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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[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................................... 15
Part II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 25
Signatures ............................................................... 26
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,
(In thousands, except per share data) 1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,477,091 $ 1,945,543 $11,022,471 $ 4,996,582
Cost of goods sold 2,434,961 1,370,439 7,749,272 3,515,612
----------- ----------- ----------- -----------
Gross margin 1,042,130 575,104 3,273,199 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 31,484 - 237,542 -
----------- ----------- ----------- -----------
Income from operations 153,880 79,930 301,185 200,474
Interest expense 92,945 30,174 284,720 66,189
----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary charge 60,935 49,756 16,465 134,285
Provision for income taxes 31,771 21,091 46,936 53,655
----------- ----------- ----------- -----------
Income (loss) before extraordinary charge 29,164 28,665 (30,471) 80,630
Extraordinary charge, net of taxes (324) (91,210) (217,934) (91,210)
----------- ----------- ----------- -----------
Net income (loss) $ 28,840 $ (62,545) $ (248,405) $ (10,580)
=========== =========== =========== ===========
Basic earnings per common share:
Income (loss) before extraordinary charge $ 0.19 $ 0.24 $ (0.20) $ 0.83
Extraordinary charge - (0.77) (1.45) (0.94)
----------- ----------- ----------- -----------
Net income (loss) $ 0.19 $ (0.53) $ (1.65) $ (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 $ (0.20) $ 0.79
Extraordinary charge - (0.74) (1.45) (0.89)
----------- ----------- ----------- -----------
Net income (loss) $ 0.18 $ (0.51) $ (1.65) $ (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
------------ -----------
<S> <C> <C>
Assets
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 201,001 90,804
------------ -----------
Total current assets 2,595,752 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 $ 10,294,660 $ 5,422,936
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,294,311 $ 766,678
Accrued expenses and other 1,007,617 407,167
Current portion of long-term debt and lease obligations 134,650 19,650
------------ -----------
Total current liabilities 2,436,578 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 282,706 528,076
------------ -----------
Total stockholders' equity 2,176,218 1,702,360
------------ -----------
Total liabilities and stockholders' equity $ 10,294,660 $ 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 $ (30,471) $ 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 80,360 -
Deferred income taxes 43,903 (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 (35,515) (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 (91,239) 55,684
Net loss (309,173) (161,926)
Diluted earnings per common share:
Income (loss) before extraordinary charge (0.59) 0.37
Net loss (2.02) (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>
8
<PAGE>
4. Merger Related Costs
The Company is in the process of implementing its plan to
integrate its five primary operations (Fred Meyer Stores, Ralphs/Food 4
Less, Smith's, QFC and Hughes) resulting in merger related costs of
$31.4 million and $237.5 million for the 12 and 40 weeks ended November
7, 1998. The integration plan includes the consolidation of
distribution, information systems, and administrative functions,
conversion of 78 store banners, closure of seven stores, and
transaction costs incurred to complete the mergers. The costs were
reported in the periods in which cash was expended except for $25.9
million that was accrued for liabilities incurred to exit certain
activities and retain certain key employees and an $80.4 million charge
to write-down certain assets. The following table presents components
of the merger related costs by quarter for the 40 weeks ended November
7, 1998 (in thousands):
<TABLE>
<CAPTION>
16 Weeks 12 Weeks 12 Weeks 40 Weeks
Ended Ended Ended Ended
May 23, Aug 15, Nov 7, Nov 7,
1998 1998 1998 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Charges recorded as cash expended
Distribution consolidation $ 10,717 $ 1,900 $ 321 $ 12,938
Systems integration 12,643 6,201 13,017 31,861
Store conversions 24,511 11,517 5,924 41,952
Transaction costs 29,215 2,839 1,138 33,192
Store closures 133 133
Administration integration 5,370 2,460 3,327 11,157
-------- -------- -------- --------
82,589 24,917 23,727 131,233
Noncash asset write-down
Distribution consolidation 28,588 28,588
Systems integration 18,722 2,000 2,333 23,055
Store conversions
Transaction costs
Store closures 6,959 18,532 25,491
Administration integration 3,226 3,226
-------- -------- -------- --------
57,495 20,532 2,333 80,360
Accrued charges
Distribution consolidation
Systems integration 1,445 1,445
Store conversions
Transaction costs 1,581 2,108 2,108 5,797
Store closures 6,686 6,686
Administration integration 8,705 3,316 12,021
-------- -------- -------- --------
18,417 2,108 5,424 25,949
-------- -------- -------- --------
Total merger related costs $158,501 $ 47,557 $ 31,484 $237,542
======== ======== ======== ========
Total charges
Distribution consolidation $ 39,305 $ 1,900 $ 321 $ 41,526
Systems integration 32,810 8,201 15,350 56,361
Store conversions 24,511 11,517 5,924 41,952
Transaction costs 30,796 4,947 3,246 38,989
Store closures 13,778 18,532 32,310
Administration integration 17,301 2,460 6,643 26,404
-------- -------- -------- --------
Total merger related costs $158,501 $ 47,557 $ 31,484 $237,542
======== ======== ======== ========
</TABLE>
9
<PAGE>
Distribution Consolidation--Represents costs to consolidate
manufacturing and distribution operations and eliminate duplicate
facilities. The costs include a $28.6 million write-down to estimated
net realizable value for the Hughes distribution center in Southern
California. Net realizable value was determined by a market analysis.
