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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 November 7, 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 offices) (Zip Code)
(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 December 5, 1998:
155,169,609
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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...................... 12
Item 3 Quantitative and Qualitative Disclosures About
Market Risk.............................................. 19
Part II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K......................... 20
Signatures ............................................................... 21
2
<PAGE>
Part I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial Statements.
- -----------------------------
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
--------------------------- --------------------------
November 7, November 8, November 7, November 8,
1998 1997 1998 1997
(In thousands, except per share data) ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,477,091 $ 1,945,543 $ 11,022,471 $ 4,996,582
Cost of goods sold 2,432,708 1,370,439 7,740,401 3,515,612
----------- ----------- ------------ ----------
Gross margin 1,044,383 575,104 3,282,070 1,480,970
Operating and administrative expenses 833,836 488,660 2,668,306 1,272,227
Amortization of goodwill 22,930 6,514 66,166 8,269
Merger related costs 33,737 - 290,701 -
----------- ----------- ------------ ----------
Income from operations 153,880 79,930 256,897 200,474
Interest expense 92,945 30,174 284,720 66,189
----------- ----------- ------------ ----------
Income (loss) before income taxes and extraordinary charge 60,935 49,756 (27,823) 134,285
Provision for income taxes 31,771 21,091 29,619 53,655
----------- ----------- ------------ ----------
Income (loss) before extraordinary charge 29,164 28,665 (57,442) 80,630
Extraordinary charge, net of taxes (324) (91,210) (217,934) (91,210)
----------- ----------- ------------ ----------
Net income (loss) $ 28,840 $ (62,545) $ (275,376) $ (10,580)
=========== =========== ============ ==========
Basic earnings per common share:
Income (loss) before extraordinary charge $ 0.19 $ 0.24 $ (0.38) $ 0.83
Extraordinary charge - (0.77) (1.45) (0.94)
----------- ----------- ------------ ----------
Net income (loss) $ 0.19 $ (0.53) $ (1.83) $ (0.11)
=========== =========== ============ ==========
Basic weighted average number of common
shares outstanding 154,690 118,331 150,601 97,355
=========== =========== ============ ==========
Diluted earnings per common share:
Income (loss) before extraordinary charge $ 0.18 $ 0.23 $ (0.38) $ 0.79
Extraordinary charge - (0.74) (1.45) (0.89)
----------- ----------- ------------ ----------
Net income (loss) $ 0.18 $ (0.51) $ (1.83) $ (0.10)
=========== =========== ============ ==========
Diluted weighted average number of common and
common equivalent shares outstanding 162,127 123,546 150,601 101,562
=========== =========== ============ ==========
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
November 7, January 31,
(In thousands) 1998 1998
----------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 186,045 $ 117,311
Receivables 140,291 108,496
Inventories 2,007,875 1,240,866
Prepaid expenses and other 60,540 70,536
Current portion of deferred taxes 218,318 90,804
----------- -----------
Total current assets 2,613,069 1,628,013
Property and equipment--net 3,570,974 2,432,040
Other assets:
Goodwill--net 3,684,442 1,279,130
Long-term deferred tax assets 272,573 -
Other 170,919 83,753
----------- -----------
Total other assets 4,127,934 1,362,883
----------- -----------
Total assets $10,311,977 $ 5,422,936
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,294,311 $ 766,678
Accrued expenses and other 1,051,905 407,167
Current portion of long-term debt and lease obligations 134,650 19,650
----------- -----------
Total current liabilities 2,480,866 1,193,495
Long-term debt 4,999,856 2,184,794
Capital lease obligations 173,341 82,782
Deferred lease transactions 30,175 38,556
Deferred income taxes - 83,183
Other long-term liabilities 478,492 137,766
Stockholders' equity:
Common stock 1,550 1,288
Additional paid-in capital 1,895,533 1,173,760
Notes receivable from officers (335) (298)
Unearned compensation (3,236) (466)
Retained earnings 255,735 528,076
----------- -----------
Total stockholders' equity 2,149,247 1,702,360
----------- -----------
Total liabilities and stockholders' equity $10,311,977 $ 5,422,936
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
40 Weeks Ended
-------------------------------
November 7, November 8,
(In thousands) 1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before extraordinary charge $ (57,442) $ 80,630
Adjustments to reconcile income (loss) before extraordinary
charge to net cash provided by operating activities:
Depreciation and amortization of property and equipment 270,039 141,807
Amortization of goodwill 66,166 8,269
Deferred lease transactions (9,791) (8,884)
Merger related asset write-offs 89,231 -
Deferred income taxes 26,586 (1,140)
Changes in operating assets and liabilities:
Receivables (4,740) (10,156)
Inventories (170,119) (189,050)
Other current assets 12,896 12,780
Accounts payable 198,018 138,750
Accrued expenses and other liabilities (98) (5,953)
Income taxes 19,628 6,235
Other 16,930 (35)
----------- -----------
Net cash provided by operating activities 457,304 173,253
Cash flows from investing activities:
Cash acquired in acquisitions 66,519 71,476
Payments made for acquisitions (173,847) (419,402)
Purchases of property and equipment (497,616) (250,302)
Proceeds from sale of property and equipment 23,028 64,625
Other (27,096) 5,375
----------- -----------
Net cash used for investing activities (609,012) (528,228)
Cash flows from financing activities:
Issuance of common stock - net 59,377 223,679
Net increase in notes receivable 319 928
Payment of deferred financing fees (69,571) -
Long-term financing:
Borrowings 4,514,075 1,989,653
Repayments (4,288,488) (1,728,105)
Other 4,730 -
----------- -----------
Net cash provided by financing activities 220,442 486,155
----------- -----------
Net increase in cash and cash equivalents for the period 68,734 131,180
Cash and cash equivalents at beginning of year 117,311 63,340
----------- -----------
Cash and cash equivalents at end of period $ 186,045 $ 194,520
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
1. Organization
Fred Meyer, Inc., a Delaware corporation, collectively with its
subsidiaries ("Fred Meyer" or the "Company") is one of the largest food
retailers in the United States, operating 830 supermarkets and
multi-department stores located primarily in the Western portion of the
United States. The Company operates multiple formats that appeal to
customers across a wide range of income brackets including stores under the
following banners: Fred Meyer, Smith's Food & Drug Centers, Smitty's, QFC,
Ralphs, and Food 4 Less.
2. Recent Events
On October 19, 1998, the Company announced the signing of a definitive
merger agreement with The Kroger Co. ("Kroger"), the largest retail grocery
chain in the United States. On that date, Kroger operated 1,398 food
stores, 802 convenience stores and 34 manufacturing facilities that
manufacture products for sale in all Kroger divisions, as well as to
external customers. Under the terms of the merger agreement, Fred Meyer
stockholders will receive one newly issued share of Kroger common stock for
each share of Fred Meyer common stock. The transaction will be accounted
for as a pooling of interests. It is expected to close in early 1999
subject to approval of Kroger and Fred Meyer stockholders and antitrust and
other regulatory authorities and customary closing conditions. In
anticipation of the intended merger with Kroger, the Company has secured
approval from its banks to amend its 1998 Senior Credit Facility (as
defined herein) as well as its operating lease facility. These proposed
amendments are subject to completion of the merger and will be guaranteed
by Kroger. The Company's outstanding senior notes due 2003 through 2008 are
expected to remain outstanding after the merger. Additional information
regarding the merger can be found in the Company's current report on Form
8-K dated October 20, 1998.
On December 6, 1998, Ralphs Grocery Company, a subsidiary of the
Company, sold 38 grocery stores located in Kansas and Missouri to
Associated Wholesale Grocers, Inc., a member-owned grocery cooperative.
3. Acquisitions
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 Markets stores in Southern
California as of the date of the merger. 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 and the accompanying financial
statements reflect the consolidated results of Fred Meyer and QFC for all
periods presented. The amounts included in the prior year results of
operations from Fred Meyer and QFC are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Fred Meyer QFC Total
Historical Historical Company
---------- ---------- -------
<S> <C> <C> <C>
12 Weeks Ended November 8, 1997
Net sales $1,460,372 $ 485,171 $ 1,945,543
Net income (loss) (72,933) 10,388 (62,545)
Diluted earnings (loss) per common share (0.89) 0.25 (0.51)
40 Weeks Ended November 8, 1997
Net sales 3,611,323 1,385,259 4,996,582
Net income (loss) (40,554) 29,974 (10,580)
Diluted earnings (loss) per common share (0.64) 0.79 (0.10)
</TABLE>
6
<PAGE>
On March 10, 1998, the Company acquired Food 4 Less Holdings, Inc.
("Ralphs/Food 4 Less"), a supermarket chain operating 409 stores primarily
in Southern California on that date, 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.
In conjunction with the acquisitions of Ralphs/Food 4 Less and QFC,
the Company entered into a settlement agreement with the State of
California in which it agreed to divest 19 specific stores in Southern
California to settle potential antitrust and unfair competition claims.
Currently, the Company has sold five of the stores and has sale agreements
or letters of intent on another 13 stores.
On September 9, 1997, the Company succeeded to the businesses of Fred
Meyer Stores, Inc. ("Fred Meyer Stores" and known as Fred Meyer, Inc. prior
to September 9, 1997) and Smith's Food & Drug Centers, Inc. ("Smith's"). 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 Jewelry Company ("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, QFC acquired the principal operations of Hughes
Markets, Inc. ("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 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, QFC 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. 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.
Additionally, the Company completed the acquisition of food and fine
jewelry stores during the 40 weeks ended November 7, 1998. On October 4,
1998, the Company acquired 123 Littman Jewelers and 9 Barclays Jewelers
stores located primarily in 10 states on the East coast. On October 1,
1998, the Company acquired 13 Albertson's and Buttrey grocery stores in
Montana and
7
<PAGE>
Wyoming. These acquisitions were accounted for under the purchase method of
accounting. The results of operations for these acquired stores do not have
a material effect on the consolidated operating results, and therefore are
not included in the pro forma data presented.
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>
40 Weeks Ended
-----------------------------
November 7, November 8,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $11,568,003 $11,285,962
Income (loss) before extraordinary charge (118,210) 55,684
Net loss (336,144) (161,926)
Diluted earnings per common share:
Income (loss) before extraordinary charge (0.77) 0.37
Net loss (2.19) (1.06)
</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 $217.9 million, net of the
related tax benefit, 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 acquisitions is as follows (in
thousands):
<TABLE>
<CAPTION>
40 Weeks Ended
----------------------------
November 7, November 8,
1998 1997
----------- -----------
<S> <C> <C>
Fair value of assets acquired $ 2,165,950 $ 2,055,091
Goodwill recorded 2,397,030 1,221,141
Value of stock issued (652,514) (767,145)
Liabilities assumed (3,736,619) (2,089,685)
----------- -----------
Cash paid $ 173,847 $ 419,402
=========== ===========
</TABLE>
4. Summary of Significant Accounting Policies
Basis of Presentation--The accompanying unaudited consolidated
financial statements of the Company 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
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.
8
<PAGE>
Fiscal Year--The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal year 1997 ended on January 31, 1998 ("1997") and fiscal
year 1998 ends on January 30, 1999 ("1998"). As a result of its
acquisition, QFC changed its year end to that of Fred Meyer beginning
February 1, 1998, the first day of fiscal 1998. Revenues and expenses of
QFC from the end of QFC's fiscal year 1997, ended on December 27, 1997, to
February 1, 1998 (5 weeks) were immaterial and have been excluded from the
statement of operations. Accordingly, net income of $3.3 million for that
period has been added to retained earnings.
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
$66.9 million at November 7, 1998 and $51.8 million at January 31, 1998.
The pretax LIFO charge in the third quarter was $4.1 million in 1998 and
$2.1 million in 1997. The pretax LIFO charge for the first 40 weeks was
$15.1 million in 1998 and $5.6 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, Hughes, and KUI (see Note 3) is being
amortized over 40 years. Goodwill recorded in connection with the Fox
acquisition is being amortized over 15 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.
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 liabilities 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 for the first 40 weeks of
1998 due to the net loss.
Reclassifications--Certain prior period amounts have been reclassified
to conform to current period presentation. The reclassifications have no
effect on reported net income.
9
<PAGE>
5. 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) for the
third quarter was $29.4 million in 1998 and $(60.4) million in 1997.
Comprehensive loss for the first 40 weeks was $270.3 million in 1998 and
$4.6 million in 1997.
6. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
November 7, January 31,
1998 1998
----------- -----------
<S> <C> <C>
1997 Senior Credit Facility $ - $1,300,000
1998 Senior Credit Facility 2,448,750 -
Senior notes, unsecured, due 2003 through 2008, fixed interest 1,750,000 -
rate from 7.15% to 7.45%
QFC Credit Facility 214,293
Commercial paper with maturities through February 10, 1999, 628,075 367,156
classified as long-term, interest rates of 5.78% to 6.10%
at August 15, 1998
QFC 8.7% Senior Subordinated Notes, principal due 2007 with 3,065 150,000
interest payable semi-annually
Long-term notes secured by trust deeds, due through 2016, 59,941 61,075
interest rates from 5.00% to 10.50%
Uncommitted bank borrowings classified as long-term 85,000 79,000
Ralphs senior subordinated notes, due 2002 through 2007, 35,232 -
fixed interest rates from 9.0% to 13.75%
Ralphs senior notes, unsecured, due 2004, fixed interest rate 13,458 -
of 10.45%
Other 70,475 29,448
----------- ---------
Total 5,093,996 2,200,972
Less current portion 94,140 16,178
----------- ---------
Total $ 4,999,856 $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") provided for 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 and secured by the stock in the 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 Adjusted LIBOR plus a margin of 1.0%. At
November 7, 1998, the weighted average interest rate on the five year
10
<PAGE>
term note and the amounts outstanding under the revolving credit facility
were 6.5% and 6.3%, respectively.
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 are 100% wholly owned subsidiaries of the Company and
constitute all of the Company's direct and indirect subsidiaries, other
than inconsequential subsidiaries. The non-guaranteeing subsidiaries
represent less than 3%, on an individual and aggregate basis, of the
Company's consolidated assets, pretax income, cash flow and net investment
in subsidiaries.
The Company is a holding company with no independent operations or
assets 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 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 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 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.
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 Company has established uncommitted money market lines with five
banks of $125.0 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 $900.0 million of unrated
commercial paper facilities with four 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 $713.1 million at
November 7, 1998, as long-term debt.
The Company on occasion enters into various interest rate swap, cap
and collar agreements to reduce the impact of changes in interest rates on
its floating rate long-term debt. At November 7, 1998, the Company had
outstanding one collar agreement which expires on July 24, 2003 and
effectively sets interest rate limits on a notional principal amount of
$300.0 million on the Company's floating rate long-term debt. The agreement
limits the interest rate fluctuation of the 3-month adjusted LIBOR (as
defined in the collar agreement) to a range between 4.10% and 6.50% and
requires quarterly cash settlements for interest rate fluctuations outside
of the limits. As of November 7, 1998, the 3-month adjusted LIBOR was
5.38%. The Company is exposed to credit loss in the event of nonperformance
by the counterparties to the interest rate collar agreement. The Company
requires an "A" or better rating of the counterparties and, accordingly,
does not anticipate nonperformance by the counterparties.
