuing, (2) the Subject Entity is not permitted to Incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
second paragraph of the covenant described under "--Limitation on Additional
Indebtedness and Disqualified Capital Stock," or (3) the aggregate amount of all
Restricted Payments made by the Subject Entity and its Subsidiaries, including
after giving effect to such proposed Restricted Payment, from and after the
Issue Date would exceed the sum (without duplication) of (a) 50% of the
aggregate Consolidated Net Income of the Subject Entity for the period (taken as
one accounting period) commencing on the first day after the Issue Date through
and including the last day of the fiscal quarter ended immediately prior to the
date of each such calculation (or, in the event Consolidated Net Income for such
period is a deficit, then minus 100% of such deficit), plus (b) the aggregate
Net Cash Proceeds and the aggregate Non-Cash Net Proceeds received by the
Subject Entity from the issuance and sale of its Qualified Capital Stock after
the Issue Date (other than (i) from or to a Subsidiary of the Subject Entity,
(ii) to the extent applied in connection with a Qualified Exchange, (iii)
Qualified Capital Stock paid as a dividend on any Capital Stock or as interest
on any Indebtedness, (iv) any Net Cash Proceeds or Non-Cash Net Proceeds from
issuances and sales financed directly or indirectly using funds borrowed from
the Subject Entity or any of its Subsidiaries until and to the extent such
borrowing is repaid and (v) any Net Cash Proceeds from the issuance of any
shares of the Company's common stock issued upon the exercise of the
underwriters' over-allotment options in the Common Stock Offering), plus (c) the
aggregate net cash proceeds and the aggregate Fair Market Value (as determined
in good faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) of all other property received by the
Subject Entity as a capital contribution after the Issue Date (other than to the
extent applied in connection with a Qualified Exchange), plus (d) the amount
equal to the net reduction in Restricted Investments made by the Subject Entity
or any of its Subsidiaries in any person resulting from (i) repurchases or
redemptions of such Restricted Investments by such person, proceeds realized
upon the sale of such Restricted Investments to any person (other than the
Subject Entity or any of its Subsidiaries), and repayments of loans or advances
or other transfers of property (valued at its Fair Market Value as determined in
good faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) by such person to the Subject Entity or any
of its Subsidiaries (provided that such
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net reduction shall occur only to the extent that the monies or property giving
rise to such reduction are received by the Subject Entity or a Domestic
Subsidiary or Guarantor Foreign Subsidiary of the Subject Entity), or the
termination of any guarantee of or other credit support or contingent obligation
with respect to any Indebtedness or other liabilities of such person provided by
the Subject Entity or any of its Domestic Subsidiaries or Guarantor Foreign
Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries as
Subsidiaries, so long as such Subsidiaries are Domestic Subsidiaries or
Guarantor Foreign Subsidiaries (valued in each case as provided in the
definition of "Investment"), not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Restricted Investments previously made by the Subject
Entity and its Subsidiaries in such Unrestricted Subsidiary, which amount was
included in the calculation of the amount of Restricted Payments or (iii) a
Non-Guarantor Foreign Subsidiary becoming a Guarantor Foreign Subsidiary (valued
in each case as provided in the definition of "Investment"), not to exceed, in
the case of any Non-Guarantor Foreign Subsidiary, the amount of Restricted
Investments previously made by the Subject Entity and its Guarantor Foreign
Subsidiaries and Domestic Subsidiaries in such Non-Guarantor Foreign Subsidiary,
but only to the extent that, in each case described in this clause (d), such
amount was previously included in the calculation of the amount of Restricted
Payments (provided, however, that no amount shall be included under this clause
(d) to the extent it is already included in Consolidated Net Income); plus (e)
$25 million.
The foregoing provisions will not prohibit or be violated by (A) a Qualified
Exchange; (B) the payment or making of any Restricted Payment within 60 days
after the date of declaration thereof or the making of any binding commitment in
respect thereof if, at said date of declaration or commitment, such Restricted
Payment would have complied with the provisions contained in clauses (1), (2)
and (3) of the first paragraph hereof, (C) the payment or making of Permitted
Payments; (D) the repurchase, redemption or other repayment of any Subordinated
Indebtedness in exchange for or solely out of the proceeds of the substantially
concurrent sale (other than to the Subject Entity or one of its Subsidiaries or
Unrestricted Subsidiaries) of Subordinated Indebtedness of the Subject Entity or
any of its Subsidiaries with (x) an Average Life equal to or greater than the
then remaining Average Life of the Subordinated Indebtedness repurchased,
redeemed or repaid (unless the Average Life of the Subordinated Indebtedness
repurchased, redeemed or repaid is, at the time, longer than the Average Life of
the Notes at such time, in which case such new Subordinated Indebtedness must
have an Average Life longer than the Average Life of the Notes at such time),
and (y) a final maturity date on or after the earlier of (1) two Business Days
after the Final Maturity Date and (2) the final maturity date of the
Subordinated Indebtedness repurchased, redeemed or repaid (provided that, in the
case of Subordinated Indebtedness of a Non-Guarantor Foreign Subsidiary, such
Subordinated Indebtedness is repurchased, redeemed or repaid with the proceeds
of Subordinated Indebtedness of another Non-Guarantor Foreign Subsidiary); or
(E) Investments in Non-Guarantor Foreign Subsidiaries of the Subject Entity if,
after giving effect to such Investment, the aggregate amount of then outstanding
Investments made by the Subject Entity and its Guarantor Foreign Subsidiaries
and Domestic Subsidiaries in Non-Guarantor Foreign Subsidiaries of the Subject
Entity would not exceed 15% of the assets of the Subject Entity and its
Subsidiaries at such time, computed on a consolidated basis in accordance with
GAAP. The full amount of any Restricted Payments made pursuant to clauses (B)
and (C) of the immediately preceding sentence, however, will be deducted in the
calculation of the aggregate amount of Restricted Payments available to be made
referred to in clause (3) of the immediately preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, create,
assume, incur or suffer to exist any consensual restriction on the ability of
the Subject Entity or any of its Subsidiaries: (i) (x) to pay dividends or make
other distributions to the Subject Entity or any of its Subsidiaries on its
Capital Stock or with respect to any other interest or participation in, or
measured by, its profits, or (y) to pay any Indebtedness owed to Subject Entity
or any of its Subsidiaries, (ii) to make capital contributions, loans or
advances to, or purchase Capital Stock of, the Subject Entity or any of its
Subsidiaries or (iii) to transfer any of its properties or
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assets to the Subject Entity or any of its Subsidiaries, except (a) restrictions
imposed by the Notes or the Indenture; (b) restrictions imposed by applicable
law and regulation; (c) restrictions under Existing Indebtedness, as in effect
on the Issue Date; (d) restrictions under any Acquired Indebtedness not Incurred
in violation of the Indenture or under any agreement relating to any property,
asset or business acquired by the Subject Entity or any of its Subsidiaries not
acquired in violation of the Indenture, which restrictions in each case existed
at the time of acquisition, were not put in place in connection with or in
anticipation of such acquisition and are not applicable to any person, other
than the person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, as the case may be; (e) restrictions
imposed by the New Credit Agreement and by any other Indebtedness Incurred under
paragraph (b) of the definition of Permitted Indebtedness; (f) restrictions with
respect to a Subsidiary of the Subject Entity imposed pursuant to a binding
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary (including,
without limitation, by merger or consolidation), provided such sale or
disposition would not be prohibited by the Indenture and such restrictions apply
solely to the Capital Stock or assets of such Subsidiary which are being sold;
(g) restrictions on transfer contained in Indebtedness (including, without
limitation, any Capitalized Lease Obligations) Incurred pursuant to paragraph
(d) of the definition of Permitted Indebtedness and in any other Purchase Money
Indebtedness of the Subject Entity or any of its Subsidiaries not prohibited by
the Indenture, provided such restrictions relate only to the property acquired,
improved, constructed or leased (and proceeds and products thereof) with the
proceeds of such Indebtedness or pursuant to such capitalized lease, as
applicable; (h) customary restrictions imposed on the transfer of copyrighted or
patented materials or other intellectual property and customary provisions in
agreements that restrict the assignment of such agreements or any rights
thereunder; (i) customary provisions restricting subletting or assignment of any
lease entered into in the ordinary course of business; (j) Liens not prohibited
by the terms of the Indenture; (k) customary net worth or similar provisions
contained in leases, subleases or similar arrangements or agreements entered
into by the Subject Entity or any of its Subsidiaries in the ordinary course of
business; (l) customary rights of first refusal, buy-sell provisions and other
similar provisions in joint venture agreements and other similar agreements; (m)
restrictions under instruments or agreements (including product purchase
agreements) entered into in connection with Indebtedness incurred by Santee; (n)
restrictions imposed by secured Indebtedness (including, without limitation,
Indebtedness secured by a mortgage or deed of trust) of the Subject Entity or
any of the Subsidiaries not prohibited by the Indenture that limit the right of
the debtor to dispose of the property (or proceeds or products thereof) securing
such Indebtedness; and (o) in connection with and pursuant to permitted
refinancings, replacements of restrictions imposed pursuant to clause (c), (d),
(e), (g), (m) or (n) of this paragraph that are not more restrictive than those
being replaced and do not apply to any other person or assets other than those
covered by the restrictions in the Indebtedness so refinanced.
LIMITATIONS ON LAYERING INDEBTEDNESS
The Indenture will provide that neither the Company nor any of the
Guarantors will, directly or indirectly, Incur, permit to remain outstanding or
otherwise suffer to exist any Indebtedness that is subordinated by the terms of
the instrument creating or evidencing such Indebtedness in right of payment to
any other Indebtedness of the Company or such Guarantor, as the case may be,
unless, by the express terms of the instrument creating or evidencing such
Indebtedness or pursuant to which such Indebtedness was issued, such
Indebtedness is subordinate in right of payment to, or PARI PASSU in right of
payment with, the Exchange Notes or the Guarantee of such Guarantor, as
applicable. For purposes of this provision, no Indebtedness shall be deemed to
be subordinated in right of payment to any other Indebtedness solely by reason
of the fact that such other Indebtedness is secured by any Lien.
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LIENS
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, create, incur, assume or suffer to
exist, to secure any Indebtedness other than Senior Debt, any Lien, other than
Permitted Liens, upon any of their respective property (whether owned on the
date of the Indenture or acquired thereafter), or upon any income or profits or
proceeds therefrom, unless the Subject Entity or such Subsidiary, as the case
may be, provides, concurrently therewith, that the Exchange Notes are equally
and ratably secured; PROVIDED that, if such Indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the Exchange Notes or the Guarantee,
as applicable, with the same relative priority as such Subordinated Indebtedness
shall have with respect to the Exchange Notes or the Guarantee, as applicable;
and PROVIDED, FURTHER, that, in the case of Indebtedness of a Guarantor, if such
Guarantor shall cease to be a Guarantor in accordance with the provisions of the
Indenture, such equal and ratable Lien to secure the Exchange Notes shall,
without any further action, cease to exist.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, in one transaction or a series of
related transactions, convey, sell, transfer, assign or otherwise dispose of,
directly or indirectly, any of their respective property, business or assets
(whether owned on the date of the Indenture or thereafter acquired), including,
without limitation, by merger or consolidation or by a Sale and Leaseback
Transaction and including, without limitation, any sale or other transfer or
issuance of any Capital Stock (other than directors qualifying shares) of any
Subsidiary of the Subject Entity, as the case may be (an "Asset Sale"), unless
(1) within 360 days following such Asset Sale (a) the Net Cash Proceeds received
from such Asset Sale are (i) (x) used to purchase one or more businesses or to
purchase more than 50% of the outstanding Capital Stock of a person operating
one or more businesses, which person becomes a Subsidiary of the Subject Entity
concurrently with such purchase, (y) used to make capital expenditures or to
purchase inventory or (z) used to acquire other assets, in each case so long as
such business or businesses, capital expenditures or assets will constitute, be
a part of or be used in a Related Business (provided that, in the case of the
sale of a supermarket, the Subject Entity may deem the Net Cash Proceeds
therefrom to have been applied in accordance with this clause (i) to the extent
of any capital expenditures made by the Subject Entity or any of its
Subsidiaries to acquire or construct a replacement supermarket in the same
general vicinity of the supermarket sold within 360 days preceding the date of
the Asset Sale) or (ii) used to retire Senior Debt and to permanently reduce the
amount of such Senior Debt outstanding (provided that in the case of a revolving
credit facility or similar arrangement that makes credit available, the
commitment thereunder is also permanently reduced by such amount) and (b) the
Net Cash Proceeds of such Asset Sale not applied as provided in clause (a) (the
"Excess Proceeds") are applied to the optional redemption of the Exchange Notes
in accordance with the terms of the Indenture or to the repurchase of the
Exchange Notes pursuant to an irrevocable, unconditional cash offer (the "Asset
Sale Offer") to repurchase Exchange Notes at a purchase price of 100% of the
principal amount (the "Asset Sale Offer Price"), plus accrued interest to the
date of payment; (2) no Default or Event of Default shall have occurred and be
continuing or would occur after giving effect, on a pro forma basis, to such
Asset Sale; and (3) the Subject Entity or such Subsidiary, as applicable, shall
have received Fair Market Value for the property, business or assets, as
applicable, disposed of in such Asset Sale; provided, however, that the Subject
Entity shall have the right to exclude from the foregoing provisions any Asset
Sale subsequent to the Issue Date, the proceeds of which are derived from a Sale
and Leaseback Transaction of a supermarket and/or related assets or equipment
which is acquired or constructed by the Subject Entity or a Subsidiary of the
Subject Entity subsequent to the Issue Date, so long as any such Sale and
Leaseback Transaction occurs within 365 days following such acquisition or the
completion of such construction, as the case may be; and, provided, further,
that clauses (2) and (3) above shall not apply to the sale or disposition of
assets as a result of a foreclosure (or a secured party taking ownership of such
assets in lieu of foreclosure) or as a result of an involuntary proceeding in
which the
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Subject Entity cannot, directly or through its Subsidiaries, direct the type of
proceeds received and, in such event, the 360 day period referred to in clause
(1) above shall commence on the date Net Cash Proceeds therefrom are received
(with a separate 360 day period commencing on each day any such Net Cash
Proceeds are received). The Indenture will provide that an Asset Sale Offer may
be deferred until the accumulated Excess Proceeds exceed $15,000,000 and that
each Asset Sale Offer shall remain open for not less than 20 Business Days
following its commencement (the "Asset Sale Offer Period"). Upon expiration of
the Asset Sale Offer Period, the Company shall apply the Excess Proceeds plus an
amount equal to accrued interest to the purchase of all Exchange Notes properly
tendered (on a PRO RATA basis if the Excess Proceeds are insufficient to
purchase all Exchange Notes so tendered) at the Asset Sale Offer Price (together
with accrued interest). To the extent Holders of Exchange Notes do not tender
Exchange Notes in connection with any such Asset Sale Offer, the remaining
Excess Proceeds may be applied in any manner not prohibited by the Indenture and
the amount of Excess Proceeds shall be reset to zero. Pending the utilization of
any Net Cash Proceeds in the manner (and within the time period) described in
this paragraph, the Subject Entity may use any such Net Cash Proceeds to repay
revolving loans under any Credit Agreement (provided that such revolving loans
constitute Senior Debt) and, in that event, anything in the Indenture to the
contrary notwithstanding, the Subject Entity shall not be required to reduce the
commitment under the related revolving credit facility as a result of such
repayments of revolving loans except to the extent the Subject Entity deems such
Net Cash Proceeds to have been used to retire Senior Debt as contemplated by
clause (1)(a)(ii) of the first sentence of this paragraph.
In the event of a transaction as a result of which a Subsidiary Guarantor
will be released from its Guarantee as provided in the last paragraph under
"--Guarantees", then, anything in the Indenture to the contrary notwithstanding,
such transaction shall be deemed to be an Asset Sale and shall be subject to and
shall only be made in compliance with the foregoing covenant.
Notwithstanding the provisions of the second preceding paragraph, the
following transactions shall not be deemed Asset Sales:
(i)(A) any sale, lease, sublease, conveyance, assignment, transfer or other
disposition of inventory made in the ordinary course of business or (B) any
sale, lease, sublease, conveyance, assignment, transfer or other
disposition, in one transaction or a series of related transactions, of any
other property or assets (other than Capital Stock of a Subsidiary of the
Subject Entity) with an aggregate Fair Market Value (as determined in good
faith by the Board of Directors of the Subject Entity) of less than
$1,000,000;
(ii) any merger or consolidation of a Guarantor that is governed by and
complies with the provisions described in the third paragraph under
"--Guarantees" above or any sale, lease, sublease, conveyance, assignment,
transfer or other disposition of property or assets (including, without
limitation, by merger or consolidation) that is governed by and complies
with the provisions described under "--Limitation on Merger, Sale or
Consolidation" below;
(iii) any Restricted Payment permitted by the covenant described above
under "--Limitation on Restricted Payments" or any Lien permitted by the
covenant described above under "--Liens";
(iv) any sale, lease, sublease, conveyance, assignment, transfer or
other disposition of property or assets by the Subject Entity or any of its
Subsidiaries to the Subject Entity or to any of its Subsidiaries;
(v) any sale, lease, sublease, conveyance, assignment, transfer or other
disposition of damaged, worn-out or other obsolete property in the ordinary
course of business so long as such property is no longer necessary for the
proper conduct of the business of the Subject Entity or any of its
Subsidiaries;
(vi) any liquidation of Cash Equivalents in the ordinary course of
business;
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(vii) the sale or other disposition of up to six of the supermarkets
acquired in the KUI Acquisition so long as such sale or other disposition of
any such store occurs prior to the conversion of such store to the Quality
Food Centers name or format;
(viii) substantially contemporaneous exchanges by the Subject Entity or
any of its Subsidiaries of property or assets (including, without
limitation, real property and improvements) for other property or assets,
provided that the property or assets received in such exchange by the
Subject Entity or such Subsidiary are part of or will be used in a Related
Business and have a Fair Market Value at least equal to the Fair Market
Value of the property and assets exchanged (determined in each case in good
faith by the Board of Directors of the Subject Entity as evidenced by a
board resolution delivered to the Trustee); provided that, if property or
assets are exchanged by the Subject Entity or any of the Subsidiary
Guarantors, the property or assets received in such exchange are also
received by the Subject Entity or a Subsidiary Guarantor; and provided
further that, if the property or assets to be exchanged by the Subject
Entity or any of its Subsidiaries in any transaction or series of related
transactions have a Fair Market Value of $20 million or more, the Board of
Directors of the Subject Entity shall have received, prior to or
concurrently with such exchange, one or more written opinions or valuations
from appraisal or valuation firms of national or regional standing selected
by the Subject Entity, with experience in appraisal or valuation of property
or assets of the type to be exchanged and be received by the Subject Entity
or such Subsidiary, as applicable, to the effect that the Fair Market Value
of the property or assets to be received is at least equal to the Fair
Market Value of the property and assets to be exchanged;
(ix) any sale, transfer or other disposition of any shares of Capital
Stock of any distributor or supplier of wholesale groceries or related
wholesale products, which shares are (A) owned by the Subject Entity or any
of its Subsidiaries on the Issue Date or (B) acquired by the Subject Entity
or any of its Subsidiaries after the Issue Date in the ordinary course of
business without the payment of any consideration (other than the purchase
of products and services related thereto in the ordinary course of
business); and
(x) any Asset Sale the Net Cash Proceeds of which do not exceed $15
million and which, together with all other Asset Sales the Net Cash Proceeds
of which have not been applied as contemplated by the second preceding
paragraph, do not exceed $15 million in the aggregate (it being understood
that, at such time as the aggregate Net Cash Proceeds from such Asset Sales
exceed $15 million, all such Net Cash Proceeds shall be applied as required
by the second preceding paragraph).
All Net Cash Proceeds from any Event of Loss shall be invested, used to
retire Senior Debt, or used to repurchase or redeem Exchange Notes, all within
the period, and as otherwise provided, in the first paragraph (other than
clauses (2) and (3) of the first sentence thereof) under the caption
"--Limitation on Sales of Assets and Subsidiary Stock."
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E under the
Exchange Act and all other applicable Federal and state securities laws, and any
provisions of the Indenture which conflict with such laws shall be deemed to be
superseded by the provisions of such laws.
The New Credit Agreement will limit, and other instruments and agreements
relating to or evidencing indebtedness which the Company or the Guarantors may
incur in the future limit or prohibit, the purchase of Exchange Notes in
response to an Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, enter into any contract, agreement,
arrangement or transaction (or any renewal or extension thereof) with (i) any
Affiliate of the Subject Entity, (ii) any Affiliate of any Subsidiary of the
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Subject Entity or (iii) any Affiliate or Subsidiary of Parent (each, an
"Affiliate Transaction") or any series of related Affiliate Transactions, unless
the terms of such Affiliate Transaction are fair and reasonable to the Subject
Entity or such Subsidiary, as the case may be, and are at least as favorable as
the terms which could reasonably be expected to be obtained by the Subject
Entity or such Subsidiary, as the case may be, in a comparable transaction made
on an arm's length basis with persons who are not such Affiliates; provided that
the following shall not be deemed Affiliate Transactions: (A) any contracts,
agreements, arrangements or transactions (or any renewals or extensions thereof)
solely between or among the Subject Entity and any of its Subsidiaries or
between or among any Subsidiaries of the Subject Entity; (B) Permitted Payments;
(C) any Restricted Payments made in compliance with the covenant described under
"--Limitation on Restricted Payments;" (D) customary loans, advances, fees and
compensation paid to, and indemnity provided on behalf of, officers, directors,
employees or consultants of the Subject Entity or any of its Subsidiaries; (E)
transactions pursuant to any contract or agreement in effect on the Issue Date
(including, without limitation, the Standstill Agreements) as the same may be
amended, modified or replaced from time to time so long as any such amendment,
modification or replacement is no less favorable to the Subject Entity and its
Subsidiaries than such contract or agreement as in effect on the Issue Date or
is approved by either a majority of the disinterested directors of the Subject
Entity or, in the case of amendments, modifications or replacements of any
Standstill Agreement after the date of the Reorganization, a majority of the
disinterested directors of Parent; (F) employment agreements entered into by the
Subject Entity or any of its Subsidiaries in the ordinary course of business;
(G) transactions with suppliers or other purchases or sales of goods and
services, in each case in the ordinary course of business (including, without
limitation, pursuant to any joint venture agreements) and otherwise in
compliance with the terms of the Indenture, which are fair to the Subject
Entity, in the reasonable determination of its Board of Directors or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party; (H) Investments in
Santee, and other contracts and agreements entered into in connection therewith,
so long as none of the foregoing is prohibited by the Indenture; (I) credit
support and other provisions of comfort in respect of, and other contracts and
agreements entered into in connection with, Indebtedness or other obligations of
Santee and all amendments, modifications and replacements thereof, so long as
none of the foregoing is prohibited by any other provision of the Indenture; and
(J) transactions pursuant to agreements and contracts with Santee (including
agreements for the purchase of milk and other products) or with any stockholders
of Santee (including stockholder agreements, indemnifications and other
agreements and transactions contemplated thereby) or entered into in connection
with Santee's financing of its new dairy which was under construction on the
Issue Date (including Permitted Liens, guarantees, credit support and other
provisions of comfort) and all amendments, modifications and replacements
thereof, so long as none of the foregoing is prohibited by any other provision
of the Indenture.
Without limiting the foregoing, in connection with any Affiliate Transaction
or series of related Affiliate Transactions (1) involving consideration to
either party in excess of $2.5 million, the Subject Entity must deliver an
officers' certificate to the Trustee, stating that the terms of such Affiliate
Transaction are fair and reasonable to the Subject Entity or the relevant
Subsidiary, as the case may be, and are no less favorable to the Subject Entity
or such Subsidiary, as the case may be, than could reasonably be expected to
have been obtained in an arm's length transaction with a non-Affiliate, (2)
involving consideration to either party in excess of $7.5 million, a majority of
the disinterested members of the Subject Entity's board of directors approve
such Affiliate Transaction or series of related Affiliate Transactions, as the
case may be, and, in their good faith judgment, believe that such transaction or
transactions, as applicable, are fair and reasonable to the Subject Entity or
such Subsidiary, as the case may be, and are no less favorable to the Subject
Entity or such Subsidiary, as the case may be, than could reasonably be expected
to have been obtained in an arms' length transaction with a non-Affiliate (all
of the foregoing to be evidenced by a resolution of such disinterested directors
delivered to the Trustee), and (3) involving consideration to either party in
excess of $20 million, the Subject Entity must also, prior to the consummation
thereof, obtain a written favorable opinion as to the fairness of such
transaction to the
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Subject Entity or the relevant Subsidiary, as the case may be, from a financial
point of view from an independent investment banking firm of recognized
standing, provided that the requirements of this clause (3) shall only be
applicable if the transaction or series of transactions is of a type as to which
investment banking firms of recognized standing customarily render fairness
opinions.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture will provide that the Company will not, directly or
indirectly, consolidate with or merge with or into any other person or sell,
lease, convey, assign, transfer or otherwise dispose of all or substantially all
of its properties and assets (computed on a consolidated basis), whether in a
single transaction or a series of related transactions, to any other person or
persons, or adopt a plan of liquidation, unless (i) either (a) if the
transaction or series of transactions is a merger, the Company shall be the
surviving person of such merger, or (b) the person formed by such consolidation
or into which the Company is merged or to which the properties and assets of the
Company are transferred or, in the case of a plan of liquidation, the entity
which receives the greatest value from such plan of liquidation (any such
surviving person or transferee person or person receiving the greatest such
value referred to in this clause (b) being hereinafter called the "Surviving
Entity") shall be a corporation organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia and
shall expressly assume by a supplemental indenture, executed and delivered to
the Trustee and in form reasonably satisfactory to the Trustee, all the
obligations of the Company under the Exchange Notes and the Indenture (and such
supplemental indenture shall also be executed by each Guarantor and shall
further provide that each Guarantor confirms that its obligations under the
Indenture and its Guarantee remain in full force and effect); (ii) no Default or
Event of Default shall exist or shall occur immediately after giving effect to
such transaction or series of transactions (including, without limitation, any
Indebtedness Incurred or to be Incurred in connection with such transaction or
series of transactions) on a pro forma basis; (iii) immediately after giving
effect to such transaction or series of transactions (including, without
limitation, any Indebtedness Incurred or to be Incurred in connection with such
transaction or series of transactions) on a pro forma basis, the Subject Entity
would immediately thereafter be permitted to Incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in the second
paragraph under "--Limitation on Additional Indebtedness and Disqualified
Capital Stock" above; (iv) if such transaction or series of transactions shall
occur in connection with or at any time from and after the date of the
Reorganization, immediately after giving effect to such transaction or series of
transactions the Company or the Surviving Entity, as applicable, shall be a
Wholly-Owned Subsidiary of the Holding Company; and (v) the Company shall
deliver, or cause to be delivered to the Trustee the officer's certificate and
opinion of counsel called for by the Indenture; provided that the conditions set
forth in clause (iii) of this sentence shall not apply to the merger of any
Guarantor into the Company.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the corporation which receives
the greatest value from such plan of liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture and the Exchange Notes with the same effect as if such successor
corporation had been named therein as the Company and thereafter, except in the
case of a lease, the predecessor corporation shall be released from all of its
obligations under the Indenture and the Exchange Notes.
For purposes of the foregoing, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, the Capital Stock of which
constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company on a consolidated basis.
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LIMITATION ON LINES OF BUSINESS
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, engage in
any line or lines of business other than a Related Business.
ADDITIONAL GUARANTORS
The Indenture will provide that the Subject Entity will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, establish or
acquire a new Subsidiary of the Subject Entity or such Subsidiary, as the case
may be, unless either (A) such new Subsidiary is designated as an Unrestricted
Subsidiary in accordance with the definition of the term "Unrestricted
Subsidiary" or (B) the Subject Entity (by delivery of an officers' certificate
to the Trustee) designates such new Subsidiary as a Non-Guarantor Foreign
Subsidiary and the aggregate amount of Investments made by the Subject Entity
and its Domestic Subsidiaries and Guarantor Foreign Subsidiaries in such
Non-Guarantor Foreign Subsidiary are not prohibited by the Indenture (provided
that the Subject Entity may at any time thereafter elect to cause such
Non-Guarantor Foreign Subsidiary to become a Guarantor as contemplated by clause
(C) of this paragraph) or (C) (i) such new Subsidiary simultaneously executes
and delivers a supplemental indenture pursuant to which such new Subsidiary
becomes a Guarantor and guarantees the obligations of the Company under the
Exchange Notes and the Indenture on the same terms as the other Guarantors and
(ii) the Subject Entity shall deliver to the Trustee an officers' certificate
and an opinion of counsel, each in a form reasonably satisfactory to the
Trustee, stating that the Subject Entity has complied with this paragraph in
connection with the establishment or acquisition of such new Subsidiary. For
purposes of this covenant, the designation of any Unrestricted Subsidiary as a
Subsidiary shall be deemed to be the establishment of a new Subsidiary. Upon the
designation of a Subsidiary as an Unrestricted Subsidiary in accordance with the
provisions of the Indenture, such Unrestricted Subsidiary shall be released from
all of its obligations under its Guarantee and the Indenture. The Indenture will
provide that from and after the time of the Reorganization, the Subject Entity
will always be a Guarantor.
REPORTING REQUIREMENTS
The Indenture will provide that the Subject Entity will file with the
Commission the annual reports, quarterly reports and other documents required to
be filed with the Commission pursuant to Sections 13 or 15(d) of the Exchange
Act, whether or not the Subject Entity has a class of securities registered
under the Exchange Act, unless the Commission will not accept such documents;
provided that, from and after the date of the Reorganization, the Subject Entity
shall be deemed to have satisfied its obligations under this sentence if (i) the
Parent shall have filed with the Commission the annual reports, quarterly
reports and other documents required to be filed with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act, whether or not the Parent has a class
of securities registered under the Exchange Act, unless the Commission will not
accept such documents (and the Subject Entity will not be deemed to have failed
to satisfy the condition set forth in this clause (i) solely by reason of the
Commission's failure to accept such documents) and (ii) if, for the most recent
fiscal quarter covered by the Parent's consolidated financial statements
included in the most recent annual report or quarterly report which the Parent
has filed or is then filing with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act (or if the Commission will not accept such documents, which
the Parent would have theretofore or then been required to file, as applicable),
the revenues of the Subject Entity and its Subsidiaries for such fiscal quarter
computed on a consolidated basis in accordance with GAAP shall be less than 95%
of the revenues of the Parent and its subsidiaries for such fiscal quarter
computed on a consolidated basis in accordance with GAAP, the notes to such
financial statements shall set forth the consolidated indebtedness, consolidated
sales, consolidated capital expenditures, consolidated interest expense (net of
interest income and excluding any deferred financing costs), and consolidated
net earnings before interest, income taxes, depreciation, amortization, LIFO
inventory charges and, if applicable, before equity earnings (losses) from
subsidiaries, non-recurring and extraordinary items, and union, pension and
benefit credits of the Subject
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Entity and its consolidated Subsidiaries, determined in accordance with GAAP, as
of the same dates and for the same periods for which consolidated financial
statements are presented for the Parent (provided that, in the case of such
information included in the notes to the Parent's audited financial statements,
such notes also shall be covered by the audit report, provided that the Parent's
independent accountants may rely on the audit report of other independent
accountants with respect to any acquired businesses). The Indenture also will
provide that, whether or not the Subject Entity is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Subject Entity, at
its expense (x) will be required to file with the Trustee and mail to each
Holder of Exchange Notes within 15 days after filing with the Commission (or if
any such filing is not permitted under the Exchange Act, 15 days after such
filing would have been required), and to deliver to prospective purchasers of
Exchange Notes upon written request, copies of the annual reports, quarterly
reports and other documents required to be filed by Sections 13 or 15(d) of the
Exchange Act and (y) so long as any of the Exchange Notes are evidenced by
Global Exchange Notes, promptly deliver copies of such reports and documents to
any beneficial owner of Exchange Notes upon written request by such beneficial
owner; provided that, from and after the date of the Reorganization, the Subject
Entity may satisfy its obligations under this sentence if (A) it shall instead
have delivered the annual reports, quarterly reports and other documents of the
Parent required to be filed by Sections 13 or 15(d) of the Exchange Act (whether
or not Parent is subject to the reporting requirements of such Sections) and (B)
the conditions set forth in clause (ii) of the preceding sentence are satisfied.
In addition, the Indenture provides that the Subject Entity will furnish to the
Holders and, so long as the Exchange Notes are evidenced by Global Exchange
Notes, beneficial owners of Exchange Notes and to prospective investors, upon
their request, the information, if any, required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
REORGANIZATION AS A HOLDING COMPANY
The Indenture will provide that the Company will not reorganize into a
holding company structure (the "Reorganization") unless (i) immediately after
giving effect to the Reorganization, the Holding Company shall own, directly,
all of the outstanding Capital Stock (other than directors' qualifying shares)
of the Company (provided that the Holding Company may thereafter cease to own
such Capital Stock directly so long as the Company shall at all times be a
Wholly-Owned Subsidiary of the Holding Company); (ii) immediately after giving
affect to the Reorganization, the Initial Parent shall own, directly, all of the
outstanding Capital Stock (other than directors' qualifying shares) of the
Holding Company and shall not own any other Capital Stock (provided that the
Parent may thereafter cease to directly own all of the outstanding Capital Stock
of Holding Company so long as Holding Company shall at all times be a Subsidiary
of Parent, and the Parent also may thereafter own other Capital Stock); (iii)
effective upon consummation of the Reorganization, the holders of outstanding
shares of the Company's Capital Stock shall generally become holders of Capital
Stock of Initial Parent; (iv) no Event of Default shall exist or shall occur
immediately after giving effect to the Reorganization; (v) the Initial Parent
shall have conducted no business or operations prior to the Reorganization other
than in connection with the Reorganization and matters reasonably related
thereto (except that Initial Parent may be a guarantor under and a party to the
New Credit Agreement) and, immediately prior to and at the time of the
Reorganization, the total Investments made by the Company and its other
Subsidiaries in Initial Parent shall be less than $100,000 and Initial Parent's
total assets shall be less than $100,000; (vi) the Reorganization is not
structured with the intention of evading the effect of the restrictive covenants
and other provisions of the Indenture; and (vii) the Company shall have
delivered to the Trustee an officers' certificate to the effect that the
Reorganization has been effected in compliance with this paragraph and an
opinion of counsel to the effect that the conditions to the Reorganization set
forth in the Indenture have been satisfied. The Indenture will provide that if
the Reorganization is effected in accordance with the provisions of this
paragraph, then the Reorganization shall not be deemed to constitute a breach of
or default under any provision of the Indenture and may be effected
notwithstanding anything in the
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Indenture to the contrary. The Indenture will further provide that the
provisions of this paragraph shall permit one Reorganization only.
The Indenture will provide that, anything therein to the contrary
notwithstanding, in the event that the Company shall organize one or more
subsidiaries solely for the purpose of acting as merger subsidiaries in
connection with the Reorganization (each, a "Merger Subsidiary"), the Company
will not be required to cause any such Merger Subsidiary to become a Guarantor
prior to the Reorganization so long as such Merger Subsidiary has assets of less
than $10,000 at all times prior to the Reorganization and conducts no business
or operations other than in connection with the Reorganization and matters
reasonably related thereto.