The facilities are held for sale and depreciation expense for the
closed Hughes distribution facility has been suspended. Depreciation
expense in the second and third quarter would have totaled $1.1 million
if it had not been suspended. Efforts to dispose of the facilities are
ongoing and a sale is expected in 1999. Also included are $12.9 million
incurred for incremental labor during the closing of the distribution
center and other incremental costs incurred as a part of the
realignment of the Company's distribution system.
Systems Integration--Represents the costs of integrating systems
from QFC, Hughes and Smith's computer platforms into Fred Meyer and
Ralphs' platforms and the related conversion of all corporate office
and store systems. The asset write-down of $23.1 million includes $17
million for computer equipment and related software that have been
abandoned and $6 million associated with computer equipment at QFC
which is being written off over one year at which time it will be
abandoned. Costs totaling $31.8 million were expensed as incurred and
includes $16.7 million of incremental operating costs, principally
labor, during the conversion process, $9.5 million paid to third
parties, and $5.0 million of training costs. Also included are
severance costs for system employees who will be terminated as the
integration is completed.
Store Conversions--Includes the costs to convert 55 Hughes stores
to the Ralphs' banner, 15 Smitty's stores to the Fred Meyer banner,
five QFC stores to the Fred Meyer banner, and three Fred Meyer stores
to the Smith's banner. As of November 7, 1998, the conversion of the
Hughes and QFC stores was substantially complete. Costs totaling $42.0
million represented incremental cash expenditures for advertising and
promotions to establish the banner, changing store signage, labor
required to remerchandise the store inventory and other services which
were expensed as incurred.
Transaction Costs--Represents $33.2 million for fees paid to
outside parties and employee bonuses that were contingent upon the
completion of the mergers and $5.8 million for an employee stay bonus
program. The stay bonus program is being accrued ratably over the stay
period and will be paid in the fourth quarter of 1998.
Store Closures--Includes the costs to close four stores identified
as duplicate facilities and to sell three stores pursuant to a
settlement agreement with the State of California ("AG Stores"). Annual
sales and operating income for the four duplicate facilities and three
AG Stores are approximately $133 million and $3 million, respectively.
The asset write-down represents $6.0 million of book value in excess of
sale proceeds, $18.5 million for the write-off of the goodwill
associated with the AG Stores, and $6.7 million of lease termination
costs. As of November 7, 1998, all stores were closed or sold except
for three AG Stores which are expected to be sold in the fourth quarter
of fiscal 1998. The net book value on the AG Stores representing
building, fixtures and equipment was written down to an estimated net
realizable value of $5.7 million. Depreciation expense continues to be
recorded at the historical rate.
Administration Integration--Includes $14.7 million for labor and
severance costs of which $9.0 million has been expended and the
employees have been terminated and $9.4 million to conform accounting
policies of QFC and Hughes to Fred Meyer, including the calculation of
bad debt and costs for real estate transactions.
10
<PAGE>
The following table presents the activity in the reserve accounts
for the 40 weeks ended November 7, 1998. The beginning balance was zero
(in thousands):
<TABLE>
<CAPTION>
Cash payments
----------------------------------
16 Weeks 12 Weeks 12 Weeks Reserve
Charged Ended Ended Ended Balance
to May 23, Aug 15, Nov 7, at Nov 7,
Expense 1998 1998 1998 Reclass 1998
------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Systems integration
Severance $ 1,445 $ 1,445
Transaction costs
Stay bonus program 5,797 5,797
Store closures
Lease obligation 6,686 $ 23 $ 746 $ 511 5,406
Administration integration
Severance 12,021 2,681 1,090 3,812 4,438
------- -------- -------- -------- ------- -------
Total amounts included in
Current Liabilities $25,949 $ 2,704 $ 1,836 $ 4,323 $ - $17,086
======= ======== ======== ======== ======= =======
</TABLE>
Severance--Severance relates to 183 Hughes administrative
employees in Southern California and 75 QFC administrative employees in
Seattle. As of November 7, 1998, all of the Hughes employees have been
terminated. The QFC employees have been notified of their terminations
on various dates ranging from February 15, 1999 to December 31, 1999.
