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 17, 1996
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. 1-11274
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 17, 1996: 26,730,071
Part I - Financial Information
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
August 17, February 3,
1996 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 44,837 $ 41,849
Receivables-net............................... 46,752 24,683
Inventories................................... 560,790 520,555
Prepaid expenses and other.................... 20,572 23,680
Current portion of deferred taxes............. 22,039 22,046
---------- ----------
Total current assets....................... 694,990 632,813
---------- ----------
PROPERTY AND EQUIPMENT-NET....................... 1,037,081 1,014,148
---------- ----------
OTHER ASSETS..................................... 45,256 24,631
---------- ----------
TOTAL................................... $1,777,327 $1,671,592
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks....... $ 343,631 $ 257,073
Current portion of long-term debt
and lease obligations...................... 1,468 1,468
Income taxes payable.......................... 15,939 4,857
Accrued expenses and other.................... 94,363 86,333
---------- ----------
Total current liabilities.................. 455,401 349,731
---------- ----------
LONG-TERM DEBT AND MORTGAGES..................... 636,469 656,260
---------- ----------
CAPITAL LEASE OBLIGATIONS........................ 13,250 13,298
---------- ----------
DEFERRED LEASE TRANSACTIONS...................... 39,392 42,271
---------- ----------
DEFERRED INCOME TAXES............................ 29,423 30,814
---------- ----------
OTHER LONG-TERM LIABILITIES...................... 7,219 7,984
---------- ----------
STOCKHOLDERS' EQUITY
Common stock.................................. 270 270
Additional paid-in capital.................... 200,064 199,363
Retained earnings............................. 400,193 375,577
Treasury stock and other...................... (4,354) (3,976)
---------- ----------
Total stockholders' equity................. 596,173 571,234
---------- ----------
TOTAL................................... $1,777,327 $1,671,592
========== ==========
See notes to consolidated financial statements.
2
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
12 Weeks Ended
----------------------------
August 17, August 12,
1996 1995
--------- ---------
NET SALES........................................ $853,914 $774,702
-------- --------
COST OF MERCHANDISE SOLD:
General...................................... 597,244 552,635
Related party lease.......................... 1,284 1,284
-------- --------
Total cost of merchandise sold............... 598,528 553,919
-------- --------
GROSS MARGIN..................................... 255,386 220,783
-------- --------
OPERATING AND ADMINISTRATIVE EXPENSES:
General...................................... 210,622 183,124
Related party leases......................... 11,113 12,426
-------- --------
Total operating and administrative expenses.. 221,735 195,550
-------- --------
INCOME FROM OPERATIONS........................... 33,651 25,233
INTEREST EXPENSE-NET............................. 9,178 8,019
-------- --------
INCOME BEFORE INCOME TAXES....................... 24,473 17,214
PROVISION FOR INCOME TAXES....................... 9,300 6,541
-------- --------
NET INCOME....................................... $ 15,173 $ 10,673
======== ========
EARNINGS PER COMMON SHARE........................ $.53 $.38
==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................ 28,703 28,369
======== ========
See notes to consolidated financial statements.
3
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
28 Weeks Ended
----------------------------
August 17, August 12,
1996 1995
---------- ---------
NET SALES........................................ $1,893,942 $1,710,053
---------- ----------
COST OF MERCHANDISE SOLD:
General...................................... 1,333,487 1,221,561
Related party lease.......................... 2,997 2,997
---------- ----------
Total cost of merchandise sold............... 1,336,484 1,224,558
---------- ----------
GROSS MARGIN..................................... 557,458 485,495
---------- ----------
OPERATING AND ADMINISTRATIVE EXPENSES:
General...................................... 467,711 414,297
Related party leases......................... 27,760 29,840
---------- ----------
Total operating and administrative expenses 495,471 444,137
---------- ----------
INCOME FROM OPERATIONS........................... 61,987 41,358
INTEREST EXPENSE-NET............................. 22,282 19,171
---------- ----------
INCOME BEFORE INCOME TAXES....................... 39,705 22,187
PROVISION FOR INCOME TAXES....................... 15,088 8,431
---------- ----------
NET INCOME....................................... $ 24,617 $ 13,756
========== ==========
EARNINGS PER COMMON SHARE........................ $.86 $.48
==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................ 28,609 28,424
========== ==========
See notes to consolidated financial statements.
