<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                   FORM 10-K
 
          [X] Annual Report Pursuant to Section 13 or 15(d) 
                of the Securities Exchange Act of 1934 
             For the Fiscal Year Ended: December 28, 1996 

       [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) 
               OF THE SECURITIES EXCHANGE ACT OF 1934 
             For the Transition Period From ______ To ______

-----------------------------------------------------------------------------
 
                   Commission File Number: 0-15590 
                     QUALITY FOOD CENTERS, INC. 
         (Exact name of registrant as specified in its charter)
 
          Washington                                   91-1330075
 --------------------------------         -----------------------------------
 (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation or organization)

10112 N.E. 10th Street, Bellevue, Washington                    98004 
--------------------------------------------                  ---------
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:           (206) 455-3761

Securities Registered Pursuant to Section 12(b) of the Act:   Common Stock, 
                                                               $.001 par value

Securities Registered Pursuant to Section 12(g) of the Act:   NONE

Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.
 
YES X  NO
   ---   ---
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, to 
the best of registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K or any 
amendment to this Form 10-K. [X]
 
The aggregate market value of the voting stock held by nonaffiliates of the 
Registrant, computed by reference to the price at which the stock was sold as 
of the close of business on March 21, 1997: $570,380,120.
 
Number of shares of Registrant's common stock, $.001 par value, outstanding 
as of March 21, 1997: 20,826,765.

<PAGE>

                                    CONTENTS
 

                                      PART I                 PAGE
                                                             ----

Item  1.   Business

Item  2.   Properties

Item  3.   Legal Proceedings

Item  4.   Submission of Matters to a Vote of Security Holders

                                      PART II

Item  5.   Market for the Company's Common Stock and Related 
           Shareholder Matters

Item  6.   Selected Financial Data

Item  7.   Management's Discussion and Analysis of Financial
           Condition and Results of Operations

Item  8.   Financial Statements and Supplementary Data

Item  9.   Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure

                                      PART III

Item 10.   Directors and Executive Officers of the Registrant

Item 11.   Executive Compensation

Item 12.   Security Ownership of Certain Beneficial Owners and Management

Item 13.   Certain Relationships and Related Transactions

                                      PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
                                       2
<PAGE>
                                     PART I
 
ITEM 1--BUSINESS
 
Special Note Regarding Forward-Looking Statements 

The information contained 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 
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.
 
OVERVIEW / RECENT DEVELOPMENTS
 
The Registrant, Quality Food Centers, Inc. (the "Company" or "QFC"), is the
second largest supermarket chain and the largest independent supermarket chain
in the Seattle/Puget Sound area of Washington State. With the recent acquisition
of Hughes Markets, Inc. ("Hughes"), the Company has entered into new markets in
Southern California. The Company began operations in 1954 with four stores and
has grown through acquisition and new store development to 145 stores today.
 
On March 19, 1997, the Company completed the financings for these
acquisitions, including: (i) the public sale of 5,175,000 shares of the
Company's common stock at a public offering price of $39.00 per share for net
proceeds to the Company of $193.2 million; (ii) the private placement of $150.0
million aggregate principal amount of 8.70% Senior Subordinated Notes for net
proceeds to the Company of $146.25 million and (iii) borrowings of $250.0
million under a new credit facility (initial interest rate of IBOR plus 0.875%).
The new $600.00 million credit facility consists of a $250.0 million term loan
facility, a $125.0 million revolving credit facility and a $225.0 million
acquisition reducing revolving credit facility. The proceeds of these three
transactions were used (i) to finance the Hughes merger, described under "Hughes
Markets, Inc." below; (ii) to refinance $197.5 million of the Company's bank
indebtedness outstanding at the time of the financings (including $59.6 million
of indebtedness incurred in connection with the acquisition of Keith Uddenberg
Inc. ("KUI"), described under "General" below; (iii) to pay related fees and
expense and (iv) to provide cash for general corporate purposes. As a result of
these acquisitions, the Company operates 89 stores in the Seattle/Puget Sound
region as well as 57 Hughes stores in Southern California. The acquisitions 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, a senior vice president for corporate development, and
a senior vice president for 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. Because of the magnitude of the
acquisitions, the Company's operations will not be comparable to QFC's or
Hughes' historical operations prior thereto. Due to these developments, the
Company's financial statements will change significantly, both in terms of total
assets and store count, and the Company anticipates that revenues will nearly
triple to over $2 billion.

                                       3

<PAGE>

The Company's capitalization will also change, reflecting the issuance of 
shares as well as a significant increase in long-term debt and a related 
increase in interest expense.

The Company has only one industry segment--the operation of retail
supermarkets.
 
GENERAL
 
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. The Company 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.
 
On February 14, 1997, the principal operations of KUI were merged into a 
subsidiary of QFC, including 22 Stock Market and three Thriftway supermarkets 
located in the Seattle/ Puget Sound region of Washington. As consideration 
for the operations being merged, QFC paid $35.3 million in cash, issued 
904,646 shares of QFC's common stock and assumed $24.3 million of KUI 
indebtedness. The KUI acquisition, which closed on February 14, 1997, 
provides QFC with desirable store locations primarily in the southern Puget 
Sound region and the Olympic Peninsula of the State of Washington, areas in 
which QFC previously has had 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 QFC 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 QFC 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 divestiture of five KUI stores, 
management estimates that QFC's market share among supermarkets in the 
Seattle/Puget Sound region is approximately 20% today.
 
With the consummation of the Hughes acquisition 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

                                       4

<PAGE>

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 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. See "Hughes Markets, Inc.", below.
 
QFC
 
MERCHANDISING
 
The Company'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's 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's
product preparation areas in these departments are open to promote such
interaction with customers. The Company 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. The Company 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

                                       5

<PAGE>

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 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 store-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. The Company'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.

                                       6

<PAGE>

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
QFC's plan to implement its merchandising and operating practices in its new
stores. It is presently expected that QFC 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 $217.0 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 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
                                                                                           --
                                                                                           64
                                                                                           --
</TABLE>


                                       7

<PAGE>

The following table sets forth additional information concerning QFC stores
for the periods indicated:
<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED
                                      -----------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>              <C>              <C>
                                         DECEMBER         DECEMBER         DECEMBER         DECEMBER         DECEMBER
                                         26, 1992         25, 1993         31, 1994         39, 1995         28, 1996
                                      ---------------  ---------------  ---------------  ---------------  ---------------
Total Stores:
Beginning of period.................         30               33               38               45               62
  Newly constructed.................          1                3                1                1                0
  Acquired..........................          2                2                6               16                2
  Closed............................          0                0                0                0                0
                                             --               --               --               --               --
End of period.......................         33               38               45               62               64
                                           ----             ----             ----            -----            -----
                                           ----             ----             ----            -----            -----
Remodels............................          5                3                2                5                5
Re-remodels.........................          1                0                2                2                8
</TABLE>
 
------------------------
 
(1) "Re-remodeled" stores are stores that have been remodeled within five years
    of a prior remodeling.
 
QFC'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. QFC'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
 
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 products with the assistance of QFC's schematic department which 
uses state-of-the-art shelf allocation software to help determine efficient 
shelf layouts.
 
    QFC's major wholesale supplier is West Coast Grocery Company ("West 
Coast"), a subsidiary of Super Valu Stores, Inc. The Company 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 ("A.G.") as its major wholesale supplier for the 12 
stores that were previously operated by Olson's. A.G. is a cooperative 
wholesale supplier located in Seattle, Washington. QFC purchased 
approximately $57.5 million of products from A.G. during fiscal 1996, 
accounting for 9.5% of QFC's cost of sales and related occupancy expense 
during the year. Currently, 49 of the Company's QFC stores buy from West 
Coast and 15

                                       8

<PAGE>

from A.G. See "Item 13--Certain Relationships and Related Transactions." 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 A.G.
 
The stores acquired in the KUI acquisition currently purchase products from
A.G. According to information made publicly available by A.G., KUI was A.G.'s
largest customer, having accounted for approximately 19% of A.G.'s sales for
A.G.'s fiscal year ended September 30, 1996. As a result of the KUI acquisition,
QFC currently owns 22% of the non-voting equity of A.G.
 
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 the Company'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 the Company'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.

Management anticipates that, over time, each of the KUI stores to be
retained by QFC will be converted to the Company'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

                                       9

<PAGE>

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 the following: 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 "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, there can be no 
assurance that work stoppages or other labor matters will not adversely 
affect the Company in the future.
 
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.

                                      10

<PAGE>

QFC 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.
 
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, the Company's
fiscal quarters consist of three 12-week quarters and a 16-week fourth quarter.
However, 1994 was a 53-week fiscal year, with a 17-week fourth quarter.
 
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 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.
 
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.
 
Hughes Markets, Inc.
 
On March 19, 1997, QFC acquired the principal operations of Hughes Market,
Inc. ("Hughes"), including the assets and liabilities related to 57 grocery
stores in southern California, as well as a 50% interest in Santee, one of the
largest dairy plants in California, providing dairy and other products to Hughes
and others, under the well-known "Knudsen", "Foremost" and other labels.
Consideration for the merger consisted of $358.8 million in cash, and the
assumption of $32.5 million of indebtedness of Hughes. The following information
relates to Hughes.
 
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

                                      11

<PAGE>

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. Fifty 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. Twenty-one 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 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.
 
                                       12

<PAGE>

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 twelve 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 $161.0 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 2,086,000 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.
 
The following table sets forth certain information with respect to Hughes'
store size:
 
<TABLE>
<CAPTION>
                                                                 NUMBER OF
                                                                 STORES AT
                                                                 MARCH 21,
                                                                   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.