Under severance agreements, the amount of severance will be paid over a
period following the date of termination.
Lease Obligation--Following the merger, the Company closed a QFC
store in the first quarter and agreed to dispose of the AG Stores under
a settlement agreement with the State of California. The lease
obligation represents future contractual lease payments on these stores
over the expected holding period, net of any sublease income. The
Company is actively marketing the stores to potential buyers and
sub-lease tenants. The disposition of the AG Stores is expected to
occur in the fourth quarter of fiscal 1998.
Stay Bonus Program--Represents amounts to be paid under a stay
bonus program in the fourth quarter of fiscal 1998.
5. Summary of Significant Accounting Policies
Amended Form 10-Q--The Company amended its third quarter 10-Q to
revise the accounting for its plan to dispose of Santee Dairy. The
amended 10-Q reflects a change in the accounting treatment to recognize
the loss on disposition when a definitive agreement for the sale of the
dairy has been reached. The original filing reflected management's
estimate of the loss that is anticipated upon disposition of the dairy.
The impact of the amendment on the third quarter 10-Q was a $44.3
million reduction of merger related costs and a corresponding decrease
in net loss of $27.0 million for the 40 weeks ended November 7, 1998.
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
11
<PAGE>
conjunction with the financial statements and related notes
incorporated by reference in the Company's latest annual report filed
on Form 10-K.
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.
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<PAGE>
6. 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 the following (in thousands):
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
November 7, November 8, November 7, November 8,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 28,840 $ (62,545) $ (248,405) $ (10,580)
Income tax benefit from the
exercise of stock options 595 2,150 5,078 5,978
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 29,435 $ (60,395) $ (243,327) $ (4,602)
========== ========== ========== ==========
</TABLE>
7. 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 rate from 7.15% to 7.45% 1,750,000 -
QFC Credit Facility 214,293
Commercial paper with maturities through February 10, 1999,
classified as long-term, interest rates of 5.78% to 6.10%
at August 15, 1998 628,075 367,156
QFC 8.7% Senior Subordinated Notes, principal due 2007 with
interest payable semi-annually 3,065 150,000
Long-term notes secured by trust deeds, due through 2016,
interest rates from 5.00% to 10.50% 59,941 61,075
Uncommitted bank borrowings classified as long-term 85,000 79,000
Ralphs senior subordinated notes, due 2002 through 2007,
fixed interest rates from 9.0% to 13.75% 35,232 -
Ralphs senior notes, unsecured, due 2004,
fixed interest rate of 10.45% 13,458 -
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
13
<PAGE>
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 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%
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<PAGE>
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.
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.
8. 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.
The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee")
and has a 10 year product supply agreement with Santee that requires
the Company to purchase 9 million gallons of fluid milk and other
products annually. The product supply agreement expires on July 29,
2007. Upon acquisition of Ralphs, Santee became excess capacity and a
duplicate facility. The Company is currently engaged in efforts to
dispose of its interest in Santee which may result in a loss of
approximately $45 million in 1999.
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.
The Company amended its third quarter 10-Q to revise the
accounting for its plan to dispose of Santee Dairy. The amended 10-Q
reflects a change in the accounting treatment to recognize the loss on
disposition when a definitive agreement for the sale of the dairy has
been reached. The original filing reflected management's estimate of
the loss that is anticipated upon disposition of the dairy. The impact
of the amendment on the third quarter 10-Q was a $44.3 million
reduction of merger related costs and a corresponding decrease in net
loss of $27.0 million for the 40 weeks ended November 7, 1998.
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
15
<PAGE>
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.
