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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 23, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-13339
FRED MEYER, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1826443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 SE 22nd Avenue
Portland, Oregon 97202
(Address of principal executive (Zip Code)
offices)
(503) 232-8844
(Registrant's telephone number, including area code)
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 [ ]
Number of shares of Common Stock outstanding at June 6, 1998: 151,633,382
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<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Items of Form 10-Q Page
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements ........................................ 3
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 16
Part II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders ......... 16
Item 6 Exhibits and Reports on Form 8-K............................. 16
Signatures .................................................................. 17
2
<PAGE>
Part I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial Statements.
- -----------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Income (Unaudited)
16 Weeks Ended
---------------------------
May 23, May 24,
(In thousands, except per share data) 1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 4,040,448 $ 1,593,437
Cost of goods sold 2,849,017 1,121,353
----------- -----------
Gross margin 1,191,431 472,084
Operating and administrative expenses 988,676 415,784
Amortization of goodwill 22,302 1,003
Merger related costs 208,965 -
----------- -----------
Income (loss) from operations (28,512) 55,297
Interest expense 99,811 18,648
----------- -----------
Income (loss) before income taxes and extraordinary charge (128,323) 36,649
Provision (benefit) for income taxes (32,770) 14,136
----------- -----------
Income (loss) before extraordinary charge (95,553) 22,513
Extraordinary charge, net of taxes (216,441)
----------- -----------
Net income (loss) $ (311,994) $ 22,513
=========== ===========
Basic earnings per common share:
Income (loss) before extraordinary charge $ (0.66) $ 0.27
Extraordinary charge (1.49)
----------- -----------
Net income (loss) $ (2.15) $ 0.27
=========== ===========
Basic weighted average number of common
shares outstanding 145,141 84,758
=========== ===========
Diluted earnings per common share:
Income (loss) before extraordinary charge $ (0.66) $ 0.25
Extraordinary charge (1.49)
----------- -----------
Net income (loss) $ (2.15) $ 0.25
=========== ===========
Diluted weighted average number of common and
common equivalent shares outstanding 145,141 88,335
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited)
May 23, January 31,
(In thousands) 1998 1998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 163,773 $ 117,311
Receivables 123,745 108,496
Inventories 1,795,974 1,240,866
Prepaid expenses and other 51,060 70,536
Current portion of deferred taxes 270,495 90,804
----------- -----------
Total current assets 2,405,047 1,628,013
Property and equipment--net 3,500,583 2,432,040
Other assets:
Goodwill--net 3,593,444 1,279,130
Long-term deferred tax assets 222,271 -
Other 167,633 83,753
----------- -----------
Total other assets 3,983,348 1,362,883
----------- -----------
Total assets $ 9,888,978 $ 5,422,936
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts $ 298,083 $ 175,799
Accounts payable 863,339 590,879
Current portion of long-term debt and lease obligations 44,967 19,650
Accrued expenses and other 1,126,431 407,167
----------- -----------
Total current liabilities 2,332,820 1,193,495
Long-term debt 4,815,013 2,184,794
Capital lease obligations 189,886 82,782
Deferred lease transactions 34,659 38,556
Deferred income taxes - 83,183
Other long-term liabilities 437,608 137,766
Stockholders' equity
Common stock 1,526 1,288
Additional paid-in capital 1,861,676 1,173,760
Notes receivable from officers (359) (298)
Unearned compensation (3,255) (466)
Retained earnings 219,404 528,076
----------- -----------
Total stockholders' equity 2,078,992 1,702,360
----------- -----------
Total liabilities and stockholders' equity $ 9,888,978 $ 5,422,936
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Unaudited)
16 Weeks Ended
---------------------------
May 23, May 24,
(In thousands) 1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before extraordinary charge $ (95,553) $ 22,513
Adjustments to reconcile income (loss) before extraordinary
charge to net cash provided by operating activities:
Depreciation and amortization of property and equipment 106,198 46,236
Amortization of goodwill 22,302 1,003
Deferred lease transactions (3,977) (4,771)
Deferred income taxes (35,120) 300
Changes in operating assets and liabilities:
Receivables (8,114) 2,969
Inventories (27,302) (20,078)
Other current assets 32,639 11,136
Accounts payable 53,019 5,303
Accrued expenses 39,145 7,502
Income taxes - 3,946
Other liabilities 8,137 272
Other 9,821 253
----------- -----------
Net cash provided by operating activities 101,195 76,584
Cash flows from investing activities:
Cash acquired in acquisitions 83,203 -
Payments made for acquisitions - (394,134)
Purchases of property and equipment (121,186) (121,165)
Proceeds from sale of property and equipment 9,996 5,465
Other 10,108 (874)
----------- -----------
Net cash used for investing activities (17,879) (510,708)
Cash flows from financing activities:
Issuance of common stock - net 29,828 206,789
Collection of notes receivable 962 -
Increase in notes receivable - (139)
Increase in bank overdrafts 23,171 21,489
Payment of deferred financing fees (65,566) -
Long-term financing:
Borrowings 4,168,900 454,257
Repayments (4,189,167) (197,400)
Other (4,982) -
----------- -----------
Net cash provided by (used for) financing activities (36,854) 484,996
----------- -----------
Net increase in cash and cash equivalents for the period 46,462 50,872
Cash and cash equivalents at beginning of year 117,311 63,340
----------- -----------
Cash and cash equivalents at end of period $ 163,773 $ 114,212
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation--The accompanying unaudited consolidated
financial statements of Fred Meyer, Inc., a Delaware corporation, and its
wholly-owned subsidiaries ("Fred Meyer") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, the statements do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments of a normal recurring nature which are considered necessary
for a fair presentation have been included. The consolidated results of
operations presented herein are not necessarily indicative of the results
to be expected for the year due to the seasonality of the Company's (as
defined) business. These consolidated financial statements should be read
in conjunction with the financial statements and related notes incorporated
by reference in the Company's latest annual report filed on Form 10-K.
On March 9, 1998, Fred Meyer issued 41.2 million shares of Fred Meyer
common stock for all the outstanding stock of Quality Food Centers, Inc.
("QFC"), a supermarket chain operating 89 stores in the Seattle/Puget Sound
region of Washington state and 56 Hughes Family Market stores in Southern
California as of the date of the merger. As a result, QFC became a wholly
owned subsidiary of Fred Meyer. All references to the "Company" hereafter
shall mean the consolidated company. On March 10, 1998, Fred Meyer acquired
Food 4 Less Holdings, Inc. ("Ralphs/Food 4 Less") in a transaction
accounted for as a purchase (see Note 3). The merger of Fred Meyer and QFC
was accounted for as a pooling of interests and the accompanying financial
statements reflect the consolidated results of Fred Meyer and QFC for all
years presented. The amounts included in the results of operations from
Fred Meyer (including Ralphs/Food 4 Less since March 10, 1998) and QFC are
as follows (in thousands):
<TABLE>
<CAPTION>
Fred Meyer QFC Total
Historical Historical Company
----------- ----------- -----------
<S> <C> <C> <C>
First Quarter of 1998
Net sales $ 3,460,519 $ 579,929 $ 4,040,448
Loss before extraordinary charge (92,173) (3,380) (95,553)
Net loss (292,401) (19,593) (311,994)
Diluted earnings per common share
Loss before extraordinary charge (0.89) (0.08) (0.66)
Net loss (2.82) (0.47) (2.15)
First Quarter of 1997
Net sales 1,193,936 399,501 1,593,437
Net income 13,259 9,254 22,513
Diluted earnings per common share 0.24 0.28 0.25
</TABLE>
Inventories--Inventories consist principally of merchandise held for
sale and substantially all inventories are stated at the lower of last-in,
first-out (LIFO) cost or market. Inventories on a first-in, first-out
method, which approximates replacement cost, would have been higher by
$57.8 million at May 23, 1998 and $51.8 million at January 31, 1998. The
pretax LIFO charge was $6.0 million in 1998 and $2.0 million in 1997.