4
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
28 Weeks Ended
--------------------------
August 17, August 12,
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 24,617 $ 13,756
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment....................... 62,560 55,607
Amortization of goodwill........................ 166 166
Deferred lease transactions..................... (2,879) (2,094)
Deferred income taxes........................... (1,384) ---
Other liabilities............................... (765) (1,285)
Income taxes.................................... 11,082 13,670
Inventories..................................... (40,235) 12,549
Other current assets............................ (18,961) 8,098
Accounts payable and accrued expenses........... 85,670 8,515
Other........................................... (3,488) 920
-------- --------
Net cash provided by operating activities.......... 116,383 109,902
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net....................... 285 2,137
Increase (decrease) in outstanding checks.......... 8,918 (17,522)
Increase in notes receivable....................... (22,396) (432)
Long-term financing:
Borrowings...................................... 22,930 70,000
Repayments...................................... (42,769) (29,887)
-------- --------
Net cash (repaid) provided
through financing activities..................... (33,032) 24,296
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of investment securities................. 5,080 1,510
Purchases of property and equipment................ (93,910) (136,617)
Net proceeds from sale of real property............ 8,467 2,089
-------- --------
Net cash used for investing activities............. (80,363) (133,018)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase for the period........................ 2,988 1,180
Beginning of period................................ 41,849 34,868
-------- --------
End of period...................................... $ 44,837 $ 36,048
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest........................................ $ 21,510 $ 13,328
Income taxes.................................... 5,335 (5,389)
See notes to consolidated financial statements.
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. 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
17, 1996 were:
(In thousands)
--------------
Stockholders' equity, February 3, 1996 $571,234
Issuance of common stock-net 285
Amortization of unearned compensation 37
Net income 24,617
--------
Stockholders' equity, August 17, 1996 $596,173
========
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.
8. Subsequent Events
-----------------
On September 5, 1996, the Company will close a sale/leaseback with
respect to ten of its stores and will generate approximately $108
million in net proceeds that will be used to pay down its credit lines.
Concurrently with an offering of the Company's stock by FMI Associates,
the Company plans to repurchase approximately $70,000,000 of Common
Stock from FMI Associates at a price equal to the public offering
price, less the underwriting discount. The Company plans to finance the
cost of the share repurchase with borrowings through its credit
facilities.
---------------
6
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 17, 1996 and August 12, 1995.
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
1996 and 1995 primarily through internally generated cash flow and
available lease facilities, supplemented by borrowings under committed and
uncommitted bank lines of credit, unrated commercial paper and the sale of
fixed rate five- and seven-year term notes.
On April 25, 1995, the Company issued $50,000,000 of unsecured seven-year
senior 7.77 percent notes to a major insurance company. On May 17, 1995,
the Company borrowed $20,000,000 from a major international bank, with a
maturity of May 17, 2000 and bearing interest at 6.775 percent. In May 1995
and December 1995 the Company also put into place two lease lines of credit
for land and buildings for up to $100,000,000 and $60,000,000,
respectively.
The Company entered into a new credit facility in 1995 with several
domestic and foreign banks for a committed line of credit which provides
for borrowings of up to $500,000,000. This agreement continues through June
30, 2000, at which time the agreement terminates; and any outstanding
amounts must be paid in full. In addition to this committed credit
facility, the Company has $105,000,000 of uncommitted money market lines of
credit with several foreign banks and $145,000,000 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 17, 1996, the Company had unrated commercial
paper outstanding in the amount of approximately $342,494,000, borrowings
under money market lines with committed line banks of $21,000,000, and a
total of approximately $136,506,000 available for borrowings that would be
supported by its committed credit facilities.
On September 5, 1996, the Company will close a sale/leaseback with respect
to ten of its stores and will generate approximately $108,000,000 in net
proceeds that will be used to pay down its credit lines, which will increase
the available capacity under those lines. The leases are for an initial
term of 21 years, subject to renewal at the option of the Company; and the
average annual rent, including amortization of fees and deferred gain, will
be approximately $7,700,000 annually.
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 17, 1996, 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.
7
The Company has entered into swap and cap agreements to reduce the impact
of changes in rent expense on its two lease lines of credit. At August 17,
1996, the Company had outstanding seven interest rate contracts with
commercial banks, having a total notional principal amount of $80,000,000.