The Indenture will provide that, anything therein to the contrary
notwithstanding (a) from and after the date of the Reorganization, the Subject
Entity will cause the Company at all times to be a Wholly-Owned Subsidiary of
the Subject Entity, and (b) the Subject Entity will not cause or permit any of
its Non-Guarantor Foreign Subsidiaries to own any Capital Stock of the Subject
Entity or any of its Domestic Subsidiaries or Guarantor Foreign Subsidiaries,
and (c) the Subject Entity will not cause or permit any of its Unrestricted
Subsidiaries to own any Capital Stock of the Subject Entity or any of its
Subsidiaries.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of any principal of or premium, if any, on
any of the Exchange Notes when the same becomes due and payable (upon Stated
Maturity, acceleration, optional redemption, required purchase in connection
with a Change of Control Offer or Asset Sale Offer, scheduled principal
payment or otherwise); or
(ii) default in the payment of any interest on, or any Liquidated
Damages, if any, with respect to, any of the Exchange Notes when the same
becomes due and payable, which default continues for a period of 30 days; or
(iii) default by the Company, the Holding Company or any Subsidiary
Guarantor in the performance or observance of any other term, covenant or
agreement contained in the Exchange Notes or the Indenture (other than a
default specified in clause (i) or (ii) above) and (A) in the case of a
default in the performance of the covenant described in clause (a) of the
third paragraph under "Certain Covenants--Reorganization as a Holding
Company," written notice of such default shall have been given to the
Company by the Trustee or to the Company and the Trustee by Holders of at
least 25% in aggregate principal amount of the Exchange Notes then
outstanding or (B) in any other case, such default continues for a period of
30 days after written notice of such default shall have been given to the
Company by the Trustee or to the Company and the Trustee by Holders of at
least 25% in aggregate principal amount of the Exchange Notes then
outstanding; or
(iv) a default under any mortgage, indenture or other instrument or
agreement under which there may be issued or by which there may be secured
or evidenced any Indebtedness of the Subject Entity or any Subsidiary of the
Subject Entity, whether such Indebtedness exists on the date of the
Indenture or shall be incurred thereafter, if (A) such default results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace period) or as a result of such default
such Indebtedness has been declared due and payable or otherwise accelerated
prior to its stated final maturity and (B) the sum of (x) the aggregate
principal amount of such Indebtedness plus (y) the aggregate principal
amount of all other such Indebtedness in default for failure to pay any such
Indebtedness at its stated final maturity (after giving effect to any
applicable grace period) or which has been so declared due and payable or
otherwise accelerated prior to its stated final maturity, aggregates more
than $20,000,000; or
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(v) one or more final judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the
payment of money (to the extent not covered by insurance) in excess of
$20,000,000, either individually or in the aggregate, shall be entered
against the Subject Entity or any Subsidiary of the Subject Entity or any
property of the Subject Entity or any Subsidiary of the Subject Entity and
shall not be discharged or fully bonded and there shall have been a period
of 60 days after the date on which any period for appeal has expired and
during which a stay of enforcement of such judgment, order or decree shall
not be in effect; or
(vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company, the Holding Company, the Parent or any Significant
Subsidiary of the Subject Entity shall have occurred; or
(vii) any Guarantor denies that it has any further liability under its
Guarantee or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of any such Guarantee in
accordance with the Indenture or, in the case of any Guarantor which is not
(A) a Significant Subsidiary of the Subject Entity or (B) from and after the
Reorganization, the Subject Entity, if such denial or notice is given by a
trustee in bankruptcy, receiver or other similar person in connection with
bankruptcy, insolvency, reorganization or similar proceedings relating to
such Guarantor) or, prior to the Reorganization, any Guarantee of a
Significant Subsidiary of the Subject Entity is declared or adjudged invalid
in a final judgment or order issued by any court or governmental authority
of competent jurisdiction or, from and after the Reorganization, the
Guarantee of the Subject Entity or any Guarantor which is a Significant
Subsidiary of the Subject Entity is declared or adjudged invalid in a final
judgment or order issued by any court or governmental authority of competent
jurisdiction.
If an Event of Default (other than as specified in clause (vi) above) shall
occur and be continuing, the Trustee, by written notice to the Company, or the
holders of at least 25% in aggregate principal amount of the Exchange Notes then
outstanding, by written notice to the Trustee and the Company, may declare the
principal of, and accrued and unpaid interest on, and accrued and unpaid
Liquidated Damages, if any, with respect to, all of the outstanding Exchange
Notes to be due and payable immediately, upon which declaration all such amounts
payable in respect of the Exchange Notes shall be immediately due and payable.
If an Event of Default specified in clause (vi) above occurs, then the principal
of, and accrued and unpaid interest on, and accrued and unpaid Liquidated
Damages, if any, with respect to all of the outstanding Exchange Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder of Exchange Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of at least a majority in aggregate principal amount of the
outstanding Exchange Notes, by written notice to the Company and the Trustee,
may rescind such declaration and its consequences if (a) the Company has paid or
deposited with the Trustee cash sufficient to pay (i) all sums paid or advanced
by the Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any other
amount due the Trustee as compensation or indemnification pursuant to the
Indenture, (ii) all interest on and Liquidated Damages, if any, with respect to
the Exchange Notes which has become due otherwise than by such declaration of
acceleration and (to the fullest extent permitted by law) interest thereon at
the rate of interest borne by the Exchange Notes and (iii) the principal of and
premium, if any, on any Exchange Notes which have become due otherwise than by
such declaration of acceleration and (to the fullest extent permitted by law)
interest thereon at the rate of interest borne by the Exchange Notes; (b) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the
non-payment of principal of, and interest on and Liquidated Damages, if any,
with respect to the Exchange Notes that have become due solely by such
declaration of acceleration, have been cured or waived.
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The Holders of not less than a majority in aggregate principal amount of the
outstanding Exchange Notes may on behalf of the Holders of all the Exchange
Notes waive any past default under the Indenture or the Exchange Notes and its
consequences, except a default (i) in the payment of the principal of, premium,
if any, or interest on, or Liquidated Damages, if any, with respect, to any
Exchange Notes, or (ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the Holder of
each Note outstanding affected or (iii) in respect of any provision which under
the Indenture cannot be modified, amended or waived without the consent of
Holders of at least 66 2/3% of the aggregate principal amount of the Exchange
Notes at the time outstanding (provided that any such waiver may be effected
with the consent the Holders of at least 66 2/3% of the aggregate principal
amount of the Exchange Notes then outstanding).
No Holder of any of the Exchange Notes has any right to institute any
proceeding or pursue any remedy with respect to the Indenture or the Exchange
Notes, unless the Holder has given written notice to the Trustee of a continuing
Event of Default, the Holders of at least 25% in aggregate principal amount of
the outstanding Exchange Notes have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as Trustee under the
Indenture, the Trustee has failed to institute such proceeding within 30 days
after receipt of such notice and the Trustee, within such 30-day period, has not
received directions inconsistent with such written request from Holders of at
least a majority in aggregate principal amount of the outstanding Exchange
Notes. Such limitations do not apply, however, to a suit instituted by a Holder
of a Note for the enforcement of the payment of the principal of, premium, if
any, or interest on, or Liquidated Damages, if any, with respect to, such Note
on or after the respective due dates therefor.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall have occurred and be
continuing, the Trustee is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders unless such Holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the Holders of not less than a majority in aggregate principal
amount of the outstanding Exchange Notes have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee, under the
Indenture.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Exchange Notes notice
of the Default or Event of Default within 30 days after obtaining knowledge
thereof. Except in the case of a default in payment of principal of, premium, if
any, or interest on, or Liquidated Damages, if any, with respect to, any
Exchange Notes, the Trustee may withhold the notice to the Holders of the
Exchange Notes if a committee of its trust officers in good faith determines
that withholding the notice is in the interest of the Holders of the Exchange
Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company of its obligations under the Indenture and as to
any default in such performance. The Company is also required to notify the
Trustee promptly after the Company's becoming aware of any Default or Event of
Default.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Company may, at its option and at any
time elect to have its obligations and the obligations of the Guarantors
discharged with respect to the outstanding Exchange Notes and Guarantees ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by, and the
Indenture shall cease to be of further effect as to, all outstanding Exchange
Notes and Guarantees, except as to, among other things, (i) rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Exchange Notes when such payments are due from the trust funds described
below and the rights of Holders to receive payments of Liquidated Damages, if
any, with respect to the Exchange Notes pursuant to the Registration Rights
Agreement; (ii) the Company's obligations with respect to such Exchange Notes
concerning issuing temporary Exchange Notes, registration of Exchange Notes,
mutilated, destroyed, lost or stolen Exchange Notes, and the maintenance of an
office or agency for payment and money for security payments held in trust;
(iii) the rights, powers, trust, duties, and immunities of the Trustee, and the
Company's and the Guarantors' obligations in connection therewith; and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and the
Guarantors released with respect to certain covenants that are set forth in the
Indenture ("Covenant Defeasance"), including the covenants described under
"Certain Covenants--Repurchase of Exchange Notes Upon a Change of Control" and
"Certain Covenants-- Limitation on Sales of Assets and Subsidiary Stock", and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee or other qualifying trustee,
in trust, for the benefit of the Holders of the Exchange Notes, U.S. legal
tender or non-callable U.S. Government Obligations or a combination thereof, in
such amounts as will be sufficient, in the written opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on, the Exchange Notes on the stated dates for
payment thereof or the applicable redemption date, as the case may be; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel reasonably acceptable to the Trustee confirming
that, since the date of the Indenture (A) the Company has received from or there
has been published by the Internal Revenue Service a ruling or (B) there has
been a change in applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of the Exchange Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel reasonably acceptable to such Trustee confirming
that the Holders of the Exchange Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as Events of Default referred
to in clause (vi) of the first paragraph under "--Events of Default" above are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Subject Entity or any of its
Subsidiaries is a party or by which the Subject Entity or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made with the intent of
preferring the Holders of the Exchange Notes over any other creditors of the
Company or the Guarantors or with the intent of defeating, hindering, delaying
or defrauding any other creditors of the Company or the Guarantors or others;
(vii) the Company shall have delivered to the Trustee an opinion of independent
counsel to the effect that, after the 91st day following such deposit, the trust
funds will not be subject to the
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effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally under any applicable U.S. federal or state
law and that the Trustee has a perfected security interest in such trust funds
for the ratable benefit of the Holders of the Exchange Notes; (viii) if the cash
and U.S. Government Obligations deposited are sufficient to pay the outstanding
Exchange Notes provided such Exchange Notes are redeemed on a particular
Redemption Date, the Company shall have given the Trustee irrevocable
instructions to redeem such Exchange Notes on such date; and (ix) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that the conditions precedent provided, in the case of the
officers' certificate, in clauses (i) through (viii) and, in the case of the
opinion of counsel, clauses (ii) or (iii), as applicable, and (v) and (vii) of
this paragraph, have been complied with. Upon Legal Defeasance but not Covenant
Defeasance as provided in the Indenture, the Guarantee of each Guarantor shall
be fully released and discharged and the Trustee shall promptly execute and
deliver to the Company any documents reasonably requested by the Company to
evidence or effect the foregoing.
In the event the Company effects Covenant Defeasance and the Exchange Notes
are declared due and payable because of the occurrence of any Event of Default
(including any Event of Default with respect to any covenant as to which such
Covenant Defeasance is not applicable), the amount of monies and/or U.S.
Government Obligations deposited with the Trustee to effect such Covenant
Defeasance may not be sufficient to pay amounts due on the Exchange Notes at the
time of any acceleration resulting from such Event of Default. However, the
Company and, subject to the limitations set forth in the Guarantees, the
Guarantors would remain liable to make payment of such amounts due at the time
of acceleration.
AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company, the Guarantors
and the Trustee to enter into one or more supplemental indentures without the
consent of the Holders for certain limited purposes, including, among other
things (i) to cure ambiguities, defects or inconsistencies; (ii) to provide for
the assumption of the Company's or any Guarantor's obligations in the case of a
merger, consolidation or sale of all or substantially all of its assets as
provided in the Indenture; (iii) to evidence the release of any Guarantor or the
addition of any new Guarantor in accordance with the Indenture; or (iv) to make
any other change that does not adversely affect the rights of any Holder in any
material respect. With the consent of the Holders of not less than a majority in
aggregate principal amount of the Exchange Notes at the time outstanding, the
Company, the Guarantors and the Trustee are permitted to amend or supplement the
Indenture or modify the rights of the Holders thereunder, and the Holders of not
less than a majority in aggregate principal amount of the outstanding Exchange
Notes may waive compliance by the Company or any Guarantor with any provision of
the Indenture or the Exchange Notes; provided that any amendments or supplements
to, or waivers with respect to, the provisions described above under "--Certain
Covenants--Repurchase of Exchange Notes Upon a Change of Control" which
adversely affect the Holders shall require the consent of Holders of not less
than 66 2/3% of the aggregate principal amount of Exchange Notes at the time
outstanding; provided, further, that no such amendment or waiver shall, without
the written consent of all holders of Senior Debt, alter the subordination
provisions of the Indenture; and provided, further, that no such amendment,
supplement or waiver may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of any Note or any installment of interest
thereon, or reduce the principal amount thereof or the rate (or extend the time
for payment) of interest thereon or any premium payable upon the redemption or
repurchase thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or interest thereon are payable, or
impair the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof (or, in the case of redemption or in the case
of repurchase at the option of the Holders, on or after the Redemption Date or
date fixed for repurchase, as applicable), or reduce the Change of Control
Purchase Price or Asset Sale Offer Price or alter the redemption provisions of
the Indenture in a manner adverse to the Holders, (ii) reduce the percentage in
principal amount of the outstanding Exchange Notes, the consent of whose Holders
is required for any such amendment, supplement or waiver
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provided for in the Indenture, (iii) modify any of the waiver provisions, except
to increase any required percentage or to provide that certain other provisions
of the Indenture cannot be modified or waived without the consent of the Holder
of each outstanding Note affected thereby, or (iv) make the Exchange Notes
further subordinated in right of payment to any extent or under any
circumstances to any other Indebtedness.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
contain limitations on the rights of the Trustee thereunder, should it become a
creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company and its Affiliates; provided, however, that if it acquires any
conflicting interest (as defined in such Act) it must eliminate such conflict or
resign. An affiliate of the Trustee is a lender under the Company's Current
Credit Facility, and it is anticipated that an affiliate of the Trustee also
will be a lender under the New Credit Facility.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture will provide that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future, of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
Exchange Notes by reason of his or its status as such stockholder, employee,
officer or director.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Subject
Entity or is merged or consolidated into or with the Subject Entity or any of
its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of (i) any person,
(ii) all or substantially all of the assets of any person or (iii) all or
substantially all of any division or line of business of any person, in each
case by any other person, whether by purchase, stock purchase, merger,
consolidation or other transfer, and whether or not for consideration.
"AFFILIATE" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For purposes of this definition, the
term "control" means the power to direct the management and policies of a
person, directly or through one or more intermediaries, whether through the
ownership of voting securities, by contract, or otherwise, provided, that, a
Beneficial Owner of 10% or more of the total voting power normally entitled to
vote in the election of directors, managers or trustees, as applicable, of a
person shall for such purposes be deemed to have control of such person.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a) the
products of the number of years (or fractions thereof) from such date of
determination to the date or dates of each successive scheduled principal (or
redemption) payment of such security or instrument and (b) the amount of each
such respective principal (or redemption) payment by (ii) the sum of all such
principal (or redemption) payments.
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"BANKRUPTCY LAW" means Title 11 of the United States Code and any similar
applicable foreign, state or federal law for the relief of debtors generally.
"BENEFICIAL OWNER" has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), except that a person
shall be deemed to have "beneficial ownership" of all shares or other securities
that such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time.
"BOARD OF DIRECTORS" means, with respect to any person, the board of
directors of such person.
"BOARD OF DIRECTORS" or "Board" means, with respect to any person, the board
of directors of such person or any committee of the board of directors of such
person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL STOCK" means, with respect to any person, any and all shares,
interests (including, without limitation, limited and general partnership
interests and joint venture interests), participations, rights or other
equivalents (however designated) in the equity of such person, and any rights
(other than debt securities convertible into or exchangeable for an equity
interest), warrants or options exchangeable for or convertible into an equity
interest in such person.
"CAPITALIZED LEASE OBLIGATION" means, with respect to any person, any
obligation of such person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed, tangible or
intangible) that is required to be classified and accounted for as a capital
lease obligation under GAAP, and the amount of such obligation at any date shall
be the capitalized amount thereof at such date, determined in accordance with
GAAP.
"CASH EQUIVALENTS" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than one year from the date of acquisition; (b) certificates of deposit, time
deposits, eurodollar time deposits, overnight bank deposits or bankers'
acceptances having maturities of not more than one year from the date of
acquisition thereof of any domestic commercial bank that is a member of the
Federal Reserve System, the long-term debt of which is rated at the time of
acquisition thereof at least A or the equivalent thereof by Standard & Poor's, a
division of The McGraw Hill Companies, Inc. ("Standard & Poor's"), or at least A
or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's") and
having capital and surplus and undivided profits in excess of $500,000,000; (c)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States of
America or issued by any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof), in each case maturing within 180 days of the date of acquisition, (d)
commercial paper rated at the time of acquisition thereof at least A-1 or the
equivalent thereof by Standard & Poor's or P-1 or the equivalent thereof by
Moody's, maturing within 270 days after the date of acquisition thereof, and (e)
shares of any money market mutual fund that (i) has at least 95% of its assets
invested continuously in the types of investments referred to in clauses (a)
through (d) above, (ii) has net assets of not less than $500 million and (iii)
has the highest rating obtainable from either Standard & Poor's or Moody's.
"COMMISSION" means the Securities and Exchange Commission or any successor
thereto.
"COMMON STOCK OFFERING" means the underwritten public offering by the
Company of 5,175,000 shares of its common stock made concurrently with the
private placement of the Old Notes.
"CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE" means, with respect to
any person for any period, the depreciation and amortization expense of such
person and its Subsidiaries for such period
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(including amortization of debt discount and deferred financing costs in
connection with any Indebtedness of such person and its Subsidiaries),
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED EBITDA" means, with respect to any person for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
or subtract therefrom, as applicable (to the extent deducted or included, as
applicable in determining such Consolidated Net Income), without duplication,
the sum of (i) Consolidated Income Tax Expense of such person for such period,
(ii) Consolidated Depreciation and Amortization Expense of such person for such
period, (iii) Consolidated Interest Expense of such person for such period, (iv)
Consolidated LIFO Charges (Credits) of such person for such period, and (v) all
other consolidated non-cash items of such person and its Subsidiaries for such
period, and further adjusted to subtract therefrom all cash payments made by
such person or any of its Subsidiaries during such period to the extent such
payments relate to non-cash charges that were added back in determining
Consolidated EBITDA for such period or any prior period, all determined on a
consolidated basis in accordance with GAAP; provided that any amounts referred
to in any one or more of clauses (i) through (v) of this sentence which are to
be added to Consolidated Net Income and which are attributable to a Subsidiary
of such person which is not a Wholly-Owned Subsidiary shall be added to
Consolidated Net Income only to the extent (and in the same proportion) that the
net income of such Subsidiary was included in calculating the Consolidated Net
Income of such person and then only to the extent that the amount of such
expense or charge, as applicable, attributable to such Subsidiary would be
permitted at the time of determination to be dividended to such person in cash
by such Subsidiary.
"CONSOLIDATED INTEREST COVERAGE RATIO" means, with respect to any person on
any date of determination (the "Transaction Date"), the ratio, on a pro forma
basis, of (a) Consolidated EBITDA of such person (exclusive of amounts
attributable to operations and businesses permanently discontinued or disposed
of) for the Reference Period to (b) Consolidated Interest Expense of such person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Interest Expense would no longer be obligations
contributing to such person's Consolidated Interest Expense subsequent to the
Transaction Date) for the Reference Period; PROVIDED, that for purposes of
calculating Consolidated EBITDA and Consolidated Interest Expense for this
definition, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Interest
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period, and (iii) the Incurrence of any Indebtedness or issuance of
any Disqualified Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the application of
the proceeds therefrom to the extent used to Refinance or retire other
Indebtedness or Disqualified Capital Stock permitted by the Indenture) shall be
assumed to have occurred on the first day of such Reference Period and the
interest rate on any such Indebtedness or the dividend rate on any such
Disqualified Capital Stock which bears interest or accrues dividends at a
floating rate shall be computed on a pro forma basis as if the average rate in
effect from the beginning of the Reference Period to the Transaction Date had
been the applicable rate for the entire period, unless such person or any of its
Subsidiaries is party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) which has the effect of fixing the interest rate or dividend rate on the
date of computation, in which case such rate (whether higher or lower) shall be
used. If such person or any of its Subsidiaries directly or indirectly
guarantees Indebtedness or dividends or other distributions on Disqualified
Capital Stock of a third person, the foregoing definition shall give effect to
the Incurrence of such guaranteed Indebtedness or the issuance of any such
guaranteed Disqualified Capital Stock as if it had been Incurred or issued, as
the case may be, by such person or such Subsidiary.
"CONSOLIDATED INCOME TAX EXPENSE" means, with respect to any person for any
period, the provision for federal, state, local and foreign income taxes of such
person and its Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP.
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"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any
period, without duplication, (i) the sum of (A) the aggregate amount of cash and
non-cash interest expense (including capitalized interest but excluding
amortization of deferred financing costs) of such person and its Subsidiaries
for such period (including, without limitation, (v) any amortization of debt
discount, (w) net costs associated with Interest Swap and Hedging Obligations
(including any amortization of discounts), (x) the interest portion of any
deferred payment obligation, (y) all accrued interest and capitalized interest,
and (z) all commissions, discounts and other fees and charges owed with respect
to letters of credit, bankers' acceptances, Interest Swap and Hedging
Obligations or similar facilities) paid or accrued, or scheduled to be paid or
accrued, during such period; (B) the aggregate amount of cash and non-cash
dividends and other distributions paid or accrued, or scheduled to be paid or
accrued, during such period in respect of Disqualified Capital Stock of such
person and its Subsidiaries; (C) the portion of any rental obligation of such
person or its Subsidiaries for such period in respect of any Capitalized Lease
Obligation allocable to interest expense (based upon the rate of interest
implicit in such Capitalized Lease Obligations as reasonably determined by the
Subject Entity) in accordance with GAAP; and (D) to the extent that any
Indebtedness of any other person is guaranteed, or any dividends or
distributions on Disqualified Capital Stock of any other person are guaranteed,
by such person or any of its Subsidiaries, the aggregate amount of interest,
dividends and distributions paid or accrued or scheduled to be paid or accrued
by such other person during such period attributable to any such Indebtedness or
Disqualified Capital Stock, as applicable, all determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED LIFO CHARGES (CREDITS)" means, with respect to any person for
any period, the consolidated LIFO charges (credits) of such person and its
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
an amount equal to (A) the net income (or loss) of such person and its
Subsidiaries for such period (adjusted as provided in the next succeeding
sentence) minus (B) to the extent not deducted in the computation of the amount
of consolidated net income (loss) referred to in clause (A), the aggregate
amount of Permitted Payments paid or accrued, or scheduled to be paid or
accrued, by such person and its Subsidiaries during such period, all determined
on a consolidated basis in accordance with GAAP; provided that, solely for
purposes of clause (3)(a) and the proviso to clause (3)(d) of the first
paragraph set forth under "Certain Covenants-- Limitation on Restricted
Payments," Consolidated Net Income shall mean the net income (or loss) of such
person and its Subsidiaries for such period (adjusted as provided in the next
succeeding sentence), determined on a consolidated basis in accordance with
GAAP. The amount referred to in clause (A) of and in the proviso to the
preceding sentence shall be adjusted to exclude (to the extent included in
computing such net income (or loss) and without duplication): (a) all gains and
losses which are extraordinary (as determined in accordance with GAAP) or which
are unusual or non-recurring, (b) the net income or loss of any other person
(other than a Subsidiary of such person) in which such person or any of its
Subsidiaries has an interest, except that any such net income shall be included
only to the extent of the amount of any dividends or distributions actually paid
in cash to such person or a Subsidiary of such person during such period but in
any case not in excess of such person's or Subsidiary's, as the case may be, PRO
RATA share of such net income for such period, and any such net loss shall be
included only to the extent of such person's or Subsidiary's, as the case may
be, PRO RATA share of such net loss for such period, (c) the net income or loss
of any person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition, (d) the net income, if positive, of any
Subsidiary of such person to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary is not at the time
permitted, directly or indirectly, by the terms of its charter, bylaws,
partnership agreement or other organizational documents or any other agreement,
instrument, judgment, decree, order, law, rule or governmental regulation
applicable to such Subsidiary, (e) gains and losses in respect of any Asset
Sales or other sale or disposition of assets outside the ordinary course of
business or from the issuance or sale of any Capital Stock by such person or any
of its Subsidiaries, (f) any gain or income or losses, net of taxes,
attributable to refunds or credits in respect of any employee benefit plan, (g)
any non-cash compensation expense in
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connection with the issuance of any employee stock options, (h) the effects of
changes in accounting principles, and (i) all deferred financing costs written
off in connection with the early extinguishment of any Indebtedness Incurred by
the Subject Entity or any of its Subsidiaries in connection with the Hughes
Acquisition or the KUI Acquisition.
"CREDIT AGREEMENT" means the one or more credit agreements (including,
without limitation, the New Credit Agreement) entered into by and among the
Company and/or the Holding Company and/or any of their respective Subsidiaries
and certain financial institutions which provide for in the aggregate one or
more term loans, letter of credit facilities and/or revolving credit facilities,
including any related notes, guarantees, letters of credit, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, refinanced, replaced or otherwise modified from time to
time whether or not with the same agent, trustee, representative, lenders or
holders, and, subject to the next succeeding sentence, irrespective of any
changes in the terms and conditions thereof. Without limiting the generality of
the foregoing, the term "Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any such credit agreement not prohibited by the Indenture and
all refundings, refinancings and replacements of any such credit agreement not
prohibited by the Indenture, including any agreement (i) extending the maturity
of any Indebtedness Incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and issuers
include one or more of the Subject Entity and its Subsidiaries, (iii) increasing
the amount of Indebtedness Incurred thereunder or available to be borrowed
thereunder, provided that on the date such Indebtedness is Incurred it would not
be prohibited by the covenant described under "--Certain Covenants--Limitation
on Additional Indebtedness and Disqualified Capital Stock," or (iv) otherwise
altering the terms and conditions thereof in a manner not prohibited by the
terms of the Indenture.
"DESIGNATED SENIOR DEBT" means, with respect to the Company (i) all Senior
Debt of the Company under any Credit Agreement; and (ii) any other Senior Debt
of the Company which (a) at the time of determination exceeds $25,000,000 in
aggregate principal amount outstanding and (b) is specifically designated in the
instrument or agreement creating or evidencing such Senior Debt or pursuant to
which such Senior Debt was issued as "Designated Senior Debt." "Designated
Senior Debt" means, with respect to any Guarantor, (i) all Senior Debt of such
Guarantor under any Credit Agreement; and (ii) any other Senior Debt of such
Guarantor which (a) at the time of determination exceeds $25,000,000 in
aggregate principal amount outstanding and (b) is specifically designated in the
instrument or agreement creating or evidencing such Senior Debt or pursuant to
which such Senior Debt was issued as "Designated Senior Debt."
"DISQUALIFIED CAPITAL STOCK" means, (a) except as set forth in clauses (b)
and (c) of this paragraph, with respect to any person, Capital Stock of such
person (excluding warrants, rights and options) that, by its terms or by the
terms of any security into which it is then convertible, exercisable or
exchangeable, is or, upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Final Maturity Date, or is convertible into or
exchangeable for debt securities at any time on or prior to the Final Maturity
Date, (b) with respect to any Subsidiary of such person (excluding, with respect
to the Subject Entity, any of its Subsidiaries which is a Guarantor and, from
and after the Reorganization, the Company), any Capital Stock (excluding
warrants, rights and options) other than common stock with no preferences or
redemption or repayment provisions, and (c) with respect to any Guarantor and,
from and after the Reorganization, the Company, any of its Capital Stock
(excluding warrants, rights and options) that (1) by its terms or by the terms
of any security into which it is convertible, exercisable or exchangeable, is
or, upon the happening of an event or the passage of time or both would be,
required to be redeemed or repurchased (including at the option of the holder
thereof) by the Subject Entity or any of its Subsidiaries, in whole or in part,
on or prior to the Final Maturity Date, or is convertible into or exchangeable
for debt securities at any time on or prior to the Final Maturity Date, or (2)
provides for any increase in the dividend or distribution rate or other monetary
penalty, or provides for
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the holders thereof to be granted any additional rights, upon the failure to pay
dividends or distributions thereon (including, without limitation, the right to
appoint or elect one or more directors, trustees or similar persons).
"DOMESTIC SUBSIDIARY" means, with respect to any person, any Subsidiary of
such person other than a Foreign Subsidiary of such person.
"EQUITY OFFERING" means an underwritten public offering of common stock of,
prior to the Reorganization, the Company or, following the Reorganization, the
Parent, in each case pursuant to a registration statement filed with the
Commission.
"EVENT OF LOSS" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset, and (ii) any actual
condemnation, seizure or taking, by exercise of the power of eminent domain or
otherwise, of such property or asset, or confiscation or requisition of the use
of such property or asset.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor thereto, in each case including the rules and regulations of the
Commission thereunder.
"EXCLUDED PERSON" means (i) Zell/Chilmark Fund L.P., a Delaware limited
partnership ("Zell/ Chilmark"), and any person who, by virtue of their position
with the general partner, or with the persons that directly or indirectly
control the general partner, of Zell/Chilmark may be deemed the Beneficial Owner
of securities owned by Zell/Chilmark and (ii) from and after the date of the
Reorganization, the Holding Company, the Parent, any Subsidiary of the Holding
Company through which the Holding Company holds an interest in the Capital Stock
of the Company and any Subsidiary of the Parent through which Parent holds an
interest in the Capital Stock of the Company or the Holding Company.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company or a Subsidiary of
the Company (including, without limitation, Hughes and KUA) in existence on the
Issue Date, other than Indebtedness under the Old Credit Agreements, the Old
Security Agreements, any Credit Agreement, and any other Indebtedness of Hughes
or any of its Subsidiaries which is to be repaid in connection with the Hughes
Acquisition.
"FAIR MARKET VALUE" means, with respect to any assets or properties, the
amount at which such assets or properties would change hands between a willing
buyer and a willing seller, within a commercially reasonable time, each having
reasonable knowledge of the relevant facts, neither being under a compulsion to
sell or buy.
"FINAL MATURITY DATE" means March 15, 2007.
"FOREIGN SUBSIDIARY" means, with respect to any person, any Subsidiary of
such person which is incorporated or otherwise organized under the laws of any
jurisdiction other than the United States of America, any state thereof or the
District of Columbia and substantially all of whose consolidated assets are
located outside of the United States of America.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, as in effect on the Issue Date.
"GUARANTEE" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment or
reimbursement of amounts drawn down under letters of credit; provided that none
of the
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following shall constitute a "guarantee" for purposes of the Indenture: (A)
Hughes' guarantee of Santee's obligations under the Trademark License Agreement
between Kraft, Inc. and Santee, as in effect on the Issue Date, and any
amendments, renewals or modifications thereof so long as the obligations
guaranteed in any such amended, modified or renewed agreement do not include
indebtedness for borrowed money or Capitalized Lease Obligations or evidenced by
bonds, notes, debentures or similar instruments, (B) guarantees by the Subject
Entity or any of its Subsidiaries of Indebtedness of Santee, provided that the
aggregate principal amount of such Indebtedness outstanding at any time shall
not exceed $30 million and, to the extent that the aggregate principal amount of
such Indebtedness outstanding at any time after the 60th day following the Issue
Date exceeds $10 million, then the amount of such outstanding Indebtedness in
excess of $10 million shall be deemed an Investment in Santee but shall not
constitute Indebtedness, and (C) agreements to purchase milk or other products
from Santee. The terms "guarantee" (when used as a verb) and "guaranteed" have
meanings correlative to the foregoing.
"GUARANTOR FOREIGN SUBSIDIARY" means any Foreign Subsidiary of the Subject
Entity which is a Guarantor.
"GUARANTORS" means (i) the Initial Guarantors and (ii) any person which
becomes a Guarantor after the Issue Date in accordance with the provisions
described in the Indenture, until such time as, in the case of any Guarantor, a
successor replaces it in accordance with the provisions of the Indenture, in
which case the term Guarantor shall thereafter include such successor, but
excluding in each case any persons whose Guarantees have been released pursuant
to the terms of the Indenture and any Unrestricted Subsidiaries and
Non-Guarantor Foreign Subsidiaries of the Subject Entity.
"HOLDING COMPANY" means Quality Food Holdings, Inc., a Delaware corporation
until a successor replaces it as a Guarantor in accordance with the provisions
of the Indenture, and thereafter means such successor.
"HUGHES" means Hughes Markets, Inc., a California corporation, and its
successors.
"HUGHES ACQUISITION" means the Company's acquisition of Hughes pursuant to
the Hughes Merger Agreement.
"HUGHES MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of
November 20, 1996, as amended, among the Company, QHI Acquisition Corporation
and Hughes.
"INCUR" and "INCURRENCE" have the respective meanings set forth under
"--Certain Covenants-- Limitation on Additional Indebtedness and Disqualified
Capital Stock."
"INDEBTEDNESS" means, with respect to any person, without duplication, (a)
all liabilities and obligations, contingent or otherwise, of such person for
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such person or only to a portion thereof) or for the deferred purchase
price of property or services, excluding any trade payables incurred in the
ordinary course of business, but including, without limitation, all obligations,
contingent or otherwise, of such person in connection with any letters of
credit, banker's acceptances or other similar credit transactions, (b) all
liabilities and obligations of such person, contingent or otherwise, evidenced
by bonds, notes, debentures or other similar instruments, (c) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), but excluding trade
accounts payable arising in the ordinary course of business, (d) all Capitalized
Lease Obligations of such person, (e) all Indebtedness of other persons of the
types referred to in the preceding clauses of this sentence, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon any
property or assets owned by such person, even though such person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the Fair Market Value (as determined
in good faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) of such property or assets or the amount of
the obligation so
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secured), other than Indebtedness of Santee secured by the Liens on the Capital
Stock of Santee owned by the Subject Entity or any of its Subsidiaries, (f) all
Disqualified Capital Stock of such person valued at the greater of its voluntary
or involuntary maximum fixed repurchase price plus accrued dividends, (g) all
net payment obligations under or in respect of Interest Swap and Hedging
Obligations of such person, (h) all Indebtedness of others of the types referred
to in the preceding clauses of this sentence which is guaranteed by such person,
and (i) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (a) through (h)
above. For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value shall be determined in good faith by the
Board of Directors of the Company and evidenced by a resolution delivered to the
Trustee.
"INITIAL GUARANTORS" means (i) Hughes, (ii) KUA, and (iii) the Holding
Company.
"INITIAL PARENT" means Quality Food, Inc., a Delaware corporation.
"INITIAL UNRESTRICTED SUBSIDIARIES" means Second Story, Inc., a Washington
corporation, Univar San Bernardino, Inc., a California corporation, MM Foods,
Inc., a California corporation, and Hughes Realty, Inc., a California
corporation.
"INTEREST SWAP AND HEDGING OBLIGATION" means, with respect to any person,
any monetary obligation of such person pursuant to any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement, interest
rate exchange agreement, currency exchange agreement or any other agreement or
arrangement designed to protect against fluctuations in interest rates or
currency values, including, without limitation, any arrangement whereby,
directly or indirectly, such person is entitled to receive from time to time
periodic payments calculated by applying either a fixed or floating rate of
interest to a stated notional amount in exchange for periodic payments made by
such person calculated by applying a fixed or floating rate of interest to the
same notional amount.