                                      13

<PAGE>

The following table sets forth additional information concerning Hughes stores 
for the periods indicated:
<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED
                                              -------------------------------------------------------------------------------------
                                                MARCH 1,       FEBRUARY 29,       FEBRUARY 27,       FEBRUARY 26,       MARCH 3,
                                                  1992             1993               1994               1995             1996
                                              -------------  -----------------  -----------------  -----------------  -------------
<S>                                           <C>            <C>                <C>                <C>                <C>
Total Stores
Beginning of period.........................           49               52                 51                 51               53
  Newly constructed.........................            3                0                  0                  2                1
  Acquired..................................            0                0                  0                  0                0
  Closed....................................            0                1                  0                  0                0
                                                       --               --                 --                 --               --
End of period...............................           52               51                 51                 53               54
                                                      ----             ----               ----              -----             ----
                                                      ----             ----               ----              -----             ----
Remodels....................................            4                3                  6                  4                4
 
<CAPTION>
                                                 MARCH 4, 1996
                                                    THROUGH
                                                  JANUARY 31,
                                                     1997
                                              -------------------
<S>                                           <C>
Total Stores
Beginning of period.........................              54
Newly constructed...........................               3
Acquired....................................               0
Closed......................................               1
                                                          --
End of period...............................              56
                                                         ----
                                                         ----
Remodels....................................               2
</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.
 
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

                                      14

<PAGE>

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.
 
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.

                                      15

<PAGE>

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.
 
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 
historically has ended on the Saturday closest to the last day of February 
and generally consisted of 52 weeks. However, fiscal year 1996 was a 53 week 
year. As a result of the acquisition of Hughes by the Company, 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 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.
 
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 environmental 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 Bros. Markets "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

                                      16

<PAGE>

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 $100.0
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 $80.0 million of secured senior notes
in a private placement, the primary terms of which have been agreed to in 
principle. See "Item 7--Management's Discussion and Analysis of Financial 
Condition and Results of Operations."
 
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.
 
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 
countries). 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.
 
                                       17
<PAGE>

ITEM 2--PROPERTIES
 
QFC
 
    At March 21, 1997, QFC leased 59 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 21, 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 these centers 
are currently not material to QFC's results of operations. During 1995 and 
1996, QFC sold two of the centers it previously operated, and the others are 
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. QFC is actively 
pursuing other new store locations and acquisition opportunities.
 
HUGHES
 
    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 $1.0 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.

                                   18

<PAGE>
 
ITEM 3--LEGAL PROCEEDINGS
 
    The Company (including QFC, KUI and Hughes) is currently involved in a 
number of other legal proceedings which have arisen in the ordinary course of 
business. Management believes these proceedings will not, in the aggregate, 
have a material impact on the Company's operations or financial condition. 
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.
 
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    No matters were submitted during the fourth quarter of fiscal 1996 to a 
vote of shareholders through the solicitation of proxies or otherwise.
 
                                       19

<PAGE>
                                    PART II
 
ITEM 5--MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
          SHAREHOLDER MATTERS
 
The common stock of the Company is traded on the New York Stock Exchange
under the symbol "XQ". Prior to February 20, 1997, the Company's stock was
traded on the Nasdaq National Market, under the symbol "QFCI". Presented below
are quarterly closing sale price ranges for the Company's common stock. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions.
 
<TABLE>
<CAPTION>
                                                                          FISCAL YEAR ENDED     FISCAL YEAR ENDED
                                                                         --------------------  --------------------
                                                                               12/28/96              12/30/95
                                                                         --------------------  --------------------
                                                                            HIGH        LOW       HIGH        LOW
                                                                         ---------  ---------  ---------  ---------
<S>                                                                      <C>        <C>        <C>        <C>
First Quarter..........................................................  $  23 1/4  $  20 1/4  $  24 1/2   $ 21 1/4
Second Quarter.........................................................     29 1/4     22 1/4     22 1/4     19
Third Quarter..........................................................     31 1/2     25 1/2     26 3/4     19 1/2
Fourth Quarter.........................................................     39 1/2     30 1/16    22 1/2     19 1/2
</TABLE>
 
    The Company had approximately 2,660 shareholders of record as of March 15,
1997.
 
    The Company currently does not pay cash dividends on its common stock and
presently intends to retain available funds to finance the growth and operations
of its business. Subject to certain exceptions, the new credit facility
restricts the payment of cash dividends on the common stock, and the indenture
also restricts the making of certain payments, including cash dividends, by the
Company on its common stock. In February 1995, QFC paid a cash dividend of $.05
per share, or an aggregate of $1.0 million, to its shareholders, but
subsequently discontinued the payment of dividends as the result of prohibitions
set forth in the Company's prior credit facility. During 1994, QFC paid
quarterly cash dividends of $.05 per share for an annual rate of $.20 per share,
or an aggregate of $3.9 million for the year.
 
                                      20

<PAGE>
ITEM 6--SELECTED FINANCIAL DATA


                             five-year summary of
                            selected financial data
 
<TABLE>
<CAPTION>

FISCAL YEAR ENDED
(IN THOUSANDS EXCEPT                                              
PER SHARE DATA)                             DEC. 28,  1996  DEC. 30, 1995  DEC. 31, 1994  DEC. 25, 1993  DEC. 26, 1992
------------------------------------------  --------------  -------------  -------------  -------------  -------------
<S>                                         <C>             <C>            <C>             <C>           <C>
sales.....................................   $  805,281      $  729,856     $  575,879     $  518,260     $  460,107
operating income..........................       48,997          42,777         39,212         38,897         36,845
interest expense..........................        9,890           9,639             --             --             --
net earnings..............................       25,418          20,216         26,377         25,994         25,076
earnings per share........................         1.71            1.28           1.34           1.33           1.28
weighted average
shares outstanding........................       14,888          15,830         19,656         19,592         19,623
cash dividends per share..................   $       --      $      .05     $      .20     $      .15     $       --
total assets..............................      304,017         284,000        208,611        181,912        151,671
long--term debt...........................      145,000         164,500             --             --             --
shareholders' equity......................       76,798          45,367        158,178        133,620        108,345
depreciation and amortization.............       19,477          16,170         11,604          9,283          7,782
</TABLE>
 
------------------------
 
(1) 53-week fiscal year.

(2) Includes one-time charge of $1.4 million, or $.08 per share, resulting from
    the Company's recapitalization completed in March 1995.

                                       21

<PAGE>
 
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS
 
 
The information contained 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 described below, 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 herein do not purport to be predictions of future events 
or circumstances and may not be realized.

                              recent developments
 
On March 19, 1997, the Company acquired Hughes Markets, Inc. ("Hughes"),
including the assets and liabilities related to 57 grocery stores in Southern
California and a 50% interest in Santee Dairies, Inc. ("Santee"), one of the
largest dairy plants in California. Consideration for the merger consisted of
$358.8 million in cash and the assumption of approximately $32.5 million of
indebtedness of Hughes. In addition, on February 14, 1997, the principal
operations of Keith Uddenberg, Inc. ("KUI") were merged into a subsidiary of the
Company, including 22 Stock Market and three Thriftway supermarkets located in
the Seattle/Puget Sound region of Washington. As consideration for the assets
and operations being merged, the Company paid $35.3 million in cash, issued
904,646 shares of the Company's common stock and assumed $24.3 million of the
KUI indebtedness. With the addition of KUI, the Company continues its strategy
of in-market and contiguous expansion within the Seattle/Puget Sound region,
while the acquisition of Hughes represents the Company's strategy to enter into
new markets; both are major developments toward the Company's overall strategy
of becoming a leading multi-regional operator of premium supermarkets.
 
    As part of the financing of the Hughes and KUI transactions, on March 19,
1997, the Company sold an additional 5,175,000 shares of common stock through a
secondary offering, issued $150.0 million aggregate principal amount of senior
subordinated notes (at 8.7%) to institutional investors, and entered into an
agreement to amend and restate its existing credit facility. The new credit
facility consists of a $250.0 million term loan facility, a $125.0 million
revolving credit facility (available for working capital and other general
corporate purposes) and a $225.0 million reducing revolving acquisition credit
facility. The Company used $193.2 million of proceeds from the common stock
offering, $146.2 million of proceeds from the notes offering, and $250.0 million
of borrowings under the new credit facility to finance the Hughes acquisition,
to refinance $197.4 million of the Company's bank indebtedness outstanding at
the time of the financings (including $59.6 million incurred in connection with
the KUI acquisition), and to pay related fees and expenses, leaving
approximately $31 million of cash on hand for general corporate purposes.
 
    As a result of these Acquisitions, the Company will operate 89 stores in the
Seattle/Puget Sound region as well as 56 Hughes stores in Southern California.
The Acquisitions will more than double 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 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. 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 will also change,
reflecting the issuance of shares as well as a significant increase in long-term
debt and a related increase in interest expense.

                                      22

<PAGE>

                                   overview

QFC reported record sales and operating income for its tenth consecutive
year and the Company's margins remain well in excess of the average for the
supermarket industry. Following four years of food price deflation, the Company
experienced modest food price inflation in 1996. The Puget Sound area is also
experiencing a stronger regional economy and population growth than in recent
years. While the supermarket industry remains highly competitive, the Company
experienced less of an impact from competitive store remodels and new store
openings near the Company's stores than in recent years. As a result of these
and other factors, the Company experienced a strong increase in same store sales
for 1996. 

     1996 included a full year impact of two major transactions completed
in March 1995, including the acquisition of Olson's Food Stores, Inc.
("Olson's"), including 12 of its grocery stores, and its interest in certain
grocery stores in various stages of development, in a merger effected through a
combination of stock and cash with a total value of approximately $60.0 million.
The other significant development in 1995 was the major recapitalization
completed in March, where the Company reduced its outstanding shares by six
million and incurred $164.5 million in long-term debt, whereas the Company had
no long-term debt at the beginning of the year. The recapitalization resulted in
lower cash balances, less interest income and significant interest expense.
Further, during the first quarter of 1995, the Company recorded a one-time
charge of $1.4 million for nondeductible expenses associated with the
recapitalization.
 
