1
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 August 12, 1995
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 August 12, 1995: 26,704,430
2
Part I - Financial Information
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
August 12, January 28,
1995 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................. $ 36,048 $ 34,868
Receivables-net ........................... 23,240 20,025
Inventories ............................... 501,924 514,473
Prepaid expenses and other ................ 30,779 42,092
Income taxes receivable ................... -- 15,021
Current portion of deferred taxes ......... 15,586 15,116
---------- ----------
Total current assets ................... 607,577 641,595
---------- ----------
PROPERTY AND EQUIPMENT-NET ................... 975,143 896,439
---------- ----------
OTHER ASSETS ................................. 22,172 24,638
---------- ----------
TOTAL ............................... $1,604,892 $1,562,672
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks ..... $ 297,099 $ 312,044
Current portion of long-term debt
and lease obligations .................... 1,623 1,623
Income taxes payable ........................ 911 --
Accrued expenses and other .................. 84,351 78,414
---------- ----------
Total current liabilities ................ 383,984 392,081
---------- ----------
LONG-TERM DEBT AND MORTGAGES ................... 580,337 540,166
---------- ----------
CAPITAL LEASE OBLIGATIONS ...................... 13,766 13,823
---------- ----------
DEFERRED LEASE TRANSACTIONS .................... 43,561 45,655
---------- ----------
DEFERRED INCOME TAXES .......................... 20,466 22,258
---------- ----------
OTHER LONG-TERM LIABILITIES .................... 8,784 10,069
---------- ----------
STOCKHOLDERS' EQUITY
Common stock ................................ 270 268
Additional paid-in capital .................. 199,222 197,087
Retained earnings ........................... 359,047 345,291
Treasury stock and other .................... (4,545) (4,026)
---------- ----------
Total stockholders' equity ............... 553,994 538,620
---------- ----------
TOTAL ................................. $1,604,892 $1,562,672
========== ==========
See notes to consolidated financial statements.
3
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
12 Weeks Ended
----------------------
August 12, August 13,
1995 1994
--------- ---------
NET SALES ............................................ $775,809 $737,284
-------- --------
COST OF MERCHANDISE SOLD:
General .......................................... 552,634 513,981
Related party lease .............................. 1,285 1,285
-------- --------
Total cost of merchandise sold ................... 553,919 515,266
-------- --------
GROSS MARGIN ......................................... 221,890 220,018
-------- --------
OPERATING AND ADMINISTRATIVE EXPENSES:
General .......................................... 184,231 172,439
Related party leases ............................. 12,426 13,193
-------- --------
Total operating and administrative expenses ...... 196,657 185,632
-------- --------
INCOME FROM OPERATIONS ............................... 25,233 36,386
INTEREST EXPENSE-NET ................................. 8,019 5,429
-------- --------
INCOME BEFORE INCOME TAXES ........................... 17,214 30,957
PROVISION FOR INCOME TAXES ........................... 6,541 11,764
-------- --------
NET INCOME ........................................... $ 10,673 $ 19,193
======== ========
EARNINGS PER COMMON SHARE ............................ $ .38 $ .67
-------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ................................ 28,369 28,676
======== ========
See notes to consolidated financial statements.
4
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
28 Weeks Ended
-----------------------
August 12, August 13,
1995 1994
--------- ---------
NET SALES .......................................... $1,712,488 $1,669,631
---------- ----------
COST OF MERCHANDISE SOLD:
General ........................................ 1,221,560 1,172,952
Related party lease ............................ 2,998 2,998
---------- ----------
Total cost of merchandise sold ................. 1,224,558 1,175,950
---------- ----------
GROSS MARGIN ....................................... 487,930 493,681
---------- ----------
OPERATING AND ADMINISTRATIVE EXPENSES:
General ........................................ 416,732 394,235
Related party leases ........................... 29,840 30,868
---------- ----------
Total operating and administrative expenses .... 446,572 425,103
---------- ----------
INCOME FROM OPERATIONS ............................. 41,358 68,578
INTEREST EXPENSE-NET ............................... 19,171 11,837
---------- ----------
INCOME BEFORE INCOME TAXES ......................... 22,187 56,741
PROVISION FOR INCOME TAXES ......................... 8,431 21,562
---------- ----------
NET INCOME ......................................... $ 13,756 $ 35,179
========== ==========
EARNINGS PER COMMON SHARE .......................... $ .48 $ 1.23
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING .............................. 28,424 28,704
========== ==========
See notes to consolidated financial statements.