Goodwill--Goodwill is being amortized on a straight-line basis over 15
to 40 years. Goodwill recorded in connection with the acquisition of
Ralphs/Food 4 Less, Smith's Food & Drug Centers, Inc. ("Smith's"), Hughes
Markets, Inc. ("Hughes"), and Keith Uddenberg, Inc. ("KUI")(see Note 3) is
being amortized over 40 years. Goodwill recorded in connection with the Fox
Jewelry Company ("Fox") acquisition is being amortized over 15 years. Other
previously recorded goodwill continues to be amortized over 30 years.
Management periodically evaluates the recoverability of goodwill based upon
current and anticipated net income and undiscounted future cash flows.
Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
6
<PAGE>
Income Taxes--Deferred income taxes are provided for those items
included in the determination of income or loss in different periods for
financial reporting and income tax purposes. Targeted jobs and other tax
credits are recognized in the year realized.
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is
the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
Deferred tax assets recognized by the Company are presented net of any
deferred tax liabilities and valuation allowance and consist primarily of
net operating loss carryforwards. The deferred tax assets will be used to
offset future tax liability generated from taxable income. However, the
amount available to offset the consolidated tax liability will be limited
by each subsidiary's tax circumstances and availability of its net
operating loss carryforwards.
Earnings per Share--Basic earnings per common share are computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted earnings per common share are computed by dividing net
income by the weighted average number of common and common equivalent
shares outstanding which consist of outstanding stock options and warrants.
Common equivalent shares are excluded from the diluted weighted average
share and common equivalent shares outstanding in 1998 due to the net loss.
2. Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires items previously reported as a component of stockholders' equity
to be more prominently reported in a separate financial statement as a
component of comprehensive income. Components of comprehensive income
include net income (loss) and the income tax benefit the Company receives
upon the exercise of stock options. Comprehensive income (loss) was
$(310.4) million in the first quarter of 1998 and $25.7 million in the
first quarter of 1997.
3. Acquisitions
On March 9, 1998, the Company acquired QFC (see Note 1 for the QFC
acquisition).
On March 10, 1998, the Company acquired Ralphs/Food 4 Less, a
supermarket chain operating 409 stores on that date primarily in Southern
California, which became a wholly-owned subsidiary of the Company. The
Company issued 21.7 million shares of common stock of the Company for all
of the equity interests of Ralphs/Food 4 Less. The acquisition is being
accounted for under the purchase method of accounting. The financial
statements reflect the preliminary allocation of the purchase price and
assumption of certain liabilities and include the operating results of
Ralphs/Food 4 Less from the date of acquisition.
On September 9, 1997, the Company succeeded to the businesses of Fred
Meyer, Inc., now known as Fred Meyer Stores, Inc. ("Fred Meyer Stores"),
and Smith's as a result of mergers pursuant to the Agreement and Plan of
Reorganization and Merger, dated as of May 11, 1997 (the "Smith's
Acquisition"). At the closing on September 9, 1997, Fred Meyer Stores and
Smith's, a regional supermarket and drug store chain operating 152 stores
in the Intermountain and Southwestern regions of the United States on that
date, became wholly owned subsidiaries of the Company. The Company issued
1.05 shares of common stock of the Company for each outstanding share of
Class A Common Stock and Class B Common Stock of Smith's and one share of
common stock of the Company for each outstanding share of common stock of
Fred Meyer Stores.
The Smith's Acquisition was accounted for under the purchase method of
accounting. The financial statements reflect the allocation of the purchase
price and assumption of certain liabilities and include the operating
results of Smith's from the date of acquisition. In total, the Company
issued 33.3 million shares of common stock to the Smith's stockholders.
On August 17, 1997, the Company acquired substantially all of the
assets and liabilities of Fox in exchange for common stock with a fair
value of $9.2 million. The Fox acquisition was accounted for under the
purchase method of accounting. The results of operations of Fox do not have
a material effect on the consolidated operating results, and therefore are
not included in the pro forma data presented.
On March 19, 1997, the Company acquired the principal operations of
Hughes, including the assets and liabilities related to 57 stores located
in Southern California and a 50% interest in Santee Dairies, Inc., one of
the largest dairy plants in California. The merger was effected through the
acquisition of 100% of the outstanding voting securities of
7
<PAGE>
Hughes for approximately $360.5 million in cash and the assumption of
approximately $33.2 million of indebtedness of Hughes. The Hughes
acquisition was accounted for under the purchase method of accounting. The
financial statements reflect the allocation of the purchase price and
assumption of certain liabilities and include the operating results of
Hughes from the date of acquisition.
On February 14, 1997, the Company acquired the principal operations of
KUI, including assets and liabilities related to 25 stores in the western
and southern Puget Sound region of Washington. The merger was effected
through the acquisition of 100% of the outstanding voting securities of KUI
for $34.5 million cash, 1.7 million shares of common stock and the
assumption of approximately $23.8 million of indebtedness of KUI. The KUI
acquisition was accounted for under the purchase method of accounting. The
financial statements reflect the allocation of the purchase price and
assumption of certain liabilities and include the operating results of KUI
from the date of acquisition.
The following unaudited pro forma information presents the results of
the Company's operations assuming the Ralphs/Food 4 Less, Smith's, QFC,
KUI, and Hughes acquisitions occurred at the beginning of each period
presented. In addition, the following unaudited pro forma information gives
effect to refinancing certain debt as if such refinancing occurred at the
beginning of each period presented (in thousands, except per share data):
<TABLE>
<CAPTION>
16 Weeks Ended
---------------------------
May 23, May 24,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 4,585,980 $ 4,493,501
Income before extraordinary charge (155,921) 22,154
Net income (loss) (372,362) (194,287)
Diluted earnings per common share:
Income before extraordinary charge (1.02) 0.15
Net income (loss) (2.44) (1.31)
</TABLE>
The pro forma financial information does not reflect anticipated
annualized operating savings and assumes all notes subject to the
refinancings were redeemed pursuant to tender offers made. Additionally,
each year includes an extraordinary charge of $216.4 million on the
extinguishment of debt as a result of refinancing certain debt. The pro
forma financial information is not necessarily indicative of the operating
results that would have occurred had the acquisitions been consummated as
of the beginning of each period nor is it necessarily indicative of future
operating results.