Three of these agreements effectively fix the Company's rental rate on the
lease lines at rates between 6.2775 percent and 6.48 percent on notional
principal amounts of $40,000,000. The remaining four agreements effectively
limit the maximum rental rate the Company will pay at 7.25 percent on
notional principal amounts totaling $40,000,000. All seven of these
contracts expire in 2000.
The Company is exposed to credit loss in the event of nonperformance by the
other counterparties to the interest/rent rate swap agreements. However,
the Company does not anticipate nonperformance by the counterparties.
The Company believes that a combination of cash flow from operations,
proceeds from sale and leasebacks and borrowings under its credit
facilities will permit it to finance its capital expenditure requirements
for 1996, currently budgeted to be approximately $160,000,000, net of
estimated land sales and real estate financed on leases. If the Company
determines that it is preferable, it may fund its capital expenditure
requirements by mortgaging facilities, or by issuing additional debt.
The Company plans to file a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of 4,000,000
shares of its Common Stock (including a 400,000 share overallotment option)
to be sold by FMI Associates, an affiliate of Kohlberg Kravis Roberts &
Co., L.P. The Company will not sell any shares in the offering.
Concurrently, with the consummation of the offering, the Company plans to
repurchase approximately $70,000,000 of Common Stock from FMI Associates at
a price equal to the public offering price, less the underwriting
discount. The Company plans to finance the cost of the share repurchase
with borrowings through its existing credit facilities. Prior to the
offering and share repurchase, FMI Associates beneficially owned 10,700,038
shares.
RESULTS OF OPERATIONS
COMPARISON OF THE 12 WEEKS ENDED AUGUST 17, 1996 WITH THE 12 WEEKS ENDED
AUGUST 12, 1995.
Net sales for the second quarter of 1996 increased $79,212,000 or 10.2
percent over the corresponding quarter in 1995. The 1996 increase in sales
reflects openings of new stores, strong food sales, and the acquisition of
71 mall jewelry stores, including the July 12, 1996 acquisition of 49 mall
jewelry stores from Merksamer Jewelers, Inc. Comparable store sales
increased 2.9 percent for the second quarter of 1996. Food comparable store
sales increased 5.1 percent, and nonfood comparable store sales increased
1.3 percent. The Company's food operations accounted for 42.6 percent of
the overall sales in 1996 and 41.7 percent in 1995.
Gross margin as a percent of net sales was 29.9 percent for the second
quarter of 1996, compared with 28.5 percent for 1995's second quarter.
Gross margins increased in the second quarter of 1996 due to lower
markdowns, an improved sales mix of nonfood products, the impact on margins
of two multistore jewelry acquisitions, lower distribution center and
delivery costs as a percent of sales, and improved manufacturing plant
efficiencies.
Operating and administrative expenses as a percent of net sales were 26.0
percent for the second quarter of 1996, compared with 25.2 percent for
1995's second quarter. Expenses as a percent of sales increased in 1996's
second quarter due to costs associated with the opening of five new stores
in 1996's second quarter versus none in 1995, an investment in improved
customer service through added staffing at store level, the impact on
expenses of two multistore jewelry acquisitions, and higher maintenance
costs.
Net interest expense in the second quarter of 1996 was $9,178,000, an
increase of 14.5 percent from the $8,019,000 reported for 1995. The
increase reflects
8
higher interest rates and higher borrowings related to
new store construction and remodels and last year's completion of our
distribution center projects.
The effective tax rate for the second quarters of 1996 and 1995 was 38.0
percent.
Net income increased 42.2 percent to $15,173,000 in the second quarter of
1996 from $10,673,000 in the second quarter of 1995. Earnings per share
were $.53 for the second quarter of 1996 based on 28,703,000 shares
outstanding, compared with $.38 for the prior year's second quarter based
on 28,369,000 shares outstanding.
COMPARISON OF THE 28 WEEKS ENDED AUGUST 17, 1996 WITH THE 28 WEEKS ENDED
AUGUST 12, 1995.
Net sales for the first 28 weeks of 1996 increased $183,889,000 or 10.8
percent to $1,893,942,000. This increase reflects openings of new stores,
strong food sales, and the acquisition of 71 mall jewelry stores.
Comparable store sales increased 4.1 percent for this 28-week period due in
part to particularly strong comparable sales in the Portland area markets.