11
<PAGE>
Annual long-term debt maturities for the five fiscal years subsequent
to November 7, 1998 are $18.1 million in 1998, $134.8 million in 1999,
$240.9 million in 2000, $362.2 million in 2001, and 472.7 million in 2002.
The Company recorded in the first 40 weeks of 1998 an extraordinary
charge of $357.8 million less a $139.9 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.
7. 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.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
- -------------------------------------------------
This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements.
RECENT EVENT
On October 19, 1998, the Company announced the signing of a definitive
merger agreement with The Kroger Co. ("Kroger"), the largest retail grocery
chain in the United States. On that date, Kroger operated 1,398 food
stores, 802 convenience stores and 34 manufacturing facilities that
manufacture products for sale in all Kroger divisions, as well as to
external customers. Under the terms of the merger agreement, Fred Meyer
stockholders will receive one newly issued share of Kroger common stock for
each share of Fred Meyer common stock. The transaction will be accounted
for as a pooling of interests. It is expected to close in early 1999
subject to approval of Kroger and Fred Meyer stockholders and antitrust and
other regulatory authorities and customary closing conditions. In
anticipation of the intended merger with Kroger, the Company has secured
approval from its banks to amend its 1998 Senior Credit Facility as well as
its operating lease facility. These proposed amendments are subject to
completion of the merger and will be guaranteed by Kroger. The Company's
outstanding senior notes due 2003 through 2008 will remain outstanding
after the merger. Additional information regarding the merger can be found
in the Company's current report on Form 8-K dated October 20, 1998.
RESULTS OF OPERATIONS
The following discussion summarizes the Company's operating results
for 1998 compared with 1997. However, 1998 results are not comparable to
prior year results due to the three recent acquisitions (See Note 3 of
Notes to Consolidated Financial Statements). The 1998 results include the
results from Fred Meyer Stores, Smith's and QFC for the full period and
include Ralphs/Food 4 Less from March 10, 1998. The 1997 results include
Fred Meyer Stores and QFC for the full period and Smith's from September 9,
1997.
12
<PAGE>
Comparison of the 12 and 40 weeks ended November 7, 1998 with the 12 and 40
weeks ended November 8, 1997
Net sales for the 12 weeks ended November 7, 1998 increased $1.5
billion to $3.5 billion from $2.0 billion for the 12 weeks ended November
8, 1997 and increased $6.0 billion to $11.0 billion in the 40 weeks ended
November 7, 1998 from $5.0 billion in the 40 weeks ended November 8, 1997.
The increases in sales were caused primarily by the recent acquisitions of
Ralphs/Food 4 Less and Smith's. Sales at Smith's accounted for $203.9
million and $1.9 billion of the increases and Ralphs/Food 4 Less accounted
for $1.5 billion and $4.3 billion of the increases for the 12 and 40 weeks
ended November 7, 1998, respectively.
Comparable store sales including the Ralphs/Food 4 Less and Smith's
stores as if acquired at the beginning of the comparable periods and
excluding the Hughes and Smitty's stores which are currently being
converted to other formats increased 3.4% and 2.4% from the prior year for
the 12 and 40 weeks ended November 7, 1998, respectively.
Gross margin increased as a percentage of net sales from 29.6% for the
12 weeks ended November 8, 1997 to 30.0% for the 12 weeks ended November 7,
1998 and from 29.6% for the 40 weeks ended November 7, 1998 to 29.8% for
the 40 weeks ended November 8, 1997. Increases in gross margin as a percent
of sales were generated primarily from economies of scale resulting from
the Company's increased sales offset almost entirely by changes in the
Company's sales mix between food and nonfood. The amount of food sales,
which have a lower gross margin percent, compared to total sales increased
over the prior year due to the recent acquisitions.
Operating and administrative expenses were $833.8 million and $488.7
million for the 12 weeks ended November 7, 1998 and November 8, 1997,
respectively and were $2.7 billion and $1.3 billion for the 40 weeks ended
November 7, 1998 and November 8, 1997, respectively. Operating and
administrative expenses decreased as a percentage of sales 1.1% and 1.25%
from the prior year for the 12 and 40 weeks ended November 7, 1998,
respectively. The reduction of operating and administrative expenses as a
percent of sales is due to economies of scale resulting from the Company's
increased sales and lower operating and administrative expenses as a
percent of sales at Smith's and Ralph's/Food 4 Less, which were recently
acquired and are lower cost operations. Additionally, the Company benefited
from the suspension of contributions to certain multi-employer pension and
benefit plans totaling $15.2 million and $32.3 million in the 12 and 40
weeks ended November 7, 1998, respectively.
Amortization of goodwill increased $16.4 million and $57.9 million
from the prior year for the 12 and 40 weeks ended November 7, 1998,
respectively, as a result of the recent acquisitions.
Charges for merger related costs of $33.7 million and $290.7 million
were recorded in the 12 and 40 weeks ended November 7, 1998 as a result of
the recent acquisitions. Additional merger related costs will be recorded
in future quarters as expenditures are incurred.
Interest expense increased to $92.9 million from $30.2 million for the
12 weeks ended November 7, 1998 and November 8, 1997, respectively and
increased to $284.7 million from $66.2 million for the 40 weeks ended
November 7, 1998 and November 8, 1997, respectively. The increase in
interest expense for the 12 and 40 week periods primarily reflect the
increased amount of indebtedness assumed and/or incurred in conjunction
with the acquisitions of Smith's and Ralphs/Food 4 Less.
The effective tax rates are affected by increased goodwill
amortization and certain merger costs which are not deductible for tax
purposes. The effective tax rates for the income tax expense were 52.1% and
42.4% for the 12 weeks ended November 7, 1998 and November 8, 1997,
respectively. For the 40 weeks ended November 7, 1998, the amount of
nondeductible goodwill amortization and
13
<PAGE>
merger costs was greater than the loss before income tax which resulted in
taxable income and income tax expense.
Income (loss) before extraordinary charge was $29.2 million and
$(57.4) million for the 12 and 40 weeks ended November 7, 1998,
respectively, compared to $28.7 million and $80.6 million for the 12 and 40
weeks ended November 8, 1997, respectively. The changes are a result of the
above mentioned factors.
The extraordinary charges of $.3 million and $217.9 million for the 12
and 40 weeks ended November 7, 1998, respectively, consist of fees incurred
in conjunction with the prepayment of certain indebtedness and the
write-off of related debt issuance costs.
Net income increased to $28.8 million for the 12 weeks ended November
7, 1998 from a net loss of $62.5 million for the 12 weeks ended November 8,
1997 and decreased to a loss of $275.4 million for the 40 weeks ended
November 7, 1998 from a loss of $10.6 million for the 40 weeks ended
November 8, 1997 primarily due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company funded its working capital and capital expenditure needs
in 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.
Cash provided by operating activities was $457.3 million for the 40
weeks ended November 7, 1998 compared to $173.3 million for the 40 weeks
ended November 8, 1997. The increase in cash provided from operating
activities is due primarily to an improvement in operating income resulting
from the recent acquisitions. The Company's principal use of cash during
the period is for seasonal purchases of inventory. Because of the inventory
turnover rate, the Company is able to finance a substantial portion of the
increased inventory through trade payables.
Cash used for investing activities was $609.0 million for the 40 weeks
ended November 7, 1998 compared to $528.2 million for the 40 weeks ended
November 8, 1997. The investing activities consisted primarily of capital
expenditures and business acquisitions. Capital expenditures of $497.6
million in the current period were for the construction of new stores,
remodeling existing stores and additions to distribution centers and
offices. During the 40 weeks ended November 7, 1998, the Company opened 17
new stores and completed the remodel of 72 stores. The Company intends to
use the combination of cash flows from operations and borrowings under its
credit facilities to finance its capital expenditure requirements for 1998,
currently budgeted to be approximately $750.0 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 $1.6 billion.
Additionally, the Company completed several business acquisitions
which resulted in the use of cash for investing activities. See Note 3 of
Notes to Consolidated Financial Statements for a discussion of the
Company's acquisitions.
Cash provided by financing activities was $220.4 million for the 40
weeks ended November 7, 1998. The financing activities consisted primarily
of cash receipts on the exercise of stock options, principal payments on
long-term debt and capital leases, and activity related to the debt
refinancing completed in conjunction with the acquisitions of Ralphs/Food 4
Less and QFC.
On March 11, 1998 the Company entered 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
14
<PAGE>
"1998 Senior Credit Facility"). The 1998 Senior Credit Facility included a
$1.875 billion five-year revolving credit agreement and a $1.625 billion
five-year term loan. The Notes consisted 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%. 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. At November
7, 1998, $332.0 million was outstanding on this lease facility. The
remaining balance of this lease facility will be used for land acquisition
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 November 7, 1998, the Company had $125.0 million of uncommitted
money market lines with five banks and $900.0 million in unrated commercial
paper facilities with four 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 November 7, 1998, a total of approximately $265.6
million was available for borrowings under the 1998 Senior Credit Facility
and the commercial paper facilities and $40.0 million was available for
borrowings from the uncommitted money market lines.
See Note 6 of Notes to Consolidated Financial Statements for a
discussion of the Company's interest rate swap, cap and collar agreements.
The Company had $44.3 million of outstanding Letters of Credit as of
November 7, 1998. The Letters of Credit are used to support the importation
of goods and to support the performance, payment, deposit or surety
obligations of the Company.
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
15
<PAGE>
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 and each of its subsidiaries are dependent on computer
hardware, software, systems, and processes ("Information Technology") and
non-information technology systems such as telephones, clocks, scales, and
refrigeration units or other equipment containing embedded microprocessor
technology ("Non-IT Systems") in several critical operating areas,
including store and distribution operations, product merchandise and
procurement, manufacturing plant operations, inventory and labor
management, and accounting.
The Company is currently working to resolve the potential effect of
the year 2000 on the processing of date-sensitive information within these
various systems. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Company programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than 2000, which could result in a
miscalculation or system failure. The date issue also applies to equipment
with embedded microprocessor chips.
The Company has developed a plan (the "Plan") to access and update its
Information Technology systems and Non-IT Systems for year 2000 readiness
and to provide for continued functionality. The Plan focuses on critical
business areas, which are separated into three major categories: (1)
Information Technology, which includes all hardware and software on all
processing platforms; (2) merchandise and external entities, including
product suppliers, service providers, and those with whom the Company
exchanges information; and (3) Non-IT Systems. Additionally, the Plan
consists of three phases: (1) creating an inventory of systems and
assessing the scope of the year 2000 problem as it relates to those
systems; (2) remediating any year 2000 problems; and (3) testing and
implementing systems following remediation.
The following table estimates the Company's completion status for each
phase of the Plan as of November 7, 1998, based on information currently
available:
<TABLE>
<CAPTION>
Percent Complete
-------------------------------
Category Phase 1 Phase 2 Phase 3
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Information Technology 1 83% 55% 28%
Merchandise and external entities 2 63% 28% 3%
Non-IT Systems 3 63% 15% 5%
</TABLE>
Phase 1 is expected to be completed by the end of the first quarter of
1999 for all three categories. Phase 2 and 3 will continue throughout
calendar 1999. Systems are regularly monitored and procedures are in place
to detect potential re-introduction of date problems.
The Company's management is currently formulating contingency plans in
the event that any critical elements of the Plan should fail, or any of the
Company's vendors or service providers fail to be year 2000 ready. The
contingency plans may be implemented to minimize the risk of interruption
of the Company's business. We expect that contingency plans will be
completed by the end of the third quarter of 1999.
16
<PAGE>
The Company's principal vendors, service providers, and other third
parties on which the Company relies for business operations have been
contacted for a status on year 2000 readiness. Based on the Company's
assessment of their responses, the Company believes that many of its
principal vendors, service providers and other third parties are taking
action for year 2000 readiness. However, the Company has limited ability to
test and control such third parties' year 2000 readiness and no assurance
can be given that failure of such third parties to address the year 2000
issue will not cause an interruption of the Company's business.
The Company expects the Plan for critical systems to be substantially
completed during the fourth calendar quarter of 1999. However, the
Company's ability to timely execute its Plan may be adversely affected by a
variety of factors, some of which are beyond the Company's control,
including the potential for unforeseen implementation problems, delays in
the delivery of products, and disruption of store operations resulting from
a loss of power or communication links between stores, distribution
centers, and headquarters. Based on currently available information, the
Company is unable to determine if such interruptions are likely to have a
material adverse effect on the Company's results of operations, liquidity,
or financial condition.
The Company has committed significant resources in connection with
resolving its year 2000 issue. The total estimated costs of the Plan,
exclusive of capital expenditures, are expected to be $25.0 to $30.0
million, of which approximately $3.0 million was expensed in 1997. Costs
charged to operations for the 40 weeks ended November 7, 1998 totaled $4.0
million, which represents an immaterial portion of the Company's
information services budget over the period. Estimated costs expected to be
incurred and expensed are approximately $2.0 million in the fourth quarter
of 1998 and $13.0 to $21.0 million thereafter.
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. The Company may
make other forward-looking statements from time to time. These
forward-looking statements may 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 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 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 the year
2000 problem; legislative or regulatory changes adversely affecting the
business in which the Company is engaged; and other opportunities or
acquisitions which may be pursued by the Company.
17
<PAGE>
Leverage; Ability to Service Debt. The Company is highly leveraged. As
of November 7, 1998, the Company has total indebtedness (including current
maturities and capital lease obligations) of $5.3 billion. Total
indebtedness consists of long-term debt, including borrowings under the
1998 Senior Credit Facilities, and the 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 may experience additional unexpected costs from
such integration and/or a loss of customers or sales as a result of the
recent mergers. There is 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 is 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.
18
<PAGE>
Labor Relations. The Company is party to more than 171 collective
bargaining agreements with unions and locals, covering approximately 60,000
employees representing approximately 65% 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.
Forward-looking statements speak only as of the date made. The Company
undertakes no obligation to publicly release the results 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.
19
<PAGE>
Part II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
10.G Employment Agreement between Fred Meyer, Inc. and Robert G.
Miller, as amended.
10.N Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and George Golleher.
10.R Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
10.S Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated October 18, 1998 to
disclose information under Item 5 thereof. On November 5, 1998, the Company
also filed a Form 8-K/A dated March 9, 1998 to amend certain financial
statement information under Item 7.
20
<PAGE>
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: December 18, 1998 By JOHN STANDLEY
-------------------------------------
John Standley
Senior Vice President and
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller,
as amended.
10.N Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and George Golleher.
10.R Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
10.S Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
27 Financial Data Schedule
CONFORMED COPY
--------------
EMPLOYMENT AGREEMENT
[As Amended through Amendment No. 3 effective October 13, 1998]
DATED: August 27, 1991 [original date]
BETWEEN: FRED MEYER STORES, INC.
3800 SE 22nd Avenue
Portland, OR 97202 "Company"
AND: ROBERT G. MILLER
0305 SW Montgomery # F508
Portland, OR 97201 "Employee"
The parties agree as follows:
1. General.
This Agreement sets forth the terms upon which Employee shall be
employed by the Company. Notwithstanding the foregoing, the Company may
terminate the Employee's employment at any time, and Employee's employment
hereunder will be considered "at will," subject to the Company's providing the
benefits hereinafter specified in accordance with the terms hereof.
2. Employment.
Employee shall be employed by Company on a full-time basis to perform
duties as Chief Executive Officer and member of the Board of Directors of the
Company.