"INVESTMENT" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
Capital Stock, bonds, notes, debentures or other securities, including any
options or warrants, of such other person or any agreement to make any such
acquisition; (b) the making by such person of any deposit with, or advance, loan
or other extension of credit to, such other person or any commitment to make any
such advance, loan or extension (but excluding accounts receivable or deposits
arising in the ordinary course of business); (c) the entering into by such
person of any guarantee of, or other credit support or contingent obligation
with respect to, Indebtedness or other liabilities of such other person; (d) the
making of any capital contribution by such person to such other person
(including by means of any transfer of cash or other property or any payment for
property or services for the account or use of such other person); (e) the
designation by the Board of Directors of the Subject Entity of any person to be
an Unrestricted Subsidiary of the Subject Entity; (f) the establishment or
acquisition by the Subject Entity of a Non-Guarantor Foreign Subsidiary; and (g)
a Subsidiary of the Subject Entity ceasing for any reason to be a Subsidiary of
the Subject Entity (other than as a result of its merger or consolidation with
or into the Subject Entity or any of its Domestic Subsidiaries or Guarantor
Foreign Subsidiaries in a transaction not prohibited by the Indenture or as a
result of its designation as an Unrestricted Subsidiary) but only if the Subject
Entity or any of its other Subsidiaries retains an equity interest in such
former Subsidiary. The Subject Entity shall be deemed to make an Investment in
an amount equal to the portion (proportionate to the Subject Entity's equity
interest in the relevant Subsidiary) of the Fair Market Value (as determined in
good faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) of any Subsidiary (or, if neither the
Subject Entity nor any of its Subsidiaries has theretofore made an Investment in
such Subsidiary, in an amount equal to the Fair Market Value (determined as
aforesaid) of the Investment being made) at the time that
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such Subsidiary is designated as an Unrestricted Subsidiary. The Subject Entity
shall be deemed to make an Investment in an amount equal to the Fair Market
Value (determined as aforesaid) of the Investment being made at the time the
Subject Entity acquires or establishes a Non-Guarantor Foreign Subsidiary. In
addition, the Indenture will provide that if any Subsidiary of the Subject
Entity shall cease for any reason to be a Subsidiary of the Subject Entity
(other than as a result of its merger or consolidation with or into the Subject
Entity or any of its Domestic Subsidiaries or Guarantor Foreign Subsidiaries in
a transaction not prohibited by the Indenture or as a result of its designation
as an Unrestricted Subsidiary), then the Subject Entity shall be deemed to make
an Investment in an amount equal to the portion (proportionate to the Subject
Entity's remaining equity interest in such former Subsidiary immediately after
it ceases to be a Subsidiary) of the Fair Market Value (as determined in good
faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) of such former Subsidiary at such time. Any
property transferred between an Unrestricted Subsidiary and the Subject Entity
or a Subsidiary of the Subject Entity, or between any Non-Guarantor Foreign
Subsidiary and the Subject Entity or a Guarantor Foreign Subsidiary or Domestic
Subsidiary of the Subject Entity, shall in each case be valued at its Fair
Market Value (determined as aforesaid) at the time of such transfer. The amount
of any such Investment shall be reduced by any liabilities or obligations of the
Subject Entity or any of its Subsidiaries to be assumed or discharged in
connection with such Investment by an entity other than the Subject Entity or
any of its Subsidiaries or Unrestricted Subsidiaries; provided that, in the case
of any Investment in a Non-Guarantor Foreign Subsidiary, such Investment shall
be reduced only to the extent of any liabilities or obligations of the Subject
Entity or any of its Guarantor Foreign Subsidiaries or Domestic Subsidiaries
which are so assumed or discharged.
"ISSUE DATE" means the date of first issuance of the Exchange Notes under
the Indenture.
"JUNIOR SECURITY" means securities of the Company or any Guarantor that are
equity securities or are subordinated in right of payment to all Senior Debt of
the Company or of such Guarantor, as the case may be, at least to the same
extent that the Exchange Notes or the Guarantees, as applicable, are
subordinated to the payment of all Senior Debt of the Company or such Guarantor,
as applicable, then outstanding.
"KUA" means KU Acquisition Corporation, a Washington corporation and its
successors.
"KUI" means Keith Uddenberg, Inc., a Washington corporation.
"KUI ACQUISITION" means the Company's acquisition of KUI pursuant to the KUI
Merger Agreement.
"KUI MERGER AGREEMENT" means the Agreement and Plan of Merger dated December
18, 1996, as amended, among the Company, KUA and KUI.
"LIEN" means any mortgage, lien, pledge, charge, security interest or other
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement and any lease deemed to constitute a security interest and any option
or other agreement to give a security interest).
"LIQUIDATED DAMAGES" shall have the meaning set forth in the Registration
Rights Agreement.
"MERGER SUBSIDIARY" shall have the meaning set forth under "Certain
Covenants--Reorganization as a Holding Company."
"NET CASH PROCEEDS" means the aggregate amount of Cash or Cash Equivalents
received after the Issue Date by the Subject Entity in the case of a sale of its
Qualified Capital Stock and by the Subject Entity or any of its Subsidiaries in
respect of an Asset Sale or an Event of Loss plus, in the case of an issuance of
Qualified Capital Stock of the Subject Entity upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Subject Entity that were issued for cash after the
Issue Date, the amount of cash originally received by the Subject Entity upon
the issuance of such securities (including any such options, warrants, rights
and convertible or
exchangeable debt) less, in each case, the sum of all out-of-pocket payments,
fees, commissions and expenses (including, without limitation, the fees and
expenses of legal counsel and investment banking fees
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and expenses) reasonably incurred in connection with such Asset Sale, Event of
Loss or sale of Qualified Capital Stock, as applicable, and, in the case of an
Asset Sale or Event of Loss only, less (i) the amount (estimated reasonably and
in good faith by the Subject Entity) of income, franchise, sales and other
applicable taxes required to be paid by the Subject Entity or any of its
Subsidiaries in connection with such Asset Sale or Event of Loss, as applicable,
(ii) the amounts of any repayments of Indebtedness of the Subject Entity or any
of its Subsidiaries secured, directly or indirectly, by Liens on the assets
which are the subject of such Asset Sale or Event of Loss, as applicable, or
Indebtedness of the Subject Entity or any of its Subsidiaries associated with
such assets which is due by reason of such Asset Sale or Event of Loss, as
applicable, (i.e., such disposition is permitted by the terms of the instruments
evidencing or applicable to such Indebtedness, or by the terms of a consent
granted thereunder, on the condition that the proceeds of such disposition (or
portion thereof) be applied to such Indebtedness), provided that (A) the
repayment of such Indebtedness is permitted by the Indenture, and (B) to the
extent that any such Indebtedness so repaid is Senior Debt, the amount of such
repayment shall permanently reduce the amount of such Senior Debt outstanding
(and, in the case of Senior Debt outstanding under a revolving credit facility
or similar arrangement that makes credit available, the commitment thereunder is
also permanently reduced by such amount); (iii) all amounts deemed appropriate
by the Subject Entity (as evidenced by an officers' certificate of the Subject
Entity delivered to the Trustee) to be provided as a reserve, in accordance with
GAAP, against any liabilities associated with such assets which are the subject
of such Asset Sale or Event of Loss, as applicable; and (iv) with respect to
Asset Sales or Event of Loss by Subsidiaries of the Subject Entity, the portion
of such cash payments attributable to persons holding a minority interest in
such Subsidiary.
"NEW CREDIT AGREEMENT" means the Amended and Restated Credit Agreement dated
as of March 14, 1997 among the Company, the Holding Company, the Initial Parent,
the various financial institutions party thereto from time to time, Bank of
America National Trust and Savings Association, as administrative agent and
paying agent, and The Chase Manhattan Bank, as administrative agent.
"NON-CASH NET PROCEEDS" means the aggregate Fair Market Value (as determined
in good faith by the Board of Directors of the Subject Entity and evidenced by a
resolution delivered to the Trustee) of property (other than Cash or Cash
Equivalents) received after the Issue Date by the Subject Entity from the
issuance and sale of its Qualified Capital Stock plus, in the case of an
issuance of Qualified Capital Stock of the Subject Entity upon any exercise,
exchange or conversion of securities (including options, warrants, rights and
convertible or exchangeable debt) of the Subject Entity that were issued for
property (other than Cash or Cash Equivalents) after the Issue Date, the
aggregate Fair Market Value (determined as aforesaid) of the property (other
than Cash and Cash Equivalents) originally received by the Subject Entity upon
the issuance of such securities (including any such options, warrants, rights
and convertible or exchangeable debt) less, in each case, the sum of all
out-of-pocket payments, fees, commissions and expenses (including, without
limitation, the fees and expenses of legal counsel and investment banking fees
and expenses) reasonably incurred in connection with the sale of such Qualified
Capital Stock.
"NON-GUARANTOR FOREIGN SUBSIDIARY" means any Foreign Subsidiary of the
Subject Entity which is not a Guarantor.
"OLD CREDIT AGREEMENTS" means the Credit Agreement dated as of March 15,
1995 among the Company, Bank of America National Trust and Savings Association,
as Agent, Seattle First National Bank, as Swingline Lender, Bank of America
Illinois, as Issuing Lender, and the other financial institutions party thereto
and the Loan Agreement dated as of October 31, 1995 among Hughes and Union Bank,
in each case including any related notes and guarantees executed in connection
therewith.
"OLD SECURITY AGREEMENTS" means any security agreement, trademark security
agreement, pledge agreement, mortgage, deed of trust or other similar instrument
or agreement entered into by the Company or Hughes or any of their respective
Subsidiaries in connection with or pursuant to any of the Old Credit Agreements.
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"PARENT" means, at any date from and after the date of the Reorganization,
the person which, directly or through one or more of its Subsidiaries, owns at
least a majority of the outstanding Voting Stock of the Holding Company on such
date and is the ultimate parent of the Holding Company on such date.
"PARI PASSU INDEBTEDNESS" means Indebtedness of the Company or any Guarantor
which ranks PARI PASSU in right of payment with the Exchange Notes or with the
Guarantee of such Guarantor, as the case may be.
"PERMITTED INDEBTEDNESS" means, without duplication:
(a) Indebtedness evidenced by the Exchange Notes or the Guarantees or
arising under the Indenture;
(b) Indebtedness of the Subject Entity or any of its Subsidiaries under the
Credit Agreements up to an aggregate principal amount outstanding at any time
not to exceed (i) $600 million minus (ii) the aggregate principal amount of any
such Indebtedness (x) repaid with Net Cash Proceeds from any Asset Sale or Event
of Loss or by application of amounts referred to in clause (ii)(B) of the
definition of "Net Cash Proceeds" or (y) assumed by a transferee in any Asset
Sale;
(c) Indebtedness owed by the Subject Entity to any Subsidiary of the Subject
Entity and Indebtedness owed by any Subsidiary of the Subject Entity to the
Subject Entity or any other Subsidiary of the Subject Entity; provided that any
such Indebtedness owed by the Company shall be unsecured and subordinated in
right of payment to the Company's obligations pursuant to the Exchange Notes;
and provided, further, that any such Indebtedness owed by any Non-Guarantor
Foreign Subsidiary of the Subject Entity shall be permitted under the provisions
described under "Certain Covenants--Limitation on Restricted Payments" and shall
not be otherwise prohibited by the Indenture;
(d) Indebtedness Incurred by the Subject Entity or any of its Subsidiaries
in connection with the purchase, construction or improvement of property (real
or personal) or equipment or other capital expenditures in the ordinary course
of business (including for the purchase of assets or stock of any retail grocery
store or business, whether by merger of otherwise) or consisting of Capitalized
Lease Obligations, provided that (i) at the time of the Incurrence thereof, such
Indebtedness, together with any other Indebtedness Incurred during the then most
recently completed four fiscal quarter period in reliance upon this clause (d),
does not exceed, in the aggregate, 3% of net sales of the Subject Entity and its
Subsidiaries during such four fiscal quarter period on a consolidated basis in
accordance with GAAP (calculated on a pro forma basis if the date of Incurrence
is prior to the end of the fourth fiscal quarter following the Hughes
Acquisition), (ii) at the time of Incurrence thereof, such Indebtedness,
together with all then outstanding Indebtedness Incurred in reliance upon this
clause (d), does not exceed, in the aggregate, 3% of the net sales of the
Subject Entity and its Subsidiaries during the most recently completed twelve
fiscal quarter period on a consolidated basis in accordance with GAAP
(calculated on a pro forma basis if the date of Incurrence is prior to the end
of the twelfth fiscal quarter following the Hughes Acquisition), and (iii) such
Indebtedness is Incurred concurrently with, or within 180 days of, such
acquisition or purchase or the completion of such construction or improvement or
the inception of such lease, as the case may be, and, if secured, is secured
only by the property so purchased, constructed, improved or leased (and proceeds
and products therefrom);
(e) Indebtedness arising from tender, bid, performance or government
contract bonds, surety bonds or completion guarantees or other obligations of
like nature, or warranty or contractual service obligations, in any case
Incurred by the Subject Entity any of its Subsidiaries in the ordinary course of
business;
(f) Interest Swap and Hedging Obligations that are Incurred by the Subject
Entity or any of its Subsidiaries for the purpose of fixing or hedging interest
rates or currency rates with respect to any fixed or floating rate Indebtedness
that is permitted by the Indenture to be outstanding or any receivable or
liability the payment of which is determined by reference to a foreign currency;
PROVIDED, that the notional amount of any such Interest Swap and Hedging
Obligation does not exceed the principal amount of such Indebtedness or the
amount of such receivable or liability to which such Interest Swap and Hedging
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Obligation relates, as applicable, at the time such Indebtedness, receivable or
liability is first incurred or, if later, the time such Interest Swap and
Hedging Obligation is first entered into (so long as any subsequent reduction in
the amount of such Indebtedness, receivable or liability without a corresponding
reduction in such notional amount is for a valid business purpose and not for
speculation and such notional amount at no time exceeds the principal amount of
such Indebtedness or the amount of such receivable or liability, as applicable,
by more than 20% or, in the event that such notional amount shall at any time
exceed the principal amount of such Indebtedness or the amount of such
receivable or liability by more than 20%, such Interest Swap and Hedging
Obligation is promptly terminated); and provided, further, that notwithstanding
the preceding proviso, the Subject Entity or any of its Subsidiaries may enter
into an Interest Swap and Hedging Obligation which would otherwise be permitted
under this clause (f) up to 90 days in advance of the date on which the related
Indebtedness, receivable or other liability is expected to be incurred so long
as (x) such Interest Swap and Hedging Obligation is entered into for a valid
business purpose and not for speculation and the notional amount thereof does
not exceed the amount of the Indebtedness, receivable or liability, as
applicable, which the Subject Entity reasonably anticipates will be incurred,
(y) such Indebtedness, receivable or liability, as applicable, is incurred
within such 90-day period or, if not incurred within such period, such Interest
Swap and Hedging Obligation is promptly terminated, and (z) the notional amount
of such Interest Swap and Hedging Obligation does not exceed the principal
amount of such Indebtedness or the amount of such receivable or liability, as
applicable, when such Indebtedness, receivable or liability is first incurred or
at any time thereafter by more than 20% or, in the event that such notional
amount shall at any time exceed the principal amount of such Indebtedness or the
amount of such receivable or liability by more than 20%, such Interest Swap and
Hedging Obligation is promptly terminated;
(g) Indebtedness of the Subject Entity or any of its Subsidiaries
represented by letters of credit for the account of the Subject Entity or such
Subsidiary in order to provide security for workers' compensation claims,
payment obligations in respect of self-insurance arrangements or similar
arrangements entered into in the ordinary course of business, or other
Indebtedness (so long as such Indebtedness is not for borrowed money or
Capitalized Lease Obligations or evidenced by bonds, notes, debentures or
similar instruments) with respect to reimbursement type obligations regarding
workers' compensation claims in the ordinary course of business or represented
by letters of credit for the account of the Subject Entity or any of its
Subsidiaries in connection with the purchase of goods or services in the
ordinary course of business;
(h) Existing Indebtedness of the Subject Entity or any of its Subsidiaries
(after giving effect to the Hughes Acquisition);
(i) other Indebtedness of the Subject Entity or any of its Subsidiaries in
an aggregate principal amount not to exceed $25 million at any time outstanding;
(j) guarantees incurred in the ordinary course of business by the Subject
Entity or any Subsidiary of the Subject Entity of Indebtedness of any other
person in an aggregate principal amount not to exceed $15 million outstanding at
any time;
(k) Indebtedness arising from agreements of the Subject Entity or any of its
Subsidiaries providing for indemnification, adjustment of purchase price or
similar obligations, in each case Incurred in connection with the disposition of
any business, assets or Subsidiary of the Subject Entity, other than guarantees
of Indebtedness Incurred or assumed by any person acquiring all or any portion
of such business, assets or Subsidiary for the purpose of financing such
acquisition; provided that the maximum aggregate liability of all such
Indebtedness shall at no time exceed the gross proceeds actually received by the
Subject Entity and its Subsidiaries in connection with such disposition;
(l) guarantees by the Subject Entity or any of its Subsidiaries of
Indebtedness or other liabilities of Santee to the extent that such guarantees
are permitted under clause (viii) or (ix) of the definition of Restricted
Investment; and
(m) Indebtedness or Disqualified Capital Stock of the Subject Entity or any
of its Subsidiaries ("Refinancing Indebtedness") (1) issued in exchange for, or
the proceeds from the issuance and sale of
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which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part or (2)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((1) and (2) above are, collectively, a "Refinancing" and the term
"Refinance" shall have a correlative meaning) any Indebtedness or Disqualified
Capital Stock of the Subject Entity or any of its Subsidiaries which was
Incurred in compliance with the Debt Incurrence Ratio described in the second
paragraph under "--Certain Covenants--Limitation on Additional Indebtedness and
Disqualified Capital Stock" or pursuant to above clause (a) or (h) (provided
that the amount of such Indebtedness so Refinanced is permanently reduced and,
if any such Indebtedness so Refinanced was Incurred under a revolving credit
facility or similar arrangement, the commitment thereunder is also permanently
reduced by an amount equal to the amount of such Indebtedness so Refinanced) or
this clause (m); provided, however, that (u) the aggregate principal amount of
Indebtedness or the aggregate liquidation preference of the Disqualified Capital
Stock, as the case may be, Incurred pursuant to this clause (m) (or, if such
Indebtedness provides for an amount less than the principal amount thereof to be
due and payable upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness) shall not exceed the aggregate
principal amount of the Indebtedness or the aggregate liquidation preference of
the Disqualified Capital Stock, as the case may be, so Refinanced (or, if the
Indebtedness so Refinanced provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the maturity
thereof, the amount that would be payable upon such an acceleration on the date
of such Refinancing), plus the amount of any premium required to be paid in
connection with such Refinancing pursuant to the terms of such Indebtedness or
Disqualified Capital Stock, as applicable, or the amount of any premium
reasonably determined by the Board of Directors of the Subject Entity as
necessary to accomplish such Refinancing by means of a tender offer or privately
negotiated purchase plus the amount of reasonable and customary out-of-pocket
fees and expenses payable in connection therewith; (v) Refinancing Indebtedness
Incurred by the Subject Entity or any of its Guarantor Foreign Subsidiaries or
Domestic Subsidiaries shall not be used to Refinance outstanding Indebtedness or
Disqualified Capital Stock of a Non-Guarantor Foreign Subsidiary of the Subject
Entity, unless such Incurrence complies with the provisions described under
"Certain Covenants-- Limitation on Restricted Payments;" (w) Refinancing
Indebtedness shall not have an Average Life shorter than the Average Life of the
Indebtedness or Disqualified Capital Stock, as applicable, to be Refinanced at
the time of such Refinancing (unless the Average Life of the Indebtedness or
Disqualified Capital Stock to be Refinanced is, at the time of such Refinancing,
longer than the Average Life of the Exchange Notes at such time, in which case
such Refinancing Indebtedness must have an Average Life longer than the Average
Life of the Exchange Notes at such time), and Refinancing Indebtedness shall
have a final maturity date which is on or after the earlier of (1) two Business
Days after the Final Maturity Date and (2) the final maturity date of the
Indebtedness or Disqualified Capital Stock, as applicable, to be Refinanced; (x)
to the extent that the Indebtedness or Disqualified Capital Stock to be so
Refinanced requires the scheduled payment of installments of principal or
liquidation amount or scheduled sinking fund payments on or prior to the Final
Maturity Date, the Refinancing Indebtedness may also require scheduled payments
of installments of principal or liquidation amount or sinking fund payments, as
applicable, on or prior to the Final Maturity Date so long as the dates of any
such scheduled payments falling on any date which is both (1) on or prior to the
final maturity date of the Indebtedness or Disqualified Capital Stock, as
applicable, to be Refinanced and (2) on or prior to the Final Maturity Date are
no earlier than, and the amounts of such payments are no greater than, was the
case with respect to the Indebtedness to be so Refinanced; (y) in the case of
Refinancing Indebtedness Incurred to Refinance Subordinated Indebtedness or
Disqualified Capital Stock, such Refinancing Indebtedness is expressly
subordinated, by the terms of the instrument or agreement evidencing such
Refinancing Indebtedness or pursuant to which it is issued, in right of payment
to the Exchange Notes or the Guarantees, as applicable, at least to the same
extent as the Indebtedness or Disqualified Stock to be so Refinanced; and (z) if
the Indebtedness to be Refinanced is Pari Passu Indebtedness, such Refinancing
Indebtedness constitutes Pari Passu Indebtedness or Subordinated Indebtedness.
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"PERMITTED LIEN" means any of the following:
(a) Liens existing on the Issue Date;
(b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in good
faith and by appropriate proceedings, if adequate reserves with respect thereto
are maintained on the books of the Subject Entity and its Subsidiaries in
accordance with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, materialmen,
suppliers, landlords, repairmen or other like Liens arising by operation of law
in the ordinary course of business provided that the underlying obligations are
not overdue or such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained on the
books of the Subject Entity and its Subsidiaries in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, zoning and similar restrictions and other
similar encumbrances or title defects which do not materially interfere with the
ordinary conduct of the business of the Subject Entity and its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, but only
to the extent, for an amount and for a period not resulting in an Event of
Default;
(g) pledges or deposits made and Liens incurred in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security legislation;
(h) any Liens securing the Exchange Notes or the Guarantees or created by
the Indenture;
(i) Liens on any assets or property of any person existing at the time such
person becomes a Subsidiary of the Subject Entity or is merged into or
consolidated with the Subject Entity or another Subsidiary of the Subject
Entity, or Liens on assets or property existing at the time of acquisition
thereof by the Subject Entity or a Subsidiary of the Subject Entity, provided in
each case that such Liens were in existence prior to the date of such
acquisition, merger or consolidation, were not incurred in anticipation thereof,
and do not extend to any other assets or property;
(j) Liens securing Indebtedness permitted to be Incurred by the Subject
Entity or any of its Subsidiaries under clause (d) of the definition of
Permitted Indebtedness or securing other Purchase Money Indebtedness of the
Subject Entity or any of its Subsidiaries which is not prohibited by the
Indenture, provided such Liens (i) relate to (and only to) the property and
assets (and proceeds and products thereof) which were acquired (including
property acquired under a capitalized lease), improved or constructed with such
Indebtedness, and (ii) the Liens securing such Indebtedness shall be created not
later than 180 days after such acquisition or the completion of such improvement
or construction or the inception of any such capitalized lease;
(k) Liens securing Refinancing Indebtedness Incurred to Refinance any
Indebtedness that was previously so secured in a manner no more adverse to the
Holders of the Exchange Notes and the Guarantees than the terms of the Liens
securing such refinanced Indebtedness and which Liens do not extend to any
additional property or assets;
(l) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of nondelinquent customs duties in connection with the
importation of goods;
(m) leases or subleases granted in the ordinary course of business to others
which do not materially interfere with the business of the Subject Entity and
its Subsidiaries;
(n) Liens encumbering customary initial deposits and margin deposits, and
other Liens incurred in the ordinary course of business that are within the
general parameters customary in the industry, in each
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case securing Senior Debt of the Company and its Subsidiaries under Interest
Swap and Hedging Obligations and under forward contracts, option futures
contracts, futures options or similar agreements or arrangements designed to
protect the Subject Entity or any of its Subsidiaries from fluctuations in the
price of commodities;
(o) Liens encumbering deposits made in the ordinary course of business to
secure nondelinquent obligations arising from statutory, regulatory, contractual
or warranty requirements of the Subject Entity or any of its Subsidiaries for
which a reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made;
(p) Liens arising out of consignment or similar arrangements for the sale of
goods entered into by the Subject Entity or any of its Subsidiaries in the
ordinary course of business;
(q) any interest or title of a lessor in the property subject to any lease,
whether characterized as a capitalized or operating lease, other than any such
interest or title resulting from or arising out of a default by the Subject
Entity or any of its Subsidiaries of its obligations under such lease;
(r) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are otherwise
permitted under the Indenture and under which the Subject Entity or any of its
Subsidiaries is lessee;
(s) Liens securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to such letters of
credit and the products and proceeds thereof and which letters of credit are
issued in connection with the purchase of goods or services in the ordinary
course of business and not in respect of Indebtedness for borrowed money or
Capitalized Lease Obligations or represented by bonds, notes, debentures or
similar instruments; and
(t) Liens on the Capital Stock or other assets of Santee.
"PERMITTED PAYMENTS" means payments made to Parent after the date of the
Reorganization in an aggregate amount not to exceed the sum of (without
duplication):
(i) the Pro Rata Portion of customary salary, bonus and other benefits
payable to officers and employees of Parent, except any such officers and
employees whose responsibilities relate primarily, in the good faith
judgment of the Subject Entity's Board of Directors, to Subsidiaries and
Affiliates of the Parent other than the Subject Entity and its Subsidiaries
and Unrestricted Subsidiaries;
(ii) the Pro Rata Portion of customary fees and expenses payable to
members of the Parent's Board of Directors;
(iii) an amount equal to the sum (without duplication) of (A) 100% of the
Parent's general corporate overhead expense (collectively "Parent Expenses")
directly attributable, in the good faith judgment of the Subject Entity's
Board of Directors, to the Subject Entity and its Subsidiaries and
Unrestricted Subsidiaries plus (B) the Pro Rata Portion of those Parent
Expenses which are not directly attributable, in the good faith judgment of
the Subject Entity's Board of Directors, to either the Subject Entity or any
of its Subsidiaries or Unrestricted Subsidiaries or to any other
Subsidiaries or Affiliates of the Parent;
(iv) the amount of foreign, federal, state or local tax liabilities
payable by Parent, not to exceed the amount of any tax liabilities that
would otherwise be payable by the Subject Entity and its Subsidiaries and
Unrestricted Subsidiaries to the appropriate taxing authorities if they
filed a separate consolidated tax return and then only to the extent that
(A) the Parent has an obligation to pay such tax liabilities relating to the
Subject Entity and its Subsidiaries and Unrestricted Subsidiaries and (B)
such tax liabilities are not otherwise paid by Subject Entity or its
Subsidiaries or Unrestricted Subsidiaries (provided that if any such payment
shall not be used by the Parent to pay such tax liabilities within 45 days
of the Parent's receipt of such payment, then the Subject Entity shall cause
such payment to be refunded to the Subject Entity);
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(v) an amount not to exceed the sum (without duplication) of (A) amounts
payable by Parent to repurchase Parent's common stock, stock options, stock
appreciation rights or similar rights under employee benefit plans held by
departing, retiring or deceased directors, officers or employees of the
Subject Entity or any Subsidiary or Unrestricted Subsidiary of the Subject
Entity and (B) the Pro Rata Portion of amounts payable by Parent after the
date of the Reorganization to repurchase Parent's common stock, stock
options, stock appreciation rights or similar rights under employee benefit
plans held by departing, retiring or deceased officers or employees of
Parent whose responsibilities did not relate primarily, in the good faith
judgment of the Subject Entity's Board of Directors, to Subsidiaries and
Affiliates of Parent other than the Subject Entity and its Subsidiaries and
Unrestricted Subsidiaries or held by departing or deceased directors of
Parent (provided that the aggregate amount paid by Subject Entity pursuant
to this clause (v) shall not exceed $1 million in any fiscal year); and
(vi) cash payments in an aggregate amount not to exceed $500,000 in any
fiscal year, with any portion of such amount which is not expended in any
fiscal year being carried forward;
provided that there shall be excluded from the expenses and other amounts
payable by Parent referred to above (other than amounts referred to in clauses
(iv) and (v)(A) above) all expenses and other amounts which relate to periods
prior to the date of the Reorganization.
"PREFERRED STOCK" means, with respect to any person, any Capital Stock of
such person of any class or series (however designated) that ranks prior, as to
payment of dividends or distributions or as to distributions upon voluntary of
involuntary liquidation, dissolution or winding up, to shares of Capital Stock
of any other class or series of such person. For purposes of this definition,
the term "Capital Stock" shall not include rights, warrants or options.
"PRO RATA PORTION" shall mean, at any date, 100% or, if the consolidated
revenues of the Parent and its consolidated subsidiaries shall, for the then
most recent period (the "Subject Period") of four full fiscal quarters ended
prior to the date of determination, exceed the consolidated revenues of the
Subject Entity and its consolidated subsidiaries for the Subject Period, then
the Pro Rata Portion shall be equal to a fraction (i) the numerator of which is
the consolidated revenues of the Subject Entity and its consolidated
subsidiaries for the Subject Period and (ii) the denominator of which is the
consolidated revenues of the Parent and its consolidated subsidiaries for the
Subject Period, provided that if the date of such determination is less than
four full fiscal quarters after the date of the Reorganization, then the term
Subject Period shall instead mean the period from and including the date of the
Reorganization through and including the last day of the then most recently
ended period for which the internal financial statements necessary to make such
calculation are available. All computations of consolidated revenues pursuant to
this definition shall be made in accordance with GAAP.
"PURCHASE MONEY INDEBTEDNESS" means, with respect to any person, any
Indebtedness of such person to any seller or other person Incurred to finance
the acquisition, improvement or construction (including in the case of a
Capitalized Lease Obligation, the lease) of any business or real or personal
property (or, in each case, any interest therein) acquired, improved or
constructed after the Issue Date which, in the reasonable judgment of the Board
of Directors of such person, is related to a Related Business and which is
Incurred concurrently with, or within 180 days of, such acquisition or the
completion of such improvement or construction and, if secured, is secured only
by the business or property so acquired, improved or constructed (and the
proceeds and products therefrom).
"QUALIFIED CAPITAL STOCK" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means (i) any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock of the Subject Entity or
Indebtedness of the Subject Entity with the Net Cash Proceeds received by the
Subject Entity from the substantially concurrent sale of its Qualified Capital
Stock or a substantially concurrent capital contribution to the Subject Entity,
or (ii) any exchange of
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Qualified Capital Stock of the Subject Entity for any outstanding Capital Stock
of the Subject Entity or outstanding Indebtedness of the Subject Entity.
"REFERENCE PERIOD" with regard to any person means the most recent period of
four full fiscal quarters (or such lesser period during which such person has
been in existence) ended immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Exchange Notes or the
Indenture.
"REFINANCE" and "REFINANCING INDEBTEDNESS" have the meanings set forth in
the definition of Permitted Indebtedness.
"RELATED BUSINESS" means the business conducted by the Subject Entity and
its Subsidiaries as of the Issue Date and any and all businesses that in the
good faith judgment of the Board of Directors of the Subject Entity are related
businesses, including related extensions thereof.
"REORGANIZATION" has the meanings set forth under "--Certain
Covenants--Reorganization as a Holding Company."
"RESTRICTED INVESTMENT" means any Investment other than (i) Investments in
the Company or any Guarantor (including any person that pursuant to such
Investment becomes a Guarantor) or any person that is merged or consolidated
with or into, or transfers or conveys all or substantially all of its assets to,
the Company or any Guarantor at the time such Investment is made; (ii)
Investments in Cash Equivalents; (iii) Investments in deposits with respect to
leases or utilities provided to third parties in the ordinary course of
business; (iv) investments in the Exchange Notes; (v) Investments in Interest
Swap and Hedging Obligations entered into by the Subject Entity or any of its
Subsidiaries for bona fide business purposes and not for speculation and which
Interest Swap and Hedging Obligations are not otherwise prohibited by the
Indenture; (vi) loans or advances to officers, employees or consultants of the
Subject Entity and its Subsidiaries for bona fide business purposes of the
Subject Entity and its Subsidiaries (including travel and moving expenses) not
in excess of $5 million in the aggregate at any one time outstanding; (vii)
Investments in evidences of Indebtedness, securities or other property received
from another person by the Subject Entity or any of its Subsidiaries in
connection with any bankruptcy proceeding of such person or by reason of a
composition or readjustment of debt or a reorganization of such person or as a
result of foreclosure or enforcement of any Lien on the assets or property of
such person held by the Subject Entity or any of its Subsidiaries, or taken in
settlement of or other resolution of claims or disputes with such person, and,
in each case, extensions, modifications and renewals thereof (but not increases
thereof, other than as a result of the accrual or accretion of interest or
original issue discount pursuant to the terms of such Investments); (viii)
Investments in Santee made prior to the second anniversary of the Issue Date in
an aggregate amount not to exceed $50 million (it being understood that amounts
temporarily advanced to Santee as a prepayment for the purchase of milk or other
products from Santee shall not be deemed an Investment for purposes of this
clause or otherwise, except to the extent of any such advances which (A) are
outstanding in an aggregate amount in excess of $10 million on any date from the
Issue Date through the 90th day after the Issue Date or (B) are outstanding on
any date after such 90th day), provided that the proceeds of such Investments
are used to pay the costs of constructing and equipping Santee's new dairy which
was under construction on the Issue Date and costs reasonably related thereto;
(ix) Investments in Santee in an aggregate amount at any time outstanding not to
exceed $30 million, provided that, to the extent that the aggregate amount of
outstanding Investments made pursuant to clause (viii) above and this clause
(ix) shall at any time exceed $40 million, then the amount of such Investments
in excess of $40 million will be deducted in the calculation of the aggregate
amount of Restricted Payments available to be made referred to in clause (3) of
the first paragraph under "Certain Covenants--Limitation on Restricted
Payments;" (x) Investments in Unrestricted Subsidiaries in an aggregate amount
not to exceed $15 million at any one time outstanding; (xi) additional
Investments in Related Businesses in an aggregate amount not to exceed $25
million at any time outstanding; (xii) Investments of the Company and its
Subsidiaries existing as of the Issue Date and any extension,
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modification or renewal of such Investments (but not increases thereof, other
than as a result of the accrual or accretion of interest or original issue
discount pursuant to the terms of such Investments); (xiii) Investments in
persons (other than Affiliates of the Subject Entity) received as consideration
from Asset Sales to the extent not prohibited by the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and
extensions, modifications and renewals thereof (but not increases thereof, other
than as a result of the accrual or accretion of interest or original issue
discount pursuant to the terms of such Investments); and (xiv) Investments made
by Non-Guarantor Foreign Subsidiaries in other Non-Guarantor Foreign
Subsidiaries. If any Investment made pursuant to clause (viii) or (ix) of the
preceding sentence is, pursuant to the proviso to such clause (ix), deducted in
the calculation of the aggregate amount of Restricted Payments available to be
made referred to in clause (3) of the first paragraph under "Certain
Covenants--Limitation on Restricted Payments," there shall be added back to the
aggregate amount of Restricted Payments available to be made referred to in such
clause (3) any net reduction in such Investment resulting from repurchases or
redemptions of such Investment by Santee, proceeds realized upon the sale of
such Investment to any person (other than to the Subject Entity or any of its
Subsidiaries), and repayments of loans or advances or other transfers of
property (valued at Fair Market Value as determined in good faith by the Board
of Directors of the Subject Entity and evidenced by a resolution delivered to
the Trustee) by Santee to the Subject Entity or any of its Subsidiaries
(provided that such net reduction shall occur only to the extent that the monies
or property giving rise to such reduction are received by the Subject Entity or
a Domestic Subsidiary or Guarantor Foreign Subsidiary of the Subject Entity) or
the termination of guarantees of, or other credit support with respect to, any
Indebtedness or other liabilities of Santee provided by the Subject Entity or
any of its Domestic Subsidiaries or Guarantor Foreign Subsidiaries, not to
exceed the amount of Investments previously made by the Subject Entity and its
Subsidiaries in Santee pursuant to such clause (viii) or (ix), as applicable,
which were, pursuant to the proviso to such clause (ix), applied to reduce the
aggregate amount of Restricted Payments available to be made pursuant to such
clause (3) (provided, however, that no amount added back pursuant to this
sentence shall be included in Consolidated Net Income for purposes of clause
(3)(a), or shall be added back pursuant to clause (3)(d), of the first paragraph
set forth under "Certain Covenants--Limitation on Restricted Payments").