MERGER RELATED COSTS
The Company is in the process of implementing its plan to
integrate its five primary operations (Fred Meyer Stores, Ralphs/Food 4
Less, Smith's, QFC and Hughes) resulting in merger related costs of
$31.4 million and $237.5 million for the 12 and 40 weeks ended November
7, 1998. The integration plan includes the consolidation of
distribution, information systems, and administrative functions,
conversion of 78 store banners, closure or sale of seven stores, and
transaction costs incurred to complete the mergers. The costs were
reported in the periods in which cash was expended except for $25.9
million that was accrued for liabilities incurred to exit certain
activities, sever employees, and retain certain key employees and an
$80.4 million charge to write-down certain assets. The Company
estimates that the total cost to implement this plan will be
approximately $355 million, of which $158.5 million, $47.6 million and
$31.4 million were incurred in the first, second and third quarters of
fiscal 1998, respectively. The remaining cost of $115 million includes
$60 million to complete the systems integration, $10 million to
complete the conversion of store banners, and $45 million to dispose of
the Santee Dairy (see Disposal of Santee Dairy). Of the $115 million of
remaining costs, approximately $20 million is expected to be incurred
in the fourth quarter, approximately $45 million in the second quarter
of 1999, and the remaining $50 million is expected to be incurred
ratably in 1999. The Company estimates that successful completion of
its integration plan will result in net annual cost savings and
improvements attributable to operating synergies of $150 million by
2000. Such cost savings and improvements consist of reduced advertising
costs from eliminating banners, reduced distribution costs by
eliminating distribution centers and independent wholesalers, increased
efficiencies from volume purchasing and merchandising, increased
efficiencies from maximizing capacity at manufacturing facilities, and
elimination of general and administrative costs by consolidating
offices, processing centers, and levels of supervision.
The distribution consolidation includes the transfer of purchasing
and distribution functions from the Hughes facility to various Ralphs'
facilities and transfer of QFC's distribution and manufacturing
functions from wholesalers to various Fred Meyer facilities. Costs
incurred to complete the distribution consolidation and close the
Hughes facility include the write-down of assets held for sale to net
realizable value, severance and incremental labor and other costs. The
Company has substantially completed the distribution consolidation
except for the disposition of the Hughes facility.
The information systems integration plan is to consolidate into
two processing platforms: a northern platform in Portland, Oregon and a
southern platform in Los Angeles, California. The consolidation
requires the conversion of all Smith's and QFC systems into Fred Meyer
systems and the conversion of all Hughes systems into Ralphs' systems
which results in the closure of three duplicate processing facilities.
Costs incurred to complete the information systems integration include
the write-down of assets that have been abandoned or become obsolete,
incremental operating costs during the integration process, payments to
third parties, training costs and severance. Computer hardware and
software that was abandoned in the first quarter following the QFC
merger was written-down to net realizable value. Computer hardware and
software that will be utilized until the end of the integration process
is being written-down over its reduced estimated useful life. The
conversion of Hughes systems into Ralphs' systems is complete and the
conversion of Smith's and QFC's systems into Fred
16
<PAGE>
Meyer systems is expected to be completed by the end of 1999. The
remaining costs are expected to include charges for assets write-downs,
incremental operating costs, payments to third parties and training
costs.
The administrative plan is similar to the information systems
integration plan except that in addition to Portland and Los Angeles,
some administrative functions will remain in Salt Lake City resulting
in the closure of two administrative offices. This integration includes
the consolidation of accounting, payroll processing, benefits and risk
administration, property management and legal services into the
remaining administrative offices. Costs incurred to complete the
administrative consolidation primarily consists of labor and severance
costs. One of the two excess administrative offices is closed and the
remainder of the administrative consolidation is expected to be
completed by the end of 1999.
The conversion of store banners includes the conversion of 55
Hughes stores to the Ralphs' banner, 15 Smitty's stores to the Fred
Meyer banner, five QFC stores to the Fred Meyer banner and three Fred
Meyer stores to the Smith's banner. Costs incurred to complete the
banner conversions include incremental cash expenditures of $28.9
million for advertising and promotions to establish the banner, and
$9.5 million for labor required to remerchandise the store inventory.
The 55 Hughes stores have been converted to the Ralphs banner and the
five QFC stores have been converted to the Fred Meyer banner. The
remaining banner conversions are expected to be completed by the end of
1999. The remaining costs are expected to include charges for
advertising and promotions costs incurred to establish the banner and
labor to remerchandise the store.
The closure or sale of seven stores includes three stores to be
sold pursuant to a settlement agreement with the State of California
(the "AG Stores") and four duplicate facilities. Costs incurred on
these stores include the write-down of assets held for sale to net
realizable value, the write-off of goodwill associated with the AG
Stores and a charge for future contractual lease payments over the
expected holding period, net of sublease income. Buyers have been
identified for the three AG Stores and the sale of these stores is
expected to be completed in the fourth quarter. The remaining four
stores have been closed and three have been sold as of November 7,
1998. All costs to close the stores have been charged to operations and
expended prior to November 7, 1998 except for lease obligations.