3. Compensation and Disability Benefits.
3.1 Salary. For services performed during the term of Employee's
employment with the Company, the Company shall pay Employee an annual salary
(prorated for any portion of a year), payable in equal periodic installments not
less than monthly, of $1,000,000, subject to annual review by the Compensation
Committee of the Board of Directors of the Company.
1
<PAGE>
3.2 Bonus. Employee will be eligible to participate in the Company's
bonus plan on the same basis as other executives. Employee's bonuses for the
Company's 1998 fiscal year and for fiscal years thereafter will be up to 60
percent (or such higher percent as may be determined by the Company's Board of
Directors) of his annual salary, to be determined upon the achievement of
financial objectives approved in advance by the Company's Board of Directors.
3.3 Insurance/Profit Sharing. Employee shall be entitled to
participate as an executive officer in all existing Company insurance, profit
sharing and other benefit plans in which executive officers may participate,
including the Company's Excess Deferral Plan, on the same basis as other
executive officers of the Company.
3.4 Long Term Disability Benefits. The Company will provide to
Employee the long term disability benefits described in Appendix A to this
Agreement. This benefit is in addition to benefits under any group disability
benefit plan purchased by the Employee, but shall not be payable in the event of
a termination under Paragraph 4. In the event of Total Disability as defined in
Appendix A, Employee's salary provided for in Paragraph 3.1, will be continued
during the elimination period.
3.5 Retiree Medical Benefits. After termination of Employee's
employment for any reason, the Company shall pay Employee upon obtaining age 55,
or shall pay Mrs. Sharon Miller (his Spouse) if she and Employee are married on
his date of death and she survives him, as applicable, a medical supplement to
the extent determined as follows:
(a) The supplement shall compensate for the premium value to
Employee of medical coverage comparable to that
2
<PAGE>
provided under the Company's program applicable to retirees generally
(the Fred Meyer Plan) during any period in which the following
applies:
(1) Neither Employee nor his surviving Spouse is eligible
for coverage under the Fred Meyer Plan.
(2) Neither employee nor his surviving Spouse is eligible
under a plan of a successor employer for medical benefits that
are reasonably comparable to benefits under the Fred Meyer Plan.
(3) Employee is at least 55 years old.
(b) The supplement shall not exceed the smallest of the following
amounts, as applicable, reduced by the employee cost applicable at the
time under the Fred Meyer Plan (references to Employee shall include
his Spouse):
(1) The cost of COBRA continuation coverage available from
the Company that Employee could have received by timely election.
(2) The cost to Employee for coverage if Employee had timely
exercised all available conversion rights under the Company's
medical program for active employees.
3
<PAGE>
(3) The cost to Employee of the coverage actually in effect
for Employee from time to time to the extent the coverage is
reasonably comparable to coverage under the Fred Meyer Plan at
the time.
(c) The supplement shall be paid only with respect to benefits
Employee would have received under the Fred Meyer Plan if Employee had
terminated when eligible under that Plan.
(d) The supplement shall be paid in cash to Employee or his
surviving Spouse or, at the Company's election, by direct payment of
the appropriate portion of the cost of coverage. The amount paid shall
constitute compensation income to Employee or his surviving Spouse,
shall be reported on IRS form W-2 and any applicable state form, and
shall be subject to all applicable state and federal withholding as
non-qualified deferred compensation.
4. Severance.
4.1 In the event Employee is terminated by the Company for any reason
other than for Cause as defined in Paragraph 4.5, death or permanent disability
and the termination is not a Qualifying Termination as defined in Paragraph 4.3,
Employee shall be entitled to payment of compensation at Employee's last
determined salary (payable on the Company's normal payroll dates and without
interest) for two years or until the date of his death if earlier.
4
<PAGE>
4.2 In the event Employee's employment with the Company ends in a
Qualifying Termination, Employee shall receive Severance Compensation as
provided below.
4.3 Qualifying Termination means:
(a) Termination by the Company, for any reason other than for
Cause, in anticipation of or within three years after a Change in
Control.
(b) Termination in anticipation of or within three years after a
Change in Control, if such termination is initiated by Mr. Miller due
to Constructive Discharge. Constructive Discharge means a material
reduction (other than for Cause) in Employee's compensation, benefits
or responsibilities in the capacity specified in Paragraph 2, or an
irreconcilable disagreement with the Board of Directors of the Company
over policy matters materially impairing Mr. Miller's ability to carry
out his responsibilities as Chief Executive Officer of the Company.
(c) Termination within 18 months after a Change in Control if
such termination is initiated by Mr. Miller for any reason.
4.4 "Severance Compensation" means:
(a) Lump sum payment within 15 days after termination of
employment of the amount determined by adding Employee's Monthly Pay
Rate (MPR) projected for 36 months
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and converted to an immediate lump sum payment using an interest
assumption equal to the Prime Rate published in the Wall Street
Journal on the date of termination (or on the date next published in
the Wall Street Journal if not published on the date of termination).
Subject to the following sentence, MPR means 1.6 times Employee's
highest annualized base salary rate during his employment with the
Company, divided by 12. If, on or after January 1, 1999, the bonus
rate applicable under the Company's executive bonus plan referred to
in Paragraph 3.2 with respect to the plan year during which the
termination of employment occurs is higher than 60 percent (but not
above 100 percent), the fraction above 1.0 shall be increased to
reflect the increased percentage. For example, if the bonus percentage
is 80 percent for the applicable year, the MPR will be 1.8. Elective
deferred compensation, if any is deferred from base salary, shall be
attributed to the period when earned. Bonuses and all other taxable
income or non-taxable income from sources other than base salary (such
as stock options, fringe benefits and other non-salary compensation of
any kind) shall be disregarded. Salary reductions, if any, set by the
Board of Directors after October 16, 1998 shall be disregarded.
(b) Payment within 15 days after termination of employment (or as
soon thereafter as the amount can reasonably
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be calculated) of the Employee's Imputed Retirement Benefits (IRB)
projected for 36 months and converted to an immediate lump sum
payment, using the interest rate specified in (a). IRB means benefits
Employee would have earned under all qualified and non-qualified
pension and savings plans of the Company in which Employee was
participating immediately prior to the Qualifying Termination or the
Change in Control relating to the Qualifying Termination, whichever is
more favorable to Employee. The 36-month projection shall be made in
accordance with the applicable plan terms, assuming no change in
Employee's pay rate, plan terms and other pertinent factors. Severance
Compensation paid under this agreement shall not be counted as covered
compensation under any benefit plan of the Company.
(c) Subject to Paragraph 4.6, during the three year period
following the Qualifying Termination, the Company will continue to
provide Employee and his dependents who are eligible for coverage as
at the Qualifying Termination with all health and welfare benefit
coverage in effect for him (and for his eligible dependents as
applicable) to the fullest extent possible as though Employee's
eligible employment continued during the three-year period, except
that fringe benefits associated with ongoing employment such as
automobile and
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other transportation and club memberships shall not be continued. All
such coverage shall be provided at the level in effect when the
Qualifying Termination occurred, or when the Change of Control
occurred if more favorable to Employee and his dependents. Where
continued coverage under the terms of the Company's health and welfare
plans is not possible, the Company shall secure alternative benefit
coverage which is comparable in terms to that provided under such
plans, for Employee and his eligible dependents. Such continuation
shall be contingent upon ongoing payment of any co-payments and
application of any deductibles required to be paid under the
applicable terms of each benefit program. This continuation shall
apply before commencement of retiree medical coverage for Employee as
provided in Paragraph 3.5.
(d) A single sum payment, to be paid to Employee as soon as
reasonably practicable, but in no event more than 15 days following
the effective date of the Qualified Termination, of a cash amount
equal to the sum of (i) any accrued but unpaid salary and (ii) the
product of (A) the annual incentive bonus to which Employee would have
been entitled under the executive bonus plan or arrangement of the
Company in effect for Employee for the plan year that includes such
effective date had Employee continued in employment until the last day
of such
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plan year (or other date required to be eligible to receive an annual
bonus for such year) and assuming that the maximum performance
objectives for such plan year had been achieved, multiplied by (B) a
fraction, the numerator of which equals the number of days in the plan
year that have elapsed as of such effective date and the denominator
of which equals 365.
(e) Payment to Employee at a suitable time or times of the amount
or amounts specified in Appendix B as an excise tax Gross-Up Payment
in connection with this Agreement. In this connection, the Company and
Executive agree to the provisions of Appendix B, which are
incorporated herein by this reference.
4.5 "Cause" is defined for the purposes of this Agreement as:
(a) Conviction of a felony which in the judgment of the Board of
Directors of the Company adversely affects the business or reputation
of the Company;
(b) Material and willful dishonesty, extreme misconduct or other
failure to perform substantial duties as Chief Executive Officer or as
a member of the Board of Directors, that is demonstrably and
materially injurious to the Company and which has not been cured
within 30 days after a written demand for substantial performance is
delivered to Employee by or on behalf of the Board of Directors, which
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demand specifically identifies the manner in which the Board of
Directors believes that Employee has not substantially performed his
duties.
4.6 Employee will not have any duty to mitigate the costs to the
Company of the Severance Compensation. Any compensation payable to Employee by
an employer unaffiliated with the Company with respect to employment after a
Qualifying Termination will not offset Severance Compensation payable or require
return of Severance Compensation paid under this Agreement, except that health
or welfare benefit coverage provided to Employee will be reduced to the extent
that he (and his eligible dependents, if applicable) receive comparable health
or welfare benefit coverage from subsequent employment. This provision does not
limit the application of Paragraph 4.7.
4.7 Except as provided below, Employee's receipt and retention of any
and all Severance Compensation is conditioned on Employee's not making
unauthorized disclosure of confidential information relating to the Company for
a period of three years after a Qualifying Termination, and not engaging
directly or indirectly in competition with the Company, whether as an employee,
sole proprietor, partner, independent contractor, director or otherwise, within
the geographical area in which the Company has offices or other business
locations for a period of three years after a Qualifying Termination. Membership
by Employee on the board of directors of a publicly held corporation, if such
membership has continued for at least six months as of the date of the
Qualifying Termination, may be continued and such continuation shall not
constitute competition (but Employee still must not disclose confidential
information). Competition means providing services or information or material
financing, without prior written approval of the Board of
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Directors of the Company, to any enterprise other than the Company if the
enterprise is engaged in the same business as the Company and has sales or gross
income of $250,000,000 or more in a year during which the competition occurs, or
in any of the five prior years. Financing includes lending money to or owning
stock or other securities or any partnership or other ownership interest in an
enterprise, but shall not include purchase or ownership of securities of an
enterprise (including a publicly held or privately held corporation) so long as
Employee does not own in the aggregate more than 5 percent of the outstanding
securities of the enterprise at the time of purchase of any such securities. For
purposes of this Paragraph 4.7, the term "Company" includes all affiliates of
the Company as of the date of the Qualifying Termination or, if earlier, the
date immediately before the Change in Control to which the Qualifying
Termination relates. If the Board of Directors of the Company reasonably
determines that Employee has violated this provision, it shall notify Employee
in writing of the violation and Employee shall have 60 days from the date of the
notice to cure the violation. If the violation is not so cured by the end of the
60-day period, the Board of Directors may refuse to pay any as yet unpaid
portion of Severance Compensation and Employee shall return to the Company all
Severance Compensation Employee has received, thereby forfeiting all benefit
from such Severance Compensation. The three year limitation referred to in the
foregoing sentences does not limit or otherwise qualify Employee's general
obligations of loyalty to the Company and duty not to compete with the Company
or disclose confidential information arising as a result of Employee's service
as an employee, officer and director of the Company. Any forfeiture of Severance
Compensation under this provision shall not be an offset against claims for
damages or impair other remedies the Company may
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have as a result of any unauthorized disclosure or competition in violation of
those general obligations of Employee to the Company.
5. Pension and Benefits.
5.1 Normal Retirement Benefit. Employee's normal retirement benefit
shall be a pension starting at the end of the first month after Employee's
normal retirement date or termination of employment if later and continuing for
Employee's life equal to $25,000 per month. Normal retirement date is the later
of age 62 or the third anniversary of Employee's Qualifying Termination if that
anniversary is after Employee reaches age 62.
5.2 Early Retirement Benefit. Employee may elect to receive the
accrued normal retirement benefit starting at the end of any month following
termination of employment provided that no such early retirement benefit shall
be payable before age 55 or during the three-year period following a Qualifying
Termination. If benefits start before the end of the first month after normal
retirement date, the amount referred to in Paragraph 5.1 shall be reduced 5/12
of one percent for each month by which the benefit starts early.
5.3 Spouse's Death Benefit. If Employee dies while married to his
Spouse, she shall receive a monthly pension for her life as follows:
(a) If Employee had retired and was receiving benefits or dies
during the first month for which benefits were to be paid, one half of
Employee's monthly benefit shall continue to the Spouse.
(b) If (a) does not apply, the Spouse may elect to start a
benefit as of the end of any month after the later of the date of
death or the date Employee would have reached age 55.
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The benefit shall be one half of the amount Employee would have
received if he had terminated just before death and elected to start
benefits at the date benefits start to the Spouse.
5.4 Additional Benefit. Retirement and Spouse's death benefit under
5.1 through 5.3 shall be in addition to and shall not reduce or be reduced by
any benefits under the Supplemental Income Plan, the Excess Deferral Plan, the
Profit Sharing Plan or any other plan maintained by the Company or an affiliate.
6. Miscellaneous Benefits.
6.1 Club Membership. The Company shall pay the cost of one club
membership for Employee during the terms of Employee's employment with the
Company.
6.2 Automobile. The Company will provide an automobile for Employee's
use while he is employed by the Company. The Company will also pay all operating
expenses associated with the automobile.
6.3 Vacation. Employee will be entitled to five weeks of vacation
annually.
6.4 Medical Expenses. Beginning on the date Employee commences
employment with the Company, the Company will provide reimbursement for medical
expenses of Employee and his dependents under the Company's medical
reimbursement plan, without any waiting or qualification period and without
exclusions for any existing conditions.
7. Change in Control.
7.1 Subject to 7.2, Change in Control means the occurrence of any of
the following events:
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(a) The shareholders of the Company approve: (i) any merger,
statutory plan of exchange or other business combination involving the
Company, other than any such transaction immediately following which
the holders of the Company's capital stock immediately prior to such
transaction continue to own equity securities of the surviving entity
representing more than 50 percent of the equity securities of such
entity entitled to vote generally in the election of directors of such
entity, or (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company or the adoption by the
Company of any plan or proposal for the liquidation or dissolution of
the Company;
(b) The commencement of a tender or exchange offer (other than
one made by the Company) for any capital stock of the Company (or
securities convertible into such capital stock), provided a Change in
Control shall be deemed to have occurred only if such offer results in
a portion of those securities being purchased and the offeror after
the consummation of the offer is the beneficial owner (as determined
pursuant to Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), directly or indirectly, of securities
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representing at least 20 percent of the voting power of outstanding
securities of the Company;
(c) A report on Schedule 13D of the Exchange Act is filed with
the Securities and Exchange Commission or is received by the Company
reporting the beneficial ownership by any person of securities
representing 20 percent or more of the voting power of outstanding
securities of the Company, except that if such report shall be filed
or so received during a tender offer or exchange offer described in
subparagraph (b) above, the provisions of such subparagraph shall
apply in determining whether a Change in Control occurs; or
(d) During any period of 12 consecutive months or less,
individuals who at the beginning of such period constituted a majority
of the Board of Directors of the Company cease for any reason to
constitute a majority thereof unless the nomination or election of
such new directors was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning
of such period.
