SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 4, 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 November 4, 1995: 26,704,480
2
Part I - Financial Information
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 4, January 28,
1995 1995
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 41,735 $ 34,868
Receivables-net................................. 24,928 20,025
Inventories..................................... 620,441 514,473
Prepaid expenses and other...................... 36,553 42,092
Income taxes receivable......................... 2,924 15,021
Current portion of deferred taxes............... 15,586 15,116
---------- ----------
Total current assets......................... 742,167 641,595
---------- ----------
PROPERTY AND EQUIPMENT-NET......................... 1,007,856 896,439
---------- ----------
OTHER ASSETS....................................... 22,262 24,638
---------- ----------
TOTAL.................................... $1,772,285 $1,562,672
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks......... $ 381,914 $ 312,044
Current portion of long-term debt
and lease obligations........................ 1,623 1,623
Accrued expenses and other...................... 78,378 78,414
---------- ----------
Total current liabilities.................... 461,915 392,081
---------- ----------
LONG-TERM DEBT AND MORTGAGES....................... 674,014 540,166
---------- ----------
CAPITAL LEASE OBLIGATIONS.......................... 13,741 13,823
---------- ----------
DEFERRED LEASE TRANSACTIONS........................ 42,915 45,655
---------- ----------
DEFERRED INCOME TAXES.............................. 20,466 22,258
---------- ----------
OTHER LONG-TERM LIABILITIES........................ 8,097 10,069
---------- ----------
STOCKHOLDERS' EQUITY
Common stock.................................... 270 268
Additional paid-in capital...................... 199,361 197,087
Retained earnings............................... 356,738 345,291
Treasury stock and other........................ (5,232) (4,026)
---------- ----------
Total stockholders' equity................... 551,137 538,620
---------- ----------
TOTAL..................................... $1,772,285 $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
--------------------------
November 4, November 5,
1995 1994
----------- -----------
NET SALES.......................................... $750,042 $626,804
-------- --------
COST OF MERCHANDISE SOLD:
General........................................ 539,939 472,876
Related party lease............................ 1,285 1,285
-------- --------
Total cost of merchandise sold................. 541,224 474,161
-------- --------
GROSS MARGIN....................................... 208,818 152,643
-------- --------
OPERATING AND ADMINISTRATIVE EXPENSES:
General........................................ 191,017 175,724
Related party leases........................... 12,408 13,138
-------- --------
Total operating and administrative expenses.... 203,425 188,862
-------- --------
WRITEDOWN OF CALIFORNIA ASSETS..................... --- 15,978
-------- --------
INCOME (LOSS) FROM OPERATIONS...................... 5,393 (52,197)
INTEREST EXPENSE-NET............................... 9,117 6,802
-------- --------
LOSS BEFORE INCOME TAXES........................... (3,724) (58,999)
BENEFIT FOR INCOME TAXES........................... (1,415) (22,420)
-------- --------
NET LOSS........................................... $ (2,309) $(36,579)
======== ========
LOSS PER COMMON SHARE.............................. $(.08) $(1.28)
===== ======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING....................... 28,254 28,556
====== ======
See notes to consolidated financial statements.
4
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
40 Weeks Ended
---------------------------
November 4, November 5,
1995 1994
----------- -----------
NET SALES........................................ $ 2,462,530 $ 2,296,435
----------- -----------
COST OF MERCHANDISE SOLD:
General...................................... 1,761,500 1,645,829
Related party lease.......................... 4,282 4,282
---------- ----------
Total cost of merchandise sold............... 1,765,782 1,650,111
---------- ----------
GROSS MARGIN..................................... 696,748 646,324
---------- ----------
OPERATING AND ADMINISTRATIVE EXPENSES:
General...................................... 607,749 569,965
Related party leases......................... 42,248 44,000
---------- ----------
Total operating and administrative expenses.. 649,997 613,965
---------- ----------
WRITEDOWN OF CALIFORNIA ASSETS................... --- 15,978
---------- ----------
INCOME FROM OPERATIONS........................... 46,751 16,381
INTEREST EXPENSE-NET............................. 28,288 18,639
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ 18,463 (2,258)
PROVISION (BENEFIT) FOR INCOME TAXES............. 7,016 (858)
---------- ----------
NET INCOME (LOSS) ............................... $ 11,447 $ (1,400)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE................. $.40 $(.05)
==== =====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................ 28,373 28,660
====== ======
See notes to consolidated financial statements.