"RESTRICTED PAYMENT" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock of
such person, (b) any payment on account of the purchase, redemption or other
acquisition or retirement for value of Capital Stock of such person, (c) any
purchase, redemption, or other acquisition or retirement for value of, any
payment in respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled sinking
fund payment, as the case may be, of such Subordinated Indebtedness and (d) any
Restricted Investment by such person; provided, however, that the term
"Restricted Payment" does not include (i) any dividend, distribution or other
payment on or with respect to Capital Stock of the Subject Entity to the extent
payable in shares of Qualified Capital Stock of the Subject Entity; (ii) any
dividend, distribution or other payment (A) to the Subject Entity, (B) to any
Domestic Subsidiary or Guarantor Foreign Subsidiary of the Subject Entity by the
Subject Entity or any of its other Subsidiaries, or (C) to any Non-Guarantor
Foreign Subsidiary of the Subject Entity by any of its other Non-Guarantor
Foreign Subsidiaries; or (iii) the declaration or payment of dividends or
distributions by any Subsidiary of the Subject Entity on any class or series of
its Capital Stock (other than rights, warrants or options), provided such
dividends or distributions are made on a PRO RATA basis (and in like form) to
all holders of Capital Stock of such class or series and except to the extent of
any such dividends or distributions paid by any Domestic Subsidiary or Guarantor
Foreign Subsidiary of the Subject Entity to any Non-Guarantor Foreign Subsidiary
of the Subject Entity.
"SALE AND LEASEBACK TRANSACTION" means, with respect to any person, any
transaction by which such person, directly or indirectly, becomes liable as a
lessee or as a guarantor or other surety with respect to any lease of any
property (whether owned at the date of the Indenture or thereafter acquired)
that such
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person has sold or transferred or is to sell or transfer to any other person in
a substantially concurrent transaction with such assumption of liability.
"SANTEE" means Santee Dairies, Inc., a California corporation, and its
successors.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor thereto, in each case including the rules and regulations of the
Commission thereunder.
"SENIOR BANK REPRESENTATIVE" means, at any time and with respect to any
Credit Agreement, the then-acting agent or agents under such Credit Agreement,
which, in the case of the New Credit Agreement, shall initially be Bank of
America National Trust and Savings Association and The Chase Manhattan Bank.
"SENIOR DEBT" means, with respect to the Company or any Guarantor, (i) any
Indebtedness and other obligations of the Company or such Guarantor, as the case
may be, under any Credit Agreement (including, without limitation, obligations
to pay principal, premium, if any, interest, penalties, fees (including
commitment fees, facility fees and letter of credit fees and commissions),
expenses, indemnities, funding losses and increased costs (including capital
adequacy charges)) and (ii) any other Indebtedness of the Company or such
Guarantor, as the case may be (including, without limitation, obligations to pay
principal, premium, if any, and interest), in each case referred to in clauses
(i) and (ii) of this sentence whether outstanding on the Issue Date or
thereafter created, Incurred or assumed and including, in the case of Designated
Senior Debt, interest accruing after the commencement of any bankruptcy case or
proceeding at the rate specified in the applicable Designated Senior Debt
whether or not such interest is allowed as a claim in such case or proceeding,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Exchange Notes or the Guarantee of such Guarantor, as applicable, or that such
Indebtedness shall rank PARI PASSU with or subordinate in right of payment to
the Exchange Notes or such Guarantee, as applicable, or that such Indebtedness
shall rank subordinate in right of payment to any other Indebtedness of the
Company or such Guarantor, as applicable. Notwithstanding the foregoing, "Senior
Debt" shall not include (a) Indebtedness evidenced by the Exchange Notes or the
Guarantees, (b) Indebtedness to trade creditors, (c) any liability for federal,
state, local or other taxes, (d) Indebtedness owed to the Company, the Holding
Company or the Parent or any of their respective Subsidiaries or Unrestricted
Subsidiaries, (e) Indebtedness owed to any officer, employee or director of the
Company, the Holding Company or the Parent or any of their respective
Subsidiaries or Unrestricted Subsidiaries, (f) Disqualified Capital Stock, (g)
that portion of any Indebtedness which is Incurred in violation of the Indenture
or (h) Indebtedness of the type referred to in clause (e) of the definition of
the term "Indebtedness" included herein.
"SIGNIFICANT SUBSIDIARY" means a "significant subsidiary" as defined in Rule
1-02 of Regulation S-X promulgated pursuant to the Securities Act, as such
Regulation S-X was in effect on January 1, 1996.
"STANDSTILL AGREEMENTS" means the Standstill Agreement dated as of January
14, 1995 between the Company and Zell/Chilmark Fund L.P., a Delaware limited
partnership, and the Standstill Agreement dated as of January 14, 1995 between
the Company and Stuart M. Sloan.
"STATED MATURITY," means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note or in the
Indenture as the fixed date on which the principal of such Note or such
installment of interest is due and payable, and when used with respect to any
other Indebtedness, means the date specified in the instrument governing or
evidencing such Indebtedness as the fixed date on which the principal of such
Indebtedness or any installment of interest thereon is due and payable.
"SUBJECT ENTITY" means (i) prior to the Reorganization, the Company and (ii)
from and after the Reorganization, the Holding Company.
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"SUBORDINATED INDEBTEDNESS" means, with respect to the Company or any
Guarantor, Indebtedness of the Company or such Guarantor, as the case may be,
that is subordinated in right of payment to the Exchange Notes or to the
Guarantee of such Guarantor, as applicable.
"SUBSIDIARY," with respect to any person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances to elect
directors, is at the time, directly or indirectly, owned by such person, by such
person and one or more Subsidiaries of such person, or by one or more
Subsidiaries of such person, and (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly or indirectly,
at the date of determination thereof has at least majority equity ownership
interest. Notwithstanding the foregoing, an Unrestricted Subsidiary shall be
deemed not to be a Subsidiary of the Subject Entity or any of its Subsidiaries,
and Santee shall not be deemed a Subsidiary of the Subject Entity or any of its
Subsidiaries for any purpose under the Indenture.
"SUBSIDIARY GUARANTORS" means, prior to the Reorganization, the Guarantors
and, from and after the Reorganization, the Guarantors other than the Holding
Company.
"UNRESTRICTED SUBSIDIARY" means a Subsidiary of the Subject Entity (i) whose
properties and assets, to the extent that they secure Indebtedness, secure only
Non-Recourse Indebtedness, (ii) which has no Indebtedness other than
Non-Recourse Indebtedness, (iii) which does not, directly or indirectly, own any
Capital Stock of, and which does not hold any Lien on any property or assets of,
the Subject Entity or any other Subsidiary of the Subject Entity other than an
Unrestricted Subsidiary or a Subsidiary which is concurrently being designated
as an Unrestricted Subsidiary, (iv) as to which neither the Subject Entity nor
any of its Subsidiaries has any direct or indirect obligation to subscribe for
additional Capital Stock or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve any specified levels of
operating results, (v) which either is designated by the Board of Directors of
the Subject Entity as an Unrestricted Subsidiary pursuant to a Board Resolution
(provided that (A) immediately prior to and immediately after giving pro forma
effect to such designation, no Default or Event of Default shall have occurred
and shall be continuing and (B) immediately after giving pro forma effect to
such designation, the Subject Entity could Incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the second paragraph of
the covenant described under "--Certain Covenants-- Limitation on Additional
Indebtedness and Disqualified Capital Stock"), or which is an Initial
Unrestricted Subsidiary; provided that the Company may not be designated as an
Unrestricted Subsidiary and, prior to the Reorganization, neither the Parent nor
the Holding Company may be designated as an Unrestricted Subsidiary. For
purposes of the Indenture, including the proviso to the immediately preceding
sentence, the Subject Entity shall be deemed to have made an Investment in an
Unrestricted Subsidiary at the time it is designated as such. If, at any time,
any Unrestricted Subsidiary would fail to meet the requirements set forth in
clauses (i) through (iv) of the second preceding sentence, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred by such
Subsidiary as of such time. The Board of Directors of the Subject Entity may at
any time designate any Unrestricted Subsidiary to be a Subsidiary of the Subject
Entity; provided that such designation shall be deemed to be an Incurrence by a
Subsidiary of the Subject Entity of any outstanding Indebtedness of such
Unrestricted Subsidiary at such time and such designation shall only be
permitted if (i) the Incurrence of such Indebtedness is not prohibited by the
Indenture, (ii) immediately prior to and immediately after giving pro forma
effect to such designation, no Default or Event of Default shall have occurred
and shall be continuing, and (iii) immediately after giving pro forma effect to
such designation, the Subject Entity could incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the second paragraph of
the covenant described under "--Certain Covenants-- Limitation on Additional
Indebtedness and Disqualified Capital Stock." Any such designation of a
Subsidiary as an Unrestricted Subsidiary, or of an Unrestricted Subsidiary as a
Subsidiary, shall be evidenced by the filing with the Trustee of the Board
Resolution of the Subject Entity effecting such designation, together with an
officers' certificate of the Subject Entity certifying that such designation
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complied with the foregoing conditions. As used above, "Non-Recourse
Indebtedness" means Indebtedness as to which (i) neither the Subject Entity nor
any of its Subsidiaries (other than the relevant Unrestricted Subsidiary or
another Unrestricted Subsidiary) (1) provides credit support (including any
undertaking, agreement or instrument which would constitute Indebtedness), (2)
guarantees or is otherwise directly or indirectly liable or (3) constitutes the
lender (in each case, other than pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Restricted Payments") and
(ii) no default with respect to such Indebtedness (including any rights which
the holders thereof may have to take enforcement action against the relevant
Unrestricted Subsidiary or its assets) would permit (upon notice, lapse of time
or both) any holder of any other Indebtedness of the Subject Entity or its
Subsidiaries (other than Unrestricted Subsidiaries) to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or to become
payable prior to its Stated Maturity.
"VOTING STOCK" means, with respect to any person, any class or classes or
series or series of Capital Stock of such person pursuant to which the holders
thereof have the general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such person
(irrespective of whether or not, at the time, Capital Stock of any other class
or classes or series or series shall have, or might have, voting power by reason
of the happening of any contingency).
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any person, any Subsidiary
of such person of which 100% of the outstanding Capital Stock is owned by such
person, by one or more Wholly-Owned Subsidiaries of such person or by such
person and one or more Wholly-Owned Subsidiaries of such person. For purposes of
this definition, any directors' qualifying shares shall be disregarded in
determining the ownership of a Subsidiary.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global Exchange
Note") and will be deposited with the Trustee as custodian for The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
Exchange Notes held by persons who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered certificated form (a "Certificated Exchange Note"). Upon the transfer
of any Certificated Exchange Note initially issued to a Non-Global Holder, such
Certificated Exchange Note will, unless the transferee requests otherwise or a
Global Exchange Note has previously been exchanged in whole for Certificated
Exchange Notes, be exchanged for an interest in such Global Exchange Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
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Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Such accounts
initially will be designated by or on behalf of the Initial Purchasers.
Ownership of beneficial interests in the Global Exchange Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Exchange Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole record owner or holder of the Exchange Notes represented by
such Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owners of an interest in the Global Exchange Note will be
able to transfer that interest except in accordance with DTC's applicable
procedures.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent Global Exchange Note desires to give or
take any action (including a suit for repayment of principal, premium or
interest) that a Holder is entitled to give or take under the Notes, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instruction of beneficial owners owning through them.
Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Exchange Note
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Exchange Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
such Global Exchange Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificated Exchange Notes for any reason, including to sell Exchange Notes to
persons in states which require such delivery of such Exchange Notes or to
pledge such Exchange Notes, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and the
procedures set forth in the Indenture.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Exchange
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
is at any time unwilling or unable to continue as a depositary
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for the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, the Company will issue Certificated Exchange Notes in
exchange for the Global Exchange Note.
EXCHANGE OFFER; REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchasers entered into a
registration rights agreement (the "Registration Rights Agreement") on March 19,
1997 pursuant to which the Company and the Guarantors agreed, for the benefit of
the Holders of the Notes, that they will, at their cost, (i) use their
reasonable best efforts to file, within 90 days after the Issue Date, a
registration statement under the Securities Act (an "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer to exchange
the Notes for the Exchange Notes, which will have terms substantially identical
to the Notes (except that such Exchange Notes will not contain terms with
respect to transfer restrictions and the identity of the Guarantors may change
in accordance with the terms of the Indenture) and (ii) use their reasonable
best efforts to cause such Exchange Offer Registration Statement to be declared
effective under the Securities Act within 180 days after the Issue Date. Upon
such Exchange Offer Registration Statement being declared effective, the Company
will offer Exchange Notes in exchange for properly tendered Notes. The Company
will be required to keep the Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of such Exchange
Offer is mailed to the Holders of the Notes. For each Note surrendered to the
Company pursuant to such Exchange Offer, the Holder of such Note will receive
Exchange Notes having a principal amount equal to that of the surrendered Note.
Under existing Commission interpretations, the Exchange Notes would in general
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided, that in the case of broker-dealers, a
prospectus meeting the requirements of the Securities Act must be delivered as
required. The Company and the Guarantors have agreed to use their reasonable
best efforts to make available, for a period ending on the earlier of (i) 180
days after consummation of the Exchange Offer (subject to extension in certain
events) and (ii) the date on which all Participating Broker-Dealers (as defined
below) have sold their Exchange Notes, a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any resale of
any such Exchange Notes so acquired. A broker-dealer (a "Participating
Broker-Dealer") that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act, and will be bound by the provisions of the Registration
Rights Agreement (including, without limitation, certain indemnification and
contribution rights and obligations).
Each Holder of the Notes (or holder of a beneficial interest in a Global
Note) who wishes to exchange such Notes for Exchange Notes in the Exchange Offer
will be required to make certain representations including representations that
(i) any Exchange Notes to be received by it will be acquired in the ordinary
course of its business, (ii) at the time of the consummation of the Exchange
Offer, it will have no arrangement or understanding with any person to
participate in the distribution of the New Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Company or any
Guarantor, or if it is an affiliate of the Company or any Guarantor, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable. In addition, if the holder (or such
beneficial owner) is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder (or such beneficial owner) is a broker-dealer that
will receive Exchange Notes for its own account in exchange for the Notes that
were acquired as a result of market-making activities or other trading
activities, it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company and the Guarantors to effect such an Exchange Offer,
or if for any other reason the Exchange Offer is not consummated by the earlier
of (x) 60 days after the effective date of the Exchange Offer Registration
Statement and (y) 240 days after the Issue Date, the Company and the Guarantors,
will, at their own expense, (a) within 45 days after such filing obligation
arises, use their reasonable best efforts to file a shelf
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registration statement covering resales of the Notes (a "Shelf Registration
Statement"), (b) use their reasonable best efforts to cause such Shelf
Registration Statement to be declared effective under the Securities Act on or
prior to 135 days after such obligation arises and (c) use their reasonable best
efforts to keep effective such Shelf Registration Statement until the earlier of
36 months (or, if the holding period under Rule 144(k) under the Securities Act
is reduced to two years, 24 months) following the Issue Date and such time as
all of the Notes have been sold thereunder or otherwise cease to be Transfer
Restricted Securities (as defined in the Registration Rights Agreement). The
Company will, in the event a Shelf Registration Statement is required to be
filed, provide to each Holder of the Notes copies of the prospectus which is a
part of such Shelf Registration Statement, notify each such Holder when such
Shelf Registration Statement for the Notes has become effective and take certain
other actions as are required to permit unrestricted resales of the Notes. A
holder or beneficial owner of the Notes who sells such Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which is applicable to such a
holder or beneficial owner (including certain indemnification and contribution
rights and obligations).
Each Note will contain a legend to the effect that the Holder thereof, by
its acceptance of such Note, will be deemed to have agreed to be bound by and to
comply with the provisions of the Registration Rights Agreement. In that regard,
the Registration Rights Agreement will provide that the Company may, by notice
to the Holders, require the Holders to suspend the use of the prospectus which
is a part of the Shelf Registration Statement (and, in the case of Participating
Broker-Dealers, the prospectus which is part of the Exchange Offer Registration
Statement) (i) for any number of periods not to exceed 45 days in the aggregate
in any 12-month period (other than the 60-day period preceding the last day of
the period during which the Company is required to keep the Shelf Registration
Statement effective) under certain circumstances relating solely to certain
material acquisitions and dispositions involving the Subject Entity or any of
its subsidiaries ("Material Business Combinations") or (ii) if any change in
such prospectus or the related registration statement is required so that it
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (other than because of a Material Business Combination)
or in certain other circumstances (any period during which the use of such
prospectus is suspended as provided in clause (i) or (ii) above being
hereinafter called a "Blackout Period," and any period during which the use of
such prospectus is suspended as provided in clause (i) being hereinafter called
a "Business Combination Blackout Period"); provided that, in any such case, the
period during which the Company and the Guarantors are required to use their
reasonable best efforts to keep the Shelf Registration Statement effective (and,
in the case of Participating Broker-Dealers, the period during which the Company
and the Guarantors are required to use their reasonable best efforts to make
available a prospectus) will be extended by a like number of days.
Although the Company intends to file one of the registration statements
described above, there can be no assurance that such registration statement will
be filed or, if filed, that it will become effective. If (a) neither of the
registration statements described above is filed on or before the date specified
for such filing, (b) neither of such registration statements is declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) an Exchange Offer
Registration Statement becomes effective and the Company fails to consummate the
Exchange Offer within 45 days of the earlier of the effectiveness of such
registration statement or the Effectiveness Target Date, (d) the Shelf
Registration Statement is declared effective but thereafter the Shelf
Registration Statement ceases to be effective or the Shelf Registration
Statement or the prospectus which is a part thereof ceases to usable (other than
because of a Business Combination Blackout Period) in connection with resales of
Notes during the period specified in the Registration Rights Agreement, (e) the
prospectus which is a part of the Exchange Offer Registration Statement ceases
to be usable during the period specified in the Registration Rights Agreement
(other than because of a Business Combination Blackout Period) in connection
with the resale of Exchange Notes by Participating Broker-Dealers, or (f) a
Business Combination Blackout Period
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shall have occurred during the 60-day period preceding the end of the period
during which the Company is required to keep the Shelf Registration Statement
effective or the aggregate number of days in all Business Combination Blackout
Periods during any 12-month period shall have exceeded 45 days (each such event
referred to in clauses (a) through (f) above a "Registration Default"), then the
Company will pay Liquidated Damages to each Holder of the Notes (or, in the case
of Registration Defaults referred to in clause (e), to Participating
Broker-Dealers who own Notes), with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount of the Notes held by such
Holder. Upon a Registration Default, Liquidated Damages will accrue at the rate
specified above until such Registration Default is cured and the amount of
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of liquidated
damages of $.25 per week per $1,000 principal amount of Notes (regardless of
whether one or more than one Registration Default is continuing). Accrued
Liquidated Damages will be paid by the Company on each Interest Payment Date to
the Holders of Notes entitled to receive the interest payable on such date by
wire transfer of immediately available funds or by mailing checks to their
registered addresses if no such accounts have been specified and, in the case of
any redemption of Notes or repurchase of Notes pursuant to a Change of Control
Offer or an Asset Sale Offer, accrued Liquidated Damages payable in respect of
the Notes (or portions thereof) to be so redeemed or purchased shall be paid to
the persons entitled to receive accrued and unpaid interest on such Notes on the
relevant redemption date or purchase date, as applicable.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes should not constitute
recognition events for federal income tax purposes. Consequently, no gain or
loss should be recognized by Holders upon receipt of the Exchange Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of
Exchange Notes, a Holder's basis in Exchange Notes should be the same as such
Holder's basis in the Old Notes exchanged therefor. Holders should be considered
to have held the Exchange Notes from the time of their original acquisition of
the Old Notes.
In any event, persons considering the exchange of Old Notes for Exchange
Notes should consult their own tax advisors concerning the United States federal
income tax consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdictions.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. To the extent any such broker-dealer participates in
the Exchange Offer and so notifies the Company, or causes the Company to be so
notified in writing, the Company has agreed that a period ending on the earlier
of (i) 180 days after consummation of the Exchange Offer (subject to extension
on certain events) and (ii) the date on which all participating broker-dealers
have sold their Exchange Notes it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers or any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act, and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the
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statements therein not misleading or which may impose upon the Company
disclosure obligations that may have a material adverse effect on the Company
(which notice the Company agrees to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the Prospectus until the Company has
notified such broker-dealer that delivery of the Prospectus may resume and has
furnished copies of any amendment or supplement to the Prospectus to such
broker-dealer.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson Thacher
& Bartlett (a partnership which includes professional corporations), New York,
New York in respect of New York law.
EXPERTS
The financial statements of Quality Food Centers, Inc. as of December 30,
1995 and December 28, 1996 and for each of the three years in the period ended
December 28, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
auditing and accounting.
The consolidated financial statements of Hughes Markets, Inc. as of March 3,
1996 and March 2, 1997 and for each of the three years in the period ended March
2, 1997 have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto.
The financial statements of Keith Uddenberg, Inc. as of and for the years
ended December 30, 1995 and December 28, 1996, and for each of the three years
in the period ended December 28, 1996, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in auditing and accounting.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUALITY FOOD CENTERS, INC.
Quarterly Financial Statements (Unaudited):
Consolidated Statements of Earnings for the 12 weeks ended March 22, 1997 and March 23, 1996................... F-2
Consolidated Balance Sheets as of March 22, 1997 and December 28, 1996......................................... F-3
Consolidated Statement of Shareholders' Equity for the 12 weeks ended March 22, 1997........................... F-4
Consolidated Statements of Cash Flows for the 12 weeks ended March 22, 1997 and March 23, 1996................. F-5
Notes to Consolidated Financial Statements for the 12 weeks ended March 22, 1997 and March 23, 1996............ F-6
Audited Financial Statements:
Independent Auditors' Report................................................................................... F-9
Statements of Earnings for each of the three years in the period ended December 28, 1996....................... F-10
Statements of Shareholders' Equity for each of the three years in the period ended December 28, 1996........... F-11
Balance Sheets as of December 28, 1996 and December 30, 1995................................................... F-12
Statements of Cash Flows for each of the three years in the period ended December 28, 1996..................... F-13
Notes to Financial Statements for each of the three years in the period ended December 28, 1996................ F-14
HUGHES MARKETS, INC.
Report of Independent Public Accountants....................................................................... F-26
Consolidated Balance Sheets as of March 3, 1996 and March 2, 1997.............................................. F-27
Consolidated Statements of Income for each of the three years in the period ended March 2, 1997................ F-28
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended March 2,
1997......................................................................................................... F-29
Consolidated Statements of Cash Flows for each of the three years in the period ended March 2, 1997............ F-30
Notes to Consolidated Financial Statements..................................................................... F-31
KU ACQUISITION CORPORATION (UNAUDITED)
Statement of Earnings for the period from February 15 to March 22, 1997........................................ F-41
Balance Sheets as of March 22, 1997 and February 15, 1997...................................................... F-42
Statement of Parent Investment for the period from February 15 to March 22, 1997............................... F-43
Statement of Cash Flows for the period from February 15 to March 22, 1997...................................... F-44
Notes to Financial Statements for the period from February 15 to March 22, 1997................................ F-45
KEITH UDDENBERG, INC.
Independent Auditors' Report................................................................................... F-50
Statements of Operations for each of the three years in the period ended December 28, 1996, the thirteen weeks
ended March 30, 1996 (unaudited), and the seven weeks ended February 14, 1997 (unaudited).................... F-51
Statements of Shareholders' Equity for each of the three years in the period ended December 28, 1996, and the
seven weeks ended February 14, 1997 (unaudited).............................................................. F-52
Balance Sheets as of December 30, 1995, December 28, 1996, and February 14, 1997 (unaudited)................... F-53
Statements of Cash Flows for each of the three years in the period ended December 28, 1996, the thirteen weeks
ended March 30, 1996 (unaudited), and the seven weeks ended February 14, 1997 (unaudited).................... F-54
Notes to Financial Statements for each of the three years in the period ended December 28, 1996, the thirteen
weeks ended March 30, 1996 (unaudited), and the seven weeks ended February 14, 1997 (unaudited).............. F-55
</TABLE>
F-1
<PAGE>
QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
12 WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
----------------------
<S> <C> <C>
MARCH 22, MARCH 23,
1997 1996
---------- ----------
Sales..................................................................................... $ 233,154 $ 176,627
Cost of sales and related occupancy expenses.............................................. 174,913 133,313
Marketing, general and administrative expenses............................................ 45,374 33,486
---------- ----------
Operating Income.......................................................................... 12,867 9,828
Interest income........................................................................... 189 72
Interest expense.......................................................................... (2,777) (2,588)
---------- ----------
Earnings Before Income Taxes.............................................................. 10,279 7,312
Taxes on income
Current................................................................................. 3,559 2,223
Deferred................................................................................ 300 406
---------- ----------
Total taxes on income..................................................................... 3,859 2,629
---------- ----------
Net Earnings.............................................................................. $ 6,420 $ 4,683
---------- ----------
---------- ----------
Earnings Per Share........................................................................ $ .40 $ .32
Weighted average shares outstanding....................................................... 16,017 14,554
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
QUALITY FOOD CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 22, 1997 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 22, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................ $ 66,349 $ 14,571
Accounts receivable.................................................................. 19,320 10,754
Notes receivable..................................................................... 5,375 --
Inventories.......................................................................... 121,324 36,954
Prepaid expenses..................................................................... 19,482 6,208
------------ ------------
Total Current Assets................................................................. 231,850 68,487
Properties
Land................................................................................. 53,343 15,025
Buildings, fixtures and equipment.................................................... 276,381 155,038
Leasehold improvements............................................................... 92,622 41,511
Property under capital leases........................................................ 21,191 --
Construction in progress............................................................. 12,297 9,910
------------ ------------
455,834 221,484
Accumulated depreciation and amortization............................................ (64,965) (60,821)
------------ ------------
390,869 160,663
Leasehold Interest, net of accumulated amortization of $11,816 and $11,257........... 106,446 27,585
Real estate held for investment...................................................... 6,423 6,048
Goodwill, net of accumulated amortization of $2,374 and $2,084....................... 234,528 33,691
Other Assets......................................................................... 34,059 7,543
------------ ------------
$ 1,004,175 $ 304,017
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................................... $ 88,651 $ 35,548
Accrued payroll and related benefits................................................. 37,899 15,884
Accrued business and sales taxes..................................................... 9,361 5,413
Other accrued expenses............................................................... 34,987 7,240
Federal income taxes payable......................................................... 6,422 945
Notes payable........................................................................ 5,183 --
Current portion of capital lease obligations......................................... 617 --
------------ ------------
Total Current Liabilities............................................................ 183,120 65,030
Deferred Income Taxes................................................................ 63,601 12,142
Other Liabilities.................................................................... 18,702 5,047
Long-Term Debt....................................................................... 400,278 145,000
Capital Lease Obligations............................................................ 26,774 --
Shareholders' Equity
Common stock, at stated value--authorized
60,000,000 shares, issued and outstanding
20,827,000 shares and 14,646,000 shares.......................................... 263,427 34,945
Retained earnings.................................................................... 48,273 41,853
------------ ------------
Total Shareholders' Equity........................................................... 311,700 76,798
------------ ------------
$ 1,004,175 $ 304,017
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TWELVE WEEKS ENDED MARCH 22, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at December 28, 1996......................................... 14,646 $ 34,945 $ 41,853 $ 76,798
Net Earnings......................................................... -- -- 6,420 6,420
Common Stock issued.................................................. 6,181 228,482 -- 228,482
--------- ---------- --------- ----------
Balance at March 22, 1997............................................ 20,827 $ 263,427 $ 48,273 $ 311,700
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
QUALITY FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
12 WEEKS ENDED MARCH 22, 1997 AND MARCH 23, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
------------------------
<S> <C> <C>
MARCH 22, MARCH 23,
1997 1996
----------- -----------
Operating Activities
Net earnings........................................................................... $ 6,420 $ 4,683
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of properties.......................................... 4,144 3,695
Amortization of leasehold interest and other......................................... 1,049 850
Amortization of debt issuance costs.................................................. 49 43
Deferred income taxes................................................................ 300 406
Other................................................................................ 100 --
Changes in Operating Assets and Liabilities
Accounts receivable.................................................................... 3,054 457
Inventories............................................................................ (3,342) 882
Prepaid expenses....................................................................... 963 (681)
Accounts payable....................................................................... (106) 928
Accrued payroll and related benefits................................................... (2,236) (2,490)
Accrued business and sales taxes....................................................... 171 (1,837)
Other accrued expenses................................................................. 6,807 1,103
Federal income taxes payable........................................................... 2,655 2,222
----------- -----------
Net Cash Provided by Operating Activities................................................ 20,028 10,261
----------- -----------
Investing Activities
Capital expenditures, net.............................................................. (5,101) (8,482)
Acquisition of KUI..................................................................... (34,087) --
Acquisition of Hughes.................................................................. (346,023) --
Increase in real estate held for investment............................................ (376) (18)
Other.................................................................................. (322) (704)
----------- -----------
Net Cash Used by Investing Activities.................................................... (385,909) (9,204)
----------- -----------
Financing Activities
Proceeds from issuance of common stock................................................. 324 156
Proceeds from March 19, 1997 financings--
Issuance of common stock............................................................. 192,199 --
Issuance of senior subordinated notes................................................ 146,250 --
Proceeds under credity facility...................................................... 248,001 --
Payment of outstanding credity facility.............................................. (197,000) --
Proceeds from (repayments of) long-term debt........................................... 27,885 (1,000)
----------- -----------
Net Cash Provided (Used) by Financing Activities......................................... 417,659 (844)
----------- -----------
Net Increase in Cash and Cash Equivalents................................................ 51,778 213
Cash and Cash Equivalents at Beginning of Period......................................... 14,571 10,933
----------- -----------
Cash and Cash Equivalents at End of Period............................................... $ 66,349 $ 11,146
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997
(UNAUDITED)
NOTE A--NATURE OF OPERATIONS
Quality Food Centers, Inc. ("QFC") is a multi-regional operator of premium
supermarkets, operating 146 stores and employing more than 10,000 people. The
Company has been in operation since 1954 and currently operates 89 stores in the
Puget Sound region of Washington state primarily under the names QFC and Stock
Market and 57 stores in Southern California under the Hughes Family Market
("Hughes") name.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION--The consolidated financial statements as of
and for the twelve weeks ended March 22, 1997 and March 23, 1996 are unaudited,
but in the opinion of management include all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the consolidated financial
position and results of operations and cash flows for the periods presented. All
significant intercompany transactions and account balances have been eliminated
in consolidation.
These statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the annual audited financial statements and the
accompanying notes included in the Company's Annual Report on Form 10-K/A for
the year ended December 28, 1996.
Complying 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 revenue and expenses during
the reporting periods. Actual results could differ from the estimates.
Certain prior years' balances have been reclassified to conform to
classifications used in the current year.
FISCAL PERIODS--The Company's fiscal year ends on the last Saturday in
December (except for Hughes' which ends on the last Sunday in December), and its
reporting quarters consist of three 12-week quarters and a 16-week fourth
quarter.
EARNINGS PER SHARE--Earnings per share is based upon the weighted average
number of common shares and common share equivalents outstanding during the
period.
NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION
On March 19, 1997, the Company completed (i) the sale of 5,175,000 shares of
the Company's common stock to the public for net proceeds of $192.2 million,
(ii) the private placement of $150.0 million of 8.7% senior subordinated notes
for net proceeds of $146.3 million, and (iii) entered into an agreement to amend
and restate its existing credit facility resulting in net proceeds of $248.0
million. The Company utilized $359.8 million of the proceeds to finance the
acquisition of Hughes and $197.0 million to refinance the Company's bank
indebtedness outstanding at the time of the financings [including $59.1 million
incurred in connection with the acquisition of Keith Uddenberg, Inc. ("KUI")],
leaving approximately $29.7 million of cash for general corporate purposes.
F-6
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
Cash paid for income taxes and interest expense was as follows (in
thousands):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
------------------------
<S> <C> <C>
MARCH 22, MARCH 23,
1997 1996
----------- -----------
Income taxes........................................................... $ 900 $ --
Interest (net of $212 and $177 of interest capitalized)................ 3,360 2,163
</TABLE>
NOTE D--KEITH UDDENBERG, INC. ACQUISITION
On February 14, 1997, the principal operations of KUI, including assets and
liabilities related to 25 grocery stores in the western and southern Puget Sound
region of Washington, were merged into a subsidiary of the Company. The merger,
which has been accounted for under the purchase method of accounting, was
effected through the acquisition of 100% of the outstanding voting securities of
KUI for consideration consisting of $35.3 million cash, 904,646 shares of the
Company's common stock, (which as of February 14, 1997 had a value of $36.0
million) and the assumption by the Company of approximately $23.8 million of
indebtedness of KUI.
For financial reporting purposes, the consideration paid for the operations
of KUI has been allocated to the fair value of assets acquired and liabilities
assumed. Goodwill of $57.6 million has been recorded as a result of the merger
and is being amortized over 40 years. Because the transaction was a statutory
merger, the Company has a carryover tax basis and amortization of the excess of
the book value over the tax basis of the assets included in the merger is not
deductible for federal income tax purposes.
Following is a summary of the assets and liabilities recorded as a result of
the KUI merger (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 1,262
Inventories....................................................... 15,985
Other current assets.............................................. 4,749
---------
Total current assets........................................ 21,996
Property, plant and equipment..................................... 25,047
Leasehold interest................................................ 20,000
Goodwill.......................................................... 53,481
Other assets...................................................... 12,330
Current liabilities............................................... (16,507)
Deferred income taxes............................................. (17,431)
Other liabilities................................................. (3,839)
Long-term debt.................................................... (23,768)
---------
$ 71,309
---------
---------
</TABLE>
Long-term debt of $23.8 million assumed in connection with the merger was
subsequently repaid.
NOTE E--HUGHES MARKETS, INC. ACQUISITION
On March 19, 1997, the Company acquired the principal operations of Hughes,
including the assets and liabilities related to 57 grocery stores located in
Southern California and a 50% interest in Santee Dairies, Inc., one of the
largest dairy plants in California. The acquisition, which has been accounted
for under the purchase method of accounting, was effected through the
acquisition of 100% of the outstanding
F-7
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE E--HUGHES MARKETS, INC. ACQUISITION (CONTINUED)
voting securities of Hughes, for cash consideration of approximately $359.8
million, and the assumption by the Company of approximately $33.2 million of
indebtedness (including $6.1 million of current indebtedness) of Hughes,
consisting primarily of capitalized store leases.
For financial reporting purposes, the consideration paid for Hughes has been
allocated to the fair value of assets acquired and liabilities assumed. Goodwill
of $147.7 million has been recorded as a result of the acquisition and is being
amortized over 40 years. Because the transaction was a statutory merger, the
Company has a carryover tax basis and amortization of the excess of the book
value over the tax basis of the assets included in the merger is not deductible
for federal income tax purposes.