7.2 Notwithstanding anything in 7.1 to the contrary, no Change in
Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in Employee, or a group (within the
meaning of Section 13(d)(3) of the Exchange Act) of persons which includes
Employee, acquiring, directly or indirectly,
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securities representing 20 percent or more of the voting power of outstanding
securities of the Company.
8. Successors and Assigns; Entire Agreement.
8.1 The rights and benefits of Employee under this Agreement are
personal to him and, except as may be set forth herein, may not be transferred
or assigned voluntarily or involuntarily.
8.2 This Agreement shall be binding on the Company, its successors and
assigns, including any person acquiring control of the Company's business and
operations.
8.3 This Agreement contains the entire agreement and understanding by
and between the Employee and the Company with respect to the employment of
Employee and the payments provided for in this Agreement shall be in lieu of any
other claims of Employee relating to his employment or benefits, including
claims relating to termination of employment.
9. Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of Oregon.
AGREEMENT DATED AUGUST 27, 1991 EXECUTED AS FOLLOWS:
- ---------------------------------------------------
FRED MEYER, INC.
By: KENNETH THRASHER, SR. V.P.
----------------------------------------
ROBERT G. MILLER
---------------------------------------------
Robert G. Miller
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AMENDMENT NO. 1 DATED AUGUST 1, 1994 EXECUTED AS FOLLOWS:
- --------------------------------------------------------
FRED MEYER, INC.
By: ROGER A. COOKE
----------------------------------------
Executed: July 14, 1994
ROBERT G. MILLER
---------------------------------------------
Robert G. Miller
Executed: July 19, 1994
AMENDMENT NO. 2 DATED SEPTEMBER 9, 1997 EXECUTED AS FOLLOWS:
- -----------------------------------------------------------
FRED MEYER STORES, INC.
By: ROGER A. COOKE
----------------------------------------
Executed: December 5, 1997
ROBERT G. MILLER
---------------------------------------------
Robert G. Miller
Executed: December 5, 1997
AMENDMENT NO. 3 DATED OCTOBER 13, 1998 EXECUTED AS FOLLOWS:
- ----------------------------------------------------------
FRED MEYER STORES, INC.
By: ROGER A. COOKE
---------------------------------------
Executed: October 18, 1998
ROBERT G. MILLER
---------------------------------------------
Robert G. Miller
Executed: October 18, 1998
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APPENDIX A
TO EMPLOYMENT AGREEMENT
BETWEEN
FRED MEYER STORES, INC. (the "Company") and
ROBERT MILLER ("Employee")
LONG TERM DISABILITY BENEFITS
1. Definition of "Total Disability".
"Total Disability" means the complete inability of an employee to
perform any and every duty of his or her regular occupation for up to 24 months.
After 24 months, the term "Total Disability" means the complete inability of an
employee to perform any and every duty of any gainful occupation for which he or
she is reasonably fitted by training, education, or experience, or may
reasonably become qualified based on his or her training, education, or
experience.
2. Long Term Disability Benefits.
2.1 Upon receipt of proof that Employee has suffered a Total
Disability as a direct result, independent of all other causes, of an injury or
illness, monthly benefits will be effective after the expiration of the
elimination period, which is the period of six consecutive months of continuous
Total Disability.
2.2 The benefit in the event of Total Disability will be $4,500 per
month.
2.3 The monthly benefit will be reduced by the following:
1. The amount available under any Worker's Compensation law or
similar law.
2. The amount of disability provided under any plan to which the
Company makes contributions on behalf of the Employee.
3. Any disability income benefits provided under an act or law.
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4. Disability income benefits provided or available from any
pension plan participated in by the Company.
5. Social Security Disability benefits provided or available.
6. Any salary, sick pay, or other income replacement benefits
provided by the employer.
7. Any retirement income provided or available from the
Employment Agreement between the Company and Employee, or from any Company
sponsored pension or retirement plan, including Social Security retirement
income.
8. Any retirement income provided or available from
any prior employer of Employee.
3. General Limitations.
3.1 No benefits shall be paid with respect to any injury or sickness:
1. Resulting from suicide, attempted suicide, or intentionally
self- inflicted injury, while sane or insane.
2. Resulting from war, whether declared or undeclared, or any act
or hazard of war.
3. Resulting from being engaged in an illegal occupation,
commission of, or attempted commission of an assault or other illegal act,
or resulting from injury caused by participation in a civil insurrection,
rebellion and/or riot.
4. Sustained while on full-time active duty in any branch of the
Armed Forces of any country, except for temporary active duty assignments
of note more than 90 days.
5. Sustained while learning to operate an aircraft, operating or
serving as a crew member of an aircraft, while traveling or flying in any
aircraft
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operated by or under the direction of any military authority, or while in
any aircraft being used for test or experimental purposes.
6. Resulting from or related to alcoholism, narcotism or the
abuse of other controlled substances.
3.2 Mental Illness Limitation - No benefits are provided with respect
to disabilities due to neuroses, psychoneuroses, psychopathies, psychoses, and
emotional diseases and disorders of any type.
4. Notice and Proof of Claim.
To make a claim for benefits proof of disability must be submitted to
and received by the Company within 20 days after Employee suffers a Total
Disability.
5. Termination of Coverage.
The Long Term Disability benefits provided above will only be provided
if Employee is employed by the Company at the time he suffers a Total
Disability.
APPENDIX B
TO EMPLOYMENT AGREEMENT
BETWEEN
FRED MEYER STORES, INC. (the "Company") and
ROBERT MILLER ("Employee")
Gross-Up Payment
1. Subject to the following provisions of this Appendix B, but otherwise
anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment or distribution by the Company to or for
the benefit of Employee (whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise, but determined without
regard to any additional payments required under this Appendix B (a "Payment")
would be subject to the excise tax imposed by
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Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any
interest or penalties are incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), the Company shall
make a payment (a "Gross-Up Payment") to Employee in an amount such that, after
payment by Employee of all income or other taxes (and any interest and penalties
imposed with respect thereto) and Excise Taxes imposed on the Gross-Up Payment,
Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Payments.
2. Subject to the provisions of paragraph 3 of this Appendix B, all
determinations required to be made under this Appendix B, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by a certified public accounting firm designated by Employee (the Employee
Accounting Firm) which shall provide detailed supporting calculations both to
the Company and to Employee within fifteen business days of the receipt of
notice from Employee that there has been a Payment, or such earlier times as is
requested by Employee. If the Employee Accounting Firm determines that no Excise
Tax is payable by Employee, it shall, upon the written request of Employee,
furnish Employee with a written opinion that failure to report the Excise Tax on
the Employee's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. The calculations prepared by the
Employee Accounting Firm shall be reviewed on behalf of the Company by the
Company's independent auditors (the "Company Accounting Firm") which shall
provide its conclusions, together with detailed supporting calculations, both to
the Company and Employee within fifteen business days after receipt of the
calculations and supporting materials prepared by the Employee Accounting Firm.
In the
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event of a dispute between the Employee Accounting Firm and the Company
Accounting firm, such firms shall, within five business days of receipt of the
conclusions and supporting materials prepared by the Company Accounting Firm,
jointly select a third nationally recognized certified public accounting firm
(the "Third Accounting Firm") to resolve the dispute. The Third Accounting Firm
shall submit its conclusions to the Company and Employee within fifteen business
days after receipt of notice of its appointment hereunder and the decision of
the Third Accounting Firm shall be final, binding and conclusive upon Employee
and the Company. All fees and expenses of all such accounting firms shall be
borne sole by the Company. Any Gross-Up Payment shall be paid by the Company to
Employee within five business days after the earlier of acceptance by the
Company of the calculations prepared by the Employee Accounting Firm or the
Company's receipt of the Third Accounting Firm's determination.
3. As a result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination of whether any Gross-Up Payment
should be made hereunder, it is possible that a Gross-Up Payment will have been
due but not made by the Company (an "Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant this Appendix B and Employee thereafter is
required to make a payment of any Excise Tax, the Employee's Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Employee.
4. Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-up Payment. Such notification shall be given as soon as
practicable but no later than
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<PAGE>
ten business days after Employee is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. Employee shall not pay such claim prior to the
expiration of the thirty day period following the date on which it gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies
Employee in writing prior to the expiration of such period that it desires to
contest such claim, Employee shall:
(a) Give the Company any information reasonably requested by it
relating to such claim;
(b) Take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company and acceptable to Employee;
(c) Cooperate with the Company in good faith in order effectively
to contest such claim; and
(d) Permit the Company to participate in any proceedings relating
to such claim.
5. The Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with a
contest of a claim under Paragraph 4 of this Appendix B and shall indemnify and
hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and
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<PAGE>
expenses. Without limitation on the foregoing provisions of this Appendix B, the
Company shall control all proceedings taken in connection with such contest and,
at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct Employee to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
Employee agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine. If the Company directs
Employee to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Employee on an interest-free basis and shall indemnify
and hold Employee harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto) imposed with respect
to such advance or with respect to any imputed income with respect to such
advance. Any extension of the statute of limitations relating to payment of
taxes for the taxable year of Employee with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and Employee
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
6. If, after the receipt by Employee of an amount advanced by the Company
pursuant to this Appendix B, Executive becomes entitled to receive any refund
with respect to such claim, Employee shall (subject to the Company's complying
with the requirements of this Appendix B) promptly pay to the Company the amount
such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Employee of an amount advanced by
the Company pursuant to this Appendix B, a
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<PAGE>
determination is made that Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify Employee in writing of its
intent to contest such denial of refund prior to the expiration of thirty days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
8
EMPLOYMENT PROTECTION AGREEMENT
This Agreement (this "Agreement") is made as of the 22nd day of
September, 1998, among Fred Meyer, Inc., a corporation organized under the laws
of the State of Delaware (together with any successor thereto, "Fred Meyer"),
Ralphs Grocery Company, a Delaware corporation and wholly owned subsidiary of
Fred Meyer (together with any successor thereto, "Employer"), and George
Golleher ("Executive").
WITNESSETH THAT:
WHEREAS, Executive is currently employed as a member of the executive
management team of the Company and is currently party to an Executive Severance
Agreement, dated March 10, 1998 (the "Current Agreement");
WHEREAS, the Company considers it essential to its best interests and
the best interests of the shareholders of Fred Meyer to foster the continued
employment of the members of the Company's executive management team, including
Executive, and to reinforce and encourage the continued attention and dedication
of such individuals to their respective assigned duties without distraction in
the event that the possibility of a change in control exists;
WHEREAS, the Company recognizes that the possibility of a change in
control exists and that such possibility and the uncertainty and questions which
may arise among members of its executive management team regarding the
consequences of any such change in control may result in the distraction or
departure of one or more of such individuals, to the detriment of the Company
and the shareholders of Fred Meyer;
NOW, THEREFORE, to provide Executive an incentive to continue his
dedication to the Company and to make available to the Company his advice and
counsel notwithstanding the possibility of a change in control of the Company,
and to encourage Executive to remain in the employ of the Company, and for other
good and valuable consideration, the Company and Executive hereby agree as
follows:
1. Definitions.
(i) "Annual Cash Compensation" shall mean an amount equal to the sum
of (x) Executive's annual base salary, at the annual rate in effect immediately
prior to the Qualifying Termination, and (y) the percentage of such base salary
payable to Executive under the terms of the Company's annual bonus plan for its
senior executives as in effect for the plan year which includes the Closing Date
and assuming that the maximum performance objectives for such plan year had been
achieved; provided that, if Executive's employment is terminated by Executive
following a reduction in Executive's annual base salary or the percentage of
such base salary
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payable to Executive as an annual bonus, Annual Cash Compensation shall be
determined on the basis of Executive's annual base salary at the rate in effect
immediately prior to such reduction and the percentage thereof payable to
Executive as an annual bonus in effect prior to any reduction thereof.
(ii) "Cause," when used in connection with the termination of
Executive's employment by Employer shall mean the occurrence of any of the
following events: (a) Executive's material dishonesty or misappropriation in
connection with the performance of the duties of his position with the Company
that adversely affects the Company or its property or funds; (b) Executive's
extreme misconduct, including reckless or willful destruction of Company
property, unauthorized disclosure of confidential information or sexual, racial
or other actionable harassment; (c) Executive's conviction of or plea of nolo
contendere to a felony or any other crime involving moral turpitude; or (d)
Executive's illegal, immoral, dishonest or fraudulent conduct in connection with
the performance of the duties of his position with the Company that results in
material harm to the business reputation of the Company or subjects the Company
to material financial loss or material loss of business.
(iii) "Change in Control" shall mean the occurrence of any of the
following events:
(a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan
of exchange or other business combination involving Fred Meyer, other than
any such transaction immediately following which the holders of Fred Meyer
capital stock immediately prior to such transaction continue to own equity
securities of the surviving entity representing more than 50 per cent of
the equity securities of such entity entitled to vote generally in the
election of directors of such entity, or (ii) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company or the adoption by
Fred Meyer of any plan or proposal for the liquidation or dissolution of
the Company;
(b) the commencement of a tender or exchange offer (other than one made by
Fred Meyer) for any capital stock of Fred Meyer (or securities convertible
into such capital stock), provided a Change in Control shall be deemed to
have occurred only if such offer results in a portion of those securities
being purchased and the offeror after the consummation of the offer is the
beneficial owner (as determined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), directly or
indirectly, of securities representing at least 20 percent of the voting
power of outstanding securities of Fred Meyer;
(c) a report on Schedule 13D of the Exchange Act is filed with the
Securities and exchange Commission or is received by Fred Meyer reporting
the beneficial ownership by any person of securities representing 20
percent or more of the voting power of outstanding securities of Fred
Meyer, except that if such report shall be filed or so received during a
tender offer or exchange offer described in subparagraph (b) above, the
provisions of such subparagraph shall apply in determining whether a Change
in Control occurs; or
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(d) during any period of 12 consecutive months or less, individuals who at
the beginning of such period constituted a majority of the Board of
Directors of Fred Meyer cease for any reason to constitute a majority
thereof unless the nomination or election of such new directors was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period.
Notwithstanding anything in the foregoing to the contrary, no Change of Control
shall be deemed to have occurred for purposes of this Agreement by virtue of any
transaction which results in Executive, or a group (within the meaning of
section 13(d)(3) of the Exchange Act) of persons which includes Executive,
acquiring, directly or indirectly, securities representing 20 percent or more of
the voting power of outstanding securities of Fred Meyer.
(iv) "Closing Date" shall mean the date of the consummation of a
transaction constituting a Control in Control, provided, that if the Change in
Control transaction is effected through a series of transactions or other
occurrences, the term "Closing Date" shall mean the date on which the first such
transaction is consummated or the date of the first such occurrence.
(v) "Company" shall mean, collectively, Fred Meyer, Employer and their
respective subsidiaries and affiliates and any successor to any such entity.
(vi) "Contract Period" shall mean the period commencing on any Closing
Date and ending on the eighteen month anniversary of such Closing Date.