5
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
40 Weeks Ended
------------------------
November 4, November 5,
1995 1994
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................. $ 11,447 $ (1,400)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of
property and equipment.................... 80,851 67,528
Deferred lease transactions.................. (2,740) (1,999)
Other liabilities............................ (1,972) 174
Income taxes................................. 9,835 (42,396)
Inventories.................................. (105,968) (113,608)
Other current assets......................... 636 (3,157)
Accounts payable and accrued expenses........ 82,252 84,709
Writedown of California assets............... --- 15,978
Other........................................ 862 1,477
-------- --------
Net cash provided by operating activities....... 75,203 7,306
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net.................... 1,031 3,004
Decrease in outstanding checks.................. (12,420) (24,202)
(Increase) decrease in notes receivable......... (114) 86
Long-term financing:
Borrowings................................... 134,461 234,462
Repayments................................... (695) (76)
-------- --------
Net cash provided by financing activities....... 122,263 213,274
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net maturities (purchases)
of investment securities..................... 1,510 (920)
Purchases of property and equipment............. (198,641) (219,440)
Net proceeds from sale of real property......... 6,532 3,429
-------- --------
Net cash used for investing activities.......... (190,599) (216,931)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase for the period..................... 6,867 3,649
Beginning of period............................. 34,868 34,054
-------- --------
End of period................................... $ 41,735 $ 37,703
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest..................................... $31,309 $21,274
Income taxes................................. (3,120) 40,759
See notes to consolidated financial statements.
6
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 forty weeks ended November 4,
1995 were:
(In thousands)
--------------
Stockholders' equity, January 28, 1995 $538,620
Issuance of common stock-net 1,031
Amortization of unearned compensation 39
Net income 11,447
--------
Stockholders' equity, November 4, 1995 $551,137
========
6. Writedown of California Assets
------------------------------
The Company recorded a pretax write-off of approximately $16 million
($.35 per share) as a result of its decision to exit the Northern
California market in the third quarter of 1994. The charge to income
covers the adjustment of the Company's book value on its Northern
California properties to an estimated net realizable value. The
properties included one store in Chico, California and three land
parcels, one in Redding and two in Sacramento, California.
7. 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.
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 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 40 weeks ended November 4, 1995 and November 5, 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 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
from a major international bank $20,000,000 with a maturity of five years
and bearing interest at 6.775 percent. In May 1995 the Company also put
into place a lease line of credit for land and building for up to
$100,000,000. The Company anticipates closing a similar lease line of
credit for $60,000,000 prior to January 1, 1996.
On October 30, 1995 the Company increased its existing $400,000,000
unsecured committed line of credit, which expires June 30, 2000, to
$500,000,000. The Company cancelled the existing $100,000,000 364-day line
of credit. In addition to these committed credit facilities, the Company
had $70,000,000 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 November 4, 1995, the Company had unrated commercial paper
outstanding in the amount of approximately $334,306,000, borrowings under
money market lines with committed line banks of $59,000,000, borrowings
under uncommitted borrowing facilities of $30,000,000, and a total of
approximately $76,694,000 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 November 4, 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 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
8
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
approximately $240,000,000, net of sale/leaseback activity. 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 NOVEMBER 4, 1995 WITH THE 12 WEEKS ENDED
NOVEMBER 5, 1994.