Following is a summary of the assets and liabilities recorded as a result of
the Hughes merger (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 13,767
Inventories....................................................... 65,042
Other current assets.............................................. 20,782
---------
Total current assets........................................ 99,591
Property, plant and equipment..................................... 182,999
Property under capital leases..................................... 21,191
Leasehold interest................................................ 59,353
Goodwill.......................................................... 147,729
Other assets...................................................... 14,178
Current liabilities............................................... (94,935)
Deferred income taxes............................................. (33,584)
Other liabilities................................................. (9,680)
Long-term debt.................................................... (278)
Capital lease obligation.......................................... (26,774)
---------
$ 359,790
---------
---------
</TABLE>
NOTE F--PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information assumes that the acquisitions
of KUI and Hughes and the related financings each occurred as of the beginning
of each period presented (in thousands, except per share data):
<TABLE>
<CAPTION>
TWELVE WEEKS TWELVE WEEKS
ENDED ENDED
MARCH 22, 1997 MARCH 23, 1996
-------------- --------------
<S> <C> <C>
Sales........................................................ $ 475,894 $ 479,534
Net earnings................................................. 6,563 5,691
Earnings per share........................................... $ .31 $ .28
</TABLE>
NOTE G--ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." was recently issued and is effective for the Company's fiscal year
ending December 27, 1997. This Statement requires a change in the presentation
of earnings per share. Early adoption of this statement is not permitted.
Management believes that the impact of the adoption of this Statement on the
financial statements, taken as a whole, will not be material.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Quality Food Centers, Inc.
Bellevue, Washington
We have audited the accompanying balance sheets of Quality Food Centers,
Inc. as of December 28, 1996 and December 30, 1995, and the related statements
of earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 28, 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, such financial statements present fairly, in all material
respects, the financial position of Quality Food Centers, Inc. as of December
28, 1996 and December 30, 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
March 21, 1997
Seattle, Washington
F-9
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 28, 1996,
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Sales........................................................................ $ 805,281 $ 729,856 $ 575,879
Cost of sales and related occupancy expenses................................. 603,947 550,434 430,711
Marketing, general and administrative expenses............................... 152,337 136,645 105,956
---------- ---------- ----------
Operating income............................................................. 48,997 42,777 39,212
Interest income.............................................................. 467 501 933
Interest expense............................................................. 9,890 9,639 --
Other expense................................................................ -- 1,400 --
---------- ---------- ----------
Earnings before income taxes................................................. 39,574 32,239 40,145
Taxes on income:
Current.................................................................... 12,790 10,087 11,593
Deferred................................................................... 1,366 1,936 2,175
---------- ---------- ----------
Total taxes on income........................................................ 14,156 12,023 13,768
---------- ---------- ----------
Net earnings................................................................. $ 25,418 $ 20,216 $ 26,377
---------- ---------- ----------
---------- ---------- ----------
Earnings per share........................................................... $ 1.71 $ 1.28 $ 1.34
Weighted average shares outstanding.......................................... 14,888 15,830 19,656
Dividends per common share................................................... $ -- $ .05 $ .20
</TABLE>
See notes to financial statements.
F-10
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 25, 1993...................................... 19,349 $ 24,576 $ 109,044 $ 133,620
Net earnings...................................................... -- -- 26,377 26,377
Common stock issued............................................... 132 1,993 -- 1,993
Tax benefit related to stock options.............................. -- 76 -- 76
Cash dividends ($.20 per share)................................... -- -- (3,888) (3,888)
--------- ---------- ----------- -----------
Balance at December 31, 1994...................................... 19,481 26,645 131,533 158,178
Net earnings...................................................... -- -- 20,216 20,216
Common stock issued............................................... 1,951 45,130 -- 45,130
Common stock repurchased (including offering fees and expenses
aggregating $2,850)............................................. (7,000) (43,510) (134,340) (177,850)
Tax benefit related to stock options.............................. -- 667 -- 667
Cash dividend ($.05 per share).................................... -- -- (974) (974)
--------- ---------- ----------- -----------
Balance at December 30, 1995...................................... 14,432 28,932 16,435 45,367
Net earnings...................................................... -- -- 25,418 25,418
Common stock issued............................................... 214 5,773 -- 5,773
Tax benefit related to stock options.............................. -- 240 -- 240
--------- ---------- ----------- -----------
Balance at December 28, 1996...................................... 14,646 $ 34,945 $ 41,853 $ 76,798
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-11
<PAGE>
QUALITY FOOD CENTERS, INC.
BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................................ $ 14,571 $ 12,055
Accounts receivable.................................................................. 10,754 9,031
Inventories.......................................................................... 36,954 36,706
Prepaid expenses..................................................................... 6,208 5,524
------------ ------------
Total Current Assets................................................................. 68,487 63,316
Properties
Land................................................................................. 15,025 8,576
Buildings, fixtures and equipment.................................................... 155,038 132,594
Leasehold improvements............................................................... 41,511 38,767
Construction in progress............................................................. 9,910 15,954
------------ ------------
221,484 195,891
Accumulated depreciation and amortization............................................ (60,821) (48,810)
------------ ------------
160,663 147,081
Leasehold interest, net of accumulated amortization of $11,257 and $9,535............ 27,585 27,954
Real estate held for investment...................................................... 6,048 5,623
Goodwill, net of accumulated amortization of $2,084 and $1,009....................... 33,691 34,598
Other assets......................................................................... 7,543 5,428
------------ ------------
$ 304,017 $ 284,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................................... $ 35,548 $ 34,173
Accrued payroll and related benefits................................................. 15,884 13,678
Accrued business and sales taxes..................................................... 5,413 5,037
Other accrued expenses............................................................... 7,240 4,720
Federal income taxes payable......................................................... 945 405
------------ ------------
Total current liabilities............................................................ 65,030 58,013
Deferred income taxes................................................................ 12,142 9,992
Other liabilities.................................................................... 5,047 6,128
Long-term debt....................................................................... 145,000 164,500
Shareholders' equity
Common stock, at stated value--
Authorized 60,000 shares issued and outstanding 14,646 shares and 14,432
shares......................................................................... 34,945 28,932
Retained earnings.................................................................... 41,853 16,435
------------ ------------
Total shareholders' equity........................................................... 76,798 45,367
------------ ------------
$ 304,017 $ 284,000
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-12
<PAGE>
QUALITY FOOD CENTERS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1996,
DECEMBER 30, 1995, AND DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Operating Activities
Net earnings.............................................................. $ 25,418 $ 20,216 $ 26,377
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of properties............................. 15,823 12,892 10,130
Amortization of leasehold interest and other............................ 3,654 3,278 1,474
Amortization of debt issuance fees...................................... 185 143 --
Deferred income taxes................................................... 1,366 1,936 2,175
Changes in operating assets and liabilities:
Accounts receivable..................................................... (2,207) (5,292) (507)
Inventories............................................................. 514 (4,550) (4,185)
Prepaid expenses........................................................ (870) (2,878) (755)
Accounts payable........................................................ 1,374 297 (35)
Accrued payroll and related benefits.................................... 2,206 3,040 542
Accrued business and sales taxes........................................ 377 1,121 727
Other accrued expenses.................................................. 1,520 2,108 (1,067)
Federal income taxes payable............................................ 1,564 1,385 (201)
--------- ---------- ---------
Net Cash Provided by Operating Activities................................... 50,924 33,696 34,675
--------- ---------- ---------
Investing activities
Capital expenditures, net............................................... (32,556) (28,639) (20,983)
Cash portion of olson's merger.......................................... -- (18,000) --
Increase in real estate held for investment............................. (425) (407) (7,196)
Other................................................................... (994) (531) (711)
Proceeds from sale of real estate....................................... 2,650 1,340 --
--------- ---------- ---------
Net Cash Used by Investing Activities....................................... (31,325) (46,237) (28,890)
--------- ---------- ---------
Financing Activities:
Proceeds from issuances of common stock................................... 2,417 27,061 2,069
Common stock repurchased................................................ -- (177,850) --
Proceeds from (repayments of) revolving credit facility................. (19,500) 500 --
Proceeds from long--term debt........................................... -- 140,000 --
Cash dividends paid..................................................... -- (974) (3,888)
--------- ---------- ---------
Net Cash Used by Financing Activities..................................... (17,083) (11,263) (1,819)
--------- ---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents...................... 2,516 (23,804) 3,966
Cash and Cash Equivalents at Beginning of Period.......................... 12,055 35,859 31,893
--------- ---------- ---------
Cash and Cash Equivalents at End of Period................................ $ 14,571 $ 12,055 $ 35,859
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Quality Food Centers, Inc. ("QFC" or the "Company") is
the second largest supermarket chain in the Seattle/Puget Sound region of
Washington State. The Company has been in operation since 1954 and, at December
28, 1996, operated 64 stores and employed over 4,400 people.
The Company has formed several subsidiaries in order to facilitate certain
acquisitions detailed in Note M, as well as a leasing subsidiary. None of the
subsidiaries had any operating activity prior to December 28, 1996 and the
capitalization of these subsidiaries is insignificant.
Basis of Presentation: The Company's financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from the
estimates.
Earnings Per Share: Earnings per share is based upon the weighted average
number of common shares and common share equivalents outstanding during the
period.
Fiscal Year: The Company's fiscal year ends on the last Saturday in
December. The years ended December 28, 1996 and December 30, 1995 represent
52-week fiscal years. The year ended December 31, 1994 was a 53-week fiscal
year.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents. The Company's investment portfolio is diversified and
consists of investment grade securities, recorded at cost which approximates
market value.
The Company's cash management system provides for reimbursement of bank
disbursement accounts on a daily basis. Checks issued but not presented for
payment to the bank in the aggregate amount of $4.0 million and $19.2 million,
at December 28, 1996 and December 30, 1995, respectively, are included in
accounts payable.
Construction in Progress: Costs associated with acquiring land, buildings,
fixtures and equipment while a store is under construction are recorded as
construction in progress. Additionally, the Company capitalizes interest on debt
incurred during the construction of a new store. When a store opens, all costs
are then transferred to the appropriate property account.
Depreciation and Amortization: Depreciation is provided on the straight-line
method over the shorter of the estimated useful lives or 31 1/2 years for
buildings and three to ten years for fixtures and equipment. Amortization of
leasehold improvements is computed on the straight-line method over the term of
the lease or useful life of the assets, whichever is shorter.
Goodwill: Goodwill arises primarily from business acquisitions and
represents the cost of purchased businesses in excess of amounts assigned to
tangible and identified intangible assets. Goodwill is being amortized over
estimated lives of up to 40 years.
Long-lived Assets: The Company periodically reviews long-lived assets,
including identified intangible assets and goodwill, for impairment to determine
whether events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Such review includes estimating expected
future cash flows. No such events or circumstances have occurred through
December 28, 1996.
F-14
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Start-up and Promotional Expenses: Costs incurred in connection with the
start-up and promotion of new store openings and major store remodels are
expensed as incurred.
Leasehold Interest: Leasehold interests from acquired operating lease rights
are amortized over the term of the respective leases, including renewal periods
exercisable at the option of the Company. Management believes that exercise of
renewal options is probable.
Real Estate Held for Investment: Real estate held for investment includes
land and buildings the Company has acquired where it plans to either operate a
store in the future or sell the real estate, and is recorded at the lower of
cost or market. Upon commencement of construction, costs are transferred to
construction in progress.
Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," has been adopted by the Company for the disclosure of
certain additional information related to its stock options and employee stock
purchase plan.
Reclassifications: Certain prior years' balances have been reclassified to
conform to classifications used in the current year.
NOTE B
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest for the last three years was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Income taxes...................................................................... $ 11,226 $ 8,872 $ 11,718
Interest (net of $1,261, and $167 of interest capitalized)........................ $ 8,996 $ 9,328 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
In the fourth quarter of 1996, the Company issued shares of common stock to
finance the acquisition of two stores from an independent local retailer.
During the first quarter of 1995, the Company acquired all of the
outstanding shares of Olson's Food Stores, Inc. in a merger transaction for
$60.1 million (Note K). In connection with the merger, liabilities assumed were
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired................................................. $ 69,246
Cash paid..................................................................... (18,000)
Long-term debt assumed........................................................ (24,000)
Common stock issued........................................................... (18,070)
--------------
Current liabilities assumed................................................... $ 9,176
--------------
--------------
</TABLE>
F-15
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE B
SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
During the first quarter of 1995, the Company recorded $4.0 million as an
increase in goodwill and deferred income tax liability to record deferred income
taxes arising from the Olson's merger. Further, as part of the merger agreement,
the Company agreed to remit certain of the benefits, if any, of Olson's net
operating loss carryforwards, totaling approximately $12.0 million, and certain
other tax credit carryforwards, totaling approximately $1.2 million, to the
former shareholders of Olson's when utilized. The Company is entitled to keep
the first $1.1 million of such benefits utilized. Accordingly, a deferred tax
asset of $5.4 million and corresponding liability of $4.3 million were recorded
to reflect amounts due the former shareholders of Olson's when tax loss and tax
credit carryforwards are utilized by the Company. The Company utilized $0.8
million and $0.7 million of the tax asset during 1996 and 1995, respectively, to
reduce current taxes payable. The net operating loss and tax credit
carryforwards expire through the year 2009.
NOTE C
INVENTORIES
Substantially all merchandise inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. The LIFO method results in a better
matching of costs and revenues, as current merchandise cost is recognized in
cost of merchandise sold instead of in ending inventories as is the practice
under the first-in, first-out (FIFO) method. Information related to the FIFO
method may be useful in comparing operating results to those of companies not on
LIFO.
On a supplemental basis, if inventories had been valued at the lower of FIFO
cost or market, inventories would have increased by $2.7 million and $2.0
million as of December 28, 1996 and December 30, 1995, and net earnings would
have increased by $0.4 million in both 1996 and 1995. There was no LIFO
adjustment in 1994.
NOTE D
LEASES
The Company leases its administrative offices and 58 of its 64 store
facilities in operation under noncancelable operating leases expiring through
2023. Certain of the leases include renewal provisions at the Company's option.
Minimum rental commitments under noncancelable leases, which exclude stores to
be added in 1997, as of December 28, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1997.......................................................................... $ 14,080
1998.......................................................................... 14,079
1999.......................................................................... 13,861
2000.......................................................................... 13,563
2001.......................................................................... 13,549
Thereafter.................................................................... 152,364
--------------
$ 221,496
--------------
--------------
</TABLE>
F-16
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE D
LEASES (CONTINUED)
A majority of the store facility leases provide for contingent rentals based
upon specified percentages of sales, real estate tax escalation clauses and
executory costs. Space in several store facilities has been sublet.
A summary of rental expense under operating leases is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Minimum rent............................................. $ 14,462 $ 12,417 $ 8,185
Contingent rentals....................................... 1,495 1,820 1,744
Real estate taxes and executory costs.................... 3,532 3,566 2,321
Less sublease rentals.................................... (806) (570) (164)
--------- --------- ---------
$ 18,683 $ 17,233 $ 12,086
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE E
FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and result from
differences in the timing of recognition of revenue and expenses for tax and
financial statement reporting. The tax effects of significant items comprising
the Company's deferred tax liability as of December 28, 1996 and December 30,
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Compensated absences.................................................... $ 884 $ 834
Self insurance.......................................................... 233 321
Inventory............................................................... 655 135
Other................................................................... 365 280
Tax credits arising from merger......................................... 3,963 4,747
--------- ---------
6,100 6,317
--------- ---------
--------- ---------
DEFERRED TAX LIABILITIES:
Accelerated depreciation................................................ 15,762 14,202
Multi-employer pension contribution..................................... 733 724
Other................................................................... 1,747 1,383
--------- ---------
18,242 16,309
--------- ---------
Net deferred tax liability.............................................. $ 12,142 $ 9,992
--------- ---------
--------- ---------
</TABLE>
No valuation allowance was necessary for the deferred tax assets at December
28, 1996 and December 30, 1995.
F-17
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE E
FEDERAL INCOME TAXES (CONTINUED)
The differences between the Company's effective income tax rates and the
federal statutory rates are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate.......................................................................... 35.0% 35.0% 35.0%
Nondeductible goodwill.................................................................. 0.9 0.9 --
Nondeductible recapitalization fees (Note L)............................................ -- 1.6 --
Other (primarily interest on tax-free municipal securities)............................. (0.1) (0.2) (0.7)
--- --- ---
Effective tax rate...................................................................... 35.8% 37.3% 34.3%
--- --- ---
--- --- ---
</TABLE>
NOTE F
LONG-TERM DEBT
In March 1995, the Company entered into a $220.0 million credit facility to
finance the repurchase of its shares pursuant to a self-tender offer (Note L)
and to finance a portion of the Olson's merger (Note K). The credit facility
consists of a term loan of $140.0 million and revolving credit loans of up to
$80.0 million.
Principal repayments of the term loan are due in quarterly installments from
March 1997 through September 2001. The revolving loans are available on a
revolving credit basis for general corporate purposes and any outstanding
amounts would become due in September 2001. At the Company's option, the
interest rate per annum applicable to the credit facility is either (1) the
greater of the bank agent's reference rate or 0.5% above the federal funds rate
or (2) IBOR plus a margin of 1.25% initially, with margin reductions if the
Company meets specified financial ratios. At December 28, 1996, the borrowings
under the credit facility bore interest at an average rate of approximately
6.6%. Additionally, the credit facility requires a commitment fee of .37% on the
average daily unused portion of the revolving credit loans, computed on a
quarterly basis in arrears.
The credit facility contains a number of significant covenants that, among
other things, restrict the ability of the Company to incur additional
indebtedness or incur liens on its assets, in each case subject to specified
exceptions, impose specified financial tests as a precondition to the Company's
acquisition of other businesses, prohibit the Company from making certain
restricted payments (including dividends) and restrict the Company from making
share repurchases above certain amounts before January 1, 1997 and, subject to
specified financial tests, restrict its ability to make such payments and
repurchases thereafter. In addition, the Company is required to comply with
specified financial ratios and tests, including a maximum debt to cash flow
ratio, minimum ratios of cash flow to fixed charges, a minimum accounts payable
to inventory ratio and a minimum net worth test. The credit facility is secured
by a lien on all of the Company's receivables and intangible assets. The
carrying amount of this debt approximates fair market value, as rates are
approximately equal to those currently available to the Company for similar
purposes. At December 28, 1996, the Company was in compliance with the financial
covenants of the existing credit facility.
F-18
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE F
LONG-TERM DEBT (CONTINUED)
As of December 28, 1996, long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER (IN THOUSANDS)
- ------------------------------------------------------------------------------
<S> <C>
1997.......................................................................... $ 25,200
1998.......................................................................... 25,200
1999.......................................................................... 29,400
2000.......................................................................... 35,000
2001.......................................................................... 30,200
--------------
$ 145,000
--------------
--------------
</TABLE>
Subsequent to year-end, the Company renegotiated its credit facility in
connection with certain acquisitions. Accordingly, no portion of long-term debt
has been classified as current. (See Note M.)
NOTE G
COMMITMENTS AND CONTINGENCIES
Litigation: The Company is involved in various matters of litigation, all
arising in the ordinary course of business. In the opinion of management, the
ultimate outcome of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
Employment Agreements: During 1996, the Company entered into employment
agreements with certain members of management which extend through various dates
in September 1999.
NOTE H
RELATED PARTY TRANSACTIONS
The Company paid a management fee of up to 0.2% of sales as compensation for
management advisory services, pursuant to an agreement with its chairman that
expired on June 16, 1996. For the period of December 31, 1995 through June 16,
1996, $0.7 million was paid pursuant to the agreement. Upon expiration of the
agreement, the Company agreed to pay its chairman a monthly fee aggregating $0.3
million, for June 17, 1996 through December 28, 1996, plus a bonus payment of
$.2 million. For the fourth quarter of 1995, in lieu of the management fee,
which would have been approximately $0.5 million, the Company granted stock
options for 58,900 shares of its stock under the Company's 1993 Executive Stock
Option (Note J) to its chairman. Management fee expense for 1996, 1995 and 1994
was $1.2 million, $1.0 million and $1.2 million, respectively.
In August 1993, two partnerships which include the Company's chairman
acquired the 24-acre University Village Shopping Center, (the "Center"), where
the Company was leasing space for one of its stores and owned an adjacent 8.8
acre parcel of land. The Company negotiated with the partnerships for certain
property rights and lease modifications, which included a 15-year lease term
extension, the right to be the exclusive grocery store in the Center and the
right to relocate its store to the adjacent site. The Company paid approximately
$5.0 million for these rights, which amount is included in Leasehold Interests
and is being amortized over a period of 29 years. In August, 1996, the Company
completed construction of
F-19
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE H
RELATED PARTY TRANSACTIONS (CONTINUED)
its flagship store on the adjacent property, moved its store and terminated the
existing lease agreement, paying the partnerships a $0.3 million lease
termination fee. The Company retained all other property rights. Rentals, common
area maintenance and real estate tax reimbursements paid to the partnerships
were at the same rates paid to the previous owner of the Center, and totaled
approximately $0.5 million, $0.7 million and $0.7 million for 1996, 1995 and
1994, respectively.
During 1995, the Company assumed a lease for one of its stores included in
the Olson's merger (Note K) for which the landlord is an entity that is
controlled by a member of the Company's Board of Directors. Rental payments for
the store, which include reimbursements for common area maintenance and real
estate taxes, totaled $0.2 million and $0.1 million during 1996 and 1995
respectively. The lease terminates in April 2001, with options to renew through
April 2035. In addition, during 1996 and 1995 the Company purchased
approximately $1.8 million and $1.7 million, respectively, of products from an
entity owned by certain family members of the same member of its Board of
Directors.
The Company's president and another director of the Company are members of
the board of directors of the Associated Grocers, Inc. (A.G.) cooperative, which
became one of the Company's major suppliers in 1995. Amounts paid to A.G. for
products and services totaled $57.7 million and $43.8 million for 1996 and 1995,
respectively. As a result of the KUI merger, the Company now owns approximately
22% of the non-voting equity of A.G.
NOTE I
RETIREMENT PLANS
The Company participates in a union administered multi-employer defined
benefit pension plan for employees covered by collective bargaining agreements.
The contributions under this plan were $3.2 million, $3.1 million and $2.4
million for 1996, 1995 and 1994, respectively.
The Company's defined contribution profit-sharing plan includes employees
not covered by collective bargaining agreements who meet certain service
requirements. Contributions to the plan are based on a percentage of gross wages
and are made at the discretion of the Company. The Company's profit-sharing
expense was $0.6 million, $0.5 million and $0.5 million for 1996, 1995 and 1994,
respectively.
The Company maintains a voluntary defined contribution retirement plan
qualified under Section 401(k) of the Internal Revenue Code of 1986, available
to all eligible employees not covered by collective bargaining agreements. The
Company does not currently match employee contributions to the plan.
NOTE J
SHAREHOLDERS' EQUITY
In March 1987, the Company adopted an Incentive Stock Option Plan, under
which options vest ratably over five years and expire after 10 years from the
date of grant. In December 1989, the Company adopted its Directors' Nonqualified
Stock Option Plan for non-employee (non-affiliated) directors of the Company,
under which nonqualified options vest ratably over three years and expire, with
certain exceptions, ten years after the date of grant. In 1993, the Company's
shareholders approved the 1993 Executive Stock Option Plan, under which
nonqualified options generally vest ratably over five years and
F-20
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE J
SHAREHOLDERS' EQUITY (CONTINUED)
expire after 10 years. For all the plans, the exercise price must not be less
than the fair market value of the common stock at the date of grant.
During 1996, the Company granted its chief executive officer options at fair
market value which vest subject to continued employment and are 100% exercisable
at the earlier of seven years or at such time as the Company's common stock
trades at $40.00 per share for any consecutive 10 trading days. Such options
became exercisable in January 1997.
These plans provide for the grant of options to acquire up to 2.3 million
shares of common stock to officers, directors and employees. Options for 2.1
million shares granted to 759 employees and six directors were outstanding at
December 28, 1996. Stock option activity under these plans for the last three
years was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- -------------
<S> <C> <C>
Outstanding, December 25, 1993........................................................ 833,519 $ 19.13
Granted............................................................................... 204,200 22.44
Forfeited............................................................................. (11,610) 25.51
Exercised............................................................................. (40,656) 7.02
---------- ------
Outstanding, December 31, 1994 (487,393 exercisable at a weighted average price of
$15.18)............................................................................. 985,453 20.27
Granted (weighted average grant date fair value--$13.71).............................. 514,950 20.64
Forfeited............................................................................. (20,730) 27.02
Exercised............................................................................. (113,895) 5.57
---------- ------
Outstanding, December 30, 1995 (582,089 exercisable at a weighted average price of
$19.80)............................................................................. 1,365,778 21.51
Granted (Weighted average grant date fair value--$18.17).............................. 785,800 30.46
Forfeited............................................................................. (15,490) 24.34
Exercised............................................................................. (68,057) 10.99
---------- ------
Outstanding, December 28, 1996........................................................ 2,068,031 $ 25.25
---------- ------
---------- ------
Exercisable, December 28, 1996........................................................ 717,555 $ 21.81
---------- ------
</TABLE>
In 1990, the Company adopted an Employee Stock Purchase Plan under which
500,000 shares of the Company's common stock are reserved for issuance to
employees. Employees are eligible to participate through payroll deductions in
amounts related to their basic compensation. At the end of each offering period,
shares are purchased by the participants at 85% of the lower of the fair market
value at the beginning or the end of the offering period. Under the plan,
93,967, 84,283 and 91,206 shares were issued to 1,236, 956 and 1,061 employees,
in 1996, 1995 and 1994 respectively. As of December 28, 1996, payroll deductions
totaling $1.3 million on behalf of approximately 1,200 employees were accrued
for purchase of shares on March 31, 1997.
F-21
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE J
SHAREHOLDERS' EQUITY (CONTINUED)
At December 28, 1996, the weighted average remaining contractual life of
options outstanding was 8 years, with an exercise price of $3.25 to $35.50. Of
the 2,068,031 options outstanding at December 28, 1996, only 950 options have an
exercise price above the quoted market price of the Company's stock of $33.50 at
December 28, 1996.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," was recently issued and is effective for the
Company's fiscal year ending December 28, 1996. The Company, as allowed, intends
to continue its current method of accounting as prescribed by Accounting
Principles Board (APB) Opinion No. 25. The fair value of each option granted
during 1996 and 1995 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: one to ten
year expected life from date of grant; stock volatility of 44.7%; risk free
interest rates from 3.91% to 6.32%; and no dividends during the expected term.
Had compensation costs for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed in SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS EXCEPT
PER SHARE DATA)
Net income as reported.................................................. $ 25,418 $ 20,216
Pro forma............................................................... 22,285 18,420
Earnings per share as reported.......................................... 1.71 1.28
Pro forma............................................................... 1.52 1.16
</TABLE>
NOTE K
OLSON'S MERGER
On March 2, 1995 the principal operations of Olson's Food Stores, Inc. were
merged into the Company, including assets and liabilities related to 12 of its
grocery stores and its interest in certain grocery stores in various stages of
development, and its rights to several other future sites. The merger was
effected through an acquisition of 100% of the outstanding voting securities of
Olson's for $18.0 million cash, 752,941 shares of the Company's common stock,
which as of March 2, 1995 had a value of $18.1 million, and the assumption by
the Company of approximately $24.0 million of indebtedness of Olson's. The
merger has been accounted for under the purchase method of accounting.
NOTE L
RECAPITALIZATION
On March 29, 1995, the Company successfully completed a recapitalization
plan, including a self-tender offer under which the Company purchased 7.0
million shares of its common stock at a price of $25.00 per share payable in
cash, and entered into a $220.0 million credit facility to finance the tender
offer, Olson's merger and provide additional capital. Additionally, the Company
sold 1.0 million newly issued shares of its common stock to Zell/Chilmark Fund
L.P. (Zell/Chilmark) at $25.00 per share on March 29, 1995. Zell/Chilmark
acquired an additional approximately 3.0 million shares at $25.00 per share,
F-22
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE L
RECAPITALIZATION (CONTINUED)
plus an amount equal to a 5% annual return on such amount from March 17, 1995
through January 16, 1996, directly from the Company's chairman in a separate
transaction that closed on January 16, 1996.
To reflect the net reduction in shareholders' equity resulting from the
recapitalization, the Company reduced retained earnings to zero at the beginning
of the second quarter of 1995 and allocated the remaining amount as a reduction
to common stock.
Fees paid in connection with the recapitalization aggregated approximately
$4.3 million. During the first quarter of 1995, $1.4 million of these fees were
recorded as a one-time expense, which is not deductible for federal income tax
purposes. The remaining costs of $2.9 million were recorded as a direct
reduction to shareholders' equity.
NOTE M
SUBSEQUENT EVENTS
Keith Uddenberg, Inc. Merger: On February 14, 1997, the Company acquired the
principal operations of Keith Uddenberg, Inc. ("KUI"), including assets and
liabilities related to 25 grocery stores in the western and southern Puget Sound
region of Washington. The merger, which will be accounted for under the purchase
method of accounting, will have the effect of an acquisition of 100% of the
outstanding voting securities of KUI for consideration consisting of
approximately $35.3 million cash, 904,646 shares of the Company's common stock,
which as of February 14, 1997 had a value of $36.0 million, and the assumption
by the Company of approximately $23.8 million of indebtedness of KUI.
Hughes Markets, Inc. Merger: On March 19, 1997, the Company acquired the
principal operations of Hughes Markets, Inc. ("Hughes"), including the assets
and liabilities related to 57 grocery stores located in Southern California and
a 50% interest in Santee Dairies, Inc. ("Santee"), one of the largest dairy
plants in California. The merger, which will be accounted for under the purchase
method of accounting, will have the effect of an acquisition of 100% of the
outstanding voting securities of Hughes, for consideration consisting of
approximately $359.8 million cash, and the assumption by the Company of
approximately $33.2 million of indebtedness of Hughes, consisting primarily of
capitalized store leases.
Financings: On March 19, 1997, the Company entered into the following
transactions to effect the Hughes acquisition, to refinance $197.0 million of
the Company's bank indebtedness outstanding (including $59.1 million of
indebtedness incurred in connection with the KUI acquisition), to pay related
fees and expenses, and to provide cash for general corporate purposes.
Common Stock Offering: The Company sold 5.2 million shares of common stock
at $39.00 per share in a secondary public offering under a Shelf Registration
Statement originally filed December 23, 1996, which provides for the issuance of
up to $500.0 million of equity and debt securities. The net proceeds from the
offering approximated $192.2 million.
Note Offering: The Company issued $150.0 million aggregate principal amount
of 8.7% Senior Subordinated Notes, due 2007, in a private offering (exempt from
the registration requirements of the Securities Act) pursuant to Rule 144a to
institutional investors. The net proceeds from the issuance of the notes
approximated $146.3 million.
F-23
<PAGE>
QUALITY FOOD CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE M
SUBSEQUENT EVENTS (CONTINUED)
Amended Credit Facility: Concurrently with the sale of the debt and equity
securities, the Company entered into an amendment to its existing credit
facility. The new credit facility consists of (i) a $250.0 million term loan
facility ("Term Loan Facility"), (ii) a $125.0 million revolving credit facility
("Revolving Credit Facility") and (iii) a $225.00 million reducing revolving
credit facility ("Acquisition Facility"). Principal repayments under the Term
Loan Facility are due in quarterly installments from June 30, 1998 through the
final maturity of the new credit facility in March 2004. The interest rate per
annum applicable to the new credit facility will either be (1) the greater of
one of the bank agents' reference rate, or 0.5% above the federal funds rate, in
each case, plus a margin (0% initially) or (2) IBOR plus a margin (0.875%
initially), in each case with margin adjustments dependent on the borrower's
senior funded debt to EBITDA ratio from time to time. Only $250.0 million of the
new $600.0 million credit facility has been utilized.
F-24
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected financial data for each of the four
quarters of 1996 and 1995.