5
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
28 Weeks Ended
-------------------------------
August 12, August 13,
1995 1994
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 13,756 $ 35,179
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment ................. 55,607 46,337
Deferred lease transactions ............... (2,094) (1,399)
Other liabilities ......................... (1,285) 122
Income taxes .............................. 13,670 (6,210)
Inventories ............................... 12,549 (21,535)
Other current assets ...................... 8,098 3,420
Accounts payable and accrued expenses ..... 8,515 28,668
Other ..................................... 1,086 930
--------- ---------
Net cash provided by operating activities .... 109,902 85,512
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net ................. 1,591 2,388
Decrease in outstanding checks ............... (17,522) (7,156)
Decrease in notes receivable ................. 114 122
Long-term financing:
Borrowings ................................ 70,000 71,072
Repayments ................................ (29,887) (142)
--------- ---------
Net cash provided by financing activities .... 24,296 66,284
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net maturities (purchases)
of investment securities .................. 1,510 (920)
Purchases of property and equipment .......... (136,617) (150,641)
Net proceeds from sale of real property ...... 2,089 3,406
--------- ---------
Net cash used for investing activities ....... (133,018) (148,155)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase for the period .................. 1,180 3,641
Beginning of period .......................... 34,868 34,054
--------- ---------
End of period ................................ $ 36,048 $ 37,695
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest .................................. $ 13,328 $ 12,898
Income taxes .............................. (5,389) 27,500
See notes to consolidated financial statements.
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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. Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to current
year presentation.
3. 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.
4. Income Taxes
------------
Income taxes have been provided for based upon the current estimate of the
Company's annual effective tax rate.
5. Stockholders' Equity
--------------------
Changes in stockholders' equity for the twenty-eight weeks ended
August 12, 1995 were:
(In thousands)
--------------
Stockholders' equity, January 28, 1995 $538,620
Issuance of common stock-net 1,591
Amortization of unearned compensation 27
Net income 13,756
--------
Stockholders' equity, August 12, 1995 $553,994
========
6. 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.
7. Commitments and Contingencies
-----------------------------
The Company and its subsidiaries are parties to various legal claims,
actions, and complaints, certain of which involve material amounts.
Although the Company is unable to predict with certainty whether or not it
will ultimately be successful in these legal proceedings or, if not, what
the impact might be, management presently believes that disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
---------------
7
The financial information furnished in this Form 10-Q reflects all adjustments
of a normal recurring nature, which, in the opinion of management, are
necessary for a fair presentation of the results for the 12 and 28 weeks ended
August 12, 1995 and August 13, 1994.
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.
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 1995
and 1994 through internally generated cash flow, supplemented by borrowings
under committed and uncommitted bank lines of credit and unrated commercial
paper.
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. On June 1, 1994, the Company issued an
aggregate of $57,500,000 of senior notes to a group of life insurance
companies. The notes mature on July 15 of 1999, 2001, 2004, and 2007 and bear
interest rates of between 7.25 percent and 7.98 percent. On April 25, 1995,
the Company issued $50,000,000 of seven year senior 7.77 percent notes to a
major insurance company. On May 30, 1995, the Company borrowed $20,000,000
from a major international bank with a maturity of five years and bearing
interest at 6.775 percent. The Company also put in place a lease line of
credit for land and buildings for up to $100,000,000.
The Company entered into a new credit facility in 1994 with several domestic
and foreign banks for a committed line of credit which provides for borrowings
of up to $400,000,000. This agreement was extended for one year in 1995 and
continues through June 30, 2000, at which time the agreement terminates and
any outstanding amounts must be paid in full. On March 6, 1995, the Company
entered into a new 364-day credit facility with several domestic and foreign
banks for an additional committed line of credit which provides for borrowings
of up to $100,000,000. After 364 days, the agreement terminates, and any
outstanding amounts must be paid in full unless extended. In addition to
these committed credit facilities, the Company had $85,000,000 of uncommitted
money market lines of credit with several foreign banks and had $107,000,000
of uncommitted money market lines of credit with banks who are in the
committed credit facility. 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 August 12, 1995, the Company
had unrated commercial paper outstanding in the amount of approximately
$326,498,000, borrowings under money market lines with committed line banks of
$4,000,000, no borrowings under uncommitted borrowing facilities, and a total
of approximately $169,502,000 available for borrowings under its committed
credit facilities.