The supplemental schedule of business acquisition is as follows (in
thousands):
<TABLE>
<CAPTION>
16 Weeks Ended
---------------------------
May 23, May 24,
1998 1997
----------- -----------
<S> <C> <C>
Fair value of assets acquired $ 2,053,601 $ 456,685
Goodwill recorded 2,314,299 194,414
Value of stock issued (652,514) (36,965)
Liabilities assumed (3,715,386) (220,000)
----------- -----------
Cash paid $ - $ 394,134
=========== ===========
</TABLE>
8
<PAGE>
4. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands):
May 23, January 31,
1998 1998
----------- -----------
<S> <C> <C>
1997 Senior Credit Facility $ 1,300,000
1998 Senior Credit Facility $ 2,415,000
Senior notes, unsecured, due 2003 through 2008, fixed interest rate 1,750,000
from 7.15% to 7.45%
QFC Credit Facility 214,293
Commercial paper with maturities through July 1, 1998, classified as 483,674 367,156
long-term, interest rates of 5.63% to 6.30% at January 31, 1998
QFC 8.7% Senior Subordinated Notes, principal due 2007 with interest 150,000
payable semi-annually
Long-term notes secured by trust deeds, due through 2012, fixed interest 68,227 67,875
rates from 9.00% to 9.52%
Uncommitted bank borrowings classified as long-term 79,000
Senior subordinated notes, due 2002 through 2007, fixed interest rates 49,470
from 9.0% to 13.75%
Senior notes, unsecured, due 2000 through 2004, fixed interest rate 18,391
of 10.45%
Other 34,935 22,648
----------- -----------
Total 4,819,697 2,200,972
Less current portion 4,684 16,178
----------- -----------
Total $ 4,815,013 $ 2,184,794
=========== ===========
</TABLE>
In conjunction with the acquisitions of QFC and Ralphs/Food 4 Less in
March 1998, the Company entered into new financing arrangements that
refinanced a substantial portion of the Company's principal debt facilities
and indebtedness assumed in the acquisitions. The new financing
arrangements included a new bank credit facility and a public issue of
$1.75 billion senior unsecured notes. The new bank credit facility (the
"1998 Senior Credit Facility") provides a $1.875 billion five-year
revolving credit agreement and a $1.625 billion five-year term note. All
indebtedness under the 1998 Senior Credit Facility is guaranteed by certain
of the Company's subsidiaries. The revolving portion of the 1998 Senior
Credit Facility is available for general corporate purposes, including the
support of the commercial paper program of the Company. Commitment fees are
charged at .30% on the unused portion of the five year revolving credit
facility. Interest on the 1998 Senior Credit Facility is at the Adjusted
LIBOR plus a margin of 1.0%. At May 23, 1998, the interest rate was 6.7% on
the five year revolving credit facility and five year term note.
The unsecured senior notes issued on March 11, 1998, included $250
million of five-year notes at 7.15%, $750 million of seven-year notes at
7.38%, and $750 million of ten-year notes at 7.45% (the "Notes"). In
connection with the issuance of the Notes, each of the Company's direct or
indirect wholly-owned subsidiaries has jointly and severally guaranteed the
Notes on a full and unconditional basis ("Subsidiary Guarantors"). The
Subsidiary Guarantors constitute all of the Company's direct and indirect
subsidiaries, other than inconsequential subsidiaries. The assets, equity,
income and cash flows of all non-guaranteeing subsidiaries in the aggregate
constitute less than a de minimus percentage of the respective consolidated
amounts and are inconsequential, individually and in the aggregate, to the
Company. The Company is a holding company with no assets or operations
other than those relating to its investments in its subsidiaries. Separate
financial statements of the Subsidiary Guarantors are not included because
the guarantees are full and unconditional, the Subsidiary Guarantors are
jointly and severally liable and because the separate financial statements
and other disclosures concerning the Subsidiary Guarantors are not deemed
material to investors by management of the Company. No restrictions exist
on the ability of the Subsidiary Guarantors to make distributions to the
Company, except, however, the obligations of each Guarantor under its
Guarantee are limited to the maximum amount as will result in obligations
of such Guarantor under its Guarantee not constituting a fraudulent
conveyance or fraudulent transfer for purposes of Bankruptcy Law, the
Uniform Fraudulent
9
<PAGE>
Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal
or state law (e.g. adequate capital to pay dividends under corporate laws).
In conjunction with the Smith's Acquisition in September 1997, the
Company entered into a bank credit facility (the "1997 Senior Credit
Facility") that refinanced a substantial portion of the Company's
indebtedness and indebtedness assumed in the Smith's Acquisition. The 1997
Senior Credit Facility was refinanced by the 1998 Senior Credit Facility.
The 1998 Senior Credit Facility requires the Company to comply with
certain ratios related to indebtedness to earnings before interest, taxes,
depreciation and amortization ("EBITDA") and fixed charge coverage. In
addition, the 1998 Senior Credit Facility limits dividends on and
redemption of capital stock.
The Company has established uncommitted money market lines with three
banks of $75.0 million. These lines, which generally have terms of
approximately one year, allow the Company to borrow from the banks at
mutually agreed upon rates, usually below the rates offered under the 1998
Senior Credit Facility. The Company also has $600.0 million of unrated
commercial paper facilities with three commercial banks. The Company has
the ability to support commercial paper and other debt on a long-term basis
through its bank credit facilities and therefore, based upon management's
intent, has classified these borrowings, which totaled $483.7 million at
May 23, 1998, as long-term debt.
The Company has entered into interest rate swap, cap and collar
agreements to reduce the impact of changes in interest rates on its
floating rate long-term debt. At May 23, 1998, the Company had outstanding
four interest rate contracts for a total notional principal amount of
$180.0 million with commercial banks. One swap agreement effectively fixes
the Company's interest rate on unrated commercial paper, floating rate
facilities and uncommitted lines of credit at 5.20% on a notional principal
amount of $15.0 million. This contract expires in 1998. Two cap agreements
effectively limit the maximum interest rate the Company will pay at rates
between 5.0% and 9.0% on notional principal amounts totaling $35.0 million.
These contracts expire through 1999. One collar agreement effectively
limits the maximum interest rate the Company will pay at 7.5% and limits
the minimum interest rate the Company will pay at 5.3% on a notional
principal amount of $130.0 million. This contract expires in 1998.
The Company has entered into swap and cap agreements to reduce the
impact of changes in rent expense on its two lease lines of credit. At May
23, 1998, the Company had outstanding seven rent rate contracts, for a
total notional principal amount of $80.0 million, with commercial banks.
Three of these agreements effectively fix the Company's rental rate on the
lease lines at rates between 6.28% and 6.54% on notional amounts of $40.0
million. The remaining four agreements effectively limit the maximum rental
rate the Company will pay at 7.25% on notional amounts totaling $40.0
million. All seven of these contracts expire in 2000.
Gains and losses on swaps and caps are amortized over the life of the
instruments. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap and cap
agreements. The Company requires an "A" or better rating of the
counterparties and, accordingly, does not anticipate nonperformance by the
counterparties.
Annual long-term debt maturities for the five fiscal years subsequent
to May 23, 1998 are $3.4 million in 1998, $6.9 million in 1999, $11.7
million in 2000, $3.1 million in 2001, and $5.0 million in 2002.