Food comparable store sales increased 5.9 percent, and nonfood comparable
store sales increased 2.9 percent. The Company's food operations accounted
for 42.7 percent of the overall sales for the first 28 weeks of 1996
compared with 41.9 percent for the first 28 weeks of 1995.
Gross margin as a percent of net sales was 29.4 percent for the first 28
weeks of 1996 compared with 28.4 percent for 1995. Gross margins increased
in the first 28 weeks of 1996 due to lower markdowns, improved food
margins, lower distribution center and delivery costs as a percent of sales
and the impact on margins of two multistore jewelry acquisitions.
Operating and administrative expenses as a percent of net sales were 26.2
percent for the first 28 weeks of 1996 compared with 26.0 percent for the
first 28 weeks of 1995. Expenses as a percent of net sales increased in
1996's first 28 weeks due to opening costs associated with six new stores
in the first 28 weeks of 1996 versus one in 1995, the impact on expenses of
the two multistore jewelry acquisitons and higher maintenance costs.
Preopening expenses for new stores are expensed in the quarter during which
the stores are opened.
Net interest expense in the first 28 weeks of 1996 was $22,282,000, an
increase of 16.2 percent from the $19,171,000 for 1995. The increase
reflects higher interest rates and higher borrowings related to new store
construction and remodels and last year's completion of our distribution
center projects.
The effective tax rate for the first 28 weeks of 1996 and 1995 was 38.0
percent.
Net income increased 79.0 percent to $24,617,000 in the first 28 weeks of
1996 from $13,756,000 in the first 28 weeks of 1995. Earnings per share
were $.86 for the first 28 weeks of 1996 based on 28,609,000 shares
outstanding, compared with $.48 for the prior year's period based on
28,424,000 shares outstanding.
In the first 28 weeks of 1996, the Company acquired 22 mall jewelry stores,
located primarily in California, which operated under various names and are
now operating under the names "Fred Meyer Jewelers" and "Merksamer
Jewelers," as well as 49 mall Merksamer Jewelers stores operating in 10
states, which will continue to operate under that name.
EFFECT OF LIFO
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 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. At year-end, the Company
makes the final adjustment reflecting the difference between its prior
quarterly estimates and actual LIFO amount for the year.
9
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, 1996, action was taken with respect to the election of
directors. As of the record date, May 1, 1996, 26,704,755 shares
of common stock were outstanding and entitled to vote. The voting
results are shown below:
Election of Directors:
For Withheld
---------- --------
James J. Curran 23,132,623 339,083
Saul A. Fox 23,018,367 453,339
A.M. Gleason 23,134,231 337,468
Jerome Kohlberg, Jr. 23,003,630 468,076
Roger S. Meier 23,132,958 338,748
Michael W. Michelson 23,028,625 443,081
Robert G. Miller 23,025,257 446,449
Paul E. Raether 23,028,393 443,306
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit
-------
10X. Real Estate Purchase and Sale Agreement dated April 5, 1996
between REC Resolution Company and Fred Meyer, Inc.
concerning seven Portland-area Fred Meyer properties.
10Y. Leasehold Assignment and Modification Agreement dated April
5, 1996 between Real Estate Properties Limited Partnership
and Fred Meyer, Inc. concerning the Assignor's leasehold
interests in various Fred Meyer properties.
10Z. Letter Agreement dated August 15, 1996 between REC
Resolution Company and Fred Meyer, Inc. concerning seven
Portland-area Fred Meyer properties.
11. Computation of Earnings 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.
10
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 4, 1996 KENNETH THRASHER
----------------- -----------------------------------
Kenneth Thrasher
Senior Vice President - Finance
Chief Financial Officer
11
EXHIBIT INDEX
Exhibit Sequential
Number Document Description Page Number
- ------ -------------------- -----------
10X. Real Estate Purchase and Sale Agreement dated
April 5, 1996 between REC Resolution Company
and Fred Meyer, Inc. concerning seven Portland-
area Fred Meyer properties.
10Y. Leasehold Assignment and Modification Agreement
dated April 5, 1996 between Real Estate
Properties Limited Partnership and Fred Meyer, Inc.
concerning the Assignor's leasehold interests in
various Fred Meyer properties.
10Z. Letter Agreement dated August 15, 1996 between
REC Resolution Company and Fred Meyer, Inc.
concerning seven Portland-area Fred Meyer
properties.
11. Computation of Earnings per Common Share.
27. Financial Data Schedule.