The Company has entered into interest rate swap and cap agreements to reduce
the impact of changes in interest rates on its floating rate long-term debt.
At August 12, 1995, the Company had outstanding six interest rate contracts
with commercial banks, having a total notional principal amount of
$100,000,000. Three of these agreements effectively fix the Company's
interest rate on unrated
8
commercial paper, floating rate facilities, and uncommitted lines of credit at
rates between 4.625 percent and 7.595 percent on a notional principal amount
of $50,000,000. These contracts expire in 1996, 1997, and 1998. The
remaining three agreements effectively limit the maximum interest rate the
Company will pay at rates between 5.00 percent and 9.00 percent on notional
principal amounts totaling $50,000,000. These three agreements mature in
1996, 1998, and 1999. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counter-
parties.
The Company believes that a combination of cash flow from operations and
borrowings under its expanded credit facilities will permit it to finance its
capital expenditure requirements for 1995, currently budgeted to be
$225,000,000. If the Company determines that it is preferable, it may fund
its capital expenditure requirements by mortgaging facilities, entering into
sale and leaseback transactions, or by issuing additional debt or equity.
RESULTS OF OPERATIONS
Comparison of the 12 weeks ended August 12, 1995 with the 12 weeks ended
August 13, 1994.
Net sales for the second quarter of 1995 increased $38,525,000 or 5.2 percent
over the corresponding quarter in 1994. The 1995 increase in sales reflects
openings of new stores and inflation, offset by soft sales in seasonal nonfood
categories partially due to weather comparisons and partly due to competitive
factors. Many competitive openings over the past year, particularly in the
home improvement and home electronic categories, softer consumer demand that
was weakest in the Seattle market, and Portland sales not entirely being back
to prestrike levels all combined to reduce our results. Comparable store
sales decreased 1.2 percent for the second quarter of 1995. Food comparable
store sales increased 1.5 percent, and nonfood comparable store sales
decreased 3.1 percent. The Company's food operations accounted for 41.6
percent of the overall sales in 1995 and 39.5 percent in 1994.
Gross margin as a percent of net sales was 28.6 percent for the second quarter
of 1995, compared with 30.1 percent for 1994's second quarter. Gross margins
decreased in the second quarter of 1995 due to higher markdowns in seasonally
sensitive items, startup costs associated with opening the Company's new food
distribution center near Seattle, and slow nonfood sales trends.
Operating and administrative expenses as a percent of net sales were 25.3
percent for the second quarter of 1995, compared with 25.2 percent for 1994's
second quarter. Expenses as a percent of sales increased in 1995's second
quarter, due to the impact of lower sales on fixed expenses and store labor
costs.
Net interest expense in the second quarter of 1995 was $8,019,000, an increase
of 47.7 percent from the $5,429,000 reported for 1994. The increase reflects
higher borrowings due to an acceleration in new store construction and
remodels and the impact of 1994's labor disputes.
The effective tax rate for the second quarters of 1995 and 1994 was 38.0
percent.
Net income decreased 44.4 percent to $10,673,000 in the second quarter of 1995
from $19,193,000 in the second quarter of 1994. Earnings per share were $.38
for the second quarter of 1995 based on 28,369,000 shares outstanding,
compared with $.67 for the prior year's second quarter based on 28,676,000
shares outstanding.
9
Comparison of the 28 weeks ended August 12, 1995 with the 28 weeks ended
August 13, 1994.