(vii) "Disability," when used in connection with the termination of
Executive's employment with Employer, shall mean Executive's failure to
substantially perform the duties of his employment with Employer due to
Executive's illness or incapacity lasting for a period of six consecutive months
after notice thereof has been delivered by Employer to Executive. The
determination of Executive's disability shall be made by the Board of Directors
of Fred Meyer in good faith based upon the advice and evidence of Executive's
personal physician and a competent medical expert retained for such purpose by
the Board.
(viii) "Qualifying Termination" shall have the meaning specified in
Section 2(ii) hereof.
(ix) "Severance Period" shall mean the period commencing on the
Termination Date and ending on the three year anniversary of the Termination
Date.
(x) "Termination Date" shall mean, in the case of a termination of
Executive's employment with Employer (a) by Employer for Cause, immediately upon
receipt by Executive of written notice of such termination, (b) by Employer
Without Cause or by Executive, as of the date specified in the written notice of
such termination delivered by Employer or Executive, as the case may be, to the
other, which date shall not be less than 14 days nor more than 28 days following
the date of delivery thereof, (c) by Employer due to Executive's Disability, the
date which is at least 30 days following the date written notice of such
termination and the specific reasons therefore is delivered to Executive, or (d)
due to Executive's death, the date of death.
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(xi) "Without Cause," when used in connection with the termination of
Executive's employment with Employer, shall mean any termination of Executive's
employment by Employer that is not a termination for Cause or a termination due
to Executive's Disability or death.
2. Termination of Employment of Executive.
(i) At all times, each of Employer and Executive shall have the right
by written notice delivered to the other to terminate Executive's employment
with Employer for any reason. Following any termination of Executive's
employment with Employer, Employer shall immediately pay to Executive all
accrued and unpaid compensation for periods prior the Termination Date and
Executive shall be entitled to all accrued benefits and coverages under the
terms of any employee compensation or benefit plan of the Company in which
Executive was a participant at any time during the period of his employment with
the Company.
(ii) In the event that the employment of Executive with Employer is
terminated (x) by Employer Without Cause (i) prior to the Contract Period and in
anticipation of a Change in Control or (ii) during the Contract Period or (y) by
Executive for any or no reason during the Contract Period (any such termination
under clause (x) or (y), a "Qualifying Termination"), Executive shall be
entitled to receive the compensation and benefits provided in Section 3 of this
Agreement. Executive shall have no right to receive any compensation or benefits
under Section 3 of this Agreement upon any other termination of Executive's
employment prior to or during the Contract Period.
3. Severance Compensation and Benefits Payable Upon Qualifying Termination.
(i) In the event of a Qualifying Termination, Employer shall pay or
provide to Executive as severance, and Executive shall be entitled to, the
following compensation and benefits in lieu of any other base or annual bonus
compensation or benefits for periods subsequent to the Termination Date payable
under any plan or agreement of the Company (other than the Current Agreement),
provided that all cash compensation provided under this Section 3 shall be
reduced on a dollar for dollar basis by the amount of comparable cash
compensation paid to Executive by the Company as severance pursuant to the
Current Agreement, if any, and any benefits provided under this Section 3 shall
be reduced by and to the extent of any comparable benefits provided to Executive
by the Company as an additional severance benefit pursuant to the Current
Agreement, if any:
a) continued payments of installments of Executive's Annual Cash
Compensation for the Severance Period, such payments to be made
to Executive in accordance with the Company's regular payroll
practices in effect for its senior executives;
b) a single lump sum payment, to be paid to Executive as soon as
reasonably practicable, but in no event more than 20 days,
following the Termination Date, of a cash amount equal to the
product of (x) the annual incentive bonus to which Executive
would have been entitled under the executive bonus plan
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or arrangement of the Company in effect for Executive for the
plan year that includes the Termination Date had Executive
continued in employment until the last day of such plan year (or
other date required to be eligible to receive an annual bonus for
such year) and assuming that the maximum performance objectives
for such plan year had been achieved multiplied by (y) a
fraction, the numerator of which equals the number of days in the
plan year that have elapsed as of the Termination date and the
denominator of which equals 365;
c) continued coverage of Executive and his or her eligible
dependents during the Severance Period under the Company's
executive and employee medical, health and other welfare benefit
plans in which Executive was a participant immediately prior to
the Termination Date, subject to payment by Executive of all
premiums and other copayment amounts required under the terms of
such plans to be paid by participants therein of comparable
position and seniority to Executive, provided that if Executive's
employment is terminated by Executive following a reduction in
the coverage of Executive or his or her eligible dependents under
any such plan, coverage under this subparagraph (c) shall be
provided in accordance with the terms of the applicable plan or
plans as in effect prior to any reduction thereof;
d) in determining the benefits payable to Executive under the Ralphs
Grocery Company Retirement Supplement Plan and the Ralphs Grocery
Company Supplemental Executive Retirement Plan, in the event of a
Qualifying Termination, Executive shall be credited with service
through the end of the Severance Period, provided that if
Employer amends either plan to cease accruals thereunder and
includes Executive under a different supplemental plan, Executive
shall be entitled to coverage under such different plan during
the Severance Period in lieu of the foregoing service credit, and
e) in accordance with the terms of the Current Agreement, all of
Executive's stock options that are outstanding immediately prior
to the Termination Date shall become fully vested and exercisable
as of the Termination Date and shall thereafter remain
exercisable in accordance with the applicable provisions of the
relevant option agreement.
(ii) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any
interest or penalties are incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), Employer shall make a
payment (a "Gross-Up Payment") to Executive in an amount such that, after
payment by Employee of all income or other taxes (and any interest and penalties
imposed with respect thereto) and
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Excise Taxes imposed upon the Gross-Up Payment, Employee retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
a) Subject to the provisions of Section 3(ii)(b), all determinations
required to be made under this Section 3(ii),including whether
and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving
at such determination, shall be made by a certified public
accounting firm designated by Executive (the "Accounting Firm")
which shall provide detailed supporting calculations both to Fred
Meyer and Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment,
or such earlier time as is requested by Executive. If the
Accounting Firm determines that no Excise Tax is payable by
Executive, it shall, upon the written request of Executive,
furnish Executive with a written opinion that failure to report
the Excise Tax on the Executive's applicable federal income tax
return would not result in the imposition of a negligence or
similar penalty. The calculations prepared by the Accounting Firm
shall be reviewed on behalf of Employer and Fred Meyer by Fred
Meyer's independent auditors (the "Fred Meyer Accounting Firm")
which shall provide its conclusions, together with detailed
supporting calculations, both to Fred Meyer and to Executive
within 15 business days after receipt of the calculations and
supporting materials prepared by the Accounting Firm. In the
event of a dispute between the Accounting Firm and the Fred Meyer
Accounting Firm, such firms shall, within five business days of
receipt of the conclusions and supporting materials prepared by
the Fred Meyer Accounting Firm, jointly select a third nationally
recognized certified public accounting firm (the "Third
Accounting Firm") to resolve the dispute. The Third Accounting
Firm shall submit its conclusions to Fred Meyer and Executive
within 15 business days after receipt of notice of its
appointment hereunder and the decision of the Third Accounting
Firm shall be final, binding and conclusive upon Executive,
Employer and Fred Meyer. All fees and expenses of all such
accounting firms shall be borne solely by Employer. Any Gross-Up
Payment shall be paid by Employer to Executive within five
business days after the earlier of acceptance by Fred Meyer of
the calculations prepared by the Accounting Firm or Fred Meyer's
receipt of the Third Accounting Firm's determination.
b) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination of whether
any Gross-Up Payment should be made hereunder, it is possible
that a Gross-Up Payment will have been due but not made by
Employer (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that Fred Meyer
exhausts its remedies pursuant to this Section 3(ii) and
Executive thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
promptly paid by Employer to or for the benefit of Executive.
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c) Executive shall notify Fred Meyer in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by Employer of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten
business days after Executive is informed in writing of such
claim and shall apprise Fred Meyer of the nature of such claim
and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the
thirty (30) day period of following the date on which it gives
such notice to Fred Meyer (or such shorter period ending on the
date that any payment of taxes with respect to such claim is
due). If Fred Meyer notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim,
Executive shall:
(1) give Fred Meyer any information reasonably
requested by it relating to such claim;
(2) take such action in connection with contesting such
claim as Fred Meyer shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by Fred Meyer and acceptable to
Executive;
(3) cooperate with Fred Meyer in good faith in order
effectively to contest such claim; and
(4) permit Fred Meyer to participate in any proceedings
relating to such claim;
provided, however, that Employer shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise
Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment
of costs and expenses. Without limitation on the foregoing
provisions of this Section 3(ii), Fred Meyer shall control all
proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Fred Meyer
shall determine; provided, however, that if Fred Meyer directs
Executive to pay such claim and sue for a refund, Employer shall
advance the amount of such payment to Executive, on an
interest-free basis and shall indemnify and hold Executive
harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto)
imposed with respect to
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such advance or with respect to any imputed income with respect
to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the
taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, Fred Meyer's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would
be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
d) If, after the receipt by Executive of an amount advanced by
Employer pursuant to this Section 3(ii), Executive becomes
entitled to receive any refund with respect to such claim,
Executive shall (subject to Employer's and Fred Meyer's complying
with the requirements of this Section 3(ii)) promptly pay to
Employer the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by Employer
pursuant to this Section 3(ii), a determination is made that
Executive shall not be entitled to any refund with respect to
such claim and Employer does not notify Executive in writing of
its intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determination, then
such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(iii) Executive shall not be required to mitigate the amount of any
compensation, benefits or other payments provided for in this Agreement by
seeking other employment or otherwise. Further, the amount of any cash
compensation provided for in this Agreement shall not be reduced or offset by
any compensation or other amounts paid to or earned by Executive in connection
with any alternative employment obtained by Executive (including
self-employment). To the extent Executive and his or her eligible dependents
obtains in connection with any subsequent employment benefit coverage comparable
to that provided to Executive pursuant to Section 3(i)(c) hereof and for a
concurrent period, the benefit coverage provided hereunder will be reduced or,
if applicable, eliminated.
(iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no
amounts paid pursuant to this Agreement will constitute compensation for any
purpose under any retirement plan or other employee benefit plan, program,
arrangement or agreement of the Company.
4. Assignment; Assumption of Agreement. This Agreement is personal to
Executive and Executive may not assign or transfer any part of his rights or
duties hereunder, or any payments due to him hereunder, to any other person,
except that this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees or beneficiaries. This Agreement shall be
binding on any successor to Fred Meyer or Employer, as the case may be, and may
not be assigned by Fred Meyer or Employer without the prior written consent of
Executive. Fred Meyer and Employer shall each require any successor thereto
(whether by merger, liquidation, dissolution or otherwise
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by operation of law), by agreement in form and substance satisfactory to
Executive, to expressly assume and agree to perform their respective obligations
under this Agreement in the same manner and to the same extent that Fred Meyer
or Employer, as the case may be, would be required to perform such obligations
if no such succession had occurred. Failure of Fred Meyer or Employer to obtain
a satisfactory assumption agreement from any successor will be deemed to be a
termination of Executive's employment by Employer Without Cause and in
anticipation of a Change in Control entitling Executive to all compensation and
benefits specified in Section 3 hereof.
5. Modification; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in a writing signed by Executive and by an officer of each of Fred Meyer and
Employer thereunto expressly authorized by the Board of Directors of Fred Meyer
and Employer, respectively. Waiver by any party of any breach of or failure to
comply with any provision of this Agreement by any other party shall not be
construed as, or constitute, a continuing waiver of such provision, or a waiver
of any other breach of, or failure to comply with, any other provision of this
Agreement.
6. Arbitration of Disputes.
(i) Any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the interpretation or validity hereof shall be
settled exclusively and finally by arbitration. It is specifically understood
and agreed that any such disagreement, dispute or controversy which cannot be
resolved between the parties, including without limitation any matter relating
to interpretation of this Agreement, may be submitted to arbitration
irrespective of the magnitude thereof, the amount in controversy or whether such
disagreement, dispute or controversy would otherwise be considered justiciable
or ripe for resolution by a court or arbitral tribunal.
(ii) The arbitration shall be conducted in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association ("AAA").
(iii) The arbitral tribunal shall consist of one arbitrator. The
parties to the arbitration jointly shall directly appoint such arbitrator within
30 days of initiation of the arbitration. If the parties shall fail to appoint
such arbitrator as provided above, such arbitrator shall be appointed by the AAA
as provided in the Arbitration Rules and shall be a person who (a) maintains his
principal place of business within 30 miles of the City of Portland, Oregon and
(b) has substantial experience in executive compensation. The parties shall each
pay an equal portion of the fees, if any, and expenses of such arbitrator.
(iv) The arbitration shall be conducted within 30 miles of the City of
Portland, Oregon or in such other city in the United States of America as the
parties to the dispute may designate by mutual written consent.
(v) At any oral hearing of evidence in connection with the
arbitration, each party thereto or its legal counsel shall have the right to
examine its witnesses and to cross-examine the witnesses of any opposing party.
No evidence of any witness shall be presented unless the
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opposing party or parties shall have the opportunity to cross-examine such
witness, except as the parties to the dispute otherwise agree in writing or
except under extraordinary circumstances where the interests of justice require
a different procedure.
(vi) Any decision or award of the arbitral tribunal shall be final and
binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any court or tribunal. The parties hereto agree that the
arbitral award may be enforced against the parties to the arbitration proceeding
or their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in any court having jurisdiction.
(vii) Nothing herein contained shall be deemed to give the arbitral
tribunal any authority, power, or right to alter, change, amend, modify, add to
or subtract from any of the provisions of this Agreement.
(viii) If any dispute is not resolved within 60 days from the date of
the commencement of an arbitration, then Fred Meyer shall, at its option, elect
to pay Executive either (a) within 5 days after the end of such 60-day period,
the amount or amounts which would have been payable to Executive had there been
no dispute, subject to reimbursement to the extent consistent with the final
disposition of the dispute or (b) following final disposition of the dispute,
the amount determined in such final disposition to have been payable, together
with Interest from the date when such sums were originally payable to the date
of actual payment. For purpose of this paragraph (viii) the term "Interest"
means interest at a rate equal to 6% per annum, compounded monthly.
(ix) Notwithstanding anything to the contrary in this Agreement, the
arbitration provisions set forth in this Section 7 shall be governed exclusively
by the Federal Arbitration Act, Title 9, United States Code.
7. Guaranty. Each and every covenant and obligation of Employer hereunder
shall be guaranteed by Fred Meyer.
8. Notice. All notices, requests, demands and other communications required
or permitted to be given by either party to the other party to this Agreement
(including, without limitation, any notice of termination of employment and any
notice of an intention to arbitrate) shall be in writing and shall be deemed to
have been duly given when delivered personally or received by certified or
registered mail, return receipt requested, postage prepaid, at the address of
the other party, as follows:
If to Fred Meyer, to:
Fred Meyer, Inc.
3800 S.E. 22nd Street
Portland, Oregon 97202-2999
Attention: General Counsel
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If to Employer, to
Ralphs Grocery Company
C/O Fred Meyer, Inc., above
If to Executive, to:
George G. Golleher
Ralphs Grocery Company
1100 West Artesia Boulevard
Compton, CA 90220
Any party hereto may change its address for purposes of this Section 8 by giving
fifteen (15) days' prior notice
9. Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. Headings. The headings in this Agreement are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning of
this Agreement.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original.