    The table below sets forth items in the Company's statements of earnings as
a percentage of sales:
 
<TABLE>
<CAPTION>
                                                                                             1996       1995       1994
                                                                                           ---------  ---------  ---------
<S>                                                                                        <C>        <C>        <C>
sales....................................................................................      100.0%     100.0%     100.0%
cost of sales & related occupancy expenses...............................................       75.0       75.4       74.8
                                                                                           ---------  ---------  ---------
gross margin.............................................................................       25.0       24.6       25.2
marketing, general & administrative expenses.............................................       18.9       18.7       18.4
                                                                                           ---------  ---------  ---------
operating income.........................................................................        6.1        5.9        6.8
interest income..........................................................................        0.1        0.1        0.2
interest expense.........................................................................        1.3        1.3         --
other expense............................................................................         --        0.2         --
                                                                                           ---------  ---------  ---------
earnings before income taxes.............................................................        4.9        4.5        7.0
taxes on income..........................................................................        1.7        1.7        2.4
                                                                                           ---------  ---------  ---------
net earnings.............................................................................        3.2%       2.8%       4.6%
                                                                                           ---------  ---------  ---------
                                                                                           ---------  ---------  ---------
</TABLE>
 
                                     sales
 
Over the past three years, sales increases have been driven primarily by the
acquisition and opening of new stores and the expansion and remodeling of
existing stores. The following table provides information pertaining to the
Company's sales increases over the three fiscal years ended December 28, 1996.
 
<TABLE>
<CAPTION>
                                                                                               CHANGE FROM PRIOR FISCAL YEAR
                                                                                              -------------------------------
<S>                                                                                           <C>        <C>        <C>
                                                                                                1996       1995       1994
                                                                                              ---------  ---------  ---------
total sales increase........................................................................       10.3%      26.7%      11.1%
store square footage increase...............................................................        5.7%      46.2%      22.1%
same store sales increase (decrease)........................................................        3.3%      (1.5)%      0.4%
</TABLE>

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 

                                      23

<PAGE>

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.
 
    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 estimates only a few competitive store openings and modest food
price inflation in 1997 and believes that same store sales should remain
positive in 1997.

                                  inflation
 
    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%.


                 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.
 
    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

                                      24

<PAGE>
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 
expense in 1994.


                                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 tax 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.

                                      25

<PAGE>

                           accounting pronouncements
 
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," was recently issued and was effective for QFC's
fiscal year ended December 28, 1996. QFC, as allowed, intends to continue to
measure stock-based compensation using its current method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25. Although the
Company will be required to disclose certain additional information related to
its stock options and employee stock purchase plans, management believes the
impact to the financial statements, taken as a whole, will not be material.


                        liquidity and capital resources
 
The Company's principal source of liquidity has been cash generated from
operations. The Company's credit facility is another source of liquidity. The
Company's cash and cash equivalents increased $2.5 million in 1996 to $14.6
million primarily due to an increase in cash provided by operations of $50.9
million, $2.7 million of proceeds received from the sale of real estate and $2.4
million from the issuance of common stock, which more than offset capital
expenditures of $33.0 million and a reduction in borrowings under the Company's
current credit facility of $19.5 million. The ratio of current assets to current
liabilities at December 28, 1996 was 1.05 to 1, compared with 1.09 to 1 at
December 30, 1995. As discussed below, the Company refinanced its outstanding
bank borrowings when it entered into the amended credit facility in connection
with the Hughes merger, leaving the Company with approximately $350.0 million of
unused committed borrowing capacity. In addition, as a result of the financings
completed in connection with the Hughes merger described above, the Company has
an additional $31.0 million in cash available for general corporate purposes.
 
    The Company's expansion and remodeling and new store activities for the
period from 1986 through December 28, 1996 are summarized below:

<TABLE>
<CAPTION>
                                                   NEW OR        SQUARE       CAPITAL
                  MAJOR                           ACQUIRED        FEET      EXPENDITURES
                REMODELS1      RE-REMODELS2        STORES        ADDED     (IN THOUSANDS)
              -------------  -----------------  -------------  ----------  --------------
<S>           <C>            <C>                <C>            <C>         <C>
1986                3               --                  1         58,000      $   3,500 
1987                2               --                 --          8,000          5,700 
1988                5               --                 --         16,000          7,600 
1989                2               --                  2         85,000          9,900 
1990                1                2                  3        107,000         16,600 
1991                2                1                  3        127,000         25,900 
1992                5                1                  3        137,000         26,800 
1993                3               --                  5        173,000         43,000 
1994                2                2                  7        239,000         28,200 
1995                5                2                 17        609,000         89,100 
1996                5                8                  2        111,000         33,000 

              -------------  -----------------  -------------  ----------  --------------
total              35               16                 43      1,670,000      $ 289,300
              -------------  -----------------  -------------  ----------  --------------
              -------------  -----------------  -------------  ----------  --------------
</TABLE>
 
------------------------
 
(1) Includes replacement stores.
 
(2) "Re-remodeled" stores are stores that have been remodeled within five years
    of a prior remodeling.
 
After adding 46% to its square footage in 1995, the Company's most active
year to date in terms of growth, 1996 has been another productive year. In March
1996, the Company opened a new 41,000 square foot store in the Northgate area,
which replaced a 14,000 square foot store in the same area. In
August 1996, the Company opened a 66,000 square foot University Village store,
replacing a 31,000 square foot store. QFC continues to invest in its existing
stores to keep them up-to-date. In addition to the two replacement stores,
during 1996, QFC remodeled three of the stores acquired from Olson's in 1995 and
completed remodelings of eight other stores. The Company has also commenced
construction of a new 45,000 square foot Harvard Market store which is expected
to be completed in mid-1997. On October 19, 1996 the Company acquired two stores
located in Seattle, Washington from a local independent retailer. The stores are
18,000 and 26,900 square feet, and the Company has commenced a substantial
remodeling of one of the stores. In addition to these remodels, the Company's
fiscal 1997 remodel plans currently include thirteen of its QFC stores and 13 of
the stores it acquired in the KUI merger. Additionally, the Company has secured
a number of other sites that are still in the entitlement process or subject to
other contingencies.
 
    The Company owns the real estate at eleven of its 147 store facilities in 
operation. The Company owns the strip shopping centers where two of these 
stores are located; however, the real estate operations of 

                                      26

<PAGE>

these centers are currently insignificant to the Company's results of 
operations. The Company sold a shopping center in the third quarter of 1996 
as well as one in the first quarter of 1995 (excluding its store buildings 
and pads). The remaining 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.
 
    Capital expenditures, which include the purchase of land, fixtures, 
equipment and leasehold improvements, as well as the purchase of leasehold 
interests, other property rights, goodwill and covenants not to compete, were 
$33.0 million in 1996. In 1997, the Company added 25 new stores as a result 
of the KUI merger and an additional 56 stores from the Hughes merger. The 
Company has currently budgeted capital expenditures for 1997 of approximately 
$62 million 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 fiscal 1997 or any future 
period. Capital expenditures may also be increased to the extent the Company 
is required to invest funds in Santee resulting from Santee's inability to 
obtain long-term financing.
 
    As part of the Hughes merger, the Company acquired a 50% interest in Santee
Dairies, Inc. 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 estimated cost of construction 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 40% of the aggregate budgeted capital
expenditures have been made. Negotiations are currently under way with certain
parties to purchase approximately $80.0 million of senior secured notes to
finance construction costs. There is no assurance, however, that Santee will be
able to obtain this long-term financing on acceptable terms, or at all. In that
regard, the Company, and the other 50% partner, 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 its existing credit facilities, and is negotiating with
its lender to extend its existing credit facilities and to obtain the
appropriate waivers. Notwithstanding such default, its lender has allowed Santee
to continue to borrow under its existing credit facility without a formal
waiver.
 
    During 1994, the Company paid cash dividends of $0.20 per share of the
Company's common stock totaling $3.9 million and a dividend of $0.05 per share
was paid in February 1995, totaling $1.0 million. The 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 business.

    On March 19, 1997, in connection with the Hughes merger, the Company entered
into a new credit facility which replaced the credit facility it entered into in
connection with its 1995 recapitalization. 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 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 Facililty 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 in an amount not to exceed $80.0 million to
finance construction of Santee's new dairy. On the date the new credit facility
became effective, the Company borrowed $250.0 million under the Term Loan
Facility. 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. The new credit facility contains a number of
significant 

                                      27

<PAGE>

covenants that among other things, restrict the ability of the Company 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 the Company and its subsidiaries' 
acquisition of other businesses, and limit the Company and its subsidiaries 
from making certain restricted payments (including dividends and repurchases 
of stock), subject in certain circumstances to specified financial tests. The 
obligations of the Company under the new credit facility have been guaranteed 
by certain existing subsidiaries. In addition, the Company has pledged the 
outstanding shares of such subsidiaries as security under the facility. In 
addition, the Company and its subsidiaries will be required to comply with 
specified financial ratios and test, 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. The covenants and ratios under the 
new credit facility and the notes described below were negotiated to provide 
appropriate flexibility to facilitate the Company's growth strategies.

     As discussed above, on March 19, 1997, the Company issued $150 million
aggregate principal amount of Senior Subordinated Notes in a private offering.
The Notes will mature on March 15, 2007. The Notes bear interest at 8.70% per
annum with interest payable in cash semi-annually on March 15 and September 15
of each year, commencing September 15, 1997. The Notes are redeemable, in whole
or in part, at the option of the Company beginning March 15, 2002, at redemption
prices declining over time from 104.35% of the principal amount in the year 2002
to 100% of the principal amount in the year 2005 and thereafter, in each case
plus accrued and unpaid interest to the redemption date. In addition, at any
time prior to March 15, 2000, the Company may redeem up to 20% of the aggregate
principal amount of the 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, provided that at least 80% of the aggregate principal
amount of the Notes originally issued remains outstanding immediately after the
occurrence of such redemption. The obligations of the Company pursuant to the
Notes are guaranteed by certain of QFC's existing subsidiaries (the
"Guarantors"). The Notes are 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,
including borrowings and guarantees under the new credit facility. Upon a
change of control, the Company will be required to offer to repurchase all
outstanding Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. The Company will also be obligated in
certain circumstances to offer to repurchase Notes at a purchase price of 100%
of the principal amount thereof, plus accrued interest, with the net cash
proceeds of certain sales or other dispositions of assets. The Indenture
relating to the Notes contains certain covenants that limit, subject to certain
significant exceptions, the ability of the Company and its subsidiaries to,
among other things, incur additional indebtedness and issue 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; enter into certain transactions
with affiliates; enter into certain mergers and consolidations or engage in new
lines of business.