(In thousands except earnings per share):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(12 WEEKS) (12 WEEKS) (12 WEEKS) (16 WEEKS)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Sales............................................................ $ 176,627 $ 184,397 $ 186,142 $ 258,115
Cost of sales and related occupancy expenses..................... 133,313 138,221 139,015 193,398
Gross margin..................................................... 43,314 46,176 47,127 64,717
Operating income................................................. 9,828 11,654 11,285 16,230
Interest income.................................................. 72 112 117 165
Interest expense................................................. 2,588 2,165 2,148 2,989
Net earnings..................................................... 4,683 6,167 5,945 8,623
Earnings per share............................................... .32 .42 .40 .57
Average shares outstanding....................................... 14,554 14,798 14,893 15,140
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(12 WEEKS) (12 WEEKS) (12 WEEKS) (17 WEEKS)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Sales............................................................ $ 138,938 $ 175,539 $ 176,057 $ 239,322
Cost of sales and related occupancy expenses..................... 104,656 131,659 132,861 181,257
Gross margin..................................................... 34,282 43,880 43,196 58,065
Operating income................................................. 7,711 11,071 10,099 13,896
Interest income.................................................. 274 76 76 76
Interest expense................................................. 72 2,875 2,938 3,754
Other expense.................................................... 1,400 -- -- --
Net earnings..................................................... 3,781 5,277 4,612 6,546
Earnings per share............................................... .19 .36 .32 .45
Average shares outstanding....................................... 19,842 14,821 14,553 14,548
</TABLE>
F-25
<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 March 3, 1996,
and March 2, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the three years in the period ended
March 2, 1997. 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 March 3, 1996, and March 2, 1997, and the results of their
operations and their cash flows for the three years in the period ended March 2,
1997, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Los Angeles, California
May 9, 1997
F-26
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 3, MARCH 2,
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $31,999,667 $ 8,215,351
Due from Santee Dairies, Inc. ...................................................... -- 5,375,215
Accounts receivable, net of allowances of $341,546 and $35,000 as of March 3, 1996,
and March 2, 1997, respectively................................................... 20,788,846 7,462,960
Inventories, at cost................................................................ 50,095,352 44,589,818
Prepaid expenses and deposits....................................................... 10,243,247 7,713,289
----------- -----------
Total current assets............................................................ 113,127,112 73,356,633
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land................................................................................ 38,579,263 29,813,559
Buildings........................................................................... 57,029,127 60,468,589
Market, automotive and office equipment............................................. 151,713,977 135,811,372
Leasehold improvements.............................................................. 46,669,490 49,529,390
----------- -----------
293,991,857 275,622,910
Less--Depreciation and amortization................................................. 121,915,875 112,144,659
----------- -----------
172,075,982 163,478,251
----------- -----------
PROPERTY UNDER CAPITAL LEASES, net of amortization.................................... 18,424,802 21,190,644
----------- -----------
INVESTMENT IN SANTEE DAIRIES, INC. ................................................... -- 12,337,688
OTHER ASSETS.......................................................................... 12,871,313 8,903,695
----------- -----------
$316,499,209 $279,266,911
----------- -----------
----------- -----------
CURRENT LIABILITIES:
Accounts payable.................................................................... $50,756,904 $35,287,868
Accrued payroll and related benefits................................................ 18,103,750 18,088,317
Current portion of self-insurance liabilities....................................... 3,877,155 6,841,873
Other accrued liabilities........................................................... 14,571,032 11,787,372
Current portion of long-term debt................................................... 22,411,076 6,594,802
Current portion of obligations under capital leases................................. 549,759 617,412
Income taxes payable................................................................ 1,861,867 1,664,994
----------- -----------
Total current liabilities....................................................... 112,131,543 80,882,638
----------- -----------
LONG-TERM DEBT, less current portion.................................................. 5,051,704 277,241
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASES, less current portion................................ 23,556,188 26,774,157
----------- -----------
DEFERRED INCOME TAXES................................................................. 8,845,146 1,253,164
----------- -----------
SELF-INSURANCE LIABILITIES, less current portion...................................... 5,224,149 9,230,520
----------- -----------
OTHER NON-CURRENT LIABILITIES......................................................... 615,424 499,151
----------- -----------
MINORITY INTEREST..................................................................... 9,531,344 --
----------- -----------
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
Common stock, nominal par value:
Authorized--10,000,000 shares
Outstanding--5,612,385 and 5,588,360 as of March 3, 1996 and March 2, 1997,
respectively..................................................................... 5,612 5,588
Additional paid-in capital.......................................................... 5,122,850 5,457,620
Retained earnings................................................................... 147,203,762 155,619,072
----------- -----------
152,541,894 161,291,950
Less--Notes receivable from shareholders............................................ (998,183) (941,910)
----------- -----------
151,543,711 160,350,040
----------- -----------
$316,499,209 $279,266,911
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-27
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
<S> <C> <C> <C>
FEBRUARY 26, MARCH 3, MARCH 2,
1995 1996 1997
------------- ------------- -------------
NET SALES........................................................... $1,110,947,177 $1,147,447,465 $1,001,041,688
COST OF SALES, INCLUDING DISTRIBUTION AND OCCUPANCY EXPENSES........ 884,862,010 901,951,393 771,054,551
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 209,211,036 215,234,435 205,766,436
------------- ------------- -------------
Income from operations.......................................... 16,874,131 30,261,637 24,220,701
------------- ------------- -------------
OTHER INCOME (EXPENSE):
INTEREST INCOME................................................... 1,054,317 1,271,754 777,221
INTEREST EXPENSE.................................................. (4,664,150) (4,335,433) (3,937,012)
------------- ------------- -------------
(3,609,833) (3,063,679) (3,159,791)
Income before provision for income taxes and minority
interest...................................................... 13,264,298 27,197,958 21,060,910
PROVISION FOR INCOME TAXES.......................................... 5,631,000 11,382,473 8,917,158
------------- ------------- -------------
Income before minority interest................................. 7,633,298 15,815,485 12,143,752
MINORITY INTEREST IN SUBSIDIARY LOSS................................ 740,948 369,033 --
EQUITY IN LOSS OF SANTEE DAIRIES, INC............................... -- -- (2,180,809)
------------- ------------- -------------
NET INCOME.......................................................... $ 8,374,246 $ 16,184,518 $ 9,962,943
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON SHARE......................................... $ 1.47 $ 2.87 $ 1.78
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 5,700,558 5,640,369 5,592,200
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 26, 1995, MARCH 3, 1996, AND MARCH 2, 1997
<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
--------- ----------- --------- --------- ----------- ----------- ------------ -------------
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Repayments of notes
receivable from
shareholders........ -- -- -- -- -- -- 56,273 56,273
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............ -- -- -- -- -- 9,962,943 -- 9,962,943
--------- ----------- --------- --------- ----------- ----------- ------------ -------------
BALANCE, March 2, 1997.... 20,967,000 $ 209,670 5,588,360 $ 5,588 $5,457,620 $155,619,072 $ (941,910) $160,350,040
--------- ----------- --------- --------- ----------- ----------- ------------ -------------
--------- ----------- --------- --------- ----------- ----------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------
<S> <C> <C> <C>
FEBRUARY 26, MARCH 3, MARCH 2,
1995 1996 1997
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $8,374,246 $16,184,518 $ 9,962,943
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in Loss of Santee Dairies, Inc.............................. -- -- 2,180,809
Depreciation and amortization...................................... 21,313,241 19,570,835 17,748,121
(Gain) / Loss on sale of property.................................. 109,934 26,391 (27,861)
Minority interest.................................................. (740,948) (342,930) --
Changes in assets and liabilities:
Accounts receivable.............................................. 421,547 (1,141,629) 352,689
Inventories...................................................... (2,989,590) 2,680,076 1,112,123
Prepaid expenses and deposits.................................... (2,353,790) (854,565) 1,079,029
Accounts payable................................................. 8,682,642 (2,177,596) (4,663,162)
Accrued liabilities.............................................. 1,917,488 1,693,671 12,918,778
Income taxes payable............................................. (3,556,176) 1,861,867 (196,873)
Deferred income taxes............................................ 1,197,000 (518,313) (7,423,262)
Other, net....................................................... (286,725) (3,359,973) (3,738,063)
------------ ----------- -----------
Net cash provided by operating activities...................... 32,088,869 33,622,352 29,305,271
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................. (36,062,608) (19,633,316) (29,409,057)
Proceeds from sale of property and equipment......................... 448,022 10,670,178 7,616,705
Proceeds from sale of investment in Santee Dairies, Inc.............. -- -- 205,000
Purchase of Santee Dairies, Inc. stock............................... -- -- (4,795,000)
Advances to Santee Dairies, Inc...................................... -- -- (5,375,215)
Proceeds from non-current deposits................................... 675,922 703,246 565,454
Payments on non-current deposits..................................... (48,938) (112,489) --
------------ ----------- -----------
Net cash provided by (used in) investing activities............ (34,987,602) (8,372,381) (31,192,113)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt...................................... 6,000,000 2,796,731 --
Repayments of long-term debt......................................... (882,271) (17,317,795) (18,590,737)
Repayments of notes receivable from shareholders..................... 222,356 277,174 56,273
Principal payments on obligations under capital leases............... (547,267) (542,094) (577,634)
Proceeds from sale of common stock................................... -- -- 334,781
Repurchases of common stock.......................................... (1,337,723) (2,317,635) (1,058,603)
Payment of dividends................................................. (499,608) (494,902) (489,065)
------------ ----------- -----------
Net cash provided by (used in) financing activities............ 2,955,487 (17,598,521) (20,324,985)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 56,754 7,651,450 (22,211,827)
CASH AND CASH EQUIVALENTS, beginning of period........................... 24,291,463 24,348,217 31,999,667
BEGINNING CASH RELATED TO SANTEE DAIRIES, INC............................ -- -- (1,572,489)
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period................................. $24,348,217 $31,999,667 $ 8,215,351
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest............................................... $4,518,823 $ 4,442,464 $ 3,623,197
Cash paid for income taxes........................................... $8,105,874 $ 8,700,000 $16,100,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for notes receivable........................ $ 292,655 $ 206,495 $ --
Purchases of property under capital leases........................... $ -- $ 2,000,000 $ 3,863,256
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 2, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Hughes Markets, Inc. (the Company), a California corporation and its
wholly-owned subsidiary, Hughes Realty, Inc. (HRI). The accompanying
consolidated balance sheet as of March 3, 1996 and the accompanying consolidated
statements of income for the years ended February 26, 1995 and March 3, 1996,
included the accounts of Santee Dairies, Inc. (Santee), a 51 percent subsidiary.
In November 1996, the Company sold approximately 1 percent of its investment in
Santee to Stater Bros. Markets (Stater)(a 50 percent shareholder after this
investment). As a result the accompanying financial statements as of and for the
year ended March 2, 1997, reflect the Company's investment in Santee under the
equity method of accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
B. MERGER
On November 20, 1996, the Company signed a definitive agreement, whereby it
would merge with Quality Food Centers, Inc. (QFC) in return for approximately
$360 million in cash. The merger closed on March 19, 1997, at which date the
Company became a wholly-owned subsidiary of QFC.
C. 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.
D. 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 $17,054,951 greater at February 26, 1995,
March 3, 1996 and March 2, 1997, respectively.
Santee's inventory balance of $4,393,411 at March 3, 1996, which consisted
primarily of raw materials and supplies, were valued using the lower of FIFO
cost or market.
E. INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset 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 basis.
F. 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
F-31
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<S> <C>
Buildings............................ 10 to 50 years
Equipment............................ 3 to 25 years
Leasehold improvements............... Lesser of useful life or lease term
</TABLE>
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.
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.
As mentioned above, the financial statements of the Company as of and for
the year ended March 2, 1997, do not consolidate the accounts of Santee Dairies,
Inc. The impact of consolidating Santee on the assets and liabilities included
in the accompanying consolidated balance sheet as of March 3, 1996 was as
follows:
<TABLE>
<S> <C>
Accounts receivable............................................ $12,973,197
Inventories.................................................... 4,393,411
Prepaid expenses and deposits.................................. 1,450,929
Property and equipment......................................... 13,841,858
Investment in Santee Dairies, Inc.............................. (4,095,019)
Other assets................................................... (2,640,835)
Accounts payable............................................... (10,805,873)
Accrued liabilities............................................ (4,990,093)
Long-term debt................................................. (2,000,000)
Deferred income taxes.......................................... (168,720)
Minority interest.............................................. (9,531,344)
-----------
Cash related to Santee Dairies, Inc........................ $(1,572,489)
-----------
-----------
</TABLE>
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 1997 and fiscal 1995
covered 52 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
F-32
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
K. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The requirements of SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," issued in 1995, is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121 did
not have a material impact on the Company's results from operations.
The requirements of SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in 1995, are effective for fiscal years beginning after December 15,
1995. SFAS No. 123 did not have an impact on the Company's results from
operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about Capital
Structure," which are effective for fiscal years ending after December 15, 1997.
The effect of these new accounting pronouncements is not expected to be
material.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal
1997 presentation.
M. SELF-INSURANCE
The Company is self-insured for a portion of its workers' compensation,
general liability, and health insurance, all subject to defined limits. The
Company establishes reserves based on an independent actuary's valuation of open
claims reported and an estimate of claims incurred but not yet filed. During
fiscal 1997, the Company reviewed its estimates of self-insurance liabilities
and included an additional estimate for the ultimate liability (the
"fully-developed" claim), which takes into account estimates of future medical
and rehabilitation costs inherent in the total population of claims. These
future costs are discounted using a risk free rate (6.0% as of March 2, 1997) to
arrive at an estimated total liability. The reserves for self-insurance
increased by approximately $7,000,000 in fiscal 1997. The change in estimates
accounted for approximately $4,600,000 of this increase.
F-33
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's expected aggregate payments, related to self-insurance
liabilities as of March 2, 1997, are as follows:
<TABLE>
<S> <C>
Fiscal year:
1998......................................................... $7,044,139
1999......................................................... 4,602,711
2000......................................................... 2,373,390
2001......................................................... 1,093,149
2002......................................................... 720,116
Thereafter................................................... 2,550,588
----------
Expected aggregate cash payments............................... 18,384,093
Less: Discount................................................. (2,311,700)
----------
Net Self-insurance liabilities................................. 16,072,393
Current portion................................................ (6,841,873)
----------
Long-term portion.............................................. $9,230,520
----------
----------
</TABLE>
2. SHAREHOLDERS' EQUITY
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. In connection with the
merger with QFC, in March 1997, the preferred shares were redeemed. For the
years ended February 26, 1995, March 3, 1996, and March 2, 1997 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 common stock at any time by giving notice to the holder, at
a price equal to book value or at the holder's cost, whichever is greater.
3. STOCK OPTIONS
The Company has a stock option plan (the Plan) which provides for the
granting of options to officers, directors 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. The
stock options are 100% vested at the date granted.
F-34
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
3. STOCK OPTIONS (CONTINUED)
Transactions under the Plan are summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
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...................................................... 1,400 $ 30.40
Exercised.................................................... (1,200) $ 30.40
Canceled..................................................... (200) $ 30.40
----------- ------
Outstanding at March 2, 1997..................................... -- --
----------- ------
----------- ------
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for the Plan and, accordingly, no compensation expense has been recognized. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for the
employee stock options under the minimum value method of SFAS No. 123. The
implementation of SFAS No. 123 for fiscal 1996 and 1997 had no impact on the
Company's results of operations.
For the years ended February 26, 1995, March 3, 1996, and March 2, 1997 the
Company repurchased 52,411, 84,045 and 35,225 shares of common stock for
$1,337,723, $2,317,635, and $1,058,603, 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 March 2, 1997, the Company had
extended loans of $988,807, $998,183 and $941,910, 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. In connection with the
merger with QFC in March 1997, all of these loans were repaid.
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 March 2, 1997, no amounts were outstanding under
the $32,000,000 revolving loan facility.
During fiscal 1996, Santee had 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.
F-35
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
4. LONG-TERM DEBT (CONTINUED)
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
MARCH 3, MARCH 2,
1996 1997
------------- ------------
<S> <C> <C>
Revolving loan, unsecured, interest at the prime rate or LIBOR plus 5/8 percent at
the time of borrowing (6 5/8 percent at March 2, 1997). Principal may be repaid and
reborrowed until maturity, October 31, 2000........................................ $ 17,000,000 $ --
Non-negotiable certificates of indebtedness, interest payable quarterly at 7 and 8
percent, due at various dates through 1998......................................... 6,455,851 6,086,524
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......... 615,992 --
Note payable, secured by land and building, interest at 6 percent, due in monthly
installments of $42,977 including interest through December 1997................... 893,874 418,295
Notes payable, collateralized by deeds of trust and equipment, interest at 8.25 to
8.75 percent, due through January 2001............................................. 497,063 367,224
Santee revolving line of credit with a bank, interest at bank's reference rate plus
1/2 percent, interest due monthly, principal due December 1, 1996.................. 2,000,000 --
------------- ------------
27,462,780 6,872,043
Less--Current portion................................................................ 22,411,076 6,594,802
------------- ------------
$ 5,051,704 $ 277,241
------------- ------------
------------- ------------
</TABLE>
As of March 2, 1997, long-term debt matures as follows:
Fiscal year:
<TABLE>
<S> <C>
1998............................................................ $6,594,802
1999............................................................ 146,157
2000............................................................ 59,957
2001............................................................ 65,419
2002............................................................ 5,708
---------
$6,872,043
---------
---------
</TABLE>
In connection with the merger with QFC, the non-negotiable certificates of
indebtedness were paid and are, therefore, classified as current in the
accompanying consolidated balance sheet as of March 2, 1997.
5. INCOME TAXES
The significant components of the consolidated provision (benefit) for
income taxes for the fiscal years ended February 26, 1995, March 3, 1996, and
March 2, 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Current........................................... $ 4,434,000 $ 10,864,000 $ 16,340,000
Deferred.......................................... 1,197,000 518,000 (7,423,000)
------------ ------------- -------------
$ 5,631,000 $ 11,382,000 $ 8,917,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
F-36
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
5. INCOME TAXES (CONTINUED)
The tax effect of temporary differences and carryforwards which give rise to
deferred tax assets and liabilities at March 3, 1996 and March 2, 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Self-insurance liabilities.................................... $ 3,026,193 $ 7,120,070
Capitalize leases............................................. 1,773,723 1,833,189
California state taxes........................................ 1,173,605 1,030,239
Vacation accrual.............................................. 987,039 1,125,756
Other......................................................... 3,331,887 3,711,380
------------- -------------
10,292,447 14,820,634
------------- -------------
Deferred tax liabilities:
Plant and equipment basis differences......................... (11,666,038) (10,608,716)
Union pension benefits paid................................... (3,978,062) --
Other......................................................... (3,493,493) (5,465,082)
------------- -------------
(19,137,593) (16,073,798)
------------- -------------
Net deferred tax liability...................................... $ (8,845,146) $ (1,253,164)
------------- -------------
------------- -------------
</TABLE>
The differences between the Company's effective income tax rates and the
federal statutory rates are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate................................................. 35.0% 35.0% 35.0%
State taxes.................................................... 6.0 6.0 6.0
Other.......................................................... 1.5 0.9 1.3
--- --- ---
Effective rate................................................. 42.5% 41.9% 42.3%
--- --- ---
--- --- ---
</TABLE>
6. LEASES
The Company leases a majority of its store facilities under long-term
leases. These leases extend for varying periods through 2022, 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.
F-37
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
6. LEASES (CONTINUED)
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:
<TABLE>
<CAPTION>
MARCH 3, MARCH 2,
1996 1997
------------- -------------
<S> <C> <C>
Store facilities under capital leases.......................... $ 28,000,306 $ 31,263,618
Equipment under capital leases................................. 1,983,877 1,081,021
------------- -------------
29,984,183 32,344,639
Less--Accumulated amortization................................. (11,559,381) (11,153,995)
------------- -------------
$ 18,424,802 $ 21,190,644
------------- -------------
------------- -------------
</TABLE>
At March 2, 1997, future minimum obligations on capital and operating leases
were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- --------------
<S> <C> <C>
Due in fiscal year:
1998...................................................... $ 3,668,274 $ 9,572,297
1999...................................................... 3,668,274 9,418,032
2000...................................................... 3,668,274 9,408,095
2001...................................................... 3,668,274 9,198,117
2002...................................................... 3,668,274 9,298,247
Thereafter 49,765,285 119,119,124
------------- --------------
Minimum lease payments 68,106,655 $ 166,013,912
--------------
--------------
Less--Amount representing interest (40,715,086)
-------------
Present value of minimum lease payments 27,391,569
Current portion (617,412)
-------------
Long-term portion $ 26,774,157
-------------
-------------
</TABLE>
Minimum lease obligations under capital leases include $19,496,496 payable
to partnerships, including principal shareholders of the Company.
As of March 2, 1997, the total minimum rent obligations under operating
leases include $7,726,666 due to partnerships, including principal shareholders
of the Company, and have not been reduced for minimum sublease rentals of
$2,443,635 due in the future under non-cancellable sublease agreements.
Rental expense related to non-cancellable operating leases is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
<S> <C> <C> <C>
FEBRUARY 26, MARCH 3, MARCH 2,
1995 1996 1997
------------- ------------- -------------
Minimum rentals................................. $ 10,635,245 $ 12,498,876 $ 9,676,804
Contingent rentals.............................. 2,963,852 3,004,046 1,941,219
------------- ------------- -------------
13,599,097 15,502,922 11,618,023
Less--Sublease rentals.......................... (395,777) (454,830) (575,462)
------------- ------------- -------------
Net rental expense.............................. $ 13,203,320 $ 15,048,092 $ 11,042,561
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-38
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
7. COMMITMENTS AND CONTINGENCIES
At March 2, 1997, the Company had approximately $8,983,000 in outstanding
letters of credit related to its workers' compensation insurance requirements
(see note 1.m.).
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 $27,544,000, $26,488,000 and
$24,660,326 for the years ended, February 26, 1995, March 3, 1996, and March 2,
1997, 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 26, 1995, March 3, 1996, and March 2, 1997 the
Company recorded reductions (credits) of approximately $3,000,000, $7,200,000,
and $3,000,000 respectively, as an offset to required contributions to the
Southern California UFCW Unions and Food Employers Benefit Fund.
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 $1,570,000, $2,563,000 and $2,554,000
for the years ended February 26, 1995, March 3, 1996, and March 2, 1997,
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 key 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.
The Company maintains a non-current deposit with Certified Grocers of
California, Ltd. (Cergro), in the form of 6.24% ownership of the total issued
and outstanding Class B Shares of Cergro as of February 14, 1997 (the record
date for Cergro's 1997 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 1996, Certified redeemed 3,367 shares of the Company's Class
B shares for total proceeds of approximately $565,454 and a total gain of
approximately $184,683. Cergro's fiscal 1997 Class B Shares redemption limit is
19,191 shares with 15,095 tendered for redemption as of Cergro's fiscal year
ended
F-39
<PAGE>
HUGHES MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 2, 1997
9. DISCLOSURE ABOUT FAIR VALUE OF INVESTMENTS (CONTINUED)
August 31, 1996. Therefore, it is not practicable to estimate the fair value of
this investment. The investment is carried at its original cost of $3,250,562 in
the accompanying consolidated balance sheets. At August 31, 1996, the total
assets reported by Cergro were $373,360,000 ($398,603,000 in 1995),
stockholders' equity was $72,706,000 ($72,160,000 in 1995), annual revenues were
$1,948,919,000 ($1,822,804,000 in 1995), and net income was $1,517,000 ($769,000
in 1995).
10. RELATED PARTY TRANSACTIONS
During fiscal 1997, the Company purchased $21,382,739 of inventory on an
arms-length basis from its equity investee, Santee Dairies, Inc. The amounts due
to Santee as a result of such purchases approximated $361,000 as of March 2,
1997.
During fiscal 1997, the Company advanced Santee $5,375,215 for product
advances. This amount is expected to be repaid within one year and does not bear
interest.
11. INVESTMENT IN SANTEE DAIRIES, INC.
As noted above, effective for fiscal 1997, the Company deconsolidated the
financial results of Santee and began accounting for its investment under the
equity method. Summarized below is certain financial data of Santee as of and
for the year ended March 2, 1997:
<TABLE>
<S> <C>
Current Assets................................................ $16,337,120
Total Assets.................................................. $67,907,127
Current Liabilities........................................... $39,875,748
Total Shareholders' Equity.................................... $24,675,376
Net Sales..................................................... $192,311,160
Net Loss...................................................... $ 4,307,721
</TABLE>
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 2, 1997, Santee was out of compliance with certain of its financial
covenants relating to its bank loans. Santee has obtained waivers of
non-compliance through Santee's fiscal year-end (December 28, 1996).
Negotiations are currently under way with certain potential lenders to provide
Santee with long-term debt, which will be used to finance the construction of
the new dairy plant. It is currently expected that the debt financing will
amount to approximately $80,000,000 of senior secured notes due in 2007. The
potential lenders have agreed in principle to the primary terms, including the
applicable interest rate and the Company has paid a non-refundable fee in
connection therewith.
In November 1996, Santee sold $9,590,000 of additional preferred stock to
the Company and Stater. The Company's share of this additional preferred stock
is $4,795,000.
F-40
<PAGE>
KU ACQUISITION CORPORATION
STATEMENT OF EARNINGS
(UNAUDITED)
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Sales.............................................................................. $ 31,583
Cost of sales and related occupancy expenses....................................... 24,982
Marketing, general and administrative expenses..................................... 5,692
---------
OPERATING INCOME................................................................... 909
Interest income.................................................................... 7
Interest expense................................................................... 399
---------
EARNINGS BEFORE INCOME TAXES....................................................... 517
Taxes on income....................................................................
Current.......................................................................... 224
Deferred......................................................................... (14)
---------
Total taxes on income.............................................................. 210
---------
NET EARNINGS....................................................................... $ 307
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
KU ACQUISITION CORPORATION
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 22, FEBRUARY 15,
1997 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................... $ 2,000 $ 1,262
Accounts receivable..................................................................... 3,901 4,340
Inventories............................................................................. 17,282 15,985
Prepaid expenses........................................................................ 338 409
---------- ------------
TOTAL CURRENT ASSETS.................................................................... 23,521 21,996
PROPERTIES
Land.................................................................................... 7,924 7,924
Buildings, fixtures and equipment....................................................... 14,972 14,893
Leasehold improvements.................................................................. 2,230 2,230
---------- ------------
25,126 25,047
Accumulated depreciation and amortization............................................... (218)
---------- ------------
24,908 25,047
LEASEHOLD INTEREST, net of accumulated amortization of $41 at March 22, 1997............ 19,959 20,000
GOODWILL, net of accumulated amortization of $82 at March 22, 1997...................... 53,399 53,481
INVESTMENT IN AFFILIATED SUPPLIER....................................................... 11,095 11,095
OTHER ASSETS............................................................................ 1,245 1,235
---------- ------------
$ 134,127 $ 132,854
---------- ------------
---------- ------------
LIABILITIES AND PARENT INVESTMENT
CURRENT LIABILITIES
Accounts payable........................................................................ $ 424 $ 11,933
Accrued payroll and related benefits.................................................... 2,173 1,846
Accrued business and sales taxes........................................................ 1,504 1,423
Other accrued expenses.................................................................. 1,016 597
Deferred income taxes................................................................... 63 63
Federal income taxes payable............................................................ 419 645
---------- ------------
TOTAL CURRENT LIABILITIES............................................................... 5,599 16,507
DEFERRED INCOME TAXES................................................................... 17,417 17,431
OTHER LIABILITIES....................................................................... 3,839 3,839
PAYABLE TO PARENT....................................................................... 71,005 35,349
LONG-TERM DEBT.......................................................................... 23,768
PARENT INVESTMENT
Parent investment....................................................................... 35,960 35,960
Retained earnings....................................................................... 307
---------- ------------
TOTAL PARENT INVESTMENT................................................................. 36,267 35,960
---------- ------------
$ 134,127 $ 132,854
---------- ------------
---------- ------------
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
KU ACQUISITION CORPORATION
STATEMENT OF PARENT INVESTMENT
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT RETAINED
INVESTMENT EARNINGS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance at February 15, 1997.................................................... $ 35,960 $ -- $ 35,960
Net earnings.................................................................... -- 307 307
----------- ----- ---------
Balance at March 22, 1997....................................................... $ 35,960 $ 307 $ 36,267
----------- ----- ---------
----------- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
KU ACQUISITION CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net earnings...................................................................... $ 307
Adjustments to reconcile net earnings to net Cash provided by operating
activities:
Depreciation and amortization of properties....................................... 218
Amortization of goodwill, leasehold interest and other............................ 124
Deferred income taxes............................................................. (14)
Other............................................................................. (11)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable............................................................... 439
Inventories....................................................................... (1,297)
Prepaid expenses.................................................................. 71
Accounts payable.................................................................. (11,509)
Accrued payroll and related benefits.............................................. 327
Accrued business and sales taxes.................................................. 81
Other accrued expenses............................................................ 419
Payable to parent................................................................. 11,888
Federal income taxes payable...................................................... (226)
---------
Net Cash Provided by Operating Activities......................................... 817
---------
INVESTING ACTIVITIES
Capital expenditures, net......................................................... (79)
---------
Net Cash Used by Investing Activities............................................. (79)
---------
FINANCING ACTIVITIES
Proceeds from parent.............................................................. 23,768
Repayment of long-term debt....................................................... (23,768)
---------
Net Cash Provided by Financing Activities......................................... --
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 738
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 1,262
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 2,000
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
KU ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(UNAUDITED)
NOTE A--NATURE OF OPERATIONS
KU Acquisition Corporation ("KUA" or the "Company") is a wholly-owned
subsidiary of Quality Food Centers, Inc. ("QFC"). On February 15, 1997, the
principal operations of Keith Uddenberg, Inc. ("KUI"), including assets and
liabilities related to 25 grocery stores in the western and southern Puget Sound
region of Washington, were merged into KUA. One store was sold subsequent to
March 22, 1997; the remaining stores are operated by KUA under the "Stock
Market" and "Thriftway" names. KUA had no significant operations prior to the
acquisition of KUI.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: KUA's financial statements for the period February 15
to March 22, 1997 are unaudited, but in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position and results of operations and cash flows for the
period presented. KUA's financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from the estimates.
REPORTING PERIODS: The Company's fiscal year will end on the last Saturday
in December, and its reporting quarters will consist of three 12-week quarters
and a 16-week fourth quarter. The accompanying financial statements present
statements of earnings, parent investment and cash flows for the period from the
date of the acquisition of KUI on February 15, 1997 to the end of the fiscal
quarter on March 22, 1997.
CASH AND CASH EQUIVALENTS: KUA considers all highly liquid investments with
a maturity of three months or less at the time of purchase to be cash
equivalents.
Cash generated by KUA is deposited into a centralized cash account operated
by QFC. Cash requirements of KUA are also met from a centralized disbursement
account operated by QFC. As of March 22, 1997, KUA had recorded a net payable to
QFC of $11.9 million, representing cash required for KUA's operations offset by
cash generated by KUA's operations.
DEPRECIATION AND AMORTIZATION: Depreciation is provided on the straight-line
method over the shorter of the estimated useful lives or 31 1/2 years for
buildings and three to ten years for fixtures and equipment. Amortization of
leasehold improvements is computed on the straight-line method over the term of
the lease or useful life of the assets, whichever is shorter.
GOODWILL: Goodwill arising from the acquisition of KUI represents the
consideration paid to KUI stockholders in excess of amounts assigned to tangible
and identified intangible assets. Goodwill is being amortized over 40 years.
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets,
including identified intangible assets and goodwill, for impairment to determine
whether events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Such review includes estimating expected
future cash flows. No such events or circumstances have occurred through March
22, 1997.
F-45
<PAGE>
KU ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASEHOLD INTEREST: Leasehold interests from acquired operating lease rights
are amortized over the term of the respective leases, including renewal periods
exercisable at the option of the Company. Management believes that exercise of
renewal options is probable.
NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest for the period February 15 to March
22, 1997 was as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------
<S> <C>
Income taxes.......................................................................... $ 450
Interest.............................................................................. 13
</TABLE>
NOTE D--INVENTORIES
Substantially all merchandise inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. The LIFO method results in a better
matching of costs and revenues, as current merchandise cost is recognized in
cost of merchandise sold instead of in ending inventories as is the practice
under the first-in, first-out (FIFO) method. There was no LIFO adjustment for
the period from February 15 to March 22, 1997.
NOTE E--LEASES
KUA leased 23 of its 25 store facilities in operation under noncancelable
operating leases expiring through 2020. Certain of the leases include renewal
provisions at KUA's option. Minimum rental commitments under noncancelable
leases as of March 22, 1997 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, YEAR ENDING DECEMBER
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 5,485
1998.............................................................................. 6,825
1999.............................................................................. 6,845
2000.............................................................................. 6,928
2001.............................................................................. 6,997
Thereafter........................................................................ 84,363
----------
$ 117,443
----------
----------
</TABLE>
A majority of the store facility leases provide for contingent rentals based
upon specified percentages of sales, real estate tax escalation clauses and
executory costs. Space in several store facilities has been sublet.
F-46
<PAGE>
KU ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE E--LEASES (CONTINUED)
A summary of rental expense under operating leases for the period February
15 to March 22, 1997 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------
<S> <C>
Minimum rent.......................................................................... $ 695
Contingent rentals.................................................................... 8
Real estate taxes and executory costs................................................. 150
Less sublease rentals................................................................. (5)
---------
$ 848
---------
---------
</TABLE>
NOTE F--INVESTMENT IN AFFILIATED SUPPLIER
The investment in affiliated supplier is stated at the consideration paid to
KUI stockholders for this asset, which approximated the fair value of the
investment as determined by the net book value of the affiliated supplier on
February 14, 1997. Liquidation of the investment 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 rata basis.
The president and another director of QFC are members of the board of
directors of the affiliated supplier. The amount paid by KUA to the affiliated
supplier for product and services for the period from February 15 to March 22,
1997 totaled approximately $18.2 million. As a result of the KUI Acquisition,
KUA, together with its parent, owns approximately 22% of the non-voting equity
of the affiliated supplier.
F-47
<PAGE>
KU ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE G--FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and result from
differences in the timing of recognition of revenue and expenses for tax and
financial statement reporting. The tax effects of significant items comprising
KUA's deferred tax liability are as follows:
<TABLE>
<CAPTION>
MARCH 22, FEBRUARY 15,
IN THOUSANDS 1997 1997
- -------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Current deferred taxes:
Accrued compensation.............................................. $ 69 $ 69
Patronage dividend receivable..................................... (219) (219)
Deferred income................................................... 87 87
---------- ------------
$ (63) $ (63)
---------- ------------
---------- ------------
Non-current deferred taxes:
Deferred taxes arising from merger................................ $ (18,354) $ (18,368)
Accrued lease obligation.......................................... 1,242 1,242
Depreciation...................................................... (864) (864)
Tax credits....................................................... 280 280
Deferred gain on property sale.................................... 135 135
Deferred income................................................... 98 98
Other............................................................. 46 46
---------- ------------
$ (17,417) $ (17,431)
---------- ------------
---------- ------------
</TABLE>
At March 22, 1997, the Company has targeted jobs tax credits, totaling
$257,717, expiring through 2005, and alternative minimum tax credits, totaling
$22,366, that are available to offset future tax liabilities.
The differences between the Company's effective income tax rates and the
federal statutory rates for the period February 15 to March 22, 1997 are
summarized as follows:
<TABLE>
<S> <C>
Statutory rate...................................................... 35.0%
Nondeductible goodwill.............................................. 5.6%
Other............................................................... --
---------
Effective Tax Rate.................................................. 40.6%
---------
---------
</TABLE>
NOTE H--LONG-TERM DEBT
In addition to the KUI/KUA merger described in Note A, QFC also acquired the
stock of Hughes Markets, Inc. ("Hughes") in March 1997. To finance each of these
acquisitions and to refinance its existing indebtedness, QFC sold 5,175,000
shares of its common stock to the public at $39 per share, issued $150.0 million
of senior subordinated notes and borrowed $250.0 million under a revolving
credit facility (the "Term Debt"). KUA and Hughes are guarantors on both the
notes and the Term Debt. KUA's financial
F-48
<PAGE>
KU ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 15 TO MARCH 22, 1997
(UNAUDITED) (CONTINUED)
NOTE H--LONG-TERM DEBT (CONTINUED)
statements reflect the push down of a portion of QFC's debt, based on the use of
proceeds described above. Accordingly, $59.1 million of long-term debt is
included in payable to parent at March 22, 1997.
NOTE I--COMMITMENTS AND CONTINGENCIES
In 1995, KUI 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 has committed to purchase a minimum of $5.0 million of
this product over an estimated five-year period in exchange for approximately
$1.9 million 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. Cash and free goods received in advance are included in short-term
accrued liabilities or long-term deferred income and totaled approximately $0.5
million at March 22, 1997. No reduction to cost of goods sold was recorded
during the period from February 15 to March 22, 1997.
The Internal Revenue Service is currently examining KUI's federal income tax
return for 1994. While no formal adjustments have been proposed, management
believes that any such adjustments would not have a material impact on the
financial statements.
KUA is involved in various matters of litigation, all arising in the
ordinary course of business. In the opinion of management, the ultimate outcome
of such matters will not have a material adverse effect on the financial
position or results of operations of KUA.
NOTE J--RETIREMENT PLANS
The Company participates in a union administered multi-employer defined
benefit pension plan for employees covered by collective bargaining agreements.
The contributions under this plan were $136,000 for the period from February 15
to March 22, 1997.
The Company's defined contribution profit-sharing plan includes employees
not covered by collective bargaining agreements who meet certain service
requirements. Contributions to the plan are based on a percentage of gross wages
and are made at the discretion of the Company. The Company's profit-sharing
expense was $6,000 for the period from February 15 to March 22, 1997.
The Company maintains a voluntary defined contribution retirement plan
qualified under Section 401(k) of the Internal Revenue Code of 1986, available
to all eligible employees not covered by collective bargaining agreements. The
Company does not currently match employee contributions to the plan.
F-49
<PAGE>
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 30, 1995, and December 28, 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 28, 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, such financial statements present fairly, in all material
respects, the financial position of Keith Uddenberg, Inc. as of December 30,
1995, and December 28, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
/s/DELOITTE & TOUCHE LLP
Seattle, Washington
May 2, 1997
F-50
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED), AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 30, FEBRUARY 14,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
SALES...................................... 2$92,669,924 3$19,141,108 3$48,915,468 8$0,162,743 $46,792,804
COST OF SALES AND RELATED OCCUPANCY
EXPENSES, net of patronage dividend from
affiliated supplier of $2,903,170,
$2,220,473, $2,911,235, $755,384, and
$441,179................................. 230,952,363 250,823,306 272,026,144 62,270,410 33,817,426
------------ ------------ ------------ ----------- ------------
Gross margin........................... 61,717,561 68,317,802 76,889,324 17,892,333 12,975,378
OPERATING EXPENSES......................... 62,201,707 70,440,769 74,916,482 17,582,307 11,003,992
------------ ------------ ------------ ----------- ------------
Operating margin....................... (484,146) (2,122,967) 1,972,842 310,026 1,971,386
OTHER INCOME (EXPENSE):
Nonstore operations...................... 587,294 665,541 659,112 125,162 63,614
Gain on disposal of land and equipment,
net.................................... 395,450 68,365 206,571 13,820 378,300
Gain on sale of investment in affiliated
supplier............................... 71,119 1,261,407
Interest expense, net of interest income
of $107,458, $79,268, $31,926, $6,768,
and $8,266............................. (1,209,384) (1,859,779) (1,681,720) (443,533) (203,324)
Other.................................... 26,079 70,769 122,964 21,167 260,836
------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.......... (613,588) (1,916,664) 1,279,769 26,642 2,470,812
INCOME TAX BENEFIT (EXPENSE)............... 273,500 674,061 441,555 (8,629) (859,843)
------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS).......................... (340,088) (1,242,603) 838,214 18,013 1,610,969
PREFERRED STOCK DIVIDENDS.................. (946,444) (946,444) (946,444) (236,611)
------------ ------------ ------------ ----------- ------------
EARNINGS (LOSS) AVAILABLE FOR COMMON
SHAREHOLDERS............................. $(1,286,532) $(2,189,047) $ (108,230) $(218,598) $1,610,969
------------ ------------ ------------ ----------- ------------
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK.................................... $ (100.28) $ (170.62) $ (8.44) $ (17.04) $ 125.56
------------ ------------ ------------ ----------- ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.............................. 12,830 12,830 12,830 12,830 12,830
------------ ------------ ------------ ----------- ------------
</TABLE>
See notes to financial statements.