12. Governing Law. This Agreement has been executed and delivered in the
State of Oregon and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the State of Oregon, without reference
to its principles of conflicts of law.
13. Certain Withholdings. Employer shall withhold from any amounts payable
to Executive hereunder all federal, state, city and other taxes and withholdings
that are required to be withheld pursuant to any applicable law or regulation.
14. Entire Agreement. This Agreement supersedes any and all other oral or
written agreements heretofore made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
FRED MEYER, INC. RALPHS GROCERY COMPANY
ROBERT G. MILLER ROGER A. COOKE
------------------------------ ------------------------
By: Robert G. Miller By: Roger A. Cooke
Title: Title:
EXECUTIVE
GEORGE GOLLEHER
------------------------------
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The Employment Protection Agreement in the form attached has been entered
into by certain officers including David Jessick and Kenneth Thrasher.
<PAGE>
EMPLOYMENT PROTECTION AGREEMENT
This Agreement (this "Agreement") is made as of the 22nd day of
September, 1998, among Fred Meyer, Inc., a corporation organized under the laws
of the State of Delaware (together with any successor thereto, "Fred Meyer"),
Fred Meyer Stores, Inc., a Delaware corporation and wholly owned subsidiary of
Fred Meyer (together with any successor thereto, "Employer"), and
_______________________ ("Executive").
WITNESSETH THAT:
WHEREAS, Executive is currently employed as a member of the executive
management team of the Company and is currently party to an Executive Severance
Agreement, dated October 15, 1997 (the "Current Agreement");
WHEREAS, the Company considers it essential to its best interests and
the best interests of the shareholders of Fred Meyer to foster the continued
employment of the members of the Company's executive management team, including
Executive, and to reinforce and encourage the continued attention and dedication
of such individuals to their respective assigned duties without distraction in
the event that the possibility of a change in control exists;
WHEREAS, the Company recognizes that the possibility of a change in
control exists and that such possibility and the uncertainty and questions which
may arise among members of its executive management team regarding the
consequences of any such change in control may result in the distraction or
departure of one or more of such individuals, to the detriment of the Company
and the shareholders of Fred Meyer;
NOW, THEREFORE, to provide Executive an incentive to continue his
dedication to the Company and to make available to the Company his advice and
counsel notwithstanding the possibility of a change in control of the Company,
and to encourage Executive to remain in the employ of the Company, and for other
good and valuable consideration, the Company and Executive hereby agree as
follows:
1. Definitions.
(i) "Annual Cash Compensation" shall mean an amount equal to the sum
of (x) Executive's annual base salary, at the annual rate in effect immediately
prior to the Qualifying Termination, and (y) the percentage of such base salary
payable to Executive under the terms of the Company's annual bonus plan for its
senior executives as in effect for the plan year which includes the Closing Date
and assuming that the maximum performance objectives for such plan year had been
achieved; provided that, if Executive's employment is terminated by Executive
for Good Reason as a result of a reduction in Executive's annual base salary or
the percentage of
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such base salary payable to Executive as an annual bonus, Annual Cash
Compensation shall be determined on the basis of Executive's annual base salary
at the rate in effect immediately prior to such reduction and the percentage
thereof payable to Executive as an annual bonus in effect prior to any reduction
thereof.
(ii) "Cause," when used in connection with the termination of
Executive's employment by Employer shall mean the occurrence of any of the
following events: (a) Executive's material dishonesty or misappropriation in
connection with the performance of the duties of his position with the Company
that adversely affects the Company or its property or funds; (b) Executive's
extreme misconduct, including reckless or willful destruction of Company
property, unauthorized disclosure of confidential information or sexual, racial
or other actionable harassment; (c) Executive's conviction of or plea of nolo
contendere to a felony or any other crime involving moral turpitude; or (d)
Executive's illegal, immoral, dishonest or fraudulent conduct in connection with
the performance of the duties of his position with the Company that results in
material harm to the business reputation of the Company or subjects the Company
to material financial loss or material loss of business.
(iii) "Change in Control" shall mean the occurrence of any of the
following events:
(a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan
of exchange or other business combination involving Fred Meyer, other than
any such transaction immediately following which the holders of Fred Meyer
capital stock immediately prior to such transaction continue to own equity
securities of the surviving entity representing more than 50 per cent of
the equity securities of such entity entitled to vote generally in the
election of directors of such entity, or (ii) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company or the adoption by
Fred Meyer of any plan or proposal for the liquidation or dissolution of
the Company;
(b) the commencement of a tender or exchange offer (other than one made by
Fred Meyer) for any capital stock of Fred Meyer (or securities convertible
into such capital stock), provided a Change in Control shall be deemed to
have occurred only if such offer results in a portion of those securities
being purchased and the offeror after the consummation of the offer is the
beneficial owner (as determined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), directly or
indirectly, of securities representing at least 20 percent of the voting
power of outstanding securities of Fred Meyer;
(c) a report on Schedule 13D of the Exchange Act is filed with the
Securities and exchange Commission or is received by Fred Meyer reporting
the beneficial ownership by any person of securities representing 20
percent or more of the voting power of outstanding securities of Fred
Meyer, except that if such report shall be filed or so received during a
tender offer or exchange offer described in subparagraph (b) above, the
provisions of such subparagraph shall apply in determining whether a Change
in Control occurs; or
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(d) during any period of 12 consecutive months or less, individuals who at
the beginning of such period constituted a majority of the Board of
Directors of Fred Meyer cease for any reason to constitute a majority
thereof unless the nomination or election of such new directors was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period.
Notwithstanding anything in the foregoing to the contrary, no Change of Control
shall be deemed to have occurred for purposes of this Agreement by virtue of any
transaction which results in Executive, or a group (within the meaning of
section 13(d)(3) of the Exchange Act) of persons which includes Executive,
acquiring, directly or indirectly, securities representing 20 percent or more of
the voting power of outstanding securities of Fred Meyer.
(iv) "Closing Date" shall mean the date of the consummation of a
transaction constituting a Control in Control, provided, that if the Change in
Control transaction is effected through a series of transactions or other
occurrences, the term "Closing Date" shall mean the date on which the first such
transaction is consummated or the date of the first such occurrence.
(v) "Company" shall mean, collectively, Fred Meyer, Employer and their
respective subsidiaries and affiliates and any successor to any such entity.
(vi) "Contract Period" shall mean the period commencing on any Closing
Date and ending on the eighteen month anniversary of such Closing Date.
(vii) "Disability," when used in connection with the termination of
Executive's employment with Employer, shall mean Executive's failure to
substantially perform the duties of his employment with Employer due to
Executive's illness or incapacity lasting for a period of six consecutive months
after notice thereof has been delivered by Employer to Executive. The
determination of Executive's disability shall be made by the Board of Directors
of Fred Meyer in good faith based upon the advice and evidence of Executive's
personal physician and a competent medical expert retained for such purpose by
the Board.
(viii) "Good Reason," when used in connection with the termination of
Executive's employment with Employer by Executive, shall mean the occurrence of
any of the following events: (a) any change in Executive's title with the
Company in effect immediately prior to the Closing Date or such change, other
than any such change to which Executive has given his or her prior written
consent, or a substantial reduction of the powers or functions associated with
Executive's positions, duties, responsibilities or status with the Company
immediately prior to the Closing Date or such reduction; or (b) a reduction in
Executive's aggregate compensation from the level in effect immediately prior to
the Closing Date or such reduction;
(ix) "Qualifying Termination" shall have the meaning specified in
Section 2(ii) hereof.
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(x) "Severance Period" shall mean the period commencing on the
Termination Date and ending on the three year anniversary of the Termination
Date.
(xi) "Termination Date" shall mean, in the case of a termination of
Executive's employment with Employer (a) by Employer for Cause, immediately upon
receipt by Executive of written notice of such termination, (b) by Employer
Without Cause or by Executive for or without Good Reason, as of the date
specified in the written notice of such termination delivered by Employer or
Executive, as the case may be, to the other, which date shall not be less than
14 days nor more than 28 days following the date of delivery thereof, (c) by
Employer due to Executive's Disability, the date which is at least 30 days
following the date written notice of such termination and the specific reasons
therefore is delivered to Executive, or (d) due to Executive's death, the date
of death.
(xii) "Without Cause," when used in connection with the termination of
Executive's employment with Employer, shall mean any termination of Executive's
employment by Employer that is not a termination for Cause or a termination due
to Executive's Disability or death.
2. Termination of Employment of Executive.
(i) At all times, each of Employer and Executive shall have the right
by written notice delivered to the other to terminate Executive's employment
with Employer for any reason. Following any termination of Executive's
employment with Employer, Employer shall immediately pay to Executive all
accrued and unpaid compensation for periods prior the Termination Date and
Executive shall be entitled to all accrued benefits and coverages under the
terms of any employee compensation or benefit plan of the Company in which
Executive was a participant at any time during the period of his employment with
the Company.
(ii) In the event that the employment of Executive with Employer is
terminated by Employer Without Cause or by Executive for Good Reason (a) prior
to the Contract Period and in anticipation of a Change in Control or (b) during
the Contract Period (any such termination, a "Qualifying Termination"),
Executive shall be entitled to receive the compensation and benefits provided in
Section 3 of this Agreement. Executive shall have no right to receive any
compensation or benefits under Section 3 of this Agreement upon any other
termination of Executive's employment prior to or during the Contract Period.
3. Severance Compensation and Benefits Payable Upon Qualifying Termination.
(i) In the event of a Qualifying Termination, Employer shall pay or
provide to Executive as severance, and Executive shall be entitled to, the
following compensation and benefits in lieu of any other base or annual bonus
compensation or benefits for periods subsequent to the Termination Date payable
under any plan or agreement of the Company (other than the Current Agreement),
provided that all cash compensation provided under this Section 3 shall be
reduced on a dollar for dollar basis by the amount of comparable cash
compensation paid to Executive by the Company as severance pursuant to the
Current Agreement, if any, and any
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benefits provided under this Section 3 shall be reduced by and to the extent of
any comparable benefits provided to Executive by the Company as an additional
severance benefit pursuant to the Current Agreement, if any:
a) continued payments of installments of Executive's Annual Cash
Compensation for the Severance Period, such payments to be made
to Executive in accordance with the Company's regular payroll
practices in effect for its senior executives;
b) a single lump sum payment, to be paid to Executive as soon as
reasonably practicable, but in no event more than 20 days,
following the Termination Date, of a cash amount equal to the
product of (x) the annual incentive bonus to which Executive
would have been entitled under the executive bonus plan or
arrangement of the Company in effect for Executive for the plan
year that includes the Termination Date had Executive continued
in employment until the last day of such plan year (or other date
required to be eligible to receive an annual bonus for such year)
and assuming that the maximum performance objectives for such
plan year had been achieved multiplied by (y) a fraction, the
numerator of which equals the number of days in the plan year
that have elapsed as of the Termination date and the denominator
of which equals 365;
c) continued coverage of Executive and his or her eligible
dependents during the Severance Period under the Company's
executive and employee medical, health and other welfare benefit
plans in which Executive was a participant immediately prior to
the Termination Date, subject to payment by Executive of all
premiums and other copayment amounts required under the terms of
such plans to be paid by participants therein of comparable
position and seniority to Executive, provided that if Executive's
employment is terminated by Executive for Good Reason as a result
of a reduction in the coverage of Executive or his or her
eligible dependents under any such plan, coverage under this
subparagraph (c) shall be provided in accordance with the terms
of the applicable plan or plans as in effect prior to any
reduction thereof;
d) in determining the benefits payable to Executive under the Fred
Meyer Supplemental Income Plan (the "Supplemental Plan"),
Executive will be deemed to have continued to accrue annual
retirement allocations and other benefits under the Supplemental
Plan during the Severance Period and to have terminated
employment within the meaning of Section 5.2 of the Supplemental
Plan on the last day of the Severance Period, in each case, in
accordance with the terms of the Supplemental Plan in effect on
the date of this Agreement;
e) in accordance with the terms of the Current Agreement, all of
Executive's stock options that are outstanding immediately prior
to the Termination Date shall become fully vested and exercisable
as of the Termination Date and shall thereafter remain
exercisable in accordance with the applicable provisions of the
relevant option agreement.
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(ii) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any
interest or penalties are incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), Employer shall make a
payment (a "Gross-Up Payment") to Executive in an amount such that, after
payment by Employee of all income or other taxes (and any interest and penalties
imposed with respect thereto) and Excise Taxes imposed upon the Gross-Up
Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
a) Subject to the provisions of Section 3(ii)(b), all determinations
required to be made under this Section 3(ii),including whether
and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving
at such determination, shall be made by a certified public
accounting firm designated by Executive (the "Accounting Firm")
which shall provide detailed supporting calculations both to Fred
Meyer and Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment,
or such earlier time as is requested by Executive. If the
Accounting Firm determines that no Excise Tax is payable by
Executive, it shall, upon the written request of Executive,
furnish Executive with a written opinion that failure to report
the Excise Tax on the Executive's applicable federal income tax
return would not result in the imposition of a negligence or
similar penalty. The calculations prepared by the Accounting Firm
shall be reviewed on behalf of Employer and Fred Meyer by Fred
Meyer's independent auditors (the "Fred Meyer Accounting Firm")
which shall provide its conclusions, together with detailed
supporting calculations, both to Fred Meyer and to Executive
within 15 business days after receipt of the calculations and
supporting materials prepared by the Accounting Firm. In the
event of a dispute between the Accounting Firm and the Fred Meyer
Accounting Firm, such firms shall, within five business days of
receipt of the conclusions and supporting materials prepared by
the Fred Meyer Accounting Firm, jointly select a third nationally
recognized certified public accounting firm (the "Third
Accounting Firm") to resolve the dispute. The Third Accounting
Firm shall submit its conclusions to Fred Meyer and Executive
within 15 business days after receipt of notice of its
appointment hereunder and the decision of the Third Accounting
Firm shall be final, binding and conclusive upon Executive,
Employer and Fred Meyer. All fees and expenses of all such
accounting firms shall be borne solely by Employer. Any Gross-Up
Payment shall be paid by Employer to Executive within five
business days after the earlier of acceptance by Fred Meyer of
the calculations prepared by the Accounting Firm or Fred Meyer's
receipt of the Third Accounting Firm's determination.