     The Company anticipates that cash flow from operations and borrowings 
under the new credit facility will be sufficient to provide financing for the 
$62 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 Securities 
and Exchange Commission registering for sale to the public, an aggregate of 
$500.0 million of securities, under which, after the secondary common stock 
offering described above, $298.2 million of common stock, preferred stock and 
certain 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.
 
<PAGE>

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Financial Statements on page 51 for the 
Company's financial statements and notes thereto. All other schedules have 
been omitted as not required or not applicable or because the information 
required to be presented is included in the financial statements and related 
notes.


                                       29

<PAGE>

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE

    There has been no change in independent auditors during the past two 
fiscal years, and there has been no disagreement with the Company's 
independent auditors on any matter of accounting principles or practices or 
financial statement disclosure.

                                       30

<PAGE>
                                    PART III

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The executive officers and directors of the Company are as follows:

<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

Dan Kourkoumelis                  45     President, Chief Executive Officer and Director

Frederick Meils                   55     Senior Vice President, Corporate Development

William P. Ketcham                46     Senior Vice President, Marketing and Public Affairs

Marc W. Evanger                   42     Vice President, Chief Financial Officer and Secretary/Treasurer

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>

    The Company's Articles of Incorporation 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. Currently the Board of 
Directors consists of nine persons. 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.

    Two designees of Zell Chilmark (Mr. Zell and Mrs. Rosenberg) are members 
of the Company'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 the Company, Stuart M. 
Sloan and Zell/Chilmark Fund L.P. ("Zell Chilmark"). A Standstill Agreement 
dated as of January 14, 1995 between the Company and Zell Chilmark (the "Zell 
Chilmark Standstill Agreement") provides that (i) Zell Chilmark will continue 
to have two representatives on the Company's Board as long as Zell Chilmark 
owns at least 10% of the outstanding common stock; (ii) the Company will not 
increase the size of its Board beyond nine members as long as Zell Chilmark 
is entitled to two Board designees and (iii) with certain exceptions, Zell 
Chilmark will vote its common stock for the election or removal of directors 
of the Company either (a) in accordance with the recommendations of a 
majority of the Company's 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

                                       31

<PAGE>

respect to any matter that would relate to a possible change in control 
of the Company. See "Item 12--Security Ownership of Certain Beneficial Owners 
and Management."

    The terms of the Agreement and Plan of Merger dated as of November 20, 
1996, among the Company, QHI Acquisition Corporation and Hughes provide that 
at the request of Roger K. Hughes, President and Chief Executive Officer of 
Hughes, the Company shall cause Mr. Hughes to be appointed as a director of 
the Company promptly following the closing of the transactions contemplated 
by such Agreement and to cause Mr. Hughes to be nominated for re-election as 
a director, if he should so desire, at the next ensuing meeting of 
shareholders at which directors, or the class of directors to which he is 
appointed, stand for re-election. It is expected that Mr. Hughes will be 
nominated for a seat on the Board of Directors of the Company at the next 
annual meeting of the shareholders of the Company.

    Stuart M. Sloan became a director of the Company in 1985 and has been 
Chairman of the Board since June 1986. Mr. Sloan served as Chief Executive 
Officer of the Company 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. See "Item 13--Certain 
Relationships and Related Transactions". 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 the Company 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 Pepsi-Cola 
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 the Company in April 1991. He 
joined the Company as a courtesy clerk in 1967 and his experience includes 
several ranks of store management and executive positions. Mr. Kourkoumelis 
was appointed Executive Vice President in 1983, Chief Operating Officer in 
1987, 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. See 
"Item 13--Certain Relationships and Related Transactions". Mr. Kourkoumelis 
is a Class III director.

    Frederick S. Meils has been Senior Vice President of Corporate 
Development of the Company 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 the Company, 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.

    Marc W. Evanger joined the Company 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 the Company 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.

                                       32

<PAGE>

    John W. Creighton, Jr. became a director of the Company in December 1989. 
He has served since 1988 as President and a director, and since August 1991 
as Chief Executive Officer of Weyerhaeuser Company, a forest products 
company. Mr. Creighton serves as a director of NHP, Inc., Portland General 
Corporation and Unocal. Mr. Creighton is a Class I director.

    Maurice F. Olson became a director of the Company 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. See "Item 13--Certain 
Relationships and Related Transactions." Mr. Olson is a Class II director.
 
    Marc H. Rapaport became a director of the Company in May 1996. Mr. 
Rapaport is currently Chairman and lead investor in 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. See "Item 13 -Certain Relationships and
Related Transactions."

    Ronald A. Weinstein served as a director of the Company from June 1986 to 
March 1987 and became a director again in February 1988. He was a principal 
of Sloan Capital Companies, a private investment company, from 1984 to July 
1991. From February 1989 until April 1991, Mr. Weinstein served as Executive 
Vice President of Merchandising at Egghead, Inc., a reseller of microcomputer 
software. Mr. Weinstein serves as Chairman of B & B Auto Parts, Inc. and is a 
director of Molbak's, Inc. and Coinstar, Inc. Mr. Weinstein is a Class III 
director.

    Samuel Zell became a director of QFC in March 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

                                       33

<PAGE>

company based in the United Kingdom. Mr. Zell is also a member of the Board 
of Directors of Sealy Corporation. Mr. Zell is a Class I director. See "Item 
13--Certain Relationships and Related Transactions."

                                       34

<PAGE>

ITEM 11--EXECUTIVE COMPENSATION

    The following table shows the compensation for services rendered for each 
person who served as the Chief Executive Officer of the Company and for each 
of the other named executive officers who earned in excess of $100,000 during 
fiscal year 1996 (together, the "Named Executive Officers").

                                                    SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                            LONG-TERM
                                                                                           COMPENSATION
                                                                                              AWARDS
                                                                    ANNUAL COMPENSATION     SECURITIES 
                                                   FISCAL        ------------------------   UNDERLYING          ALL OTHER
NAME AND PRINCIPAL POSITION                         YEAR          SALARY ($)    BONUS ($)   OPTIONS(#)    COMPENSATION ($)(4)
---------------------------                       --------       ------------   ---------  -------------  -------------------
<S>                                               <C>            <C>            <S>        <S>            <S>

Stuart M. Sloan.........................           1996           952,816(1)     250,000     50,000                   0
   Chairman, Chief Executive Officer (1)           1995           981,068(1)           0     58,900                   0
                                                   1994         1,131,757(1)           0     50,000                   0

Christopher A. Sinclair.................           1996           173,077(2)      87,500    500,000                   0
   President, Chief Executive Officer (2)          1995                 0(2)           0          0                   0
                                                   1994                 0(2)           0          0                   0

Dan Kourkoumelis........................           1996           285,000(3)     195,000     35,000              35,009
   President, Chief Executive Officer (3)          1995           275,000(3)     145,000    130,000              35,996
                                                   1994           233,528(3)     143,000     30,000              20,862

Marc Evanger............................           1996            155,000       100,000     30,000              17,443
   Vice President, Chief Financial                 1995            150,000        75,000    100,000              17,663
   Officer                                         1994            121,093        73,000     20,000              12,929

</TABLE>

------------------------

(1) Mr. Sloan served as the Chief Executive Officer of the Company until
    September 1996. Mr. Sloan continues to serve as Chairman of the Company. Mr.
    Sloan received only management fees from the Company for the fiscal years
    1994 and 1995. From August 17, 1986 to June 16, 1996, Sloan Capital
    Companies, which is controlled by Mr. Sloan, received from the Company a
    management fee of 0.2% of the Company's total sales pursuant to a management
    agreement. The management fee was not adjusted during the term of the
    management agreement, which expired on June 16, 1996, except that for the
    fourth quarter of 1995, the parties agreed that Mr. Sloan would accept
    options to purchase 58,900 shares of the Company's stock in lieu of a cash
    management fee, which would have been approximately $479,000. For the period
    from December 31, 1995 through June 16, 1996, Mr. Sloan was paid 0.2% of
    sales, or $683,585, under the agreement. Subsequent to June 16, 1996 and
    through December 28, 1996, Mr. Sloan was paid a monthly fee, aggregating
    $269,231, plus a bonus payment of $250,000. See "Item 13--Certain
    Relationships and Related Transactions."

(2) Mr. Sinclair was appointed President and Chief Executive Officer of the
    Company in September 1996. See "Employment Contracts and Termination of
    Employment and Change-In-Control Arrangements."

(3) Mr. Kourkoumelis was appointed Chief Executive Officer of the Company in
    September 1996. See "Employment Contracts and Termination of Employment and
    Change-In-Control Arrangements."

(4) These amounts represent the accrued Company contributions to the Quality
    Food Centers, Inc. Defined Contribution Profit Sharing Plan. The amounts 
    for 1996 include cash compensation of $24,535 and $6,969 payable to
    Mr. Kourkoumelis and Mr. Evanger, respectively, representing the shortfall
    in contributions that would otherwise have been made had a $150,000 salary
    limit on compensation to be considered for profit sharing contributions not
    been imposed by the Internal Revenue Code.