F-51
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND SEVEN WEEKS ENDED
FEBRUARY 14, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK, COMMON STOCK,
SERIES A NO PAR VALUE
-------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------- ------------- -------------
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....................................... 838,214 838,214
--------- --------- --------- ---------- ------------- -------------
BALANCE,
December 28, 1996................................ 11,542 1,000 12,830 148,580 2,965,784 3,115,364
Net income (unaudited)........................... 1,610,969 1,610,969
--------- --------- --------- ---------- ------------- -------------
BALANCE, February 14, 1997 (unaudited)............. 11,542 $ 1,000 12,830 $ 148,580 $ 4,576,753 $ 4,726,333
--------- --------- --------- ---------- ------------- -------------
--------- --------- --------- ---------- ------------- -------------
</TABLE>
See notes to financial statements.
F-52
<PAGE>
KEITH UDDENBERG, INC.
BALANCE SHEETS
DECEMBER 30, 1995,
DECEMBER 28, 1996, AND FEBRUARY 14, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, FEBRUARY 14,
ASSETS 1995 1996 1997
- ----------------------------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash................................................................................... $3,894,377 $ 895,566 $1,371,535
Accounts receivable (no allowance deemed necessary):
Trade................................................................................ 2,327,849 2,699,784 3,253,906
Affiliated supplier.................................................................. 645,083 645,083 1,086,262
Inventories............................................................................ 11,377,977 11,380,950 11,532,743
Federal income taxes receivable........................................................ 191,896 138,839
Other current assets................................................................... 252,516 459,621 829,246
------------ ------------ ------------
Total current assets............................................................... 18,689,698 16,219,843 18,073,692
PROPERTY AND EQUIPMENT:
Land................................................................................... 2,415,183 2,415,183 2,415,183
Buildings and building improvements.................................................... 5,954,062 6,025,329 6,018,679
Fixtures and equipment................................................................. 41,841,882 44,838,045 43,474,721
Leasehold improvements................................................................. 2,565,719 2,614,646 2,353,060
Vehicles............................................................................... 589,221 542,983 542,983
Construction in progress............................................................... 3,716,903 4,112,728 4,099,913
------------ ------------ ------------
57,082,970 60,548,914 58,904,539
Less accumulated depreciation.......................................................... (27,475,399) (29,972,713) (29,281,723)
------------ ------------ ------------
29,607,571 30,576,201 29,622,816
Real estate and improvements--Nonstore operations...................................... 1,040,445 580,523 128,025
Less accumulated depreciation.......................................................... (165,126) (173,775)
------------ ------------ ------------
Total property and equipment, net.................................................. 30,482,890 30,982,949 29,750,841
INVESTMENTS AND OTHER ASSETS:
Investment in affiliated supplier...................................................... 4,212,385 5,170,519 5,170,519
Notes receivable....................................................................... 366,540 534,769 682,180
Assets under contract of sale to related party......................................... 183,279 183,279 183,279
Deferred income taxes.................................................................. 1,424,166 1,021,631 937,073
Other assets........................................................................... 358,300 364,709 364,709
------------ ------------ ------------
Total investments and other assets................................................. 6,544,670 7,274,907 7,337,760
------------ ------------ ------------
TOTAL.................................................................................... $55,717,258 $54,477,699 $55,162,293
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Trade................................................................................ $5,728,923 $5,984,638 $4,693,675
Affiliated supplier.................................................................. 8,016,149 6,891,079 6,890,696
Accrued payroll and related benefits................................................... 1,838,312 1,778,988 1,846,014
Accrued business and sales taxes....................................................... 999,159 1,031,616 1,423,481
Other accrued expenses................................................................. 1,400,945 1,552,492 628,544
Deferred income taxes.................................................................. 18,949 58,149 62,689
Federal income taxes payable........................................................... 644,766
Current portion of long-term debt:
Bank and other....................................................................... 3,913,352 5,387,861 5,685,142
Affiliated supplier.................................................................. 304,746 351,438 351,438
------------ ------------ ------------
Total current liabilities.......................................................... 22,220,535 23,036,261 22,226,455
DEFERRED INCOME.......................................................................... 655,000 330,000 287,000
ACCRUED LEASE OBLIGATION................................................................. 3,483,000 3,818,000 3,839,000
LONG-TERM DEBT, less current portion:
Bank and other......................................................................... 21,519,889 18,971,688 18,920,753
Affiliated supplier.................................................................... 2,233,365 1,878,067 1,834,443
------------ ------------ ------------
Total long-term debt............................................................... 23,753,254 20,849,755 20,755,196
DIVIDENDS PAYABLE ON PREFERRED STOCK..................................................... 2,381,875 3,328,319 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...................................................................... 3,074,014 2,965,784 4,576,753
------------ ------------ ------------
Total shareholders' equity......................................................... 3,223,594 3,115,364 4,726,333
------------ ------------ ------------
TOTAL.................................................................................... $55,717,258 $54,477,699 $55,162,293
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-53
<PAGE>
KEITH UDDENBERG, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 30, FEBRUARY 14,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)............................... $ (340,088) $(1,242,603) $ 838,214 $ 18,013 $1,610,969
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................. 3,820,084 3,326,599 2,738,995 710,097 337,261
Gain on sale of investment in affiliated
supplier.................................... (71,119) (1,261,407)
Gain on disposal of land and equipment, net... (395,450) (68,365) (206,571) (13,820) (378,300)
Noncash patronage dividends received from
affiliated supplier....................... (735,823) (1,012,321) (958,134) (239,536)
Deferred income taxes....................... (53,000) (612,217) 441,735 3,121 89,098
Cash provided (used) by changes in operating
assets and liabilities:
Accounts receivable....................... (830,009) (500,644) (371,935) 918,636 (995,301)
Inventories............................... (688,337) (816,642) (2,973) 180,634 (151,793)
Income taxes receivable................... 31,500 28,604 53,057 138,839
Other current assets...................... 120 (90,361) (207,105) (360,654) (369,625)
Other assets.............................. (33,432) (39,960) (6,409)
Accounts payable.......................... 817,227 1,367,009 (869,355) (1,042,772) (1,291,346)
Accrued liabilities....................... 181,749 223,781 124,680 730,369 (465,057)
Income taxes payable...................... 117,379 644,766
Deferred income........................... 655,000 (325,000) (81,250) (43,000)
Accrued lease obligation.................. 469,000 566,000 335,000 111,667 21,000
------------ ------------ ------------ ----------- ------------
Net cash provided (used) by operating
activities...................................... 2,172,422 522,473 1,584,199 1,051,884 (852,489)
INVESTING ACTIVITIES:
Capital expenditures, net....................... (7,439,967) (7,426,851) (3,032,483) (1,099,473) 1,273,147
Proceeds from notes receivable.................. 30,509 756,021 55,000 222,088
Issuance of notes receivable.................... (223,229) (147,441)
Proceeds from sale of investment in affiliated
supplier...................................... 1,000,039 1,584,735
------------ ------------ ------------ ----------- ------------
Net cash provided (used) by investing
activities.................................... (6,409,419) (5,086,095) (3,200,712) (877,385) 1,125,736
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........ 25,384,318 45,153,571 24,367,980 6,191,995 202,722
Principal payments of long-term debt............ (21,490,929) (39,340,978) (25,750,278) (6,270,413)
Principal payments of note payable to
shareholder................................... (200,000) (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 (1,382,298) (78,418) 202,722
------------ ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH................... (263,608) 1,096,444 (2,998,811) 96,081 475,969
CASH:
Beginning of period............................. 3,061,541 2,797,933 3,894,377 3,894,377 895,566
------------ ------------ ------------ ----------- ------------
End of period................................... $2,797,933 $3,894,377 $ 895,566 $3,999,458 $1,371,535
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $1,317,624 $1,928,445 $1,924,314 $ 450,301 $ 203,224
Cash received for income tax refund............. 90,294 167,237
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
TRANSACTIONS:
Nonstore real estate exchanged for assets under
contract of sale to related party............. 183,279
</TABLE>
See notes to financial statements.
F-54
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (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. As discussed in note 10,
the Company was acquired by Quality Food Centers, Inc. on February 14, 1997.
Accordingly, the accompanying 1997 interim financial statements are as of and
for the seven week period ended February 14, 1997, which represents the
Company's final period.
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 consists of a
53-week period while the years ended December 30, 1995, and December 28, 1996,
reflects 52-week periods.
INTERIM FINANCIAL INFORMATION: The interim financial information as of and
for the three months ended March 30, 1996, and February 14, 1997, 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 seven week period ended
February 14, 1997 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:
<TABLE>
<S> <C>
25-40
Buildings and building improvements............................. years
Fixtures and equipment.......................................... 5-10 years
10-30
Leasehold improvements.......................................... years
Vehicles........................................................ 3-5 years
</TABLE>
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.
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, $219,000, and $242,000, during the years ended December 31, 1994,
December 30, 1995,
F-55
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and December 28, 1996, 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 30, 1995, and December 28,
1996, reasonably approximates the fair value of these financial instruments.
The investment in affiliated supplier is stated at cost. At December 30,
1995, and December 28, 1996, the fair value of the investment in affiliated
supplier, as determined by the net book value of the affiliated supplier, was
approximately $10,376,000 and $11,000,000, respectively. Liquidation of the
investment 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 rata basis.
Fair value of long-term obligations, based on current interest rates,
approximates historical cost at December 30, 1995, and December 28, 1996, due to
the frequent repricing of the instruments.
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets,
including identifiable assets and goodwill for impairment to determine whether
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Such review includes estimating expected future
cash flows. No such events or circumstances have occurred during 1996.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share of common stock is
based upon the weighted average number of common shares 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
F-56
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 2: INVENTORIES (CONTINUED)
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 $6,648,000 and $7,105,000 as of December
30, 1995, and December 28, 1996. Earnings on a pretax basis for the years ended
December 31, 1994, December 30, 1995, and December 28, 1996 would have increased
by $109,000, $138,000, and $457,000, respectively.
NOTE 3: BORROWING ARRANGEMENTS
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Note payable at $58,198 per month, including interest at financial institution's
option rate (7.19% at December 28, 1996), matures through October 1, 2001........ $ 9,500,000 $ 8,750,000
Note payable at $760,000 per year including interest at financial institution's
option rate (7.16% at December 28, 1996), matures November 2003.................. 3,117,980
Note payable at $74,721 per month, including interest at financial institution's
option rate (7.16% at December 28, 1996), matures
October 2000..................................................................... 3,615,699 2,954,997
Note payable at $37,233 per month, including interest at financial institution's
option rate (7.16% at December 28, 1996), matures
May 2005......................................................................... 2,986,560 2,743,588
Note payable at $52,481 per month, including interest at financial institution's
option rate (7.35% at December 28, 1996), matures
June 2000........................................................................ 2,557,935 2,104,531
Note payable at $8,011 per week, including interest at financial institution's
option rate (8.25% at December 28, 1996), matures August 2000.................... 2,322,659 2,096,300
Revolving line of credit due August 1, 1996 (7.06% at December 28, 1996)........... 2,000,000 1,000,000
Note payable at $8,458 per month, interest only at financial institution's option
rate (7.16% at December 28, 1996), matures August 1997........................... 1,400,000 1,400,000
Revolving line of credit due September 30, 1997 (8.25% at December 28, 1996)....... 1,250,000 500,000
Note payable at $9,869 per month, including interest at financial institution's
option rate (9.25% at December 28, 1996), matures
March 1999....................................................................... 773,969 726,744
------------- -------------
Balance, CARRIED FORWARD........................................................... $ 26,406,822 $ 25,394,140
</TABLE>
F-57
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 3: BORROWING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Balance, BROUGHT FORWARD........................................................... $ 26,406,822 $ 25,394,140
Note payable at $7,000 per month, including interest at 9%, matures October 2008... 637,090 609,463
Note payable at $5,000 per month, including interest at 9%, matures September
2006............................................................................. 410,835 386,940
Note payable at $87,563 per month, including interest at financial institution's
option rate (8.5% at December 28, 1996), matures July 1996....................... 197,167
Other notes payable, maturing through 2005......................................... 319,438 198,511
------------- -------------
27,971,352 26,589,054
Less current portion............................................................... (4,218,098) (5,739,299)
------------- -------------
$ 23,753,254 $ 20,849,755
------------- -------------
------------- -------------
</TABLE>
The Company has available a line of credit of $3,000,000 with a financial
institution available through September 30, 1997, of which $1,250,000 and
$500,000 was outstanding at December 30, 1995, and December 28, 1996,
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 has available a revolving line of credit of $2,000,000 with a
financial institution available through August 1, 1998, of which $2,000,000 and
$1,000,000, respectively, was outstanding at December 30, 1995, and December 28,
1996, respectively, 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, and December 28, 1996, inventory, land, buildings, and
equipment with a net depreciated total cost of approximately $22,947,000 and
$21,946,000, respectively, 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.
F-58
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 3: BORROWING ARRANGEMENTS (CONTINUED)
Subsequent to year end, the majority of long-term debt was assumed by
Quality Food Centers in connection with the merger (Note 10). Maturities of
long-term debt at December 28, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 5,739,298
1998........................................................................... 5,293,447
1999........................................................................... 5,274,623
2000........................................................................... 5,451,977
2001........................................................................... 2,842,817
Thereafter..................................................................... 1,986,892
-------------
$ 26,589,054
-------------
-------------
</TABLE>
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.
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 30, 1995, and
December 28, 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Statutory rate................................................................ 34% 34%
Tax credits................................................................... 2
Other, net.................................................................... (1) 1
-- --
Effective rate................................................................ 35% 35%
-- --
-- --
</TABLE>
The income tax benefit for the fiscal years ended December 30, 1995, and
December 28, 1996, consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Current.............................................................. $ 61,844 $ (39,000)
Deferred............................................................. 612,217 (402,555)
---------- -----------
$ 674,061 $ (441,555)
---------- -----------
---------- -----------
</TABLE>
F-59
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 5: INCOME TAXES (CONTINUED)
The components of the benefit (provision) for deferred income taxes at
December 30, 1995, and December 28, 1996, are:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Tax credits......................................................... $ 181,294 $ --
Depreciation........................................................ (217,802) (452,028)
Accrued lease obligation............................................ 219,640 113,900
Deferred gain on property sale...................................... 134,545
Deferred income..................................................... 294,540 (110,500)
Net operating loss.................................................. 46,073
----------- -----------
$ 612,217 $ (402,555)
----------- -----------
----------- -----------
</TABLE>
At December 30, 1995 and December 28, 1996, deferred income taxes consisted
of the following:
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
Current:
Accrued compensation........................................... $ 69,379 $ 69,379
Patronage dividend receivable.................................. (219,328) (219,328)
Deferred income................................................ 131,000 91,800
------------- ------------
$ (18,949) $ (58,149)
------------- ------------
Noncurrent:
Accrued lease obligation....................................... $ 1,184,220 $ 1,298,120
Depreciation................................................... (397,382) (849,390)
Tax credits.................................................... 280,083 280,083
Deferred gain on property sale................................. 134,545 134,545
Deferred income................................................ 222,700 112,200
Net operating loss............................................. -- 46,073
------------- ------------
$ 1,424,166 $ 1,021,631
------------- ------------
------------- ------------
</TABLE>
At December 28, 1996, 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, 1995, and 1996
approximated $1,188,000, $1,375,000, and $1,427,000, 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
F-60
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 6: RETIREMENT PLANS (CONTINUED)
made annually at the discretion of the Board of Directors. No contribution was
made for 1994, 1995, or 1996.
NOTE 7: LEASING ARRANGEMENTS
The Company leases most of its store facilities under noncancellable
operating leases expiring through 2020. Total rent expense in 1994, 1995, and
1996 was $5,644,916, $6,995,767, and $7,450,667, respectively, including
contingent rentals of $152,293, $79,233, and $79,285, 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 as an
accrued lease obligation. Minimum rental commitments under noncancellable
operating lease agreements as of December 28, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- ------------------------------------------------------------------------------
<S> <C>
1997.......................................................................... $ 7,327,207
1998.......................................................................... 7,162,355
1999.......................................................................... 7,183,295
2000.......................................................................... 7,174,897
2001.......................................................................... 7,211,938
Thereafter.................................................................... 86,704,736
--------------
$ 122,764,428
--------------
--------------
</TABLE>
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 in 1995 and 1996 from these leases was approximately
$540,000 and $495,000, respectively. Most of these leases contain renewal
options. Minimum rental income from operating lease commitments under
noncancellable lease agreements as of December 28, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 443,954
1998............................................................................ 353,075
1999............................................................................ 243,570
2000............................................................................ 109,643
2001............................................................................ 41,550
Thereafter...................................................................... 484,400
------------
$ 1,676,192
------------
------------
</TABLE>
NOTE 8: RELATED PARTY TRANSACTIONS
During 1994, 1995, and 1996, the Company incurred expenses totalling
$93,000, $93,000, and $92,700, respectively, for rental of facilities from
entities in which the Company's president is a principal owner.
At December 30, 1994, and December 28, 1996, other current assets include a
receivable from the Company's president of $125,000 and $330,000, respectively.
F-61
<PAGE>
KEITH UDDENBERG, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995,
DECEMBER 28, 1996, AND THIRTEEN WEEKS ENDED
MARCH 30, 1996 (UNAUDITED) AND SEVEN WEEKS ENDED FEBRUARY 14, 1997 (UNAUDITED)
NOTE 8: RELATED PARTY TRANSACTIONS (CONTINUED)
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 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, and December 28, 1996.
The Company is a shareholder in, and the Company's president is a director
of, the Company's principal supplier of inventories (the Supplier). The Supplier
also provides a variety of financial and marketing services. Included in
transactions with the Supplier for the years 1994, 1995, and 1996, were
inventory purchases of approximately $181,706,900, $178,213,000, and
$195,197,000, respectively, and rent expense under operating leases of
$3,428,349, $3,692,185, and $3,547,177, respectively. Accounts payable to the
Supplier at December 30, 1995, and December 28, 1996, totalled $8,016,149 and
$6,891,079, respectively.
A substantial portion of the earnings of the Supplier are distributed
annually to its shareholders as patronage dividends, in the form of cash or
additional stock of the Supplier. Such dividends are based on gross purchases
and are subject to specified limits. During the years 1994, 1995, and 1996,
dividends were $2,903,170, $2,220,473, and $2,911,235, respectively. These
amounts include patronage dividends receivable at December 30, 1995, and
December 28, 1996, of $645,083 and $645,083, respectively, based on gross
purchases during the fourth quarter of each year, which are included in accounts
receivable.
At December 30, 1995, and December 28, 1996, notes payable includes
$2,538,111 and $2,229,505, respectively, representing financing provided by the
Supplier and a wholly owned subsidiary of the 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 has 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. Cash and free goods received in advance are included in short-term
accrued liabilities or long-term deferred income and the amounts earned totalled
$1,040,000 and $600,000 for the years ended December 30, 1995, and December 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.
F-62
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information............................ 2
Incorporation of Documents by Reference.......... 2
Summary.......................................... 3
Risk Factors..................................... 18
The Acquisitions................................. 27
The Proposed Reorganization...................... 29
Use of Proceeds.................................. 31
Capitalization................................... 32
Unaudited Pro Forma Condensed Consolidated
Financial Statements........................... 33
Selected Historical Financial Data............... 38
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 41
Business......................................... 55
Management....................................... 73
Principal Shareholders........................... 76
Description of Certain Indebtedness.............. 78
The Exchange Offer............................... 82
Description of Exchange Notes.................... 92
Certain United States Federal Tax
Considerations................................. 140
Plan of Distribution............................. 140
Legal Matters.................................... 141
Experts.......................................... 141
Index to Financial Statements.................... F-1
</TABLE>
<TABLE>
<CAPTION>
[LOGO] [LOGO]
<S> <C>
</TABLE>
QUALITY FOOD CENTERS, INC.
OFFER TO EXCHANGE $150,000,000 OF ITS 8.70% SERIES B SENIOR SUBORDINATED
NOTES DUE 2007, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR
$150,000,000 OF ITS OUTSTANDING 8.70% SENIOR SUBORDINATED NOTES DUE 2007
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.510 through 23B.08.600, as amended, of the Washington
Business Corporation Act provide that a Washington corporation may indemnify,
among others, its officers, directors, employees and agents under the
circumstances described in the statute. QFC's Bylaws contain indemnification
provisions substantially similar to Sections 23B.08.510 through 23B.08.600 of
the Washington Business Corporation Act. Article IX of the Articles of
Incorporation of QFC provides for indemnification of QFC directors and officers
as follows:
"Section 1. INDEMNIFICATION. The Corporation shall indemnify, in the
manner and to the full extent permitted by law, any person (or the estate of
any person) who was or is a party to, or is threatened to be made a party to
any threatened, pending or complete action, suit or proceeding, whether or
not by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any such
person against any liability which may be asserted against such person. To
the full extent permitted by law, the indemnification provided herein shall
include expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, and, in the manner provided by law, any such expenses
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding. The indemnification provided herein shall not be
deemed to limit the right of the Corporation to indemnify any other person
for any such expense to the full extent permitted by law, nor shall it be
deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement,
vote of shareholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office.
"Section 2. LIMITATION ON LIABILITY OF DIRECTORS. No director of the
Corporation shall be personally liable to the Corporation or its
shareholders for monetary damages for his conduct as a director, except for
(i) acts or omissions that involve intentional misconduct or a knowing
violation of law by the director, (ii) approval of distributions or loans in
violation of RCW 23B.08.310, or (iii) any transaction from which the
director will personally receive a benefit in money, property or services to
which the director is not legally entitled. If the Washington Business
Corporation Act is hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Washington Business Corporation Act, as
so amended. Any amendment to or repeal of this Article shall not adversely
affect any right or protection of a director of the Corporation for or with
respect to any such acts or omissions of such director occurring prior to
such amendment or repeal."
The directors and officers of QFC are covered by insurance policies
indemnifying against certain liabilities, including certain liabilities arising
under the Securities Act of 1933, which might be incurred by them in such
capacities and against which they cannot be indemnified by QFC.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereto, which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding for foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities would not exceed that which was registered) and any deviation
from the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the
II-2
<PAGE>
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Quality Food
Centers, Inc. has duly caused this Registration Statement or amendment thereto
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Bellevue and State of Washington, on the 19th day of May, 1997.
QUALITY FOOD CENTERS, INC.
BY /S/ MARC W. EVANGER
------------------------------------------
(Marc W. Evanger, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Dan Kourkoumelis and Marc W. Evanger, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
additional Registration Statement or amendment thereto pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------------------- ----------------------
<C> <S> <C>
CHRISTOPHER A. SINCLAIR*
--------------------------------- President, Chief Executive Officer and Director May 19, 1997
Christopher A. Sinclair (Principal Executive Officer)
DAN KOURKOUMELIS*
--------------------------------- President, Chief Executive Officer and Director May 19, 1997
Dan Kourkoumelis
/s/ MARC W. EVANGER
--------------------------------- Vice President and Chief Financial Officer (Principal May 19, 1997
Marc W. Evanger Financial and Accounting Officer)
STUART M. SLOAN*
--------------------------------- Chairman of the Board of Directors May 19, 1997
Stuart M. Sloan
JOHN W. CREIGHTON, JR.*
--------------------------------- Director May 19, 1997
John W. Creighton, Jr.
MARC H. RAPAPORT*
--------------------------------- Director May 19, 1997
Marc H. Rapaport
RONALD A. WEINSTEIN*
--------------------------------- Director May 19, 1997
Ronald A. Weinstein
MAURICE F. OLSON*
--------------------------------- Director May 19, 1997
Maurice F. Olson
SAMUEL ZELL*
--------------------------------- Director May 19, 1997
Samuel Zell
SHELI Z. ROSENBERG*
--------------------------------- Director May 19, 1997
Sheli Z. Rosenberg
</TABLE>
/s/ MARC W. EVANGER
---------------------------------
(Marc W. Evanger,
*By: ATTORNEY-IN-FACT)
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Hughes Markets,
Inc. has duly caused this Registration Statement or amendment thereto to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bellevue and State of Washington, on the 19th day of May, 1997.
HUGHES MARKETS, INC.
BY /S/ ALLAN P. BRENNAN
------------------------------------------
(Allan P. Brennan, SENIOR VICE PRESIDENT
AND
CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Allan P. Brennan, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and any additional Registration Statement or
amendment thereto pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------------------- ----------------------
<C> <S> <C>
ROGER K. HUGHES*
--------------------------------- Chairman and Chief Executive Officer (Principal Executive May 19, 1997
Roger K. Hughes Officer)
/s/ ALLAN P. BRENNAN
--------------------------------- Senior Vice President and Chief Financial Officer May 19, 1997
Allan P. Brennan (Principal Financial and Accounting Officer)
STUART M. SLOAN*
--------------------------------- Director May 19, 1997
Stuart M. Sloan
CHRISTOPHER A. SINCLAIR*
--------------------------------- Director May 19, 1997
Christopher A. Sinclair
MARC W. EVANGER*
--------------------------------- Director May 19, 1997
Marc W. Evanger
</TABLE>
/s/ ALLAN P. BRENNAN
---------------------------------
(Allan P. Brennan,
*By: ATTORNEY-IN-FACT)
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, KU Acquisition
Corporation has duly caused this Registration Statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Bellevue and State of Washington, on the 19th day of May, 1997.
KU ACQUISITION CORPORATION
BY /S/ MARC W. EVANGER
------------------------------------------
(Marc W. Evanger, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Marc W. Evanger his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and any additional Registration Statement or
amendment thereto pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------------------- ----------------------
<C> <S> <C>
DAN KOURKOUMELIS*
--------------------------------- President and Director, (Principal Executive Officer) May 19, 1997
Dan Kourkoumelis
/s/ MARC W. EVANGER
--------------------------------- Vice President, Chief Financial Officer and Director May 19, 1997
Marc W. Evanger (Principal Financial and Accounting Officer)
</TABLE>
/s/ MARC W. EVANGER
---------------------------------
(Marc W. Evanger,
*By: ATTORNEY-IN-FACT)
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Quality Food
Holdings, Inc. has duly caused this Registration Statement or amendment thereto
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Bellevue and State of Washington, on the 19th day of May, 1997.
QUALITY FOOD HOLDINGS, INC.
BY /S/ MARC W. EVANGER
------------------------------------------
(Marc W. Evanger, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Marc W. Evanger, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and any additional Registration Statement or
amendment thereto pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------------------- ----------------------
<C> <S> <C>
CHRISTOPHER A. SINCLAIR*
--------------------------------- President, Chief Executive Officer (Principal Executive May 19, 1997
Christopher A. Sinclair Officer)
/s/ MARC W. EVANGER
--------------------------------- Vice President and Chief Financial Officer (Principal May 19, 1997
Marc W. Evanger Financial and Accounting Officer)
SAMUEL ZELL*
--------------------------------- Director May 19, 1997
Samuel Zell
SHELI Z. ROSENBERG*
--------------------------------- Director May 19, 1997
Sheli Z. Rosenberg
</TABLE>
/s/ MARC W. EVANGER
---------------------------------
(Marc W. Evanger,
*By: ATTORNEY-IN-FACT)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1 Senior Subordinated Notes Purchase Agreement dated as of March 13, 1997 among Quality Food Centers,
Inc., Hughes Markets, Inc., KU Acquisition Corporation and Quality Food Holdings, Inc., and Donaldson
Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
BancAmerica Securities, Inc. (Incorporated by reference to Exhibit 99.3 to the Company's Current Report
on Form 8-K, filed March 27, 1997).
2.1 Agreement and Plan of Merger, dated as of November 20, 1996, by and among Quality Food Centers, Inc.,
QHI Acquisition Corporation and Hughes Markets, Inc. (Incorporated by reference to Exhibit 2(a) to the
Company's Registration Statement of Form S-3, No. 333-18567, filed on December 23, 1996).
2.1(a) Principal Stockholders Agreement, dated as of November 20, 1996, among Quality Food Centers, Inc., and
certain stockholders of Hughes Markets, Inc. (Incorporated by reference to Exhibit 2(b) to the
Company's Registration statement on Form S-3, No. 333-18567, filed on December 23, 1996).
2.2 Agreement and Plan of Merger, dated as of December 18, 1996, among Quality Food Centers, Inc., KU
Acquisition Corporation, Keith Uddenberg, Inc. and the Shareholders named therein. (Incorporated by
reference to Exhibit 2(c) to the Company's Registration Statement on Form S-3, No. 333-18567, filed on
December 23, 1996).
2.2(a) Agreement, Waiver and Amendment No. 1 to Agreement and Plan of Merger among Quality Food Centers, Inc.,
KU Acquisition Corporation, Keith Uddenberg, Inc. and the Shareholders named therein, dated February 4,
1997. (Incorporated by reference to Exhibit 99.10 to the Company's Current Report on Form 8-K, filed on
March 27, 1997).
2.2(b) Agreement, Waiver and Amendment No. 2 to Agreement and Plan of Merger among Quality Food Centers, Inc.,
KU Acquisition Corporation, Keith Uddenberg, Inc. and the Shareholders named therein, dated February
14, 1997. (Incorporated by reference to Exhibit 99.11 to the Company's Current Report on Form 8-K,
filed on March 27, 1997).
2.2(c) Investors Rights Agreement, dated as of February 14, 1997, by and among Quality Food Centers, Inc., and
the Signatories thereto. (Incorporated by reference to Exhibit 99.6 to the Company's Current Report on
Form 8-K/A, filed on February 18, 1997).
3.1 Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K, filed on March 28, 1997).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K, filed on March 28, 1997).
4.1 Senior Subordinated Notes Indenture, dated as of March 19, 1997, among Quality Food Centers, Inc. and
the Guarantors named therein and First Trust National Association, Trustee. (Incorporated by reference
to Exhibit 99.5 to the Company's Current Report on Form 8-K, filed March 27, 1997).
4.2 Form of 8.70% Senior Subordinated Note due 2007. (Included as part of Senior Subordinated Notes
Indenture filed as Exhibit 4.1 hereto).
4.3 Form of 8.70% Series B Senior Subordinated Note due 2007. (Included as part of Senior Subordinated
Notes Indenture filed as Exhibit 4.1 hereto).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.4 Senior Subordinated Notes Registration Rights Agreement, dated as of March 19, 1997, by and among
Quality Food Centers, Inc., the Guarantors named on the signature page thereof and Donaldson Lufkin &
Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancAmerica
Securities, Inc., as purchasers. (Incorporated by reference to Exhibit 99.4 to the Company's Current
Report on Form 8-K, filed March 27, 1997).
5.1 Opinion of Simpson Thacher & Bartlett. (Filed herewith).
10.1 Amended and Restated Credit Agreement, dated as of March 14, 1997, among Quality Food Centers, Inc.,
Quality Food Holdings, Inc., Quality Food, Inc., Bank of America National Trust and Savings
Association, as Administrative Agent and Paying Agent, The Chase Manhattan Bank, as Administrative
Agent, and the other financial institutions party thereto. (Incorporated by reference to Exhibit 99.6
to the Company's Current Report on Form 8-K, filed March 27, 1997).
10.2 Guaranty, dated as of March 19, 1997, executed in favor of Bank of America National Trust and Savings
Association, as Paying Agent, by Quality Food Holdings, Inc., Hughes Markets, Inc. and KU Acquisition
Corporation. (Incorporated by reference to Exhibit 99.7 to the Company's Current Report on Form 8-K,
filed March 27, 1997).
10.3 Pledge Agreement, dated as of March 19, 1997, between Quality Food, Inc. and Bank of America National
Trust and Savings Association, as Paying Agent. (Incorporated by reference to Exhibit 99.8 to the
Company's Current Report on Form 8-K, filed March 27, 1997).
10.4 Pledge Agreement, dated as of March 19, 1997, between Quality Food Centers, Inc. and Bank of America
National Trust and Savings Association, as Paying Agent. (Incorporated by reference to Exhibit 99.9 to
the Company's Current Report on Form 8-K, filed March 27, 1997).
12 Computation of ratio of earnings to fixed charges. (Filed herewith).
23.1 Consent of Simpson Thacher & Bartlett (Included as part of its opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP, independent auditors. (Filed herewith).
23.3 Consent of Deloitte & Touche LLP, independent auditors for KUI. (Filed herewith).
23.4 Consent of Arthur Andersen LLP, independent public accountants for Hughes. (Filed herewith).
24 Powers of Attorney (included on pages II-4, II-5, II-6 and II-7).
25 Statement of Eligibility of First Trust National Association on Form T-1. (Filed herewith).
99.1 Form of Letter of Transmittal. (Filed herewith).
99.2 Form of Notice of Guaranteed Delivery. (Filed herewith).
</TABLE>
<PAGE>
Exhibit 5.1
May 19, 1997
Quality Food Centers, Inc.
10112 N.E. 10th Street, Suite 201
Bellevue, Washington 98004
Ladies and Gentlemen:
We have acted as special counsel for Quality Food Centers, Inc., a
Washington corporation (the "Company"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), relating to the issuance by the
Company of $150,000,000 aggregate principal amount of its 8.70% Series B Senior
Subordinated Notes due 2007 (the "Exchange Notes"), guaranteed (the
"Guarantees") on a senior subordinated basis by Hughes Markets, Inc., a
California corporation, KU Acquisition Corporation, a Washington corporation,
and Quality Food Holdings, Inc., a Delaware corporation (collectively, the
"Guarantors"). The Exchange Notes are to be offered by the Company in exchange
for (the "Exchange") $150,000,000 aggregate principal amount of its outstanding
8.70% Senior Subordinated Notes due 2007 (the "Notes"). The Notes have been,
and the Exchange Notes will be, issued under an Indenture dated as of March 19,
1997 (the "Indenture") between the Company, the Guarantors and First Trust
National Association, as Trustee (the "Trustee").
<PAGE>
Quality Food Centers, Inc. 2 May 19, 1997
We have examined the Registration Statement and the form of the
Indenture, which has been filed with the Commission as an Exhibit to the
Registration Statement. In addition, we have examined, and have relied as to
matters of fact upon, the originals or copies, certified or otherwise identified
to our satisfaction, of such corporate records, agreements, documents and other
instruments and such certificates or comparable documents of public officials
and of officers and representatives of the Company, and have made such other and
further investigations, as we have deemed relevant and necessary as a basis for
the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals and the conformity to original documents
of all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that:
(i) assuming the Indenture has been duly authorized and validly
executed and delivered by the parties thereto, when (1) the Indenture
has been duly qualified under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), (2) the Board of Directors of the
Company, a duly constituted and acting committee thereof or duly
authorized officers thereof have taken all necessary corporate action
to approve the issuance and terms of the Exchange Notes, the terms of
the Exchange and related matters, and (3) the Exchange Notes have been
duly executed, authenticated, issued and delivered in accordance with
the provisions of the Indenture upon the Exchange, the Exchange Notes
will constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms; and
(ii) assuming the Indenture has been duly authorized and validly
executed and delivered by the parties thereto, when (1) the Indenture
has been duly
<PAGE>
Quality Food Centers, Inc. 3 May 19, 1997
qualified under the Trust Indenture Act, (2) the Board of Directors of
the Company, a duly constituted and acting committee thereof or duly
authorized officers thereof have taken all necessary corporate action
to approve the issuance and terms of the Exchange Notes, the terms of
the Exchange and related matters, (3) the Board of Directors of each
Guarantor, a duly constituted and acting committee thereof or duly
authorized officers thereof have taken all necessary corporate action
to approve the issuance and terms of such Guarantor's Guarantee and
(4) the Exchange Notes have been duly executed, authenticated, issued
and delivered in accordance with the provisions of the Indenture upon
the Exchange, each Guarantor's Guarantee will constitute a valid and
legally binding obligation of such Guarantor, enforceable against such
Guarantor in accordance with its terms.