The Company recorded in the first quarter of 1998 an extraordinary
charge of $355.4 million less a $139.0 million income tax benefit which
consisted of premiums paid in the prepayment of certain notes and bank
facilities of Fred Meyer, QFC and Ralphs/Food 4 Less and the write-off of
the related deferred financing costs. In the third quarter of 1997, the
Company recorded an extraordinary charge of $148.3 million less a $57.1
million income tax benefit which consisted of premiums paid in the
prepayment of certain notes and bank facilities of Fred Meyer Stores and
Smith's and the write-off of the related deferred financing costs.
5. Commitments and Contingencies
The Company and its subsidiaries are parties to various legal claims,
actions and complaints, certain of which involve material amounts. Although
the Company is unable to predict with certainty whether or not it will
ultimately be successful in these legal proceedings or, if not, what the
impact might be, management presently believes that disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial statements.
10
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
- -------------------------------------------------
Overview
On March 9, 1998, Fred Meyer issued 41.2 million shares of Fred Meyer
common stock for all the outstanding stock of QFC, a supermarket chain
operating 89 stores in the Seattle/Puget Sound region of Washington state
and 56 Hughes Family Market stores in Southern California as of that date.
As a result, QFC became a wholly-owned subsidiary of Fred Meyer. The merger
of Fred Meyer and QFC was accounted for as a pooling of interests.
Accordingly, the results for 1998 and 1997 reflect the consolidated results
of Fred Meyer and QFC. The assets and liabilities reflect the combined
historical recorded values of Fred Meyer and QFC at the end of each
quarter. All references to the "Company" hereafter shall mean the
consolidated company.
On March 10, 1998, the Company acquired Ralphs/Food 4 Less, a
supermarket chain operating 409 stores as of that date primarily in
Southern California, which became a wholly-owned subsidiary of the Company.
The Company issued 21.7 million shares of common stock of the Company for
all of the equity interests of Ralphs/Food 4 Less. The acquisition of
Ralphs/Food 4 Less is being accounted for under the purchase method of
accounting. Accordingly, the results for 1998 reflect only 11 weeks of
operations from the Ralphs/Food 4 Less stores. As a result of the purchase,
the assets and liabilities of Ralphs/Food 4 Less have been recorded at
their fair value as of March 10, 1998. The purchase price in excess of the
fair value of Ralphs/Food 4 Less's assets and liabilities is recorded as
goodwill and is being amortized over a 40-year period.
On September 9, 1997, the Company succeeded to the businesses of Fred
Meyer, Inc., now known as Fred Meyer Stores, and Smith's as a result of
mergers pursuant to the Agreement and Plan of Reorganization and Merger,
dated as of May 11, 1997. At the closing, Fred Meyer Stores and Smith's, a
regional supermarket and drug store chain operating 152 stores in the
Intermountain and Southwestern regions of the United States on that date,
became wholly owned subsidiaries of the Company. The Company issued 33.3
million shares of common stock of the Company for all outstanding shares of
common stock of Smith's.
The Smith's Acquisition was accounted for under the purchase method of
accounting. Accordingly, the results for 1998 reflect the operations from
the Smith's stores for the entire period. As a result of the purchase, the
assets and liabilities of Smith's have been recorded at their fair value as
of September 9, 1997. The purchase price in excess of the fair value of
Smith's assets and liabilities is recorded as goodwill and is being
amortized over a 40-year period.
On August 17, 1997, the Company acquired substantially all of the
assets and liabilities of Fox, a regional jewelry store chain operating 44
stores on that date, in exchange for common stock with a fair value of $9.2
million. The Fox acquisition was accounted for under the purchase method of
accounting. Accordingly, the results for 1998 reflect 16 weeks of
operations from the Fox stores.
On March 19, 1997, the Company acquired the principal operations of
Hughes, including the assets and liabilities related to 57 stores located
in Southern California and a 50% interest in Santee Dairies, Inc., one of
the largest dairy plants in California. The merger was effected through the
acquisition of 100% of the outstanding voting securities of Hughes for
approximately $360.5 million cash and the assumption of approximately $33.2
million of indebtedness of Hughes. The Hughes acquisition was accounted for
under the purchase method of accounting. Accordingly, the results for 1997
reflect only 9 weeks of operations from the Hughes stores. As a result of
the purchase, the assets and liabilities of Hughes have been recorded at
their fair value as of March 19, 1997. The purchase price in excess of the
fair value of Hughes' assets and liabilities is recorded as goodwill and is
being amortized over a 40-year period.
On February 14, 1997, the Company acquired the principal operations of
Keith Uddenberg, Inc. ("KUI"), including assets and liabilities related to
25 stores in the western and southern Puget Sound region of Washington. The
merger was effected through the acquisition of 100% of the outstanding
voting securities of KUI for $34.5 million cash, 1.7 million shares of
common stock and the assumption of approximately $23.8 million of
indebtedness of KUI. The KUI Acquisition was accounted for under the
purchase method of accounting. Accordingly, the results for 1997 reflect
only 14 weeks of operations from the KUI stores. As a result of the
purchase, the assets and liabilities of KUI have been
11
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recorded at their fair value as of February 14, 1997. The purchase price in
excess of the fair value of KUI's assets and liabilities is recorded as
goodwill and is being amortized over a 40-year period.
The Company used the proceeds from a public issue of $1.75 billion
senior unsecured notes and a new bank credit facility (the "1998 Senior
Credit Facility") to refinance debt assumed in the acquisition of QFC and
Ralphs/Food 4 Less and to repay a certain portion of the Company's existing
indebtedness. The 1998 Senior Credit Facility provided a $1.875 billion
five-year revolving credit agreement and a $1.625 billion five-year term
note. The unsecured senior notes includes $250 million of five-year notes
at 7.15%, $750 million of seven-year notes at 7.38%, and $750 million of
ten-year notes at 7.45%. As a result of prepaying certain indebtedness, the
Company recorded in the first quarter of 1998 an extraordinary charge, net
of taxes, of $216.4 million consisting of fees incurred in the prepayment
and the write-off of debt issuance costs.
The Company also refinanced certain debt in conjunction with the
Smith's Acquisition. As a result, the Company recorded in the third quarter
of 1997 an extraordinary charge, net of taxes, of $91.2 million consisting
of fees incurred in the prepayment and the write-off of debt issuance
costs.
The following discussion summarizes the Company's operating results
for the first quarter ended May 23, 1998 ("1998") compared with the first
quarter ended May 24, 1997 ("1997"). However, 1998 first quarter results
are not comparable to prior year results due to the three recent
acquisitions. The first quarter of 1998 results include the results from
Fred Meyer Stores, Smith's and QFC for the full quarter and include
Ralphs/Food 4 Less from March 10, 1998. The first quarter of 1997 results
include only Fred Meyer Stores and QFC. Also included are discussions of
the Company's liquidity and capital resources, effect of LIFO, effect of
inflation and recent accounting changes. This discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements.