Net sales for the third quarter of 1995 increased $123,238,000 or 19.7
percent over the corresponding quarter in 1994. The 1995 increase reflects
the negative effect on 1994 sales of strikes in the Company's Portland area
stores and other facilities. Food sales were strong in the third quarter of
1995; but nonfood sales were soft as a result of increased competition, a
more promotional sales environment, sluggish consumer demand, a difficult
retail climate in the Puget Sound area, and deflation in certain product
categories. Comparable store sales increased 13.8 percent for the third
quarter of 1995. Food comparable store sales increased 23.7 percent, and
nonfood comparable store sales increased 7.4 percent. Excluding the stores
affected by the strikes, total comparable store sales increased 2.2
percent, with comparable store food sales increasing 9.0 percent and
comparable store nonfood sales decreasing 2.2 percent. The Company's food
operations accounted for 42.4 percent of the overall sales in 1995 and 38.2
percent in 1994.
Gross margin as a percent of net sales was 27.8 percent for the third
quarter of 1995, compared with 24.4 percent for 1994's third quarter. Gross
margins increased in the third quarter of 1995, primarily due to 1994's
results being negatively affected by strikes. 1995's gross margins were
reduced by slow nonfood sales, and startup costs associated with opening of
the perishable portion of the Company's new food distribution center near
Seattle, Washington.
Operating and administrative expenses as a percent of net sales were 27.1
percent for the third quarter of 1995, compared with 30.1 percent for
1994's third quarter. Expenses as a percent of sales decreased in 1995's
third quarter, due primarily to strikes in the prior year's third quarter.
The third quarter expenses were up mainly as a result of higher labor costs
and fixed costs due to slower than planned sales growth; and as a result of
opening five new stores, closing four stores, and completing three major
remodels.
The Company recorded a pretax write-off of $15,978,000 in 1994's third
quarter as a result of its decision to exit the Northern California market.
The charge to income covers the adjustment of the Company's book value on
its Northern California properties to an estimated net realizable value.
Net interest expense in the third quarter of 1995 was $9,117,000, an
increase of 34.0 percent from the $6,802,000 reported for 1994. The
increase primarily reflects higher borrowings due to an acceleration in new
store construction and remodels.
The effective tax rate for the third quarters of 1995 and 1994 was 38.0
percent.
The Company had a net loss of $2,309,000 in the third quarter of 1995
compared with a net loss of $36,579,000 in the third quarter of 1994. The
loss per share was $.08 for the third quarter of 1995 based on 28,254,000
shares outstanding, compared with a loss per share of $1.28 for the prior
year's third quarter based on 28,556,000 shares outstanding. The 1994 net
loss was affected by the above-mentioned strikes plus the California
after-tax write-off of $9,906,000, or $.35 per share. Excluding this
write-off, the Company's 1994 third quarter net loss and loss per share
were $26,673,000 and $.93, respectively.
9
COMPARISON OF THE 40 WEEKS ENDED NOVEMBER 4, 1995 WITH THE 40 WEEKS ENDED
NOVEMBER 5, 1994.
Net sales for the first 40 weeks of 1995 increased $166,095,000 or 7.2
percent to $2,462,530,000. The 1995 increase reflects the negative effect
on 1994 sales of strikes in the Company's Portland area stores and other
facilities. Food sales have been stronger than nonfood sales for the first
forty weeks of 1995. Nonfood sales were soft as a result of increased
competition, a more promotional sales environment, sluggish consumer
demand, a difficult retail climate in the Puget Sound area, and deflation
in certain product categories. Comparable store sales increased 1.4 percent
for this 40 week period. Food comparable store sales increased 5.9 percent,
and nonfood comparable store sales decreased 1.7 percent. Excluding the
stores affected by the strikes, total comparable store sales decreased 2.0
percent for the first 40 weeks of 1995, with comparable store food sales
increasing 1.6 percent and comparable store nonfood sales decreasing 4.5
percent. The Company's food operations accounted for 42.0 percent of the
overall sales for the first 40 weeks of 1995 compared with 39.2 percent for
the first 40 weeks of 1994.