Our opinions set forth in paragraphs (i) and (ii) are subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the law of the State of
New York and the federal law of the United States.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit 12
QUALITY FOOD CENTERS, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------------------------------
12 Weeks Ended
March 22, 1997 1996 1995 1994 1993 1992
-------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings Before
Income Taxes 10,279,158 39,573,770 32,239,238 40,144,536 39,776,572 37,708,720
Less: Interest
Capitalized (212,051) (1,260,623) (166,959)
---------- ---------- ---------- ---------- ---------- ----------
Earnings 10,067,107 38,313,147 32,072,279 40,144,536 39,776,572 37,708,720
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Interest (including
capitalized
interest) 2,988,730 11,150,873 9,806,364
Interest factor in
Rent Expense 1,372,487 4,820,707 4,139,078 2,728,333 2,390,014 1,737,563
---------- ---------- ---------- ---------- ---------- ----------
Total Fixed
Charges 4,361,217 15,971,580 13,945,442 2,728,333 2,390,014 1,737,563
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Total Earnings
and Fixed
Charges 14,428,324 54,284,727 46,017,721 42,872,869 42,166,586 39,446,283
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings
to Fixed Charges 3.31 3.40 3.30 15.71 17.64 22.70
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Quality Food Centers,
Inc. ("QFC") on Form S-4 of our report dated March 21, 1997 on the financial
statements of QFC as of December 30, 1995 and December 28, 1996 and for each
of the three years in the period ended December 28, 1996, appearing in the
Prospectus, which is a part of this Registration Statement, and to the
reference to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
May 15, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Quality Food Centers,
Inc. on Form S-4 of our report dated May 2, 1997 on the financial statements
of Keith Uddenberg, Inc. as of December 30, 1995 and December 28, 1996 for
each of the three years in the period ended December 28, 1996, appearing in
the Prospectus, which is a part of this Registration Statement, and the
reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
May 15, 1997
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of
our report and to all references to our Firm included in or made a
part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
May 15, 1997
<PAGE>
EXHIBIT 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)
------------------------
FIRST TRUST NATIONAL ASSOCIATION
(Exact Name of Trustee as Specified in its Charter)
36-4046888
(I.R.S. Employer Identification No.)
<TABLE>
<S> <C>
111 E. WACKER DRIVE, SUITE 3000
CHICAGO, ILLINOIS 60601
(Address of Principal Executive Officer) (Zip Code)
</TABLE>
------------------------------
G. M. CARROLL
FIRST TRUST NATIONAL ASSOCIATION
111 E. WACKER DRIVE, SUITE 3000
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 228-9451
(Name, Address, and Telephone Number of Agent for Service)
------------------------------
QUALITY FOOD CENTERS, INC.
(Exact Name of Obligor as Specified in its Charter)
<TABLE>
<S> <C>
WASHINGTON 91-1330075
(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
10112 N.E. 10TH STREET
BELLEVUE, WASHINGTON 98004
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
DEBT SECURITIES
(Title of Indenture Securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE
FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF
THE TRUSTEE:
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. B
COL. A -----------
- --------------------------------------------------------------------------------- AMOUNT
TITLE OF CLASS OUTSTANDING
- --------------------------------------------------------------------------------- -----------
<S> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER
SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER
SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION:
(A) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH OTHER INDENTURE.
Not applicable by virtue of response to Item 13.
(B) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS FOR THE CLAIM THAT
NO CONFLICTING INTEREST WITHIN THE MEANING OF SECTION 310(B)(1) OF THE ACT
ARISES AS A RESULT OF THE TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING
A STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS COMPARED WITH THE
SECURITIES ISSUED UNDER SUCH OTHER INDENTURE.
Not applicable by virtue of response to Item 13.
1
<PAGE>
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS
WITH THE OBLIGOR OR UNDERWRITERS.
IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE
IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE, OR REPRESENTATIVE OF THE
OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING
ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION.
Not applicable by virtue of response to Item 13.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE
OBLIGOR OR ITS OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE
OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE
OFFICER OF THE OBLIGOR.
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. D
COL. C ---------------------
COL. B ----------- PERCENTAGE OF VOTING
COL. A --------- AMOUNT SECURITIES
- ------------------------------------------------ TITLE OF OWNED REPRESENTED BY AMOUNT
NAME OF OWNER CLASS BENEFICIALLY GIVEN IN COL. C
- ------------------------------------------------ --------- ----------- ---------------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE
OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR,
PARTNER, AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER.
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. D
COL. C ---------------------
COL. B ----------- PERCENTAGE OF VOTING
COL. A --------- AMOUNT SECURITIES
- ------------------------------------------------ TITLE OF OWNED REPRESENTED BY AMOUNT
NAME OF OWNER CLASS BENEFICIALLY GIVEN IN COL. C
- ------------------------------------------------ --------- ----------- ---------------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
2
<PAGE>
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED
BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE
TRUSTEE:
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. B
---------
WHETHER
THE COL. C
SECURITIES -------------------------- COL. D
ARE AMOUNT OWNED BENEFICIALLY --------------------------
COL. A VOTING OR OR HELD AS COLLATERAL PERCENT OF CLASS
- -------------------------- NONVOTING SECURITY FOR OBLIGATIONS REPRESENTED BY AMOUNT
TITLE OF CLASS SECURITIES IN DEFAULT GIVEN IN COL. C
- -------------------------- --------- -------------------------- --------------------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH
THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY
OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE.
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. C
-------------------- COL. D
AMOUNT OWNED ---------------
BENEFICIALLY OR HELD PERCENT OF
COL. B AS COLLATERAL CLASS
COL. A ----------- SECURITY FOR REPRESENTED BY
- ----------------------------------------- AMOUNT OBLIGATIONS IN AMOUNT GIVEN IN
NAME OF ISSUER AND TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C
- ----------------------------------------- ----------- -------------------- ---------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF
CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF
THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR
OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE
FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON.
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. C
-------------------- COL. D
AMOUNT OWNED ---------------
BENEFICIALLY OR HELD PERCENT OF
COL. B AS COLLATERAL CLASS
COL. A ----------- SECURITY FOR REPRESENTED BY
- ----------------------------------------- AMOUNT OBLIGATIONS IN AMOUNT GIVEN IN
NAME OF ISSUER AND TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C
- ----------------------------------------- ----------- -------------------- ---------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
3
<PAGE>
ITEM 11. OWNERSHIP OF HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE
TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR,
FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON
ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE.
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. C
-------------------- COL. D
AMOUNT OWNED ---------------
BENEFICIALLY OR HELD PERCENT OF
COL. B AS COLLATERAL CLASS
COL. A ----------- SECURITY FOR REPRESENTED BY
- ----------------------------------------- AMOUNT OBLIGATIONS IN AMOUNT GIVEN IN
NAME OF ISSUER AND TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C
- ----------------------------------------- ----------- -------------------- ---------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE
TRUSTEE, FURNISH THE FOLLOWING INFORMATION:
AS OF MAY 19, 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C
NATURE OF INDEBTEDNESS AMOUNT OUTSTANDING DATE DUE
- -------------------------------------------------------------- ------------------- ---------
<S> <C> <C>
</TABLE>
Not applicable by virtue of response to Item 13.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(A) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE
SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT.
There is not nor has there been a default with respect to the securities
under this indenture.
(B) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY
OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER
SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS TRUSTEE FOR MORE THAN ONE
OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS
BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR
SERIES AFFECTED, AND EXPLAIN THE NATURE OR ANY SUCH DEFAULT.
There is not nor has there been a default with respect to the securities
under this indenture. The trustee is not a trustee under other indentures under
which any other securities or certificates of interest or participation in any
other securities of the obligor are outstanding.
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
IF ANY UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE OF THE TRUSTEES, DESCRIBE
EACH SUCH AFFILIATION.
Not applicable by virtue of response to Item 13.
ITEM 15. FOREIGN TRUSTEE.
IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE FOREIGN TRUSTEE IS
AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED
UNDER THE ACT.
Not applicable.
4
<PAGE>
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY.
1. A copy of the Articles of Association of First Trust National
Association as now in effect, incorporated herein by reference to Exhibit 1
to T-1; Registration No. 333-19025.
2. A copy of the certificate of authority to commence business,
incorporated herein by reference to Exhibit 2 to T-1, Registration No.
33-64175.
3. A copy of the certificate of authority to exercise corporate trust
powers, incorporated herein by reference to Exhibit 3 to T-1, Registration
No. 33-64175.
4. A copy of the existing By-Laws of First Trust National Association as
now in effect, filed herewith.
5. Not applicable by virtue of response to Item 13.
6. The consent of the trustee required by Section 321(b) of the Trust
Indenture Act of 1939, incorporated herein by reference to Exhibit 6 to T-1;
Registration No. 33-64175.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority, filed herewith.
8. Not applicable.
9. Not applicable.
5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Trust National Association, a National Banking Association
organized and existing under the laws of the United States of America, has duly
caused this Statement of Eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the city of Chicago, and state of
Illinois, as of 19th day of May, 1997.
FIRST TRUST NATIONAL ASSOCIATION
By /s/ G. M. CARROLL
--------------------------------------
G. M. CARROLL
VICE PRESIDENT AND ASSISTANT SECRETARY
6
<PAGE>
EXHIBIT 4
FIRST TRUST
NATIONAL ASSOCIATION
BYLAWS
AS LAST AMENDED ON JULY 16, 1996
ARTICLE I
MEETINGS OF SHAREHOLDERS
Section 1.1. ANNUAL MEETING. The annual meeting of the shareholders, for
the election of directors and the transaction of other business, shall be held
at a time and place as the Chairman or President may designate. Notice of such
meeting shall be given at least ten days prior to the date thereof, to each
shareholder of the Association. If, for any reason, an election of directors is
not made on the designated day, the election shall be held on some subsequent
day, as soon thereafter as practicable, with prior notice thereof.
Section 1.2. SPECIAL MEETINGS. Except as otherwise specially provided by
law, special meetings of the shareholders may be called for any purpose, at any
time by a majority of the board of directors, or by any shareholder or group of
shareholders owning at least ten percent of the outstanding stock. Every such
special meeting, unless otherwise provided by law, shall be called upon not less
than ten days prior notice stating the purpose of the meeting.
Section 1.3. NOMINATIONS FOR DIRECTORS. Nominations for election to the
board of directors may be made by the board of directors or by any shareholder.
Section 1.4. PROXIES. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing. Proxies shall be valid only
for one meeting and any adjournments of such meeting and shall be filed with the
records of the meeting.
Section 1.5. QUORUM. A majority of the outstanding capital stock,
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders, unless otherwise provided by law. A majority of the votes cast
shall decide every question or matter submitted to the shareholders at any
meeting, unless otherwise provided by law or by the Articles of Association.
ARTICLE II
DIRECTORS
Section 2.1. BOARD OF DIRECTORS. The board of directors (hereinafter
referred to as the "board"), shall have power to manage and administer the
business and affairs of the Association. All authorized corporate powers of the
Association shall be vested in and may be exercised by the board.
Section 2.2. POWERS. In addition to the foregoing, the board of directors
shall have and may exercise all of the powers granted to or conferred upon it by
the Articles of Association, the Bylaws and by law.
Section 2.3. NUMBER. The board shall consist of a number of members to be
fixed and determined from time to time by resolution of the board or the
shareholders at any meeting thereof, in accordance with the Articles of
Association.
Section 2.4. ORGANIZATION MEETING. The newly elected board shall meet for
the purpose of organizing the new board and electing and appointing such
officers of the Association as may be appropriate. Such meeting shall be held on
the day of the election or as soon thereafter as practicable, and, in any event,
within thirty days thereafter. If, at the time fixed for such meeting, there
shall not be a quorum present, the directors present may adjourn the meeting
until a quorum is obtained.
Section 2.5. REGULAR MEETINGS. The regular meetings of the board shall be
held, without notice, as the Chairman or President may designate and deem
suitable.
<PAGE>
Section 2.6. SPECIAL MEETINGS. Special meetings of the board may be called
by the Chairman or the President of the Association, or at the request of two or
more directors. Each member of the board shall be given notice stating the time
and place of each such meeting.
Section 2.7. QUORUM. A majority of the directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but fewer may adjourn any
meeting. Unless otherwise provided, once a quorum is established, any act by a
majority of those constituting the quorum shall be the act of the board.
Section 2.8. VACANCIES. When any vacancy occurs among the directors, the
remaining members of the board may appoint a director to fill such vacancy at
any regular meeting of the board, or at a special meeting called for that
purpose.
ARTICLE III
COMMITTEES
Section 3.1. ADVISORY BOARD OF DIRECTORS. The board may appoint persons,
who need not be directors, to serve as advisory directors on an advisory board
of directors established with respect to the business affairs of either this
Association alone or the business affairs of a group of affiliated organizations
of which this Association is one. Advisory directors shall have the powers and
duties as may be determined by the board, provided, that the board's
responsibility for the business and affairs of this Association shall in no
respect be delegated or diminished.
Section 3.2. AUDIT COMMITTEE. The board shall appoint an Audit Committee
which shall consist of at least two Directors. If legally permissible, the board
may determine to name itself as the Audit Committee. The Audit Committee shall
direct and review audits of the Association's fiduciary activities.
The members of the Audit Committee shall be appointed each year and shall
continue to act until their successors are named. The Audit Committee shall have
power to adopt its own rules and procedures and to do those things which in the
judgment of such Committee are necessary or helpful with respect to the exercise
of its functions or the satisfaction of its responsibilities.
Section 3.3. EXECUTIVE COMMITTEES. The board may appoint an Executive
Committee which shall consist of at least three directors and which shall have,
and may exercise, all the powers of the board between meetings of the board or
otherwise when the board is not meeting.
Section 3.4. OTHER COMMITTEES. The board may appoint, from time to time,
committees of one or more persons who need not be directors, for such purposes
and with such powers as the board may determine. In addition, either the
Chairman or the President may appoint, from time to time, committees of one or
more officers, employees, agents or other persons, for such purposes and with
such powers as either the Chairman or the President deems appropriate and
proper.
Whether appointed by the board, the Chairman, or the President, any such
Committee shall at all times be subject to the direction and control of the
board.
Section 3.5. MEETING MINUTES AND RULES. An advisory board of directors
and/or committee shall meet as necessary in consideration of the purpose of the
advisory board of directors or committee, and shall maintain minutes in
sufficient detail to indicate actions taken or recommendations made; unless
required by the members, discussions, votes or other specific details need not
be reported. An advisory board of directors or a committee may, in consideration
of its purpose, adopt its own rules for the exercise of any of its functions or
authority.
ARTICLE IV
OFFICERS AND EMPLOYEES
Section 4.1. CHAIRMAN OF THE BOARD. The board may appoint one of its
members to be Chairman of the board to serve at the pleasure of the board. The
Chairman shall supervise the carrying out of the policies adopted or approved by
the board; shall have general executive powers, as well as the specific
<PAGE>
powers conferred by these Bylaws; shall also have and may exercise such powers
and duties as from time to time may be conferred upon or assigned by the board.
Section 4.2. PRESIDENT. The board may appoint one of its members to be
President of the Association. In the absence of the Chairman, the President
shall preside at any meeting of the board. The President shall have general
executive powers, and shall have and may exercise any and all other powers and
duties pertaining by law, regulation or practice, to the Office of President, or
imposed by these Bylaws. The President shall also have and may exercise such
powers and duties as from time to time may be conferred or assigned by the
board.
Section 4.3. VICE PRESIDENT. The board may appoint one or more Vice
Presidents who shall have such powers and duties as may be assigned by the board
and to perform the duties of the President on those occasions when the President
is absent, including presiding at any meeting of the board in the absence of the
Chairman and President.
Section 4.4. SECRETARY. The board shall appoint a Secretary, or other
designated officer who shall be Secretary of the board and of the Association,
and shall keep accurate minutes of all meetings. The Secretary shall attend to
the giving of all notices required by these Bylaws to be given; shall be
custodian of the corporate seal, records, document and papers of the
Association; shall provide for the keeping of proper records of all transactions
of the Association; shall have and may exercise any and all other powers and
duties pertaining by law, regulation or practice, to the Secretary, or imposed
by these Bylaws; and shall also perform such other duties as may be assigned
from time to time by the board.
Section 4.5. OTHER OFFICERS. The board may appoint, and may authorize the
Chairman or the President to appoint, any officer as from time to time may
appear to the board, the Chairman or the President to be required or desirable
to transact the business of the Association. Such officers shall exercise such
powers and perform such duties as pertain to their several offices, or as may be
conferred upon or assigned to them by these Bylaws, the board, the Chairman or
the President.
Section 4.6. TENURE OF OFFICE. The Chairman or the President and all other
officers shall hold office for the current year for which the board was elected,
unless they shall resign, become disqualified, or be removed. Any vacancy
occurring in the Office of Chairman or President shall be filled promptly by the
board.
Any officer elected by the board or appointed by the Chairman or the
President may be removed at any time, with or without cause, by the affirmative
vote of a majority of the board or, if such officer was appointed by the
Chairman or the President, by the Chairman or the President, respectively.
ARTICLE V
STOCK
Section 5.1. Shares of stock shall be transferable on the books of the
Association, and a transfer book shall be kept in which all transfers of stock
shall be recorded. Every person becoming a shareholder by such transfer shall,
in proportion to such person's shares, succeed to all rights of the prior holder
of such shares. Each certificate of stock shall recite on its face that the
stock represented thereby is transferable only upon the board of the Association
properly endorsed.
<PAGE>
ARTICLE VI
CORPORATE SEAL
Section 6.1. The Chairman, the President, the Secretary, any Assistant
Secretary or other officer designated by the board, the Chairman, or the
President, shall have authority to affix the corporate seal to any document
requiring such seal, and to attest the same. Such seal shall be substantially in
the following form:
[SEAL]
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1. EXECUTION OF INSTRUMENTS. All agreements, checks, drafts,
orders, indentures, notes, mortgages, deeds, conveyances, transfers,
endorsements, assignments, certificates, declarations, receipts, discharges,
releases, satisfactions, settlements, petitions, schedules, accounts,
affidavits, bonds, undertakings, guarantees, proxies and other instruments or
documents may be signed, countersigned, executed, acknowledged, endorsed,
verified, delivered or accepted on behalf of the Association, whether in a
fiduciary capacity or otherwise, by any officer of the Association, or such
employee or agent as may be designated from time to time by the board by
resolution, or by the Chairman or the President by written instrument, which
resolution or instrument shall be certified as in effect by the Secretary or an
Assistant Secretary of the Association. The provisions of this section are
supplementary to any other provision of the Articles of Association or Bylaws.
Section 7.2. RECORDS. The Articles of Association, the Bylaws and the
proceedings of all meetings of the shareholders, the board, and standing
committees of the board, shall be recorded in appropriate minute books provided
for the purpose. The minutes or each meeting shall be signed by the Secretary,
or other officer appointed to act as Secretary of the meeting.
Section 7.3. TRUST FILES. There shall be maintained in the Association
files all fiduciary records necessary to assure that its fiduciary
responsibilities have been properly undertaken and discharged.
Section 7.4. TRUST INVESTMENTS. Funds held in a fiduciary capacity shall
be invested according to the instrument establishing the fiduciary relationship
and according to law. Where such instrument does not specify the character and
class of investments to be made and does not vest in the Association a
discretion in the matter, funds held pursuant to such instrument shall be
invested in investments in which corporate fiduciaries may invest under law.
Section 7.5. NOTICE. Whenever notice is required by the Articles of
Association, the Bylaws or law, such notice shall be by mail, postage prepaid,
telegram, in person, or by any other means by which such notice can reasonably
be expected to be received, using the address of the person to receive such
notice, or such other personal data, as may appear on the records of the
Association. Prior notice shall be proper if given not more than 30 days nor
less than 10 days prior to the event for which notice is given.
<PAGE>
ARTICLE VIII
INDEMNIFICATION
Section 8.1. The Association shall indemnify to the full extent permitted
by, and in the manner permissible under, the Articles of Association and the
laws of the United States of America, as applicable and as amended from time to
time, any person made, or threatened to be made, a party to any action, suit or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that such person is or was a director, advisory director, officer or
employee of the Association, or any predecessor of the Association, or served
any other enterprise as a director or officer at the request of the Association
or any predecessor of the Association.
Section 8.2. The board in its discretion may, on behalf of the Association,
indemnify any person, other than a director, advisory director, officer or
employee, made a party to any action, suit or proceeding by reason of the fact
that such person is or was an agent of the Association or any predecessor of the
Association serving in such capacity at the request of the Association or any
predecessor of the Association.
ARTICLE IX
INTERPRETATION AND AMENDMENT
Section 9.1. The Bylaws shall be interpreted in accordance with and subject
to appropriate provisions of law, and may be amended, altered or repealed, at
any regular or special meeting of the board.
Section 9.2. A copy of the Bylaws, with all amendments, shall at all times
be kept in a convenient place at the main office of the Association, and shall
be open for inspection to all shareholders during Association hours.
<PAGE>
First Trust National Association
111 East Wacker Drive, Suite 3000
Chicago, IL 60601
EXHIBIT 7
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS FOR DECEMBER 31, 1996
Schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
RCON IN THOUSANDS C200
----------- -------------- ---------
<S> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin (1)................... 0081 76,629 1.a
b. Interest-bearing balances (2)............................................ 0071 0 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)............... 1756 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D)............. 1773 3,195 2.b
3. Federal funds sold and securities purchased under agreements to resell:
a. Federal funds sold....................................................... 0276 0 3.a
b. Securities purchased under agreements to resell.......................... 0277 0 3.b
4. Loans and Lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C)............ 2122 0 4.a
b. LESS: Allowance for loan and lease losses................................ 3123 0 4.b
c. LESS: Allocated transfer risk reserve.................................... 3128 0 4.c
d. Loans and Leases, net of unearned income, allowance, and reserve (item
4.a minus 4.b and 4.c)................................................... 2125 0 4.d
5. Trading assets............................................................. 3545 0 5.
6. Premises and fixed assets (including capitalized Leases)................... 2145 99 6.
7. Other real estate owned (from Schedule RC-M)............................... 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies (from
schedule RC-M)............................................................. 2130 0 8.
9. Customers' Liability to this bank on acceptances outstanding............... 2155 0 9.
10. Intangible assets (from Schedule RC-M)..................................... 2143 25,943 10.
11. Other assets (from Schedule RC-F).......................................... 2160 2,217 11.
12. Total assets (sum of items 1 through 11)................................... 2170 108,083 12.
</TABLE>
- ------------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
First Trust National Association
111 East Wacker Drive, Suite 3000
Chicago, IL 60601
SCHEDULE RC--CONTINUED
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
RCON IN THOUSANDS C200
----------- -------------- ---------
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule
RC-E).................................................................... 2200 0 13.a
(1) Noninterest-bearing (1)............................................... 6631 0 13.a.1
(2) Interest-bearing...................................................... 6636 0 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs............
(1) Noninterest-bearing..................................................
(2) Interest-bearing.....................................................
14. Federal funds purchased and securities sold under agreements to repurchase:
a. Federal funds purchased.................................................. 0278 0 14.a
b. Securities sold under agreements to repurchase........................... 0279 0 14.b
15. a. Demand notes issued to the U.S. Treasury................................ 2840 0 15.a
b. Trading Liabilities...................................................... 3548 0 15.b
16. Other borrowed money:
a. With a remaining maturity of one year or less............................ 2332 0 16.a
b. With a remaining maturity of more than one year.......................... 2333 0 16.b
17. Mortgage indebtedness and obligations under capitalized Leases............. 2910 0 17.
18. Bank's Liability on acceptances executed and outstanding................... 2920 0 18.
19. Subordinated notes and debentures.......................................... 3200 0 19.
20. Other Liabilities (from Schedule RC-G)..................................... 2930 1,245 20.
21. Total Liabilities (sum of items 13 through 20)............................. 2948 1,245 21.
22. Limited-Life preferred stock and related surplus........................... 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus.............................. 3838 0 23.
24. Common stock............................................................... 3230 1,000 24.
25. Surplus (exclude all surplus related to preferred stock)................... 3839 106,712 25.
26. a. Undivided profits and capital reserves.................................. 3632 (874) 26.a
b. Net realized holding gains (losses) on available-for-sale
securities............................................................... 8434 0 26.b.
27. Cumulative foreign currency translation adjustments
28. Total equity capital (sum of items 23 through 27).......................... 3210 106,838 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of
items 21, 22, and 28)...................................................... 3300 108,083 29.
MEMORANDUM
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the
bank by independent external auditors as of any date during 1995............. 6724 N/A M-1
</TABLE>
- ------------------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
<PAGE>
- ------------------------
1. Independent audit of the bank conducted in accordance with generally
accepted auditing by a certified public accounting firm which submits a
report on the bank.
2. Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately).
3. Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority).
4. Directors' examination of the bank performed by other external auditors (may
be required by state chartering authority).
5. Review of the bank's financial statements by external auditors.
6. Compilation of the bank's financial statements by external auditors.
7. Other audit procedures (excluding tax preparation work)
8. No external audit work.
<PAGE>
LETTER OF TRANSMITTAL
FOR
8.70% SENIOR SUBORDINATED NOTES
DUE 2007
OF
QUALITY FOOD CENTERS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997 (THE "EXPIRATION DATE") UNLESS EXTENDED BY QUALITY FOOD CENTERS, INC.
EXCHANGE AGENT:
FIRST TRUST NATIONAL ASSOCIATION
<TABLE>
<S> <C>
BY HAND: BY MAIL:
First Trust National Association (INSURED OR REGISTERED RECOMMENDED)
100 Wall Street, Suite 2000 First Trust National Association
New York, New York 10005 100 Wall Street, Suite 2000
Attention: Cathy Donohue New York, New York 10005
Attention: Cathy Donohue
BY OVERNIGHT EXPRESS:
First Trust National Association
100 Wall Street, Suite 2000
New York, New York 10005
Attention: Cathy Donohue
</TABLE>
BY FACSIMILE:
(212) 514-7431
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 361-2546
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated , 1997
(the "Prospectus") of Quality Food Centers, Inc. (the "Company"), and this
Letter of Transmittal (the "Letter of Transmittal"), which together describe the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
its new 8.70% Series B Senior Subordinated Notes due 2007 (the "Exchange Notes")
for each $1,000 in principal amount of outstanding 8.70% Senior Subordinated
Notes due 2007 (the "Old Notes"). The terms of the Exchange Notes are identical
in all material respects (including principal amount, interest rate and
maturity) to the terms of the Old Notes for which they may be exchanged pursuant
to the Exchange Offer, except that the Exchange Notes are freely transferable by
holders thereof (except as provided herein or in the Prospectus) and are not
subject to any covenant regarding registration under the Securities Act of 1933,
as amended (the "Securities Act").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<PAGE>
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
AGGREGATE
NAME(S) AND ADDRESS(ES) OF PRINCIPAL AMOUNT PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBER(S)* BY OLD NOTES* TENDERED**
<S> <C> <C> <C>
Total
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. See
instruction 2.
This Letter of Transmittal is to be used either if certificates representing
Old Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Delivery of
documents to the book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer-- Procedures for Tendering Old Notes."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
/ / The Depository Trust Company
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
If Delivered by Book-Entry Transfer:
Account Number _____________________________________________________________
<PAGE>
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN PERSON
SIGNING THE LETTER OF TRANSMITTAL:
Name _________________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name _______________________________________________________________________
Address ____________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Any holder who is an "affiliate" of the Company or who has
an arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, or any broker-dealer who
purchased Old Notes from the Company to resell pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act must
comply with the registration and prospectus delivery requirements under the
Securities Act.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of the Old Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Old Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the Old Notes to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
the book-entry transfer facility. The undersigned further agrees that acceptance
of any and all validly tendered Old Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Rights Agreement (as defined
in the Prospectus) and that the Company shall have no further obligations or
liabilities thereunder except as provided in Section 2 of said agreement.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Certain Conditions to the
Exchange Offer." The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company), as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Notes tendered hereby and, in such event, the Old Notes not exchanged
will be returned to the undersigned at the address shown above. In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth under "The Exchange Offer--Certain Conditions to
the Exchange Offer" occur.
By tendering, each holder of Old Notes represents that the Exchange Notes
acquired in the exchange will be obtained in the ordinary course of such
holder's business, that such holder has no arrangement with any person to
participate in the distribution of such Exchange Notes, that such holder is not
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and that such holder is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. Any holder of Old Notes using
the Exchange Offer to participate in a distribution of the Exchange Notes (i)
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in its interpretive letter with respect
to Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (ii) must comply with the registration and prospectus requirements
of the Securities Act in connection with a secondary resale transaction.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes, however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
<PAGE>
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged, and registered in
the name of the undersigned, shall be delivered to the undersigned at the
address shown below the signature of the undersigned.
TENDER HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
________________________________________________________________________________
________________________________________________________________________________
Signature(s) of Holder(s)
Dated ___________________ Area Code and Telephone Number ___________________
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER
PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE
FULL TITLE OF SUCH PERSON.) SEE INSTRUCTION 3.
Name(s) ________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No. ____________________________________________________
Taxpayer Identification No. ____________________________________________________
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature ___________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
Address ________________________________________________________________________
Name of Firm ___________________________________________________________________
Area Code and Telephone No. ____________________________________________________
Dated __________________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by this Letter of Transmittal, to the Exchange
Agent at its address set forth above on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received on
or prior to the Expiration Date, a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering holder, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date, the Old Notes in proper form for
transfer (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless Old
Notes being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender. Copies of the notice of
guaranteed delivery ("Notice of Guaranteed Delivery") which may be used by
Eligible Institutions for the purposes described in this paragraph are available
from the Exchange Agent.
<PAGE>
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Old Notes submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Old Notes or othewise comply with the book-entry transfer facility
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company and such determination will
be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the caption "Procedures for Tendering Old Notes" in
the Prospectus at any time on or prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
<PAGE>
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holder of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the OldNotes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes, for the holder of such Old Notes; or (ii) for the
account of an Eligible Institution.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in whole
or in part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated above for further
instructions.
7. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exchange (or other
payee) is required to provide a correct taxpayer identification number ("TIN"),
generally the holder's Social Security or federal employer identification
number, and with certain other information, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify that the holder
(or other payee) is not subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the holder (or other payee)
to a $50 penalty imposed by the Internal Revenue Service and 31% federal income
tax backup withholding on payments made in connection with the Exchange Notes.
The box in Part 3 of the Substitute Form W-9 may be checked if the holder (or
other payee) has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part 3 is checked and a TIN is
not provided by the time any payment is made in connection with the Exchange
Notes, 31% of all such payments will be withheld until a TIN is provided.
<PAGE>
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to Quality Food Centers, Inc., 10112 N.E. 10th
Street, Bellevue, Washington 98004, attention: Corporate Secretary (telephone:
206-455-3761).
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Old Notes whose Old Notes are
accepted for exchange may be subject to backup withholding unless the holder
provides First Trust National Association (as payor) (the "Paying Agent"),
through the Exchange Agent, with either (i) such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 attached hereto, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such holder of
Old Notes is awaiting a TIN) and that (A) the holder of Old Notes has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of a failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder of Old Notes that he or she
is no longer subject to backup withholding; or (ii) an adequate basis for
exemption from backup withholding. If such holder of Old Notes is an individual,
the TIN is such holder's social security number. If the Paying Agent is not
provided with the correct taxpayer identification number, the holder of Old
Notes may be subject to certain penalties imposed by the Internal Revenue
Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt receipient, the holder must submit a Form W-8, signed under penalties
of perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Paying Agent. See the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Old Notes or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Old Notes has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near futue. If the box in Part 3 is
checked, the holder of Old Notes or other payee must also complete the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding . Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the Paying
Agent will withhold 31% of all payments made prior to the time a properly
certified TIN is provided to the Paying Agent.
The holder of Old Notes is required to give the Paying Agent the TIN (e.g.,
social security number or employer identification number) of the record owner of
the Old Notes. If the Old Notes are in more than one name or are not in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
<PAGE>
<TABLE>
<S> <C> <C>
PAYOR'S NAME: FIRST TRUST NATIONAL ASSOCIATION, AS PAYING AGENT
SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN Social Security number(s) or
IN THE BOX AT RIGHT AND CERTIFY Employer Identification
BY SIGNING AND DATING BELOW. Number(s)
PART 2--CERTIFICATION--Under penalties of perjury, I certify
that:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be issued
for me), and
FORM W-9 (2) I am not subject to backup withholding because: (a) I am
DEPARTMENT OF THE TREASURY exempt form backup withholding, or (b) I have not been notified
INTERNAL REVENUE SERVICE by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that
I am no longer subject to backup withholding.
PAYOR'S REQUEST FOR CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if
TAXPAYER IDENTIFICATION you have been notified by the IRS that you are currently subject
NUMBER ("TIN") to backup withholding because of underreporting interest or
dividends on your tax return.
Signature PART 3--Awaiting TIN / /
Date
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHHOLDING OF 31% OF
ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office or (2) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all reportable cash
payments made to me thereafter will be withheld until I provide a taxpayer
identification number.
<TABLE>
<S> <C>
------------------------------------------------ --------------------------------
Signature Date
</TABLE>
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
8.70% SENIOR SUBORDINATED NOTES
DUE 2007
IN EXCHANGE FOR NEW
8.70% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
OF
QUALITY FOOD CENTERS, INC.
Registered holders of outstanding 8.70% Senior Subordinated Notes due 2007
(the "Old Notes") who wish to tender their Old Notes in exchange for a like
principal amount of new 8.70% Series B Senior Subordinated Notes due 2007 (the
"Exchange Notes") and whose Old Notes are not immediately available or who
cannot deliver their Old Notes and Letter of Transmittal (and any other
documents required by the Letter of Transmittal) to First Trust National
Association (the "Exchange Agent") prior to the Expiration Date, may use this
Notice of Guaranteed Delivery or one substantially equivalent hereto. This
Notice of Guaranteed Delivery may be delivered by hand or sent by facisimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight courier) or mail to the Exchange Agent. See "The Exchange
Offer--Procedure for Tendering Old Notes" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
MARINE MIDLAND BANK
<TABLE>
<S> <C>
BY HAND: BY MAIL:
First Trust National Association (INSURED OR REGISTERED RECOMMENDED)
100 Wall Street, Suite 2000 First Trust National Association
New York, New York 10005 100 Wall Street, Suite 2000
Attention: Cathy Donohue New York, New York 10005
Attention: Cathy Donohue
BY OVERNIGHT EXPRESS:
First Trust National Association
100 Wall Street, Suite 2000
New York, New York 10005
Attention: Cathy Donohue
</TABLE>
BY FACSIMILE:
(212) 514-7431
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 361-2546
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old Notes indicated
below, upon the terms and subject to the conditions contained in the Prospectus
dated , 1997 of Quality Food Centers, Inc. (the "Prospectus"), receipt of
which is hereby acknowledged.
<PAGE>
DESCRIPTION OF SECURITIES TENDERED
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
REGISTERED HOLDER AS IT CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT
APPEARS ON THE OLD NOTES OF OLD NOTES OF OLD NOTES
NAME OF TENDERING HOLDER (PLEASE PRINT) TENDERED TENDERED
<S> <C> <C> <C>
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
</TABLE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth above, the certificates representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility), together with a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees, and any other documents required by the Letter of
Transmittal within three business days after the Expiration Date (as defined in
the Prospectus and the Letter of Transmittal).
<TABLE>
<S> <C>
Name of Firm:
Address: (Authorized Signature)
Title:
(Zip Code) Name:
Area Code and Telephone No.: (Please type or print)
Date:
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD
NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