                                       35

<PAGE>

    The Company has stock option plans pursuant to which options to purchase
common stock are granted to officers and key employees of the Company. The
following tables show stock option grants in fiscal year 1996 to the Named
Executive Officers, and the year-end value of unexercised options. No options
were exercised in fiscal year 1996 by any of the Named Executive Officers.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                          INDIVIDUAL GRANTS
                                -----------------------------------------------------
                                                                                        POTENTIAL REALIZABLE VALUE
                                 NUMBER OF         % OF TOTAL                             AT ASSUMED ANNUAL RATES
                                 SECURITIES         OPTIONS                             OF STOCK PRICE APPRECIATION
                                 UNDERLYING        GRANTED TO    EXERCISE                  FOR OPTION TERM (1)
                                  OPTIONS         EMPLOYEES IN     PRICE    EXPIRATION  ---------------------------
NAME                            GRANTED(#) (2)     FISCAL YEAR    ($/SHR)      DATE        5% ($)        10% ($)
-----------------------------   --------------    ------------    -------   ----------  -----------   -------------
<S>                             <C>               <C>             <C>       <C>         <C>           <C>

Stuart M. Sloan..............      50,000(3)           6.3         22.25     2/12/2006     699.500     1,773,000

Christopher A. Sinclair......     500,000(4)          63.3         31.50     9/18/2006   9,905,000    25,100,000

Dan Kourkoumelis.............      35,000(5)           4.4         31.00     9/19/2006     682,500     1,729,350

Marc Evanger.................      30,000(5)           3.8         31.00     9/19/2006     585,000     1,482,300

</TABLE>

------------------------

(1) Potential realizable value is based on the assumption that the stock price
    of the Company's common stock appreciates at the annual rate shown
    (compounded annually) from the date of grant until the end of the five or
    ten year option term. These numbers are calculated based on the requirements
    promulgated by the Securities and Exchange Commission and do not reflect the
    Company's estimate of future stock price performance. No gain to the
    optionee is possible without an increase in the price of the common stock,
    which would benefit all holders of the common stock commensurately.

(2) The Company's stock option plans are administered by the Compensation
    Committee of the Board of Directors, which determines to whom the options
    are granted, the number of shares subject to each option, the vesting
    schedule and the exercise price. Stock options granted to Messrs. Sloan,
    Sinclair, Kourkoumelis and Evanger were granted pursuant to the 1993
    Executive Stock Option Plan and, in the case of Mr. Sinclair, subject to
    shareholder approval.

(3) The options were granted on February 12, 1996, at fair market value and vest
    ratably over five years.

(4) The options were granted on September 18, 1996, at fair market value and
    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 day trading window. (Such options
    became exercisable in January 1997.) 

5)  The options were granted on September 19, 1996, at fair market value and 
    vest ratably over five years.

                                       36

<PAGE>
              AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                              NUMBER OF
                                             SECURITIES
                                             UNDERLYING         VALUE OF
                                            UNEXERCISED       UNEXERCISED
                                              OPTIONS         IN-THE-MONEY
                                           AT FISCAL YEAR   OPTIONS AT FISCAL
                                              END (#)       YEAR-END ($) (1)
                                           ______________   _________________
                                            EXERCISABLE/     EXERCISABLE/
NAME                                       UNEXERCISABLE    UNEXERCISABLE
--------------------------------------     --------------   ----------------
<S>                                        <C>              <C>
Stuart M. Sloan.......................     91,780/167,000   610,195/1,653,280

Christopher A. Sinclair...............       0/500,000          0/1,000,000

Dan Kourkoumelis......................     26,000/139,000    341,500/1,453,500

Marc Evanger..........................     20,000/110,000    262,000/1,123,000

</TABLE>

--------------------------------------------------------

(1) Value is (i) the fair market value of Company's common stock at fiscal 1996
    year end ($33.50 per share) less the option exercise price times (ii) the
    number of shares.

Employment Contracts and Termination Of Employment and Change-In-Control 
Arrangements

Mr. Sinclair is employed pursuant to a contract which provides for 
continuation of his employment through September 16, 1999, subject to earlier 
termination under various circumstances. The agreement provides for an annual 
base salary of $600,000, subject to increase by the Company's Compensation 
Committee, as well as an annual bonus, targeted at 50 percent (50%) of annual 
base salary, although the actual amount of bonus paid is based on criteria 
established form time to time by the Company's Compensation Committee, and 
such amount may be more or less than 50 percent (50%) of annual base salary. 
Pursuant to the agreement, Mr. Sinclair was granted options to purchase a 
total of 500,000 shares of the Company's common stock, at an exercise price 
of $31.50 per share pursuant to the 1993 Executive Stock Option Plan, which 
grant is subject to approval by the shareholders of an amendment to such 
Plan. The agreement also provides for additional grants of stock options to 
Mr. Sinclair on the first and second anniversaries thereof, based on a 
formula which generally provides for options equal to three times base salary 
and target bonus, divided by the market price of the Company's common stock 
on or prior to the date of each such grant. In the event Mr. Sinclair's 
employment is terminated under certain circumstances prior to September 16, 
1999, (including within 90 days after a change in control of the Company), 
Mr. Sinclair would be entitled to severance payments equal to his base salary 
through September 16, 1999, plus the target bonus applicable to the period 
during which such termination occurred.

Mr. Kourkoumelis is employed pursuant to a contract which provides for 
continuation of his employment through September 1, 1999, subject to earlier 
termination under various circumstances. The agreement provides for an annual 
base salary of $283,246, subject to increase by the Company's Compensation 
Committee. In the event Mr. Kourkoumelis' employment is terminated under 
certain circumstances prior to September 1, 1999 (including termination by 
the Company within 180 days after a change in control of the Company), Mr. 
Kourkoumelis would be entitled to severance payments equal to the sum of base 
salary plus bonus for a period of two years from the date of such 
termination, and all options to purchase shares of the Company's common stock 
then held by Mr. Kourkoumelis would immediately vest.

                                      37

<PAGE>

Mr. Evanger is employed pursuant to a contract which provides for 
continuation of his employment through September 1, 1999, subject to earlier 
termination under various circumstances. The agreement provides for an annual 
base salary of $154,498, subject to increase by the Company's Compensation 
Committee. In the event Mr. Evanger's employment is terminated under certain 
circumstances prior to September 1, 1999 (including termination by the 
Company within 180 days after a change in control of the Company), Mr. 
Evanger would be entitled to severance payments equal to the sum of base 
salary plus bonus for a period of two years from the date of such 
termination, and all options to purchase shares of the Company's common stock 
then held by Mr. Evanger would immediately vest.

DIRECTORS' FEES

Through April 30, 1996, Directors who were not employees of the Company, and 
excluding Mr. Sloan, were paid an annual retainer fee of $10,000 plus $1,000 
for each Board of Directors meeting attended in person and $250 for each 
teleconference, were reimbursed for their expenses incurred in attending such 
meetings and were granted stock options under the Directors' Nonqualified 
Stock Option Plan (the "Directors' Plan").

Under the Director's Plan, each non-employee (non-affiliated) director of the 
Company is granted a non-qualified option to purchase 10,000 shares of the 
Company's common stock upon becoming a director. Prior to May 31, 1996, each 
director also was granted a non-qualified option to purchase 1,000 shares of 
common stock on an annual basis. Options vest in equal annual installments 
over three years and terminate, to the extent not previously exercised, upon 
the occurrence of the first of the following events: (i) ten years after the 
date of grant; (ii) termination as a director for any reason other than death 
or disability or (iii) 30 days after termination as a director due to death 
or disability. The exercise price for the options is the fair market value of 
the Company's common stock on the date of grant. Upon exercise, the exercise 
price may be paid in cash, by certified or cashier's check or in shares of 
stock of the Company owned by a director. Options to purchase up to 100,000 
shares of common stock are authorized under the Directors' Plan. At the end 
of fiscal year 1996, options to acquire an aggregate of 68,200 shares were 
held by six directors at an average exercise price of $25.08 per share. 
Options to purchase 10,000 shares were granted to each of Mrs. Rosenberg and 
Mr. Rapaport upon their joining the Board on April 30, 1996, and May 28, 
1996, respectively, at option prices of $26.00 and $27.00, respectively.

Effective April 29, 1996 through December 31, 1996, and on a calendar year 
basis thereafter, directors who are not employees or officers of the Company 
will continue to be eligible for the one-time grant of options noted above. 
In addition, in lieu of the annual retainer and meeting attendance fees, each 
such director shall receive $45,000 which shall be payable at the direction 
of the director, in either cash or stock units pursuant to the Company's 
Director's Stock Unit Plan (the "Stock Unit Plan"). Pursuant to the terms of 
the Stock Unit Plan, each eligible director will receive, on an annual basis, 
that number of stock units equal to $45,000 divided by the fair market value 
of the Company's common stock on the date of the award. Stock units vest in 
equal quarterly installments and may be exercised and converted on a 
one-for-one basis into shares of the Company's common stock on a date 
designated by each director (such designation to be pre-determined each year 
prior to grant). For fiscal year 1996, the award value was prorated to 
$30,000, resulting in 967 stock units being awarded to each of six directors 
(for a total of 5,802 units). The Stock Unit Plan is subject to shareholder 
approval.

                                      38

<PAGE>

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Voting Securities and Principal Holders

The only voting securities of the Company are shares of common stock, $.001 
par, each of which is entitled to one vote. At March 21, 1997, there were 
issued and outstanding 20,826,765 shares of common stock.

The following table sets forth information, as of March 21, 1997, with 
respect to all shareholders known by the Company to be the beneficial owners 
of more than five percent of its outstanding shares of common stock. It also 
shows beneficial ownership for each director, each of the Named Executive 
Officers and all executive officers and directors of the Company as a group. 
Except as noted below, each person has sole voting and investment power with 
respect to the shares shown.

<TABLE>
<CAPTION>
                                                                  PERCENT OF
                                        AMOUNT AND NATURE OF        SHARES
NAME AND ADDRESS (1)                  BENEFICIAL OWNERSHIP (2)   OUTSTANDING (2)
--------------------                  ------------------------   -------------
<S>                                   <C>                        <C>
Stuart M. Sloan (3).................           1,857,882               8.54
Christopher A. Sinclair.............             500,000               2.30
Ronald A. Weinstein.................             297,559               1.36
Maurice F. Olson....................             600,608               2.76
Zell/Chilmark Fund L.P. (4)(5)......           3,975,000              18.28
Samuel Zell (4)(5)..................           3,982,667              18.31
Sheli Z. Rosenberg (4)(5)...........           3,980,333              18.30
Dan Kourkoumelis....................             138,123                  *
John W. Creighton, Jr...............              15,075                  *
Marc W. Evanger.....................              90,251                  *
Marc H. Rapaport....................               1,000                  *
Frederick S. Meils..................                 -0-                  *
William P. Ketcham..................                 -0-                  *
All executive officers and directors
 as a group (12 persons)............           7,488,498              34.43
</TABLE>


                                       39

<PAGE>

------------------------

*   Denotes less than one percent.