Net sales for the first 28 weeks of 1995 increased $42,857,000 or 2.6 percent
to $1,712,488,000. This increase reflects openings of new stores and
inflation, offset by soft sales in seasonal nonfood categories partially due
to weather comparisons and partly due to competitive factors. Many
competitive openings over the past year, particularly in the home improvement
and home electronic categories, softer consumer demand that was weakest in the
Seattle market, and Portland sales not entirely being back to prestrike levels
all combined to reduce our results. Comparable store sales decreased 3.3
percent for this 28 week period. Food comparable store sales decreased .5
percent, and nonfood comparable store sales decreased 5.2 percent. The
Company's food operations accounted for 41.8 percent of the overall sales for
the first 28 weeks of 1995 compared with 39.6 percent for the first 28 weeks
of 1994.
Gross margin as a percent of net sales was 28.5 percent for the first 28 weeks
of 1995 compared with 29.6 percent for 1994. Gross margins decreased in the
first 28 weeks of 1995 due to higher markdowns in seasonally sensitive items,
startup costs associated with opening the Company's new food distribution
center near Seattle, and slow nonfood sales trends.
Operating and administrative expenses as a percent of net sales were 26.1
percent for the first 28 weeks of 1995 compared with 25.5 percent for the
first 28 weeks of 1994. Expenses as a percent of sales increased in 1995's
first 28 weeks, due to the impact of lower sales on fixed expenses and store
labor costs.
Net interest expense in the first 28 weeks of 1995 was $19,171,000, an
increase of 62.0 percent from the $11,837,000 for 1994. The increase reflects
higher borrowings due to an acceleration in new store construction and
remodels and the impact of 1994's labor disputes.
The effective tax rate for the first 28 weeks of 1995 and 1994 was 38.0
percent.
Net income decreased 60.9 percent to $13,756,000 in the first 28 weeks of 1995
from $35,179,000 in the first 28 weeks of 1994. Earnings per share were $.48
for the first 28 weeks of 1995 based on 28,424,000 shares outstanding,
compared with $1.23 for the prior year's period based on 28,704,000 shares
outstanding.
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 second 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.
10
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders.
At the annual meeting of the stockholders of the Company held on
June 27, 1995, action was taken with respect to the election of
directors. As of the record date, May 1, 1995, 26,702,580 shares
of common stock were outstanding and entitled to vote. The voting
results are shown below:
Election of Directors:
For Withheld
---------- --------
Saul A. Fox 22,858,960 762,840
A.M. Gleason 23,454,831 166,969
Jerome Kohlberg, Jr. 22,856,089 765,711
Roger S. Meier 23,459,847 161,953
Michael W. Michelson 23,422,737 199,063
Robert G. Miller 23,421,820 199,980
Paul E. Raether 23,423,019 198,781
Amendments to the Company's 1990 Stock Incentive Plan:
Broker
For Against Abstain Nonvotes
---------- --------- --------- ----------
16,266,370 4,634,049 74,065 2,648,316
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit
-------
4F. Amended and Restated Term Loan Agreement, dated as of
May 17, 1995, in an original aggregate principal
amount of $30,000,000, among Fred Meyer, Inc., and
Cooperatieve Centrale Raiffeisen- Boerenleenbank B.A.
4G. Note Agreement, dated April 25, 1995, in an original
aggregate principal amount of $50,000,000, among Fred
Meyer, Inc., and The Prudential Insurance Company of
America and Pruco Life Insurance Company.
11. Computation of Earnings per Common Share.
22. Amended Fred Meyer, Inc. 1990 Stock Incentive Plan.
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the period for which
this report is filed.
11
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: September 7, 1995 /s/ KENNETH THRASHER
-------------------------------
Kenneth Thrasher
Senior Vice President - Finance
Chief Financial Officer
12
EXHIBIT INDEX
Exhibit Sequential
Number Document Description Page Number
------ -------------------- -----------
4F. Amended and Restated Term Loan Agreement,
dated as of May 17, 1995, in an original
aggregate principal amount of $30,000,000,
among Fred Meyer, Inc., and Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A.
4G. Note Agreement, dated April 25, 1995, in an
original aggregate principal amount of
$50,000,000, among Fred Meyer, Inc., and The
Prudential Insurance Company of America and
Pruco Life Insurance Company.
11. Computation of Earnings per Common Share.
22. Amended Fred Meyer, Inc. 1990 Stock Incentive Plan
27. Financial Data Schedule.