Results of Operations -- 1998 Compared with 1997
Net sales for 1998 increased $2.4 billion, or 153.6%, over $1.6
billion for 1997. The increase in sales was primarily caused by recent
acquisitions. Sales at Fred Meyer Stores were up $129 million or 10.8% from
the prior year. Sales at QFC were up $221 million from the prior year. QFC
completed two acquisitions during the first quarter of the prior year which
contributed to the sales increase. Sales at Smith's accounted for $951
million of the increase and Ralphs/Food 4 Less accounted for $1.15 billion
of the increase.
Comparable store sales at Fred Meyer Stores increased 6.2% for 1998.
Comparable food sales increased 7.1%, and comparable nonfood sales
increased 4.9%. Comparable store sales at QFC were up 2.6% for 1998.
Gross margin as a percent of net sales was 29.5% in 1998 compared with
29.6% in 1997. Gross margin decreased primarily due to the increase in food
sales compared to total sales as a result of the acquisitions.
Operating and administrative expenses increased 137.8% to $988.7
million in 1998 from $415.8 million in 1997, and as a percent of net sales
were 24.5% in 1998 and 26.0% in 1997. Operating and administrative expenses
decreased as a percent of sales primarily due to increased sales from the
acquired companies and achieved economies of scale.
Amortization of goodwill increased to $22.3 million in 1998 from $1.0
million in 1997 as a result of goodwill recorded in the acquisition of
Smith's and Ralphs/Food 4 Less.
A charge for merger related costs and merger integration costs of $209
million was recorded in 1998 in conjunction with the recent acquisitions.
Additional merger integration charges will be recorded in future quarters
as expenditures are incurred.
Net interest expense increased to $99.8 million in 1998 from $18.6
million in 1997. The increase primarily reflects the increased amount of
indebtedness incurred in conjunction with the acquisition of Smith's and
Ralphs/Food 4 Less.
The effective tax rate for the income tax benefit in 1998 was 25.5%
and for the income tax expense in 1997 was 38.6%. The effective tax rate on
the loss in 1998 was reduced by the effect of increased amortization of
goodwill and certain merger costs which are not deductible for tax
purposes.
The loss before extraordinary charge was $95.5 million for 1998
compared to income before extraordinary charge of $22.5 million for 1997.
This decrease is primarily the result of the above-mentioned factors.
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The extraordinary charge of $216.4 million recorded in 1998 consists
of fees incurred in the prepayment of certain indebtedness and write-off of
debt issuance costs.
The net loss was $312.0 million for 1998 compared to net income of
$22.5 million for 1997. This decrease is primarily the result of the
decrease in income before extraordinary charge and by the extraordinary
charge.
Liquidity and Capital Resources
The Company funded its working capital and capital expenditure needs
in the first quarter of 1998 through internally generated cash flow and the
issuance of unrated commercial paper, supplemented by borrowings under
committed and uncommitted bank lines of credit and lease facilities.
In conjunction with the acquisitions of Ralphs/Food 4 Less and QFC,
the Company entered on March 11, 1998 into new financing arrangements which
included a public issue of $1.75 billion of senior unsecured notes (the
"Notes") and a bank credit facility (the "1998 Senior Credit Facility").
The 1998 Senior Credit Facility includes a $1.875 billion five-year
revolving credit agreement and a $1.625 billion five-year term loan. The
Notes consist of $250 million of five-year notes at 7.15%, $750 million of
seven-year notes at 7.38% and $750 million of ten-year notes at 7.45%. The
1998 Senior Credit Facility and Notes contain certain restrictions on
payments by the Company of cash dividends, repurchase of common stock, the
handling of proceeds from the sale or disposition of assets, other than in
the normal course of business, and require, among other things, that the
Company maintain a maximum leverage ratio and a minimum fixed charge ratio.
The leverage ratio compares debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The fixed charge ratio compares
EBITDA to interest expense. Each of the Company's direct or indirect
wholly-owned subsidiaries has jointly and severally guaranteed the Notes on
a full and unconditional basis. No restrictions exist on the ability of the
Subsidiary Guarantors to make distributions to the Company, except,
however, the obligations of each Subsidiary Guarantor under its Guarantee
are limited to the maximum amount as will result in obligations of such
Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal
or state law (e.g. adequate capital to pay dividends under corporate laws).
The obligations of the Company under the 1998 Senior Credit Facility are
guaranteed by certain subsidiaries and are also collateralized by the stock
of certain subsidiaries.
In addition to the 1998 Senior Credit Facility and Notes, the Company
entered into a $500 million five-year operating lease facility, which
refinanced $303 million in existing lease financing facilities. The balance
of this lease facility will be used for land and construction costs for new
stores. The obligations of the Company under the lease facility are
guaranteed by certain subsidiaries and are also collateralized by the stock
of certain subsidiaries.
At May 23, 1998, the Company had $75.0 million of uncommitted money
market lines with three banks and $600.0 million in unrated commercial
paper facilities with three banks. The uncommitted money market lines and
unrated commercial paper are used primarily for seasonal inventory
requirements, new store construction and financing existing store
remodeling, acquisition of land, and major projects such as management
information systems. At May 23, 1998, the Company had borrowings under the
1998 Senior Credit Facility of $2.9 billion which includes outstanding
unrated commercial paper in the amount of $483.7 million. A total of
approximately $563.7 million was available for borrowings under the 1998
Senior Credit Facility and $75.0 million was available for borrowings from
the uncommitted money market lines.
The Company has entered into interest rate swap, cap and collar
agreements to reduce the impact of changes in interest rates on its
floating rate long-term debt and rent expense on its lease lines of credit.
At May 23, 1998, the Company had outstanding four interest rate contracts
for a total notional amount of $180.0 million, and seven rent rate
contracts, for a total notional amount of $80.0 million. The interest rate
contracts effectively fix the Company's interest rates between 5.0% and
9.0% on the notional amount and expire through 1999. The rent rate
contracts effectively fix the Company's rental rates between 6.28% and
7.25% on the notional amount and expire through 2000. The Company is
exposed to credit loss in the event of nonperformance by the counterparties
of the interest rate and rent rate agreements. All contracts are with "A"
rated or better commercial banks and the Company does not anticipate
nonperformance by the counterparties.
The Company had $42.3 million of outstanding Letters of Credit as of
May 23, 1998. The Letters of Credit are used
13
<PAGE>
to support the importation of goods and to support the performance,
payment, deposit or surety obligations of the Company. The Company pays
annual commitment fees ranging form .25% to 1.25% on the outstanding
portion of these Letters of Credit.
The Company believes that the combination of cash flows from
operations and borrowings under its credit facilities will permit it to
finance its capital expenditure requirements for 1998, currently budgeted
to be approximately $600 million, net of estimated real estate sales and
stores financed on leases. If the Company determines that it is preferable,
it may fund its capital expenditure requirements by mortgaging facilities,
entering into sale/leaseback transactions, or by issuing additional debt or
equity. The Company currently owns real estate with a net book value of
approximately $3.5 billion.
Effect of LIFO
During each year, the Company estimates the LIFO adjustment for the
year based on estimates of three factors: inflation rates (calculated by
reference to the Department Stores Inventory Price Index published by the
Bureau of Labor Statistics for soft goods and jewelry and to internally
generated indices based on Company purchases during the year for all other
departments), expected inventory levels, and expected markup levels (after
reflecting permanent markdowns and cash discounts). At year end, the
Company makes the final adjustment reflecting the difference between the
Company's prior quarterly estimates and actual LIFO amount for the year.