(1) The business address of each shareholder identified as the beneficial owner
    of more than five percent of the common stock other than Zell Chilmark , Mr.
    Zell and Mrs. Rosenberg, is 10112 NE 10th Street, Bellevue, Washington
    98004-4148. 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 or stock units, as follows: Mr. Sloan, 158,900 shares; Mr. 
    Sinclair, 500,000 shares; Mr. Weinstein, 13,000 shares; Mr. Olson, 7,667 
    shares; Mr. Kourkoumelis, 131,985 shares; Mr. Creighton, 11,200 shares; 
    Mr. Zell, 7,667 shares; Mr. Rapaport, 1,000 shares; Mrs. Rosenberg, 4,333 
    shares; Mr. Meils, -0- shares; Mr. Ketcham, -0- shares; Mr. Evanger, 
    85,484 shares; and all executive officers and directors as a group, 
    911,903.
 
(3) In connection with the Recapitalization, Mr. Sloan and the Company entered
    into a Standstill Agreement dated as of January 14, 1995 (the "Sloan
    Standstill Agreement") pursuant to which Mr. Sloan agreed that he will not
    take any of the following actions, 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 donations of
    common stock in an amount not to exceed 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 Securities Exchange Act
    of 1934, as amended (the "Exchange Act"), or enter into any agreement or
    arrangement or otherwise act in concert with any other person, for the
    purpose of acquiring, holding, voting or disposing of common stock; (c)
    engage in any material transactions with the Company without the approval of
    a majority of the Company'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 the Company or otherwise seek to
    circumvent any of the foregoing limitations. See "Item 13--Certain
    Relationships and Related Transactions."
 
(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) In connection with the Zell Chilmark Standstill Agreement, pursuant to which
    Zell Chilmark has agreed that it and certain of its affiliates will not take
    any of the following actions without the approval of a majority of the
    Company's disinterested directors, subject to specified limited exceptions:
    (a) increase their ownership of common stock (or securities convertible into
    or exchangeable for common stock or other options or rights to acquire
    common stock) prior to June 30, 2000, beyond 30%; (b) sell or otherwise
    dispose of any common stock prior to March 29, 1997; (c) sell or otherwise
    dispose of any common stock during the two-year period following March 29,
    1997 to any person or group that would own (to Zell Chilmark's knowledge)
    more than 5% of the outstanding common stock after such transfer; (d) form,
    join or participate in any other way in a partnership, voting trust or other
    "group" (as such term is defined under Section 13(d) of the Exchange Act),
    or enter into any agreement or arrangement or otherwise act in concert with
    any other person, for the purpose of acquiring, holding, voting or disposing
    of common stock; (e) engage in certain specified takeover actions or take
    any other actions, alone or in concert with any other person, to seek
    control of the Company or otherwise seek to circumvent any of the foregoing
    limitations or (f) engage in any material transaction with the Company. See
    "Item 13--Certain Relationships and Related Transactions."

                                       40

<PAGE>

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to a management agreement dated August 17, 1986 with Sloan Capital 
Companies (the "Management Agreement"), the Company paid Sloan Capital 
Companies a management fee in an amount not greater than 0.2% of the 
Company's total sales in exchange for general advisory and policy-making 
services. Stuart M. Sloan, the Company's Chairman, controls Sloan Capital 
Companies. Pursuant to the Management Agreement, which expired June 16, 1996, 
a total of $683,585 in management fees was paid for the period from December 
31, 1995 through June 16, 1996. For the remainder of 1996, a monthly 
management fee aggregating $269,231 was paid. The management fee payable to 
Mr. Sloan for 1997 will be $150,000. In addition, Mr. Sloan was paid a bonus 
of $250,000 in January 1997.

In August 1993, two partnerships which include Mr. Sloan acquired the 24-acre 
University Village Shopping Center (the "Center"), where the Company was 
leasing space for one if 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 its flagship store on the 
adjacent property, moved its store and terminated the existing lease 
agreement, paying the partnership 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 as those paid to the previous owner of the Center, and totaled 
approximately $0.5 million for the fiscal year ended December 28, 1996.
 
Pursuant to the Recapitalization Agreement, the Company on March 29, 1995 (i) 
issued to Zell Chilmark 1,000,000 newly issued shares of common stock at $25 
per share, (ii) completed a tender offer, purchasing 7,000,000 shares of 
common stock at $25 per share (the "Offer") and (iii) entered into a credit 
facility to finance the Offer. Samuel Zell and Sheli Z. Rosenberg, who became 
directors of the Company as a result of the Recapitalization, indirectly 
control the general partner of Zell Chilmark. The Recapitalization was 
approved by a special committee of the Board of Directors consisting solely 
of outside directors.
 
In connection with the Recapitalization Agreement, Mr. Sloan and Zell 
Chilmark entered into a Stock Purchase and Sale Agreement dated as of January 
14, 1995, pursuant to which Mr. Sloan sold to Zell Chilmark on January 16, 
1996, 2,975,000 shares of common stock owned by Mr. Sloan at $25 per share 
plus an additional amount equal to a 5% annual return on that base price 
calculated from March 17, 1995 through January 16, 1996.
 
Also in connection with the Recapitalization Agreement, Mr. Sloan and the 
Company entered into the Sloan Standstill Agreement and Zell Chilmark and the 
Company entered into the Zell Chilmark Standstill Agreement. See footnotes 
(3)and (5) to the Beneficial Ownership table under "Voting Securities and 
Principal Holders."

In connection with the merger of Olson's Food Stores, Inc. ("Olson's") into 
the Company in 1995, Maurice F. Olson, a director of the Company, leases one 
of the former Olson's stores included in the merger. Annual lease payments 
paid to Mr. Olson under the lease were approximately $164,000 for fiscal year 
1996.

The Company purchased $1,792,240 in wholesale bakery goods from Signature 
Bakery, L.L.C., which is owned by members of Mr. Olson's immediate family, 
during fiscal year 1996.
 
Messrs. Kourkoumelis and Olson are each members of the board of directors of 
Associated Grocers, Incorporated ("A.G."), which is one of the Company's 
major suppliers. Amounts paid to A.G. for products and service totaled $57.7 
million for fiscal year 1996.

                                       41

<PAGE>

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is comprised of Messrs. Creighton, Weinstein and 
Zell and Mrs. Rosenberg. Mr. Sloan, the Company's Chairman, is a director and 
serves on the compensation committee of Anixter International Inc., Mr. Zell 
is the Chairman of the Board of Anixter International Inc. and Mrs. Rosenberg 
is a director of Anixter International Inc.

The Company and certain of its subsidiaries incurred legal fees during 1996 
with Rosenberg & Liebentritt, P.C., a law firm of which Mrs. Rosenberg, a 
director, is a principal. Such legal fees were for certain legal services, 
including services performed in connection with various general corporate 
matters.


                                       42

<PAGE>

                                    PART IV

ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
         ON FORM 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits
 
        1.  Financial Statements

            Reference is made to the Index to Financial
            Statements on page 51.
 
        2.  Financial Statement Schedules
 
            None required.
  
        3.  Exhibits
 
            A list of the exhibits required to be filed as part of this report
            is set forth in the Index to Exhibits on page 46 hereof. The Index
            to Exhibits indicates each management contract, compensatory plan, 
            or arrangement required to be filed as an exhibit to this report.

(b) Reports on Form 8-K

    The Company filed a report on Form 8-K dated November 12, 1996, as amended
by Current Reports on Form 8-K/A dated December 24, 1996, December 27, 1996 and
February 18, 1997.


                                       43

<PAGE>


Signatures
----------

    Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, Quality Food Centers, Inc. has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized.


                                         QUALITY FOOD CENTERS, INC.

                                               /s/ MARC W. EVANGER
                                         ------------------------------
                                         Marc W. Evanger, Vice President
                                         and Chief Financial Officer, 
                                         and Secretary/Treasurer

Date: March 27, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed below by the following persons on behalf of the 
Registrant and in the capacities indicated on March 27, 1997.



        Signature                    Capacity
        ---------                    --------

/s/ STUART M. SLOAN                  Director, Chairman
--------------------------
Stuart M. Sloan

/s/ CHRISTOPHER A. SINCLAIR          Director, Chief Executive Officer
--------------------------
Christopher A. Sinclair

/s/ DAN KOURKOUMELIS                 Director, Chief Executive Officer
--------------------------
Dan Kourkoumelis

/s/ MARC W. EVANGER                  Vice President and Chief
--------------------------           Financial Officer,
Marc W. Evanger                      Secretary/Treasurer
                                     (Principal Financial and
                                     Accounting Officer)


/s/ MARC H. RAPAPORT                 Director
--------------------------
Marc H. Rapaport

/s/ SHELI Z. ROSENBERG               Director
--------------------------
Sheli Z. Rosenberg

/s/ SAMUEL ZELL                      Director
--------------------------
Samuel Zell

                                     44

<PAGE>

INDEPENDENT AUDITORS' CONSENT
-----------------------------

Board of Directors
 and Shareholders
Quality Food Centers, Inc.
Bellevue, Washington

We consent to the incorporation by reference in Registration Statements Nos. 
33-32878, 33-38736, 33-69514, 33-84202, and 333-19913 of Quality Food 
Centers, Inc. on Forms S-8 and Registration Statement No. 333-19567 on Form 
S-3 of our report dated March 21, 1997, incorporated by reference in this 
Annual Report on Form 10-K of Quality Food Centers, Inc. for the year ended 
December 28, 1996.