Gross margin as a percent of net sales was 28.3 percent for the first 40
weeks of 1995 compared with 28.1 percent for 1994. Gross margins increased
in the first 40 weeks of 1995 primarily due to 1994's results being
negatively affected by strikes. 1995's gross margins were reduced by slow
nonfood sales, and startup costs associated with opening of the Company's
new food distribution center near Seattle, Washington.
Operating and administrative expenses as a percent of net sales were 26.4
percent for the first 40 weeks of 1995 compared with 26.7 percent for the
first 40 weeks of 1994. Expenses as a percent of sales decreased in 1995's
first 40 weeks, due primarily to strikes in the prior year.
The Company recorded a pretax write-off of $15,978,000 in 1994's third
quarter as a result of its decision to exit the Northern California market.
The charge to income covers the adjustment of the Company's book value on
its Northern California properties to an estimated net realizable value.
Net interest expense in the first 40 weeks of 1995 was $28,288,000, an
increase of 51.8 percent from the $18,639,000 for 1994. The increase
primarily reflects higher borrowings due to an acceleration in new store
construction and remodels, and to a lesser extent the impact on debt of
1994's strikes.
The effective tax rate for the first 40 weeks of 1995 and 1994 was 38.0
percent.
Net income was $11,447,000 in the first 40 weeks of 1995 compared with a
loss of $1,400,000 in the first 40 weeks of 1994. Earnings per share were
$.40 for the first 40 weeks of 1995 based on 28,373,000 shares outstanding,
compared with a loss per share of $.05 for the prior year's period based on
28,660,000 shares outstanding. The net loss in 1994 was affected by the
above-mentioned strikes plus the California after-tax write-off of
$9,906,000, or $.35 per share. Excluding the California write-off, net
income and earnings per share for the first 40 weeks of 1994 were
$8,506,000 and $.30, respectively.
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 third 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibit
-------
4F. Amended and Restated Credit Agreement dated as of October 30,
1995 among Fred Meyer, Inc., Various Financial Institutions,
Bank of America National Trust & Savings Association, as Agent,
and the Bank of Nova Scotia as co-Agent; arranged by BA
Securities, Inc.
10T. Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994
Restatement dated as of January 1, 1994.
10U. Lease Agreement Tax Retention Operating Lease dated May 5, 1995
between First Security Bank of Utah, N.A. not individually but
solely as Owner Trustee under SM Trust 1995-1, as Lessor and
Fred Meyer, Inc., as Lessee, Appendix A to Participation
Agreement and Lease Supplements nos. 1, 2, and 3 dated as of
May 3, 1995 between First Security Bank of Utah, N.A. lessor,
and Fred Meyer, Inc., lessee.
11. Computation of Earnings (Loss) per Common Share.
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: December 6, 1995 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 Credit Agreement dated as
of October 30, 1995 among Fred Meyer, Inc.,
Various Financial Institutions, Bank of
America National Trust & Savings Association,
as Agent, and the Bank of Nova Scotia as co-
Agent; arranged by BA Securities, Inc.
10T. Fred Meyer Excess Deferral and Benefit
Equalization Plan. 1994 Restatement dated as
of January 1, 1994.
10U. Lease Agreement Tax Retention Operating Lease
dated May 5, 1995 between First Security Bank
of Utah, N.A. not individually but solely as
Owner Trustee under SM Trust 1995-1, as Lessor
and Fred Meyer, Inc., as Lessee, Appendix A to
Participation Agreement and Lease Supplements
nos. 1, 2, and 3 dated as of May 3, 1995
between First Security Bank of Utah, N.A.
lessor, and Fred Meyer, Inc., lessee.
11. Computation of Earnings (Loss) per Common Share.
27. Financial Data Schedule.