Transaction costs represent fees paid to outside parties, employee
bonuses contingent upon the closing of the merger and an accrual for an
employee stay bonus program.
DISPOSAL OF SANTEE DAIRY
The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee")
and has a 10 year product supply agreement with Santee that requires
the Company to purchase 9 million gallons of fluid milk and other
products annually. The product supply agreement expires on July 29,
2007. Upon acquisition of Ralphs, Santee became excess capacity and a
duplicate facility. The Company is currently engaged in efforts to
dispose of its interest in Santee which may result in a loss of
approximately $45 million in 1999.
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.
17
<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 8, 1997
to 29.7% for the 40 weeks ended November 7, 1998. 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 losses on liquidated inventory of $2.3 million and $8.9
million for the 12 and 40 weeks ended November 7, 1998, respectively,
incurred in connection with store banner conversions and distribution
consolidations and 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.
The merger related costs of $31.4 million and $237.5 million for
the 12 and 40 weeks ended November 7, 1998, respectively, were incurred
in connection with the Company's plan to integrate its five primary
operations. See Merger Related Costs.
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
18
<PAGE>
the 40 weeks ended November 7, 1998, the amount of nondeductible
goodwill amortization and merger costs was greater than the income
before income tax which resulted in an unusually high effective tax
rate of 285.1%.
Income (loss) before extraordinary charge was $29.2 million and
$(30.5) 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 $248.4 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.
19
<PAGE>
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 "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 7 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
20
<PAGE>
merchandise sold year-to-year and other pricing and competitive
influences. By attempting to control costs and efficiently utilize
resources, the Company strives to minimize the effects of inflation on
its operations.
Recent Accounting Changes
SFAS No. 131 - Disclosures about Segments of an Enterprise and
Related Information is effective for the Company's fiscal 1998.
However, under this standard no interim disclosures are required. Any
required disclosure will be included in the Company's Form 10-K for
fiscal 1998. The Company believes that the disclosure will not have a
material impact to financial reporting.
SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities is effective for the Company's fiscal 2000. The Company
currently has outstanding one collar agreement that would be reported
under this standard and has determined that the impact of this
agreement on financial reporting is immaterial.
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>
21
<PAGE>
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.
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
22
<PAGE>
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.
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
23
<PAGE>
Company's competitors in each of its operating divisions include
national and regional supermarket chains, discount stores, independent
and specialty grocers, drug and convenience stores, large
category-dominant stores and the newer "alternative format" food
stores, including warehouse club stores, deep discount drug stores,
"supercenters" and conventional department stores. Competitors of the
Company include, among others, Safeway, Albertson's, Lucky, Costco,
Wal-Mart and Target. Retail businesses generally compete on the basis
of location, quality of products and service, price, product variety
and store condition. The Company's ability to compete depends in part
on its ability to successfully maintain and remodel existing stores and
develop new stores in advantageous locations.
Labor Relations. The Company is party to more than 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.
24
<PAGE>
Part II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
10G* Employment Agreement between Fred Meyer, Inc. and Robert G.
Miller, as amended.
10N* Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and George Golleher.
10R* Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
10S* Employment Protection Agreement dated September 22, 1998 between
Fred Meyer, Inc. and certain officers.
27 Restated Financial Data Schedule
* Previously filed with the quarterly report on Form 10-Q to which
this amendment relates.
(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.
25
<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: March 4, 1999 By JOHN STANDLEY
--------------------------------
John Standley
Senior Vice President and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> NOV-07-1998
<CASH> 186,045
<SECURITIES> 0
<RECEIVABLES> 140,291
<ALLOWANCES> 0
<INVENTORY> 2,007,875
<CURRENT-ASSETS> 2,595,752
<PP&E> 4,673,910
<DEPRECIATION> 1,102,936
<TOTAL-ASSETS> 10,294,660
<CURRENT-LIABILITIES> 2,436,578
<BONDS> 4,999,856
0
0
<COMMON> 1,550
<OTHER-SE> 2,174,668
<TOTAL-LIABILITY-AND-EQUITY> 10,294,660
<SALES> 11,022,471
<TOTAL-REVENUES> 11,022,471
<CGS> 7,749,272
<TOTAL-COSTS> 2,734,472
<OTHER-EXPENSES> 237,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,720
<INCOME-PRETAX> 16,465
<INCOME-TAX> 46,936
<INCOME-CONTINUING> (30,471)
<DISCONTINUED> 0
<EXTRAORDINARY> (217,934)
<CHANGES> 0
<NET-INCOME> (248,405)
<EPS-PRIMARY> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