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b) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination of whether
any Gross-Up Payment should be made hereunder, it is possible
that a Gross-Up Payment will have been due but not made by
Employer (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that Fred Meyer
exhausts its remedies pursuant to this Section 3(ii) and
Executive thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
promptly paid by Employer to or for the benefit of Executive.
c) Executive shall notify Fred Meyer in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by Employer of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten
business days after Executive is informed in writing of such
claim and shall apprise Fred Meyer of the nature of such claim
and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the
thirty (30) day period of following the date on which it gives
such notice to Fred Meyer (or such shorter period ending on the
date that any payment of taxes with respect to such claim is
due). If Fred Meyer notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim,
Executive shall:
(1) give Fred Meyer any information reasonably
requested by it relating to such claim;
(2) take such action in connection with contesting such
claim as Fred Meyer shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by Fred Meyer and acceptable to
Executive;
(3) cooperate with Fred Meyer in good faith in order
effectively to contest such claim; and
(4) permit Fred Meyer to participate in any proceedings
relating to such claim;
provided, however, that Employer shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise
Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment
of costs and expenses. Without limitation on the foregoing
provisions of this Section 3(ii), Fred Meyer shall control all
proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any
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and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct Executive to pay the
tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate
courts, as Fred Meyer shall determine; provided, however, that if
Fred Meyer directs Executive to pay such claim and sue for a
refund, Employer shall advance the amount of such payment to
Executive, on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of Executive with respect
to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, Fred Meyer's
control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive
shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other
taxing authority.
d) If, after the receipt by Executive of an amount advanced by
Employer pursuant to this Section 3(ii), Executive becomes
entitled to receive any refund with respect to such claim,
Executive shall (subject to Employer's and Fred Meyer's complying
with the requirements of this Section 3(ii)) promptly pay to
Employer the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by Employer
pursuant to this Section 3(ii), a determination is made that
Executive shall not be entitled to any refund with respect to
such claim and Employer does not notify Executive in writing of
its intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determination, then
such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(iii) Executive shall not be required to mitigate the amount of any
compensation, benefits or other payments provided for in this Agreement by
seeking other employment or otherwise. Further, the amount of any cash
compensation provided for in this Agreement shall not be reduced or offset by
any compensation or other amounts paid to or earned by Executive in connection
with any alternative employment obtained by Executive (including
self-employment). To the extent Executive and his or her eligible dependents
obtains in connection with any subsequent employment benefit coverage comparable
to that provided to Executive pursuant to Section 3(i)(c) hereof and for a
concurrent period, the benefit coverage provided hereunder will be reduced or,
if applicable, eliminated.
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(iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no
amounts paid pursuant to this Agreement will constitute compensation for any
purpose under any retirement plan or other employee benefit plan, program,
arrangement or agreement of the Company.
4. Assignment; Assumption of Agreement. This Agreement is personal to
Executive and Executive may not assign or transfer any part of his rights or
duties hereunder, or any payments due to him hereunder, to any other person,
except that this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees or beneficiaries. This Agreement shall be
binding on any successor to Fred Meyer or Employer, as the case may be, and may
not be assigned by Fred Meyer or Employer without the prior written consent of
Executive. Fred Meyer and Employer shall each require any successor thereto
(whether by merger, liquidation, dissolution or otherwise by operation of law),
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform their respective obligations under this Agreement in
the same manner and to the same extent that Fred Meyer or Employer, as the case
may be, would be required to perform such obligations if no such succession had
occurred. Failure of Fred Meyer or Employer to obtain a satisfactory assumption
agreement from any successor will be deemed to be a termination of Executive's
employment by Employer Without Cause and in anticipation of a Change in Control
entitling Executive to all compensation and benefits specified in Section 3
hereof.
5. Modification; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in a writing signed by Executive and by an officer of each of Fred Meyer and
Employer thereunto expressly authorized by the Board of Directors of Fred Meyer
and Employer, respectively. Waiver by any party of any breach of or failure to
comply with any provision of this Agreement by any other party shall not be
construed as, or constitute, a continuing waiver of such provision, or a waiver
of any other breach of, or failure to comply with, any other provision of this
Agreement.
6. Arbitration of Disputes.
(i) Any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the interpretation or validity hereof shall be
settled exclusively and finally by arbitration. It is specifically understood
and agreed that any such disagreement, dispute or controversy which cannot be
resolved between the parties, including without limitation any matter relating
to interpretation of this Agreement, may be submitted to arbitration
irrespective of the magnitude thereof, the amount in controversy or whether such
disagreement, dispute or controversy would otherwise be considered justiciable
or ripe for resolution by a court or arbitral tribunal.
(ii) The arbitration shall be conducted in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association ("AAA").
(iii) The arbitral tribunal shall consist of one arbitrator. The
parties to the arbitration jointly shall directly appoint such arbitrator within
30 days of initiation of the arbitration. If the parties shall fail to appoint
such arbitrator as provided above, such arbitrator
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<PAGE>
shall be appointed by the AAA as provided in the Arbitration Rules and shall be
a person who (a) maintains his principal place of business within 30 miles of
the City of Portland, Oregon and (b) has substantial experience in executive
compensation. The parties shall each pay an equal portion of the fees, if any,
and expenses of such arbitrator.
(iv) The arbitration shall be conducted within 30 miles of the City of
Portland, Oregon or in such other city in the United States of America as the
parties to the dispute may designate by mutual written consent.
(v) At any oral hearing of evidence in connection with the
arbitration, each party thereto or its legal counsel shall have the right to
examine its witnesses and to cross- examine the witnesses of any opposing party.
No evidence of any witness shall be presented unless the opposing party or
parties shall have the opportunity to cross-examine such witness, except as the
parties to the dispute otherwise agree in writing or except under extraordinary
circumstances where the interests of justice require a different procedure.
(vi) Any decision or award of the arbitral tribunal shall be final and
binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any court or tribunal. The parties hereto agree that the
arbitral award may be enforced against the parties to the arbitration proceeding
or their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in any court having jurisdiction.
(vii) Nothing herein contained shall be deemed to give the arbitral
tribunal any authority, power, or right to alter, change, amend, modify, add to
or subtract from any of the provisions of this Agreement.
(viii) If any dispute is not resolved within 60 days from the date of
the commencement of an arbitration, then Fred Meyer shall, at its option, elect
to pay Executive either (a) within 5 days after the end of such 60-day period,
the amount or amounts which would have been payable to Executive had there been
no dispute, subject to reimbursement to the extent consistent with the final
disposition of the dispute or (b) following final disposition of the dispute,
the amount determined in such final disposition to have been payable, together
with Interest from the date when such sums were originally payable to the date
of actual payment. For purpose of this paragraph (viii) the term "Interest"
means interest at a rate equal to 6% per annum, compounded monthly.
(ix) Notwithstanding anything to the contrary in this Agreement, the
arbitration provisions set forth in this Section 7 shall be governed exclusively
by the Federal Arbitration Act, Title 9, United States Code.
7. Guaranty. Each and every covenant and obligation of Employer hereunder
shall be guaranteed by Fred Meyer.
8. Notice. All notices, requests, demands and other communications required
or permitted to be given by either party to the other party to this Agreement
(including, without
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limitation, any notice of termination of employment and any notice of an
intention to arbitrate) shall be in writing and shall be deemed to have been
duly given when delivered personally or received by certified or registered
mail, return receipt requested, postage prepaid, at the address of the other
party, as follows:
If to Fred Meyer, to:
Fred Meyer, Inc.
3800 S.E. 22nd Street
Portland, Oregon 97202-2999
Attention: General Counsel
If to Employer, to
Fred Meyer Stores, Inc.
C/O Fred Meyer, Inc., above
If to Executive, to:
[-----------------------]
Fred Meyer Stores, Inc.
3800 S.E. 22nd Avenue
Portland, OR 97202
Any party hereto may change its address for purposes of this Section 8 by giving
fifteen (15) days' prior notice
9. Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall to any extent be invalid
'or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. Headings. The headings in this Agreement are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning of
this Agreement.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original.
12. Governing Law. This Agreement has been executed and delivered in the
State of Oregon and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the State of Oregon, without reference
to its principles of conflicts of law.
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13. Certain Withholdings. Employer shall withhold from any amounts payable
to Executive hereunder all federal, state, city and other taxes and withholdings
that are required to be withheld pursuant to any applicable law or regulation.
14. Entire Agreement. This Agreement supersedes any and all other oral or
written agreements heretofore made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
FRED MEYER, INC. FRED MEYER STORES, INC.
ROGER A. COOKE ROGER A. COOKE
------------------------------------ ----------------------------------
By: Roger A. Cooke By: Roger A. Cooke
Title: Executive Vice President, Title: Executive Vice President
General Counsel and Secretary and Secretary
EXECUTIVE
------------------------------------
12
The Employment Protection Agreement in the form attached has been entered
into by certain officers including Mary F. Sammons and Sammy K. Duncan.
<PAGE>
EMPLOYMENT PROTECTION AGREEMENT
This Agreement (this "Agreement") is made as of the 22nd day of
September, 1998, among Fred Meyer, Inc., a corporation organized under the laws
of the State of Delaware (together with any successor thereto, "Fred Meyer"),
Fred Meyer Stores, Inc., a Delaware corporation and wholly owned subsidiary of
Fred Meyer (together with any successor thereto, "Employer"), and
_______________________ ("Executive").
WITNESSETH THAT:
WHEREAS, Executive is currently employed as a member of the executive
management team of the Company and is currently party to an Executive Severance
Agreement, dated October 15, 1997 (the "Current Agreement");
WHEREAS, the Company considers it essential to its best interests and
the best interests of the shareholders of Fred Meyer to foster the continued
employment of the members of the Company's executive management team, including
Executive, and to reinforce and encourage the continued attention and dedication
of such individuals to their respective assigned duties without distraction in
the event that the possibility of a change in control exists;
WHEREAS, the Company recognizes that the possibility of a change in
control exists and that such possibility and the uncertainty and questions which
may arise among members of its executive management team regarding the
consequences of any such change in control may result in the distraction or
departure of one or more of such individuals, to the detriment of the Company
and the shareholders of Fred Meyer;
NOW, THEREFORE, to provide Executive an incentive to continue his
dedication to the Company and to make available to the Company his advice and
counsel notwithstanding the possibility of a change in control of the Company,
and to encourage Executive to remain in the employ of the Company, and for other
good and valuable consideration, the Company and Executive hereby agree as
follows:
1. Definitions.
(i) "Annual Cash Compensation" shall mean an amount equal to the sum
of (x) Executive's annual base salary, at the annual rate in effect immediately
prior to the Qualifying Termination, and (y) the percentage of such base salary
payable to Executive under the terms of the Company's annual bonus plan for its
senior executives as in effect for the plan year which includes the Closing Date
and assuming that the maximum performance objectives for such plan year had been
achieved; provided that, if Executive's employment is terminated by Executive
for Good Reason as a result of a reduction in Executive's annual base salary or
the percentage of
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such base salary payable to Executive as an annual bonus, Annual Cash
Compensation shall be determined on the basis of Executive's annual base salary
at the rate in effect immediately prior to such reduction and the percentage
thereof payable to Executive as an annual bonus in effect prior to any reduction
thereof.
(ii) "Cause," when used in connection with the termination of
Executive's employment by Employer shall mean the occurrence of any of the
following events: (a) Executive's material dishonesty or misappropriation in
connection with the performance of the duties of his position with the Company
that adversely affects the Company or its property or funds; (b) Executive's
extreme misconduct, including reckless or willful destruction of Company
property, unauthorized disclosure of confidential information or sexual, racial
or other actionable harassment; (c) Executive's conviction of or plea of nolo
contendere to a felony or any other crime involving moral turpitude; or (d)
Executive's illegal, immoral, dishonest or fraudulent conduct in connection with
the performance of the duties of his position with the Company that results in
material harm to the business reputation of the Company or subjects the Company
to material financial loss or material loss of business.
(iii) "Change in Control" shall mean the occurrence of any of the
following events:
(a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan
of exchange or other business combination involving Fred Meyer, other than
any such transaction immediately following which the holders of Fred Meyer
capital stock immediately prior to such transaction continue to own equity
securities of the surviving entity representing more than 50 per cent of
the equity securities of such entity entitled to vote generally in the
election of directors of such entity, or (ii) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company or the adoption by
Fred Meyer of any plan or proposal for the liquidation or dissolution of
the Company;
(b) the commencement of a tender or exchange offer (other than one made by
Fred Meyer) for any capital stock of Fred Meyer (or securities convertible
into such capital stock), provided a Change in Control shall be deemed to
have occurred only if such offer results in a portion of those securities
being purchased and the offeror after the consummation of the offer is the
beneficial owner (as determined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), directly or
indirectly, of securities representing at least 20 percent of the voting
power of outstanding securities of Fred Meyer;
(c) a report on Schedule 13D of the Exchange Act is filed with the
Securities and exchange Commission or is received by Fred Meyer reporting
the beneficial ownership by any person of securities representing 20
percent or more of the voting power of outstanding securities of Fred
Meyer, except that if such report shall be filed or so received during a
tender offer or exchange offer described in subparagraph (b) above, the
provisions of such subparagraph shall apply in determining whether a Change
in Control occurs; or
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(d) during any period of 12 consecutive months or less, individuals who at
the beginning of such period constituted a majority of the Board of
Directors of Fred Meyer cease for any reason to constitute a majority
thereof unless the nomination or election of such new directors was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period.
Notwithstanding anything in the foregoing to the contrary, no Change of Control
shall be deemed to have occurred for purposes of this Agreement by virtue of any
transaction which results in Executive, or a group (within the meaning of
section 13(d)(3) of the Exchange Act) of persons which includes Executive,
acquiring, directly or indirectly, securities representing 20 percent or more of
the voting power of outstanding securities of Fred Meyer.
(iv) "Closing Date" shall mean the date of the consummation of a
transaction constituting a Control in Control, provided, that if the Change in
Control transaction is effected through a series of transactions or other
occurrences, the term "Closing Date" shall mean the date on which the first such
transaction is consummated or the date of the first such occurrence.
(v) "Company" shall mean, collectively, Fred Meyer, Employer and their
respective subsidiaries and affiliates and any successor to any such entity.
(vi) "Contract Period" shall mean the period commencing on any Closing
Date and ending on the eighteen month anniversary of such Closing Date.
(vii) "Disability," when used in connection with the termination of
Executive's employment with Employer, shall mean Executive's failure to
substantially perform the duties of his employment with Employer due to
Executive's illness or incapacity lasting for a period of six consecutive months
after notice thereof has been delivered by Employer to Executive. The
determination of Executive's disability shall be made by the Board of Directors
of Fred Meyer in good faith based upon the advice and evidence of Executive's
personal physician and a competent medical expert retained for such purpose by
the Board.
(viii) "Good Reason," when used in connection with the termination of
Executive's employment with Employer by Executive, shall mean the occurrence of
any of the following events: (a) any change in Executive's title with the
Company in effect immediately prior to the Closing Date or such change, other
than any such change to which Executive has given his or her prior written
consent, or a substantial reduction of the powers or functions associated with
Executive's positions, duties, responsibilities or status with the Company
immediately prior to the Closing Date or such reduction; (b) a reduction in
Executive's aggregate compensation from the level in effect immediately prior to
the Closing Date or such reduction; or (c) a change in Executive's principal
work location other than any such change to another location within the
metropolitan area in which Executive was located immediately prior to the
Closing Date or such change.
(ix) "Qualifying Termination" shall have the meaning specified in
Section 2(ii) hereof.
3
<PAGE>
(x) "Severance Period" shall mean the period commencing on the
Termination Date and ending on the three year anniversary of the Termination
Date.
(xi) "Termination Date" shall mean, in the case of a termination of
Executive's employment with Employer (a) by Employer for Cause, immediately upon
receipt by Executive of written notice of such termination, (b) by Employer
Without Cause or by Executive for or without Good Reason, as of the date
specified in the written notice of such termination delivered by Employer or
Executive, as the case may be, to the other, which date shall not be less than
14 days nor more than 28 days following the date of delivery thereof, (c) by
Employer due to Executive's Disability, the date which is at least 30 days
following the date written notice of such termination and the specific reasons
therefore is delivered to Executive, or (d) due to Executive's death, the date
of death.
