SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 21, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-15023
FRED MEYER, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0798201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3800 S.E. 22nd Avenue
Portland, Oregon 97202
(Address of principal executive offices) (Zip Code)
(503) 232-8844
(Registrant's telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year,
if changed since last report.)
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 XX No
---- ----
Shares of Common Stock Outstanding at May 21, 1994: 26,500,998
2
Part I - Financial Information
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
May 21, January 29,
1994 1994
---------- ----------
ASSETS
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,026 $ 34,054
Receivables-net . . . . . . . . . . . . . . . . . . . . . 19,254 18,306
Inventories . . . . . . . . . . . . . . . . . . . . . . . 503,787 477,568
Prepaid expenses and other. . . . . . . . . . . . . . . . 48,453 54,098
Current deferred taxes. . . . . . . . . . . . . . . . . . 7,828 7,828
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . 617,348 591,854
---------- ----------
PROPERTY AND EQUIPMENT (NET) . . . . . . . . . . . . . . . . 783,550
719,338
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 7,310 7,590
---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $1,408,208 $1,318,782
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks . . . . . . . . . $ 310,819 $ 289,650
Current portion of long-term debt
and lease obligations. . . . . . . . . . . . . . . . . 1,749 1,749
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 5,329 18,660
Accrued expenses and other. . . . . . . . . . . . . . . . 71,743 72,934
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . 389,640 382,993
---------- ----------
LONG-TERM DEBT AND MORTGAGES . . . . . . . . . . . . . . . . 387,297
321,398
---------- ----------
CAPITAL LEASE OBLIGATIONS. . . . . . . . . . . . . . . . . . 14,865 14,895
---------- ----------
DEFERRED LEASE TRANSACTIONS. . . . . . . . . . . . . . . . . 47,455
48,254
---------- ----------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 18,496 18,496
---------- ----------
OTHER LONG-TERM LIABILITIES. . . . . . . . . . . . . . . . . 5,129 5,060
---------- ----------
STOCKHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . 268 267
Additional paid-in capital. . . . . . . . . . . . . . . . 195,189 193,719
Unearned compensation . . . . . . . . . . . . . . . . . . (344) (527)
Retained earnings . . . . . . . . . . . . . . . . . . . . 354,109 338,123
Treasury stock. . . . . . . . . . . . . . . . . . . . . . (3,896) (3,896)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . 545,326 527,686
---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $1,408,208 $1,318,782
========== ==========
See notes to consolidated financial statements.
/TABLE
3
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
16 Weeks Ended
-----------------------------
May 21, May 22,
1994 1993
-------- --------
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . $932,347 $852,059
-------- --------
COST OF MERCHANDISE SOLD:
General. . . . . . . . . . . . . . . . . . . . . . . . . . 659,195 604,219
Related party leases . . . . . . . . . . . . . . . . . . . 1,717 1,717
-------- --------
Total cost of merchandise sold . . . . . . . . . . . . . . 660,912 605,936
-------- --------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . . . . . 271,435 246,123
-------- --------
OPERATING AND ADMINISTRATIVE EXPENSES:
General. . . . . . . . . . . . . . . . . . . . . . . . . . 221,232 200,163
Related party leases . . . . . . . . . . . . . . . . . . . 17,672 18,073
Interest related to occupancy. . . . . . . . . . . . . . . 3,675 3,381
-------- --------
Total operating and administrative expenses. . . . . . . . 242,579 221,617
-------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . 28,856 24,506
INTEREST EXPENSE-NET . . . . . . . . . . . . . . . . . . . . . 3,072 2,267
-------- --------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . 25,784 22,239
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . 9,798 8,228
-------- --------
NET INCOME BEFORE THE EFFECT OF
AN ACCOUNTING CHANGE. . . . . . . . . . . . . . . . . . . . 15,986 14,011
EFFECT OF AN ACCOUNTING CHANGE . . . . . . . . . . . . . . . . ---
(2,588)
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,986 $ 11,423
======== ========
EARNINGS PER COMMON SHARE:
Net income before the effect
of an accounting change . . . . . . . . . . . . . . . . $.56 $.50
Effect of an accounting change . . . . . . . . . . . . . . --- (.09)
---- ----
Net income . . . . . . . . . . . . . . . . . . . . . . . . $.56 $.41
==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . . . . 28,725
28,165
====== ======
See notes to consolidated financial statements.