/s/ Deloitte & Touche LLP
--------------------------
Seattle, Washington
March 28, 1997

                                     45

<PAGE>
                           QUALITY FOOD CENTERS, INC.

                            Index to Exhibits Filed
                            with the Annual Report
                             on Form 10-K for the
                     Fiscal Year Ended December 28, 1996

  Exhibit
  Number                      Description
-----------  ------------------------------------------------

 1.1    U.S. Common Stock Purchase Agreement dated as of March 13, 1997 among 
        Quality Food Centers, Inc., Merrill Lynch & Co., Merrill Lynch, 
        Pierce, Fenner & Smith Incorporated, Donaldson Lufkin & Jenrette 
        Securities Corporation, Salomon Brothers Inc. and Dain Bosworth 
        Incorporated (Incorporated by reference to Exhibit 99.1 to be the 
        Company's Current Report on Form 8-K, filed March 27, 1997).

 1.2    International Common Stock Purchase Agreement dated as of March 13, 
        1997 among Quality Food Centers, Inc., Merrill Lynch International, 
        Donaldson Lufkin & Jenrette Securities Corporation, Salomon Brothers 
        International Limited and Dain Bosworth Incorporated (Incorporated by 
        reference to Exhibit 99.2 to the Company's Current Report on Form 
        8-K, filed March 27, 1997).

 1.3    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).

 3.1    Articles of Incorporation of the Company. (Filed herewith.)

 3.2    Amended and Restated Bylaws of the Company. (Filed herewith.)

 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    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).

10.1    Executive Supplemental Retirement Plan Participant Agreement, dated 
        July 3, 1984, between Quality Food Centers, Inc. and Ruth F. Cook, 
        under which Quality Food Centers, Inc. undertakes to pay certain 
        retirement benefits to Mrs. Cook, one of the Company's former 
        officers. (Incorporated by reference to Exhibit 10.7 to the Company's 
        Registration Statement on Form S-1, No. 33-9663, filed October 22, 
        1986.)*

                                      46

<PAGE>

Exhibit
Number      Description
-------     -----------

10.2    Quality Food Centers, Inc. Amended and Restated 1987 Incentive Stock 
        Option Plan. (Incorporated by reference to Exhibit 10.1 to the 
        Company's Registration Statement on Form S-8, No. 333-19913, filed 
        January 16, 1997.)*

10.3    Form of Stock Option Agreement under Quality Food Centers, Inc. 1987 
        Incentive Stock Option Plan. (Incorporated by reference to Exhibit 
        10.29 to the Company's Registration Statement on Form S-1, No. 
        33-12474, filed March 9, 1987.)*

10.4    Amended and Restated 1990 Employee Stock Purchase Plan. (Incorporated 
        by reference to Exhibit 10.2 to the Company's Registration Statement 
        on Form S-8, No. 333-19913, filed January 16, 1997.)*

10.5    Director's Nonqualified Stock Option Plan. (Incorporated by reference 
        to Exhibit 10.1 to the Company's Registration Statement on Form S-8, 
        No. 33-38736, filed January 25, 1991.)*

10.6    Amended and Restated Management Agreement, dated August 17, 1986, 
        between Sloan Capital Companies and Quality Food Centers, Inc., under 
        which the Company has engaged Sloan Capital Companies to perform 
        management services through June 16, 1996. (Incorporated by reference 
        to Exhibit 10.12 to the Company's Form 10-K filed March 27, 1993.)* 

10.7    Quality Food Centers, Inc. 1993 Executive Stock Option Plan. 
        (Incorporated by reference to Exhibit 10.1 to the Company's 
        Registration Statement on Form S-8, No. 33-69514, filed September 28, 
        1993.)*

10.8    Shopping Center Lease, dated June 17, 1987 between Quality Food 
        Centers, Inc. and University Village, Inc. (Incorporated by reference 
        to Exhibit 10.15 to the Company's Form 10-K filed March 24, 1994.)

10.8a   First Amendment to Shopping Center Lease, dated August 15, 1993, 
        between Quality Food Centers, Inc. and University Village, Inc. 
        (Incorporated by reference to Exhibit 10.15a to the Company's Form 
        10-K filed March 24, 1994.)

10.8b   Declaration of Restrictions and Easements, dated August 15, 1993, 
        between Quality Food Centers, Inc. and University Village, Inc. 
        (Incorporated by reference to Exhibit 10.15b to the Company's Form 
        10-K filed March 24, 1994.)

10.8c   Development Agreement, dated August 25, 1993, among Quality Food 
        Centers, Inc., U Village Land Limited Partnership and U Village Imp. 
        Limited Partnership. (Incorporated by reference to Exhibit 10.15c to 
        the Company's Form 10-K filed March 24, 1994.) 

10.8d   Franchise Agreement, dated August 25, 1993, between Quality Food 
        Centers, Inc., and University Village, Inc. (Incorporated by 
        reference to Exhibit 10.15d to the Company's Form 10-K filed March 
        24, 1994.)

10.8e   Tenant Estoppel Certificate, dated as of August 9, 1993, from Quality 
        Food Centers, Inc. to Principal Mutual Life Insurance Company, U 
        Village Land Limited Partnership and U Village Imp. Limited 
        Partnership. (Incorporated by reference to Exhibit 10.15e to the 
        Company's Form 10-K filed March 24, 1994.)

                                     47


<PAGE>

Exhibit
Number        Description
-------       -----------

10.8f   Subordination, Forbearance and Attornment Agreement, dated as of 
        August 9, 1993, among Quality Food Centers, Inc., Principal Mutual 
        Life Insurance Company, U Village Land Limited Partnership and U 
        Village Imp. Limited Partnership. (Incorporated by reference to 
        Exhibit 10.15f to the Company's Form 10-K filed March 24, 1994.)

10.9    Agreement and Plan of Merger between the Company and Olson's Food 
        Stores, Inc., dated as of December 23, 1994. (Incorporated by 
        reference to Exhibit 2.1 to the Company's Form 8-K filed December 30, 
        1994.)

10.9a   First Amendment to Agreement and Plan of Merger between the Company 
        and Olson's Food Stores, Inc., dated as of February 17, 1995. 
        (Incorporated by reference to Exhibit 10.15a to the Company's Form 
        10-K filed March 31, 1995.)

10.9b   Second Amendment to Agreement and Plan of Merger between the Company 
        and Olson's Food Stores, Inc., dated as of March 1, 1995. 
        (Incorporated by reference to Exhibit 10.15b to the Company's Form 
        10-K filed March 31, 1995.)

10.9c   Indemnification and Escrow Agreement between the Company and Maurice 
        F. Olson, dated as of March 1, 1995. (Incorporated by reference to 
        Exhibit 10.15c to the Company's Form 10-K filed March 31, 1995.)

10.9d   Right of First Refusal among the Company and Signature Bakery LLC, 
        North Snohomish Enterprises, Inc., and Olson's Management Group LLC, 
        dated as of March 1, 1995. (Incorporated by reference to Exhibit 
        10.15d to the Company's Form 10-K filed March 31, 1995.)

10.9e   Investors Rights Agreement between the Company and Maurice F. Olson, 
        Charles M. Olson and Maurice S. Olson, Jr., dated as of March 1, 
        1995. (Incorporated by reference to Exhibit 10.15e to the Company's 
        Form 10-K filed March 31, 1995.)

10.9f   Noncompetition Agreement between the Company and Maurice F. Olson 
        dated as of March 1, 1995. (Incorporated by reference to Exhibit 
        10.15f to the Company's Form 10-K filed March 31, 1995.)*

10.10   Credit Agreement arranged by B A Securities, Inc. among the Company, 
        Bank of America National Trust and Savings Association, as Agent, 
        Seattle First National Bank, Bank of America Illinois, as Issuing 
        Lender and the Other Financial Institutions Party hereto, dated March 
        15, 1995. (Incorporated by reference to Exhibit (b)(2) to the 
        Company's Schedule 13E-4 Amendment 2 filed March 28, 1995.)

10.11   Recapitalization and Stock Purchase and Sale Agreement among the 
        Company, Zell/Chilmark Fund L.P., and Stuart M. Sloan dated as of 
        January 14, 1995. (Incorporated by reference to Exhibit (c)(2) to the 
        Company's Schedule 13E-4 filed on January 19, 1995).

10.12   Standstill Agreement between the Company and Zell/Chilmark Fund L.P. 
        dated as of January 14, 1995. (Incorporated by reference to Exhibit 
        (c)(4) to the Company's Schedule 13E-4 filed on January 19, 1995).

10.13   Standstill Agreement between the Company and Stuart M. Sloan dated as 
        of January 14, 1995. (Incorporated by reference to Exhibit (c)(5) to 
        the Company's Schedule 13E-4 filed on January 19, 1995).

                                      48

<PAGE>

Exhibit
Number        Description
-------       -----------

10.14   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.)

10.15   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.)

10.16   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.)

10.17   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.)

10.18   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.)

10.19   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.)

10.20   Employment Agreement, dated as of September 1, 1996, between Quality 
        Food Centers, Inc. and Marc Evanger (Incorporated by reference to 
        Exhibit 99.7 to the Company's Current Report on Form 8-K/A, filed on 
        February 18, 1997.)*

10.21   Employment Agreement, dated as of September 1, 1996, by and between 
        Quality Food Centers, Inc. and Dan Kourkoumelis (Incorporated by 
        reference to Exhibit 99.8 to the Company's Current Report on Form 
        8-K/A, filed on February 18, 1997.)*

10.22   Employment Agreement, dated as of September 1, 1996, by and between 
        Quality Food Centers, Inc. and Christopher A. Sinclair (Incorporated 
        by reference to Exhibit 99.9 to the Company's Current Report on Form 
        8-K/A, filed on February 18, 1997.)*

10.23   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.)

                                     49

<PAGE>

Exhibit
Number        Description
-------       -----------

10.24   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.)

10.25   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.)

10.26   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.)