(xii) "Without Cause," when used in connection with the termination of
Executive's employment with Employer, shall mean any termination of Executive's
employment by Employer that is not a termination for Cause or a termination due
to Executive's Disability or death.
2. Termination of Employment of Executive.
(i) At all times, each of Employer and Executive shall have the right
by written notice delivered to the other to terminate Executive's employment
with Employer for any reason. Following any termination of Executive's
employment with Employer, Employer shall immediately pay to Executive all
accrued and unpaid compensation for periods prior the Termination Date and
Executive shall be entitled to all accrued benefits and coverages under the
terms of any employee compensation or benefit plan of the Company in which
Executive was a participant at any time during the period of his employment with
the Company.
(ii) In the event that the employment of Executive with Employer is
terminated by Employer Without Cause or by Executive for Good Reason (a) prior
to the Contract Period and in anticipation of a Change in Control or (b) during
the Contract Period (any such termination, a "Qualifying Termination"),
Executive shall be entitled to receive the compensation and benefits provided in
Section 3 of this Agreement. Executive shall have no right to receive any
compensation or benefits under Section 3 of this Agreement upon any other
termination of Executive's employment prior to or during the Contract Period.
3. Severance Compensation and Benefits Payable Upon Qualifying Termination.
(i) In the event of a Qualifying Termination, Employer shall pay or
provide to Executive as severance, and Executive shall be entitled to, the
following compensation and benefits in lieu of any other base or annual bonus
compensation or benefits for periods subsequent to the Termination Date payable
under any plan or agreement of the Company (other than the Current Agreement),
provided that all cash compensation provided under this Section 3 shall be
reduced on a dollar for dollar basis by the amount of comparable cash
compensation paid to Executive by the Company as severance pursuant to the
Current Agreement, if any, and any
4
<PAGE>
benefits provided under this Section 3 shall be reduced by and to the extent of
any comparable benefits provided to Executive by the Company as an additional
severance benefit pursuant to the Current Agreement, if any:
a) continued payments of installments of Executive's Annual Cash
Compensation for the Severance Period, such payments to be made
to Executive in accordance with the Company's regular payroll
practices in effect for its senior executives;
b) a single lump sum payment, to be paid to Executive as soon as
reasonably practicable, but in no event more than 20 days,
following the Termination Date, of a cash amount equal to the
product of (x) the annual incentive bonus to which Executive
would have been entitled under the executive bonus plan or
arrangement of the Company in effect for Executive for the plan
year that includes the Termination Date had Executive continued
in employment until the last day of such plan year (or other date
required to be eligible to receive an annual bonus for such year)
and assuming that the maximum performance objectives for such
plan year had been achieved multiplied by (y) a fraction, the
numerator of which equals the number of days in the plan year
that have elapsed as of the Termination date and the denominator
of which equals 365;
c) continued coverage of Executive and his or her eligible
dependents during the Severance Period under the Company's
executive and employee medical, health and other welfare benefit
plans in which Executive was a participant immediately prior to
the Termination Date, subject to payment by Executive of all
premiums and other copayment amounts required under the terms of
such plans to be paid by participants therein of comparable
position and seniority to Executive, provided that if Executive's
employment is terminated by Executive for Good Reason as a result
of a reduction in the coverage of Executive or his or her
eligible dependents under any such plan, coverage under this
subparagraph (c) shall be provided in accordance with the terms
of the applicable plan or plans as in effect prior to any
reduction thereof;
d) in determining the benefits payable to Executive under the Fred
Meyer Supplemental Income Plan (the "Supplemental Plan"),
Executive will be deemed to have continued to accrue annual
retirement allocations and other benefits under the Supplemental
Plan during the Severance Period and to have terminated
employment within the meaning of Section 5.2 of the Supplemental
Plan on the last day of the Severance Period, in each case, in
accordance with the terms of the Supplemental Plan in effect on
the date of this Agreement;
e) in accordance with the terms of the Current Agreement, all of
Executive's stock options that are outstanding immediately prior
to the Termination Date shall become fully vested and exercisable
as of the Termination Date and shall thereafter remain
exercisable in accordance with the applicable provisions of the
relevant option agreement.
5
<PAGE>
(ii) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any
interest or penalties are incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), Employer shall make a
payment (a "Gross-Up Payment") to Executive in an amount such that, after
payment by Employee of all income or other taxes (and any interest and penalties
imposed with respect thereto) and Excise Taxes imposed upon the Gross-Up
Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
a) Subject to the provisions of Section 3(ii)(b), all determinations
required to be made under this Section 3(ii),including whether
and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving
at such determination, shall be made by a certified public
accounting firm designated by Executive (the "Accounting Firm")
which shall provide detailed supporting calculations both to Fred
Meyer and Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment,
or such earlier time as is requested by Executive. If the
Accounting Firm determines that no Excise Tax is payable by
Executive, it shall, upon the written request of Executive,
furnish Executive with a written opinion that failure to report
the Excise Tax on the Executive's applicable federal income tax
return would not result in the imposition of a negligence or
similar penalty. The calculations prepared by the Accounting Firm
shall be reviewed on behalf of Employer and Fred Meyer by Fred
Meyer's independent auditors (the "Fred Meyer Accounting Firm")
which shall provide its conclusions, together with detailed
supporting calculations, both to Fred Meyer and to Executive
within 15 business days after receipt of the calculations and
supporting materials prepared by the Accounting Firm. In the
event of a dispute between the Accounting Firm and the Fred Meyer
Accounting Firm, such firms shall, within five business days of
receipt of the conclusions and supporting materials prepared by
the Fred Meyer Accounting Firm, jointly select a third nationally
recognized certified public accounting firm (the "Third
Accounting Firm") to resolve the dispute. The Third Accounting
Firm shall submit its conclusions to Fred Meyer and Executive
within 15 business days after receipt of notice of its
appointment hereunder and the decision of the Third Accounting
Firm shall be final, binding and conclusive upon Executive,
Employer and Fred Meyer. All fees and expenses of all such
accounting firms shall be borne solely by Employer. Any Gross-Up
Payment shall be paid by Employer to Executive within five
business days after the earlier of acceptance by Fred Meyer of
the calculations prepared by the Accounting Firm or Fred Meyer's
receipt of the Third Accounting Firm's determination.
6
<PAGE>
b) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination of whether
any Gross-Up Payment should be made hereunder, it is possible
that a Gross-Up Payment will have been due but not made by
Employer (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that Fred Meyer
exhausts its remedies pursuant to this Section 3(ii) and
Executive thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
promptly paid by Employer to or for the benefit of Executive.
c) Executive shall notify Fred Meyer in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by Employer of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten
business days after Executive is informed in writing of such
claim and shall apprise Fred Meyer of the nature of such claim
and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the
thirty (30) day period of following the date on which it gives
such notice to Fred Meyer (or such shorter period ending on the
date that any payment of taxes with respect to such claim is
due). If Fred Meyer notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim,
Executive shall:
(1) give Fred Meyer any information reasonably
requested by it relating to such claim;
(2) take such action in connection with contesting such
claim as Fred Meyer shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by Fred Meyer and acceptable to
Executive;
(3) cooperate with Fred Meyer in good faith in order
effectively to contest such claim; and
(4) permit Fred Meyer to participate in any proceedings
relating to such claim;
provided, however, that Employer shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise
Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment
of costs and expenses. Without limitation on the foregoing
provisions of this Section 3(ii), Fred Meyer shall control all
proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any
7
<PAGE>
and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct Executive to pay the
tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate
courts, as Fred Meyer shall determine; provided, however, that if
Fred Meyer directs Executive to pay such claim and sue for a
refund, Employer shall advance the amount of such payment to
Executive, on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of Executive with respect
to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, Fred Meyer's
control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive
shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other
taxing authority.
d) If, after the receipt by Executive of an amount advanced by
Employer pursuant to this Section 3(ii), Executive becomes
entitled to receive any refund with respect to such claim,
Executive shall (subject to Employer's and Fred Meyer's complying
with the requirements of this Section 3(ii)) promptly pay to
Employer the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by Employer
pursuant to this Section 3(ii), a determination is made that
Executive shall not be entitled to any refund with respect to
such claim and Employer does not notify Executive in writing of
its intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determination, then
such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(iii) Executive shall not be required to mitigate the amount of any
compensation, benefits or other payments provided for in this Agreement by
seeking other employment or otherwise. Further, the amount of any cash
compensation provided for in this Agreement shall not be reduced or offset by
any compensation or other amounts paid to or earned by Executive in connection
with any alternative employment obtained by Executive (including
self-employment). To the extent Executive and his or her eligible dependents
obtains in connection with any subsequent employment benefit coverage comparable
to that provided to Executive pursuant to Section 3(i)(c) hereof and for a
concurrent period, the benefit coverage provided hereunder will be reduced or,
if applicable, eliminated.
8
<PAGE>
(iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no
amounts paid pursuant to this Agreement will constitute compensation for any
purpose under any retirement plan or other employee benefit plan, program,
arrangement or agreement of the Company.
4. Assignment; Assumption of Agreement. This Agreement is personal to
Executive and Executive may not assign or transfer any part of his rights or
duties hereunder, or any payments due to him hereunder, to any other person,
except that this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees or beneficiaries. This Agreement shall be
binding on any successor to Fred Meyer or Employer, as the case may be, and may
not be assigned by Fred Meyer or Employer without the prior written consent of
Executive. Fred Meyer and Employer shall each require any successor thereto
(whether by merger, liquidation, dissolution or otherwise by operation of law),
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform their respective obligations under this Agreement in
the same manner and to the same extent that Fred Meyer or Employer, as the case
may be, would be required to perform such obligations if no such succession had
occurred. Failure of Fred Meyer or Employer to obtain a satisfactory assumption
agreement from any successor will be deemed to be a termination of Executive's
employment by Employer Without Cause and in anticipation of a Change in Control
entitling Executive to all compensation and benefits specified in Section 3
hereof.
5. Modification; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in a writing signed by Executive and by an officer of each of Fred Meyer and
Employer thereunto expressly authorized by the Board of Directors of Fred Meyer
and Employer, respectively. Waiver by any party of any breach of or failure to
comply with any provision of this Agreement by any other party shall not be
construed as, or constitute, a continuing waiver of such provision, or a waiver
of any other breach of, or failure to comply with, any other provision of this
Agreement.
6. Arbitration of Disputes.
(i) Any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the interpretation or validity hereof shall be
settled exclusively and finally by arbitration. It is specifically understood
and agreed that any such disagreement, dispute or controversy which cannot be
resolved between the parties, including without limitation any matter relating
to interpretation of this Agreement, may be submitted to arbitration
irrespective of the magnitude thereof, the amount in controversy or whether such
disagreement, dispute or controversy would otherwise be considered justiciable
or ripe for resolution by a court or arbitral tribunal.
(ii) The arbitration shall be conducted in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association ("AAA").
(iii) The arbitral tribunal shall consist of one arbitrator. The
parties to the arbitration jointly shall directly appoint such arbitrator within
30 days of initiation of the arbitration. If the parties shall fail to appoint
such arbitrator as provided above, such arbitrator
9
<PAGE>
shall be appointed by the AAA as provided in the Arbitration Rules and shall be
a person who (a) maintains his principal place of business within 30 miles of
the City of Portland, Oregon and (b) has substantial experience in executive
compensation. The parties shall each pay an equal portion of the fees, if any,
and expenses of such arbitrator.
(iv) The arbitration shall be conducted within 30 miles of the City of
Portland, Oregon or in such other city in the United States of America as the
parties to the dispute may designate by mutual written consent.
(v) At any oral hearing of evidence in connection with the
arbitration, each party thereto or its legal counsel shall have the right to
examine its witnesses and to cross- examine the witnesses of any opposing party.
No evidence of any witness shall be presented unless the opposing party or
parties shall have the opportunity to cross-examine such witness, except as the
parties to the dispute otherwise agree in writing or except under extraordinary
circumstances where the interests of justice require a different procedure.
(vi) Any decision or award of the arbitral tribunal shall be final and
binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any court or tribunal. The parties hereto agree that the
arbitral award may be enforced against the parties to the arbitration proceeding
or their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in any court having jurisdiction.
(vii) Nothing herein contained shall be deemed to give the arbitral
tribunal any authority, power, or right to alter, change, amend, modify, add to
or subtract from any of the provisions of this Agreement.
(viii) If any dispute is not resolved within 60 days from the date of
the commencement of an arbitration, then Fred Meyer shall, at its option, elect
to pay Executive either (a) within 5 days after the end of such 60-day period,
the amount or amounts which would have been payable to Executive had there been
no dispute, subject to reimbursement to the extent consistent with the final
disposition of the dispute or (b) following final disposition of the dispute,
the amount determined in such final disposition to have been payable, together
with Interest from the date when such sums were originally payable to the date
of actual payment. For purpose of this paragraph (viii) the term "Interest"
means interest at a rate equal to 6% per annum, compounded monthly.
(ix) Notwithstanding anything to the contrary in this Agreement, the
arbitration provisions set forth in this Section 7 shall be governed exclusively
by the Federal Arbitration Act, Title 9, United States Code.
7. Guaranty. Each and every covenant and obligation of Employer hereunder
shall be guaranteed by Fred Meyer.
8. Notice. All notices, requests, demands and other communications required
or permitted to be given by either party to the other party to this Agreement
(including, without
10
<PAGE>
limitation, any notice of termination of employment and any notice of an
intention to arbitrate) shall be in writing and shall be deemed to have been
duly given when delivered personally or received by certified or registered
mail, return receipt requested, postage prepaid, at the address of the other
party, as follows:
If to Fred Meyer, to:
Fred Meyer, Inc.
3800 S.E. 22nd Street
Portland, Oregon 97202-2999
Attention: General Counsel
If to Employer, to
Fred Meyer Stores, Inc.
C/O Fred Meyer, Inc., above
If to Executive, to:
[-----------------------]
Fred Meyer Stores, Inc.
3800 S.E. 22nd Avenue
Portland, OR 97202
Any party hereto may change its address for purposes of this Section 8 by giving
fifteen (15) days' prior notice
9. Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall to any extent be invalid
'or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. Headings. The headings in this Agreement are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning of
this Agreement.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original.
12. Governing Law. This Agreement has been executed and delivered in the
State of Oregon and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the State of Oregon, without reference
to its principles of conflicts of law.
11
<PAGE>
13. Certain Withholdings. Employer shall withhold from any amounts payable
to Executive hereunder all federal, state, city and other taxes and withholdings
that are required to be withheld pursuant to any applicable law or regulation.
14. Entire Agreement. This Agreement supersedes any and all other oral or
written agreements heretofore made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
FRED MEYER, INC. FRED MEYER STORES, INC.
ROGER A. COOKE ROGER A. COOKE
------------------------------------ ----------------------------------
By: Roger A. Cooke By: Roger A. Cooke
Title: Executive Vice President, Title: Executive Vice President
General Counsel and Secretary and Secretary
EXECUTIVE
------------------------------------
12
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<PERIOD-END> NOV-7-1998
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<PP&E> 4,673,910
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0
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