/TABLE
4
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
16 Weeks Ended
-----------------------------
May 21, May 22,
1994 1993
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $15,986 $11,423
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment. . . . . . . . . . . . . . . . 25,924 20,259
Income taxes . . . . . . . . . . . . . . . . . . . . . . (13,331) (9,013)
Inventories. . . . . . . . . . . . . . . . . . . . . . . (26,219) (26,123)
Other current assets . . . . . . . . . . . . . . . . . . 4,660 6,187
Accounts payable . . . . . . . . . . . . . . . . . . . . 32,267 27,360
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (1,538) (7,079)
Effect of an accounting change . . . . . . . . . . . . . --- 2,588
------- -------
Net cash provided by operating activities . . . . . . . . . 37,749 25,602
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net . . . . . . . . . . . . . . . 1,471 892
Outstanding checks . . . . . . . . . . . . . . . . . . . . (11,098) (21,904)
Decrease (increase) in notes receivable. . . . . . . . . . 117 (15)
Long-term financing:
Borrowings . . . . . . . . . . . . . . . . . . . . . . . 66,125 42,150
Repayments . . . . . . . . . . . . . . . . . . . . . . . (256) (228)
------- -------
Net cash provided by financing activities . . . . . . . . . 56,359 20,895
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . (91,612) (42,792)
Net proceeds from sale of real property . . . . . . . . . . 1,476 1,457
------- -------
Net cash used for investing activities. . . . . . . . . . . (90,136) (41,335)
------- -------
NET INCREASE IN CASH FOR THE PERIOD. . . . . . . . . . . . . . 3,972
5,162
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . 34,054 31,884
------- -------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . $38,026 $37,046
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 7,212 $ 5,072
Income taxes . . . . . . . . . . . . . . . . . . . . . . 23,018 17,178
See notes to consolidated financial statements.
/TABLE
5
FRED MEYER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Reporting Periods
-------------------------
The Company's interim reporting periods for reports
to stockholders are the 16th, 28th, and 40th weeks
of its fiscal year.
2. Inventories
-----------
Inventories consist mainly of merchandise held for
sale. Substantially all the inventories are valued
at the lower of last-in, first-out (LIFO) cost or
market. Estimated gross margins have been used for
determining the cost of merchandise sold for those
operating departments not taking physical
inventories at the end of the interim periods.
3. Income Taxes
------------
Income taxes have been provided for based upon the
current estimate of the Company's annual effective
tax rate.
The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," effective January 31, 1993.
This resulted in a one-time reduction in net income
of $2,588,000 in the first quarter of 1993.
4. Stockholders' Equity
--------------------
Changes in stockholders' equity for the sixteen
weeks ended May 21, 1994 were:
(In thousands)
--------------
Stockholders' equity, January 29, 1994 $527,686
Stock options exercised 1,471
Amortization of unearned compensation 183
Net income 15,986
----------
Stockholders' equity, May 21, 1994 $545,326
==========
5. Earnings Per Common Share
-------------------------
Fully diluted earnings per common share are computed by
dividing net income by the weighted average number of common
and common equivalent shares outstanding. Weighted average
shares reflect the dilutive effect of outstanding stock
options (ranging in exercise price from $3.24 to $41.25 per
share) which was determined by using the "treasury stock"
method.
6. 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 position or
consolidated results of operations.
_______________
The financial information furnished in this Form 10-Q reflects
all adjustments of a normal recurring nature, except for the
change in accounting for income taxes in the period ended May 22,
1993, which, in the opinion of management, are necessary for a
fair presentation of the results for the 16 weeks ended May 21,
1994 and May 22, 1993.
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.
6
FRED MEYER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company funded its working capital and capital expenditure
needs in 1993 and 1994 through internally generated cash flow,
supplemented by borrowings under committed and uncommitted bank
lines of credit and unrated commercial paper.
On October 4, 1993 the Company completed a secondary offering of
its stock whereby an affiliate of Kohlberg, Kravis, Roberts &
Co., L.P. ("The Selling Shareholder"), sold 3,450,000 of its
shares. The Company received proceeds of $1,638,000 resulting
from the exercise of 505,067 option shares by The Selling
Shareholder. Following the offering, The Selling Shareholder
owned approximately 38 percent of the Company's stock.
On June 29, 1993 and August 2, 1993, the Company issued an
aggregate of $70,000,000 of five-year floating rate notes to a
group of five banks. At the Company's option, the notes will
bear interest at a spread above LIBOR or certificate of deposit
rates. Proceeds from the floating rate notes were used to reduce
commercial paper borrowings.
The Company maintains a credit facility with several domestic and
foreign banks for committed lines of credit which provide for
borrowings of up to $300,000,000. This agreement was extended in
July 1993 for an additional year and continues through July 31,
1996, at which time the outstanding amounts convert to a term
loan payable quarterly through July 31, 2000. The Company is in
the process of renegotiating and extending its credit facility at
a total commitment of $400,000,000. In addition, uncommitted
lines of credit have been made available to the Company by
several foreign banks for a total of $35,000,000. The bank lines
of credit 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 MIS development. At May 21, 1994 the
Company had unrated commercial paper outstanding in the amount of
approximately $226,000,000, and a total of approximately
$74,000,000 available for borrowing under its committed credit
facilities.