11      Statement re computation of per share earnings. (Filed herewith.)

13      Selected Financial Data, Management's Discussion and Analysis of 
        Financial Condition and Results of Operations, and Financial 
        Statements and Supplementary Data from the Company's Annual Report to 
        Shareholders for the year ended December 30, 1995. (Filed herewith.)

23      Independent Auditor's Consent to incorporation by reference of its 
        report on financial statements in Registration Statements on Form 
        S-8 and Form S-3. (The consent appears on page    of this Annual 
        Report on Form 10-K.)

27      Financial Data Schedule (Filed herewith.)
--------------------------------------------------------------------------------

*   Management contract, compensatory plan or arrangement required to be filed
    as an exhibit to this report.

                                   50
<PAGE>

                                QUALITY FOOD CENTERS, INC.

                             Index to Financial Statements Filed
                                    with the Annual Report
                                     on Form 10-K for the
                             Fiscal Year Ended December 28, 1996


F-1    Statements of Earnings for the Fiscal Years ended December 28, 1996, 
       December 30, 1995 and December 31, 1994.

F-2    Statements of Shareholders' Equity for the Fiscal Years ended December 
       28, 1996, December 30, 1995 and December 31, 1994.

F-3    Balance Sheets at December 28, 1996 and December 30, 1995.

F-4    Statements of Cash Flows for the Fiscal Years ended December 28, 1996, 
       December 30, 1995 and December 31, 1994.

F-5    Notes to Financial Statements.

F-16   Independent Auditors' Report

F-17   Responsibility for Financial Reporting.

                                   51


<PAGE>
                            statements of
                               earnings

<TABLE>
<CAPTION>
                    YEARS ENDED DECEMBER 28, 1996,
               DECEMBER 30, 1995 AND DECEMBER 31, 1994
                 IN THOUSANDS, EXCEPT PER SHARE DATA                       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-1
<PAGE>
                            statements of
                         shareholders' equity

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
                                                 COMMON STOCK            RETAINED
IN THOUSANDS, EXCEPT PER SHARE DATA          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-2
<PAGE>
                               balance sheets
 
<TABLE>
<CAPTION>
IN THOUSANDS                                                      DECEMBER 28, 1996    DECEMBER 30, 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
--------------------------------------------------------------------------------------------------------
commitments and contingencies
--------------------------------------------------------------------------------------------------------
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-3
<PAGE>

                                     statements of

                                      cash flows

<TABLE>

<CAPTION>


YEARS ENDED DECEMBER 28, 1996,
DECEMBER 30, 1995, AND DECEMBER 31, 1994                                  
IN THOUSANDS                                                              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-4
<PAGE>
                                    NOTES TO
                              FINANCIAL STATEMENTS
 
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
 
                                       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
subsidiaires 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-5
<PAGE>
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.
 
                                       B.
 
                    SUPPLEMENTAL CASH FLOW INFORMATION 

Cash paid for income taxes and interest for the last three years was as 
follows:
 
<TABLE>
<CAPTION>

IN THOUSANDS                                                                          1996       1995       1994
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>        <C>        <C>
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>
 
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.

 
                                       F-6

<PAGE>


                                       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.



                                       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>

IN THOUSANDS
YEAR ENDING DECEMBER
-------------------------------------------------------------------------------
<S>                                                                   <C>
1997.................................................................$ 14,080
1998.................................................................  14,079
1999.................................................................  13,861
2000.................................................................  13,563
2001.................................................................  13,549
thereafter........................................................... 152,364
                                                                     ----------
                                                                      $221,496
                                                                     ----------
                                                                     ----------
-------------------------------------------------------------------------------
</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.
 
    A summary of rental expense under operating leases is as follows:


<TABLE>
<CAPTION>

IN THOUSANDS                                   1996       1995       1994
---------------------------------------------------------------------------
<S>                                          <C>        <C>        <C>
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>


                                       F-7


<PAGE>

                                       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>

IN THOUSANDS                                                 1996       1995
--------------------------------------------------------  ---------  ---------
<S>                                                       <C>        <C>
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.
 
    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>

                                      F-8

<PAGE>
                                       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 f 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.
 
    As of December 28, 1996, long-term debt matures as follows:


<TABLE>
<CAPTION>

IN THOUSANDS
YEAR ENDING DECEMBER
-----------------------------------------------------------------
<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.)


                                       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 Agreeements with certain 
members of management which extend through various dates in September 1999.
                                      F-9

<PAGE>

                                       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 $269,231, for June 17, 1996 through December 28, 1996, plus a 
bonus payment of $250,000 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 Plan (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 
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. 
 
                                       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.

                                      F-10

<PAGE>
                                       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 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 options 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>                                                                                                      
                                                                                NUMBER       WEIGHTED AVERAGE
                                                                              OF SHARES      EXERCISE 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 
(weighted average grant date fair value $18.17)
granted                                                                       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-$13.71)                       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-11

<PAGE>

     At December 28, 1996, the weighted average remaining contract life of 
options outstanding was 8 years with an exercise price of $3.25 to $35.50. Of 
the 2,088,031 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. 125, "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>


In thousands except per share data                        1996       1995
--------------------------------------------------------------------------
<S>                                                      <C>        <C>
NET INCOME AS REPORTED                                   $25,418    $20,216
PRO FORMA                                                 22,285     18,420


EARNINGS PER SHARE AS REPORTED                              1.28       1.28
PRO FORMA                                                   1.52       1.16   
----------------------------------------------------------------------------

</TABLE>

                                    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 in 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 
account.


                                      F-12


<PAGE>
                                     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 in 
Zell/Chilmark Fund L.P. (Zell/Chilmark) at $25.00 per share on March 29, 
1995. Zell/Chilmark acquired an additional approximately 2.0 million shares 
at $25.00 per share, plus an amount equal to a 5% annual return on such 
amount from March 17, 1995 through January 10, 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 in the 
beginning of the second quarter of 1995 and allocated the remaining amount in 
a reduction to common stock.

    Fees paid in connection with the recapitalization aggregated approximately 
$4.5 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.


                                     M.
                             Subsequent Events

Keith Uddenberg, Inc. Merger:   On February 14, 1997, the Company acquired the 
principal operation of Keith Uddenberg, Inc. ("KUI"), including assets and 
liabilities related to 75 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 $35.3 million, and the 
assumption by the Company of approximately $24.9 million of indebtedness of 
KUI.

Hughes Markets, Inc. Merger:   On March 19, 1977, 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 effects of an acquisition of 100% 
of the outstanding voting securities of Hughes, for consideration consisting 
of approximately $358.8 million cash, and the assumption by the Company of 
approximately $32.5 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 $197.5 million of 
the Company's bank indebtedness outstanding (including $59.0 million of 
indebtedness incurred in connection with the KUI acquisition), to pay 
related fees and expenses, and to provide cash for general corporate purposes.

                                      F-13


<PAGE>




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 products from 
the offering approximated $193.2 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 
!44a to institutional investors. The net proceeds from the issuance of the 
notes approximated $146.2 million.

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, 
1996 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) LIBOR 
plus a margin (0.875% initially) in each case with 
margin adjustments dependent on the borrower's senior funded debt to EBITDA 
from time to time. Only $250 million of the new $600 million credit facility 
has been utilized.
                                 F-14


<PAGE>


                    SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED)

Following is a presentation of selected financial data for each of the four 
quarters of 1996 and 1995.

<TABLE>
<CAPTION>

                                   First          Second           Third          Fourth
In thousands                      Quarter         Quarter         Quarter         Quarter
except earnings per share        (12 weeks)      (12 weeks)      (19 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                        43,214          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                         4,685           6,167           5,945           8,623
EARNINGS PER SHARE                     .32             .42             .40             .57
AVERAGE SHARES OUTSTANDING          14,554          14,798          14,893          15,140
---------------------------------------------   -------------   -------------   -----------

1995
SALES                             $138,938        $175,539        $176,058         $239,322
COST OF SALES AND RELATED
  OCCUPANCY EXPENSES               104,656         131,659         132,862          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-15




<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
Seattle, Washington

March 21, 1997

                                     F-16

<PAGE>

                              responsibility for
                              financial reporting
-----------------------------------------------------------------------------

The management of Quality Food Centers, Inc. is responsible for the 
preparation and integrity of the financial statements of the Company. The 
accompanying financial statements have been prepared by the Management of the 
Company, in accordance with generally accepted accounting principles, using 
Management's best estimates and judgment where necessary. Financial 
information appearing throughout this Annual Report is consistent with that 
in the financial statements.

To help fulfill its responsibility, Management maintains a system of internal 
controls designed to provide reasonable assurance that assets are safeguarded 
against loss or unauthorized use and that transactions are executed in 
accordance with Management's authorizations and are reflected accurately in 
the Company's records. The concept of reasonable assurance is based on the 
recognition that the cost of maintaining our system of internal accounting 
controls should not exceed benefits expected to be derived from the system. 
The Company believes that its long-standing emphasis on the highest standards 
of conduct and ethics, set forth in comprehensive written policies, serves to 
reinforce its system of internal controls.

Deloitte & Touche LLP, the Company's independent auditors, have audited the 
financial statements in accordance with generally accepted auditing standards 
to independently assess the fair presentation of the Company's financial 
position, results of operations and cash flows.

The Audit Committee of the Board of Directors, comprised entirely of outside 
directors, oversees the fulfillment by Management of it responsibilities over 
financial controls and preparation of financial statements. The Committee 
periodically meets with the independent auditors to review audit plans and 
audit results. This provides the external auditors direct access to the Board 
of Directors.

Management recognizes its responsibility to conduct QFC's business in 
accordance with high ethical standards. This responsibility is reflected in 
key policy statements that, among other things, address potentially 
conflicting outside business interests of Company employees and specify 
proper conduct of business activities. Ongoing communications and review 
programs are designed to help ensure compliance with these policies.



Christopher A. Sinclair                  Marc Evanger
President                                Vice President
Chief Executive Officer                  Chief Financial Officer


March 21, 1997

                                F-17