Effect of Inflation
While management believes that some portion of the increase in sales
is due to inflation, it is difficult to segregate and to measure the
effects of inflation because of changes in the types of merchandise sold
year-to-year and other pricing and competitive influences. By attempting to
control costs and efficiently utilize resources, the Company strives to
minimize the effects of inflation on its operations.
Recent Accounting Changes
There are no issued and pending accounting changes which are expected
to have a material effect on the Company's financial reporting.
Year 2000
The Company has performed an analysis and is modifying its computer
hardware and software to address year 2000 issues. The Company is also
contacting major suppliers to determine the extent to which the Company may
be vulnerable to third party year 2000 issues. Based on current
information, management believes that all hardware and software
modifications necessary to operate and effectively manage the Company will
be performed by the year 2000 and that related costs will not have a
material impact on the results of operations, cash flow, or financial
condition of future periods.
Forward-looking Statements; Factors Affecting Future Results
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. These
forward-looking statements include information regarding the Company's
plans for future operations, expectations relating to cost savings and the
Company's integration strategy with respect to its recent mergers, store
expansion and remodeling, capital expenditures, inventory reductions and
expense reduction. The Company may make other forward-looking statements
from time to time. The following factors, as well as those discussed below,
are among the principal factors that could cause actual results to differ
materially from the forward-looking statements: business and economic
conditions generally and in the regions in which the Company's stores are
located, including the rate of inflation; population, employment and job
growth in the Company's markets; demands placed on management by the
substantial increase in the Company's size; loss or retirement of senior
management of the Company or of its principal operating subsidiaries;
changes in the availability of debt or equity capital and increases in
borrowing costs or interest rates, especially since a substantial portion
of the Company's borrowings bear interest at floating rates; competitive
factors, such as increased penetration in the Company's markets by large
national food and nonfood chains, large category-dominant stores and large
national and regional discount retailers (whether existing
14
<PAGE>
competitors or new entrants) and competitive pressures generally, which
could include price-cutting strategies, store openings and remodels;
results of the Company's programs to decrease costs as a percent of sales;
increases in labor costs and deterioration in relations with the union
bargaining units representing the Company's employees; unusual
unanticipated costs or unanticipated consequences relating to the recent
mergers and integration strategy and any delays in the realization thereof;
operational inefficiencies in distribution or other Company systems,
including any that may result from the recent mergers; issues arising from
addressing year 2000 information technology issues; legislative or
regulatory changes adversely affecting the business in which the companies
are engaged; and other opportunities or acquisitions which may be pursued
by the Company.
Leverage; Ability to Service Debt. The Company is highly leveraged. As
of the end of the quarter, the Company has total indebtedness (including
current maturities and capital lease obligations) of $5.0 billion. Total
indebtedness consists of long-term debt, including borrowings under the
1998 Senior Credit Facilities, notes and capitalized leases. Total
indebtedness does not reflect certain commitments and contingencies of the
Company, including operating leases under the lease facility and other
operating lease obligations. The Company has significant interest and
principal repayment obligations and significant rental payment obligations,
and the ability of the Company to satisfy such obligations is subject to
prevailing economic, financial and business conditions and to other
factors, many of which are beyond the Company's control. A significant
amount of the Company's borrowings and rental obligations bear interest at
floating rates (including borrowings under the 1998 Senior Credit
Facilities and obligations under the lease facility), which will expose the
Company to the risk of increased interest and rental rates.
Merger Integration. The significant increase in size of the Company's
operations resulting from the recent mergers has substantially increased
the demands placed upon the Company's management, including demands
resulting from the need to integrate the accounting systems, management
information systems, distribution systems, manufacturing facilities and
other operations of Fred Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less.
In addition, the Company could experience unexpected costs from such
integration and/or a loss of customers or sales as a result of the recent
mergers, including as a result of the conversion of the Hughes Family
Markets banner to Ralphs. There can also be no assurance that the Company
will be able to maintain the levels of operating efficiency which Fred
Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less had achieved separately
prior to the mergers. The failure to successfully integrate the operations
of the acquired businesses, the loss of key management personnel and the
loss of customers or sales could each have a material adverse effect on the
Company's results of operations or financial position.
Ability to Achieve Intended Benefits of the Recent Mergers. Management
believes that significant business opportunities and cost savings are
achievable as a result of the Smith's, QFC and Ralphs/Food 4 Less mergers.
Management's estimates of cost savings are based upon many assumptions
including future sales levels and other operating results, the availability
of funds for capital expenditures, the timing of certain events as well as
general industry, and business conditions and other matters, many of which
are beyond the control of the Company. Estimates are also based on a
management consensus as to what levels of purchasing and similar
efficiencies should be achievable by an entity the size of the Company.
Estimates of potential cost savings are forward-looking statements that are
inherently uncertain. Actual cost savings, if any, could differ from those
projected and such differences could be material; therefore, undue reliance
should not be placed upon such estimates. There can be no assurance that
unforeseen costs and expenses or other factors (whether arising in
connection with the integration of the Company's operations or otherwise)
will not offset the estimated cost savings or other components of the
Company's plan or result in delays in the realization of certain projected
cost savings.
Competition. The retail merchandising business in general, and the
supermarket industry in particular, is highly competitive and generally
characterized by narrow profit margins. The Company's competitors in each
of its operating divisions include national and regional supermarket
chains, discount stores, independent and specialty grocers, drug and
convenience stores, large category-dominant stores and the newer
"alternative format" food stores, including warehouse club stores, deep
discount drug stores, "supercenters" and conventional department stores.
Competitors of the Company include, among others, Safeway, Albertson's,
Lucky, Costco, Wal-Mart and Target. Retail businesses generally compete on
the basis of location, quality of products and service, price, product
variety and store condition. The Company's ability to compete depends in
part on its ability to successfully maintain and remodel existing stores
and develop new stores in advantageous locations.
Labor Relations. The Company is party to more than 166 collective
bargaining agreements with local unions covering
15
<PAGE>
approximately 58,000 employees representing approximately 70% of the
Company's total employees. Among the contracts that have expired or will
expire in 1998 are those covering 15,500 employees. Typical agreements are
three years in duration, and as such agreements expire, the Company expects
to negotiate with the unions and to enter into new collective bargaining
agreements. There is no assurance, however, that such agreements will be
reached without work stoppages. A prolonged work stoppage affecting a
substantial number of stores could have a material adverse effect on the
Company's results of operations or financial position.
The Company may make other forward-looking statements from time to
time. Forward-looking statements speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any
revisions to any forward-looking statements which may be made to reflect
subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At a special meeting of stockholders of the Company held March 5,
1998, action was taken with respect to three proposals. As of the record
date, January 26, 1998, 88,379,520 shares of common stock were outstanding
and entitled to vote. The voting results are shown below.
Proposal No. 1. - Approval of the acquisition of Quality Food Centers,
Inc.
The stockholders approved the merger with QFC (with 72,805,299
affirmative votes, 63,675 negative votes, 162,556 abstentions, and
9,098,603 broker non-votes).