The average interest rate for commercial paper outstanding at May
21, 1994 was approximately 4.29 percent. The Company has entered
into interest rate swap agreements to reduce the impact of
changes in interest rates on its commercial paper and other
floating rate debt. At May 21, 1994 the Company had outstanding
four interest rate contracts with commercial banks which
effectively fix the Company's interest rate exposure on an
aggregate $75,000,000 principal amount of commercial paper and
bank line borrowings at rates of between 4.63 percent and 7.60
percent and mature between June 1994 and November 1998. The
Company also purchased two interest rate contracts ("CAPs") which
limit the maximum interest rate the Company can pay at 5.00
percent on a notional amount of $25,000,000 of its short-term
floating rate debt, and which expire in November of 1996 and
1998. In the event of nonperformance by the other parties to the
interest rate swap agreements (which is not anticipated), the
Company could be exposed to prospective increases in interest
rates.
In April 1994, the Company received commitments from major
insurance companies to fund $57,500,000 for privately placed
notes with maturities of between five and 13 years, and an
average maturity of 9.35 years. Funding is scheduled for July
1994. Interest will be paid at fixed rates of between 7.25
percent and 7.98 percent payable on a semi-annual basis.
The Company believes that a combination of cash flow from
operations, the above-mentioned note issuance, and borrowings
under its expanded credit facilities will permit it to finance
its capital expenditure requirements for 1994, budgeted to be
$265,000,000. Due primarily to the current favorable interest
rates in relation to market rents, the Company believes that it
is presently desirable for it to own its newly constructed
facilities. If the Company determines that it is preferable, it
may also fund its capital expenditure requirements by mortgaging
facilities, entering into sales and leaseback transactions, or by
issuing additional debt or equity.
7
RESULTS OF OPERATIONS
COMPARISON OF THE 16 WEEKS ENDED MAY 21, 1994 WITH THE 16 WEEKS
ENDED MAY 22, 1993.
Net sales for the first quarter of 1994 increased $80,288,000 or
9.4 percent over the corresponding quarter in 1993. This
increase reflects sales growth at existing stores, openings of
new stores, and inflation. Sales increases were highlighted by
strong sales in seasonal garden and outdoor merchandise, offset
in part by flat apparel sales. Comparable store sales increased
3.4 percent for the first quarter of 1994. Comparable food store
sales increased 2.5 percent, and nonfood store sales increased
4.0 percent. The Company's food operations accounted for 39.7
percent of the overall sales in 1994 and 38.9 percent in 1993.
Gross margin as a percent of net sales was 29.1 percent for the
first quarter of 1994, compared with 28.9 percent in 1993's first
quarter. Gross margins increased due to improved nonfood sales
in the first quarter of 1994 and a slightly lower LIFO charge
related to continued low food inflation.
Operating and administrative expenses as a percent of net sales
were 26.0 percent for the first quarter of 1994, the same as for
1993's first quarter. Expenses as a percent of sales were flat
with 1993's first quarter, reflecting lower store occupancy
expenses and sales promotion costs, offset generally by the costs
of opening two new stores.
Net interest expense in the first quarter of 1994 was $3,072,000,
an increase of 35.5 percent from the $2,267,000 reported for
1993. The increase primarily reflects higher borrowings due to
an acceleration in new store construction and remodels and, to a
lesser extent, the impact of higher interest rates.
The effective tax rate for the first quarter of 1994 was 38.0
percent, compared with 37.0 percent in 1993.
Net income increased 14.1 percent to $15,986,000 in the first
quarter of 1994 from $14,011,000 in 1993 before the effect of
last year's accounting change. In the first quarter of 1993 a
charge of $2,588,000 was recognized from the Company's adoption
of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," resulting in reported net income
of $11,423,000 in the first quarter of 1993 after the effect of
this accounting change.
EFFECT OF LIFO
The Company estimates annual LIFO expense 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 softgoods 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). The Company reviewed these year-to-date indices at
the end of the first quarter and adjusted its LIFO reserve on a
year-to-date basis to reflect the Company's overall product mix,
anticipated year-end inventory levels, and the Company's
expectations of the indices for the remainder of the year.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
-------
11. Computation of Earnings per Common Share
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the
period for which this report is filed.
8
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.
(Registrant)
Dated: June 13, 1994 KENNETH THRASHER
------------- -------------------------------
Kenneth Thrasher
Senior Vice President - Finance
Chief Financial Officer
EXHIBIT INDEX
Exhibit Document Sequential
Number Description Page Number
- - ------- ------------ -----------
11 Computation of Earnings
per Common Share