Proposal No. 2 - Approval of the acquisition of Food 4 Less Holdings,
Inc.
The stockholders approved the merger with Ralphs/Food 4 Less (with
72,761,482 affirmative votes, 102,538 negative votes, 167,510 abstentions,
and 9,098,603 broker non-votes).
Proposal No. 3 - Amendment of the certificate of incorporation.
The stockholders approved the amendment to the Company's Certificate
of Incorporation to increase the maximum size of the Board of Directors
(with 80,445,844 affirmative votes, 1,503,648 negative votes, 180,641
abstentions, and no broker non-votes).
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
3A Restated Certificate of Incorporation, as amended, of Fred Meyer,
Inc.
11 Statement Re Computation of Per Share Earnings.
27A Financial Data Schedule.
27C Restated Financial Data Schedule for each fiscal quarter of 1996.
27D Restated Financial Data Schedule for each fiscal quarter of 1997.
16
<PAGE>
(b) Reports on Form 8-K
The Company filed reports on Form 8-K dated February 13, 1998,
February 20, 1998, March 4, 1998 and March 12, 1998 to disclose information
under Item 5.
The Company filed a report on Form 8-K dated February 27, 1998
including certain financial statement disclosure relating to an
accountant's consent under Item 7 and other disclosures under Item 5.
The Company filed a report on Form 8-K dated March 9, 1998 to disclose
information relating to recent acquisitions required by Items 2 and 7.
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FRED MEYER, INC.
Date: July 7, 1998 By DAVID R. JESSICK
--------------------------------------
David R. Jessick
Senior Vice President and
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
3A Restated Certificate of Incorporation, as amended, of
Fred Meyer, Inc.
11 Statement Re Computation of Per Share Earnings.
27A Financial Data Schedule.
27C Restated Financial Data Schedule for each fiscal quarter
of 1996.
27D Restated Financial Data Schedule for each fiscal quarter
of 1997.
RESTATED CERTIFICATE OF INCORPORATION
OF
MEYER-SMITH HOLDCO, INC.
A DELAWARE CORPORATION
(Originally incorporated on July 7, 1997)
Pursuant to Sections 242 and 245 of the Delaware General Corporation Law,
the undersigned hereby makes this Restated Certificate of Incorporation of the
Delaware corporation MEYER-SMITH HOLDCO, INC., whose Certificate of
Incorporation was filed in the office of the Secretary of State of Delaware on
July 7, 1997, and certifies as follows:
ARTICLE I
The name of the Corporation is FRED MEYER, INC.
ARTICLE II
The registered office and registered agent of the Corporation is The
Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which Corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
A. The total number of shares of stock that the Corporation shall have
authority to issue is five hundred million (500,000,000) shares, consisting of
four hundred million (400,000,000) shares of Common Stock having a par value of
$.01 per share and one hundred million (100,000,000) shares of Preferred Stock
having a par value of $.01 per share.
B. The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article IV, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include determination of the following:
<PAGE>
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payment of
dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such
voting rights and the voting powers, if any, of the holders of
such series;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision
for adjustment of the conversion rate in such events as the Board
of Directors shall determine;
(5) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of
payment of shares of that series; and
(8) Any other relative rights, preferences and limitations of that
series.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
ARTICLE V
The Board of Directors of the Corporation may alter, amend or repeal the
Bylaws of the Corporation.
2
<PAGE>
ARTICLE VI
No action may be taken by stockholders of this Corporation other than at an
annual or special meeting of stockholders and the ability of stockholders to act
by written consent is specifically denied.
ARTICLE VII
A. The Corporation shall indemnify to the fullest extent then permitted by
law any person who is made, or threatened to be made, a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise (including an action, suit or
proceeding by or in the right of the Corporation) by reason of the fact that the
person is or was a director or officer of the Corporation, or serves or served
at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection therewith. Expenses
incurred by an officer or director in defending a civil or criminal action, suit
or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Corporation as authorized in this Article. The indemnification provided hereby
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any statute, bylaw, agreement, vote of shareholders or
directors or otherwise, both as to action in any official capacity and as to
action in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such person. The foregoing right
to indemnification shall not apply in respect of actions, suits or proceedings
(or parts thereof) against the Corporation unless such action, suit or
proceeding shall have been approved by the Board of Directors.
Any person other than a director or officer who is or was an employee or
agent of the Corporation, or fiduciary within the meaning of the Employee
Retirement Income Security Act of 1974 with respect to any employee benefit plan
of the Corporation, or is or was serving at the request of the Corporation as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, may be indemnified to such extent as the Board of Directors in
its discretion at any time or from time to time may authorize.
B. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the Corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal.
3
<PAGE>
ARTICLE VIII
A. The number of directors constituting the entire Board of Directors of
the Corporation shall be not less than three nor more than 15 as fixed from time
to time by the Board of Directors, provided, however, that the number of
directors shall not be reduced so as to shorten the term of any director at the
time in office, and provided further, that the number of directors constituting
the entire Board of Directors shall be eleven until otherwise fixed by a
majority of the entire Board of Directors.
B. The Board of Directors, other than those who may be elected by the
holders of any class or series of stock having a preference over the Common
Stock as to dividend or upon liquidation, shall be divided into three classes,
as nearly equal in number as the then total number of directors constituting the
entire Board of Directors permits with the term of office of one class expiring
each year. Directors of the first class shall be elected to hold office for a
term expiring at the 1998 annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the 1999 annual meeting and
directors of the third class shall be elected to hold office for a term expiring
at the 2000 annual meeting. Any vacancies in the Board of Directors for any
reason, and any directorships resulting from any increase in the number of
directors, may be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected and
qualified. Subject to the foregoing, at each annual meeting of stockholders the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Despite the expiration of a director's term, the director shall
continue to serve until the director's successor is elected and qualified or the
number of directors is decreased. Directors need not be residents of the State
of Delaware or stockholders of the Corporation.
C. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Restated Certificate
of Incorporation or the Bylaws of the Corporation), any director or the entire
Board of Directors of the Corporation may be removed at any time, but only for
cause and only by the affirmative vote of the holders of 75% or more of the
voting power of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose.
D. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Restated Certificate
of Incorporation or the Bylaws of the Corporation), the provisions set forth in
this Article VIII may not be amended, altered, changed or repealed in any
respect, nor may any provision be adopted which is inconsistent with this
Article VIII, unless such action is approved by the affirmative vote of the
holders of not less than 75% of the voting power of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
4
<PAGE>
E. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Restated Certificate
of Incorporation or the Bylaws of the Corporation), the provisions set forth in
Section 1.11 of the Bylaws of the Corporation may not be amended, altered,
changed or repealed in any respect, nor may any provision be adopted which is
inconsistent with Section 1.11 of the Bylaws, unless such action is approved by
the Board of Directors or by the affirmative vote of the holders of not less
than 75% of the voting power of the outstanding shares of capital stock of the
Corporation entitled to vote generally at an annual or special meeting of
stockholders (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates, integrates and further amends the provisions of the Certificate of
Incorporation of the Corporation, and which has been duly adopted in accordance
with Sections 242 and 245 of the Delaware General Corporation Law, has been
executed by a duly authorized officer of the Corporation this 9th day of
September, 1997.
MEYER-SMITH HOLDCO, INC.
By ROGER A COOKE
--------------------------------------
Roger A. Cooke, Senior Vice President
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
FRED MEYER, INC.
Pursuant to Section 242 of the Delaware General Corporation Law (the
"DGCL") Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby
certify that:
1. At a meeting of the Board of Directors of the Company, resolutions were
duly adopted setting forth a proposed amendment of the Restated Certificate of
Incorporation of the Company, declaring that amendment to be advisable and
calling a meeting of the stockholders of the Company for consideration of the
amendment. The amendment amends Article VIII, paragraph A to read as follows:
"The number of directors constituting the entire Board of Directors of
the Corporation shall be not less than three nor more than 25 as fixed
from time to time by the Board of Directors, provided, however, that
the number of directors shall not be reduced so as to shorten the term
of any director at the time in office, and provided further, that the
number of directors constituting the entire Board of Directors shall
be eleven until otherwise fixed by a majority of the entire Board of
Directors."
2. The amendment was duly adopted by the stockholders of the Company at a
special meeting of the stockholders duly called and held, upon notice in
accordance with Section 222 of the DGCL.
3. The amendment was duly adopted in accordance with the provisions of
Section 242 of the DGCL.
IN WITNESS WHEREOF, Fred Meyer, Inc. has caused this certificate to be
signed by Roger A. Cooke, its Senior Vice President, this 5th day of March,
1998.
FRED MEYER, INC.
By ROGER A. COOKE
--------------------------------------
Roger A. Cooke
Senior Vice President
<TABLE>
<CAPTION>
FRED MEYER, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Thousands, except per share amounts)
16 Weeks 16 Weeks
Ended Ended
May 23, May 24,
1998 1997
---------- ----------
<S> <C> <C>
Basic earnings per common share
Weighted average number
of shares outstanding 145,141 84,758
========== ==========
Income (loss) before extraordinary
charge $ (95,553) $ 22,513
Extraordinary charge (216,441) -
---------- ----------
Net income (loss) $ (311,994) $ 22,513
========== ==========
Per share calculation
Income (loss) before extraordinary
charge $ (0.66) $ 0.27
Extraordinary charge (1.49) -
---------- ----------
Net income (loss) $ (2.15) $ 0.27
========== ==========
Diluted earnings per common share
Weighted average number
of shares outstanding 145,141 84,758
The effect of options outstanding
during the period using the
treasury stock method - 3,577
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 145,141 88,335
========== ==========
Income (loss) before extraordinary
charge $ (95,553) $ 22,513
Extraordinary charge (216,441) -
---------- ----------
Net income (loss) $ (311,994) $ 22,513
========== ==========
Per share calculation
Income (loss) before extraordinary
charge $ (0.66) $ 0.25
Extraordinary charge (1.49) -
---------- ----------
Net income (loss) $ (2.15) $ 0.25
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-23-1998
<CASH> 163,773
<SECURITIES> 0
<RECEIVABLES> 123,745
<ALLOWANCES> 0
<INVENTORY> 1,795,974
<CURRENT-ASSETS> 2,405,047
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,888,978
<CURRENT-LIABILITIES> 2,332,820
<BONDS> 4,815,013
0
0
<COMMON> 1,526
<OTHER-SE> 2,077,466
<TOTAL-LIABILITY-AND-EQUITY> 9,888,978
<SALES> 4,040,448
<TOTAL-REVENUES> 4,040,448
<CGS> 2,849,017
<TOTAL-COSTS> 1,010,978
<OTHER-EXPENSES> 208,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,811
<INCOME-PRETAX> (128,323)
<INCOME-TAX> (32,770)
<INCOME-CONTINUING> (95,553)
<DISCONTINUED> 0
<EXTRAORDINARY> (216,441)
<CHANGES> 0
<NET-INCOME> (311,994)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> FEB-1-1997 FEB-1-1997 FEB-1-1997
<PERIOD-END> MAY-25-1996 AUG-17-1996 NOV-09-1996
<CASH> 47,206 56,933 50,239
<SECURITIES> 0 0 0
<RECEIVABLES> 32,005 55,853 44,738
<ALLOWANCES> 0 0 0
<INVENTORY> 594,041 595,729 714,104
<CURRENT-ASSETS> 722,913 757,878 864,262
<PP&E> 1,781,818 1,842,629 1,762,468
<DEPRECIATION> 622,822 649,926 666,973
<TOTAL-ASSETS> 1,987,768 2,070,191 2,051,937
<CURRENT-LIABILITIES> 476,404 527,359 626,554
<BONDS> 770,355 780,869 712,191
0 0 0
0 0 0
<COMMON> 816 817 818
<OTHER-SE> 630,617 654,121 597,405
<TOTAL-LIABILITY-AND-EQUITY> 1,987,768 2,070,191 2,051,937
<SALES> 1,277,059 2,317,906 3,336,929
<TOTAL-REVENUES> 1,277,059 2,317,906 3,336,929
<CGS> 903,716 1,633,054 2,352,000
<TOTAL-COSTS> 331,181 597,620 867,949
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 16,320 27,517 37,921
<INCOME-PRETAX> 25,842 59,715 79,059
<INCOME-TAX> 9,597 22,258 29,404
<INCOME-CONTINUING> 16,245 37,457 49,655
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 16,245 37,457 49,655
<EPS-PRIMARY> 0.20 0.46 0.62
<EPS-DILUTED> 0.19 0.44 0.59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-END> MAY-24-1997 AUG-16-1997 NOV-08-1997
<CASH> 127,979 112,737 194,520
<SECURITIES> 0 0 0
<RECEIVABLES> 49,199 56,759 136,501
<ALLOWANCES> 0 0 0
<INVENTORY> 742,968 747,998 1,320,879
<CURRENT-ASSETS> 988,731 993,581 1,807,110
<PP&E> 2,118,831 2,111,204 3,144,287
<DEPRECIATION> 728,729 755,218 802,317
<TOTAL-ASSETS> 2,789,046 2,751,686 5,589,769
<CURRENT-LIABILITIES> 716,477 684,451 1,354,920
<BONDS> 958,397 917,945 2,085,700
0 0 0
0 0 0
<COMMON> 976 978 1,279
<OTHER-SE> 907,730 941,654 1,622,427
<TOTAL-LIABILITY-AND-EQUITY> 2,789,046 2,751,686 5,589,769
<SALES> 1,593,437 3,051,039 4,996,582
<TOTAL-REVENUES> 1,593,437 3,051,039 4,996,582
<CGS> 1,121,354 2,145,174 3,515,613
<TOTAL-COSTS> 416,787 785,322 1,280,496
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 18,648 36,015 66,189
<INCOME-PRETAX> 36,648 84,528 134,284
<INCOME-TAX> 14,135 32,563 53,654
<INCOME-CONTINUING> 22,513 51,965 80,630
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 (91,210)
<CHANGES> 0 0 0
<NET-INCOME> 22,513 51,965 (10,580)
<EPS-PRIMARY> 0.27 0.58 (0.11)
<EPS-DILUTED> 0.25 0.56 (0.10)
</TABLE>
