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 9, 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 November 9, 1996: 24,571,712
Part I - Financial Information
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 9, February 3,
1996 1996
---------- ----------
ASSETS
CURRENT ASSET:
Cash and cash equivalents.................................. $ 42,834 $ 41,849
Receivables-net............................................ 34,579 24,683
Inventories................................................ 679,430 520,555
Prepaid expenses and other................................. 25,682 23,680
Current portion of deferred taxes.......................... 22,039 22,046
---------- ----------
Total current assets.................................... 804,564 632,813
---------- ----------
PROPERTY AND EQUIPMENT-NET.................................... 936,582 1,014,148
---------- ----------
OTHER ASSETS.................................................. 21,231 24,631
---------- ----------
TOTAL................................................ $1,762,377 $1,671,592
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks.................... $ 449,630 $ 257,073
Current portion of long-term debt
and lease obligations................................... 1,468 1,468
Income taxes payable....................................... 12,662 4,857
Accrued expenses and other................................. 91,130 86,333
---------- ----------
Total current liabilities............................... 554,890 349,731
---------- ----------
LONG-TERM DEBT AND MORTGAGES.................................. 576,891 656,260
---------- ----------
CAPITAL LEASE OBLIGATIONS..................................... 13,224 13,298
---------- ----------
DEFERRED LEASE TRANSACTIONS................................... 47,564 42,271
---------- ----------
DEFERRED INCOME TAXES......................................... 29,423 30,814
---------- ----------
OTHER LONG-TERM LIABILITIES................................... 6,895 7,984
---------- ----------
STOCKHOLDERS' EQUITY
Common stock............................................... 270 270
Additional paid-in capital................................. 200,954 199,363
Retained earnings.......................................... 406,485 375,577
Treasury stock and other................................... (74,219) (3,976)
---------- ----------
Total stockholders' equity.............................. 533,490 571,234
---------- ----------
TOTAL................................................ $1,762,377 $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
--------------------------------
November 9, November 4,
1996 1995
---------- ----------
NET SALES..................................................... $835,142 $749,015
-------- --------
COST OF MERCHANDISE SOLD:
General................................................... 589,430 539,939
Related party lease....................................... 1,285 1,285
-------- --------
Total cost of merchandise sold............................ 590,715 541,224
-------- --------
GROSS MARGIN.................................................. 244,427 207,791
-------- --------
OPERATING AND ADMINISTRATIVE EXPENSES:
General................................................... 214,049 189,990
Related party leases...................................... 11,906 12,408
-------- --------
Total operating and administrative expenses............... 225,955 202,398
-------- --------
INCOME FROM OPERATIONS........................................ 18,472 5,393
INTEREST EXPENSE-NET.......................................... 8,324 9,117
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES............................. 10,148 (3,724)
PROVISION (BENEFIT) FOR INCOME TAXES.......................... 3,856 (1,415)
-------- --------
NET INCOME (LOSS)............................................. $ 6,292 $ (2,309)
======== ========
INCOME (LOSS) PER COMMON SHARE................................ $.23 $(.08)
==== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.................................. 27,693 28,254
====== ======
See notes to consolidated financial statements.
3
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
40 Weeks Ended
----------------------------------
November 9, November 4,
1996 1995
---------- ----------
NET SALES.................................................. $2,729,084 $2,459,068
---------- ----------
COST OF MERCHANDISE SOLD:
General................................................ 1,922,917 1,761,500
Related party lease.................................... 4,282 4,282
---------- ----------
Total cost of merchandise sold......................... 1,927,199 1,765,782
---------- ----------
GROSS MARGIN............................................... 801,885 693,286
---------- ----------
OPERATING AND ADMINISTRATIVE EXPENSES:
General................................................ 681,761 604,287
Related party leases................................... 39,665 42,248
---------- ----------
Total operating and administrative expenses............ 721,426 646,535
---------- ----------
INCOME FROM OPERATIONS..................................... 80,459 46,751
INTEREST EXPENSE-NET....................................... 30,606 28,288
---------- ----------
INCOME BEFORE INCOME TAXES................................. 49,853 18,463
PROVISION FOR INCOME TAXES................................. 18,944 7,016
---------- ----------
NET INCOME ................................................ $ 30,909 $ 11,447
========== ==========
EARNINGS PER COMMON SHARE.................................. $1.09 $.40
===== ====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING...................................... 28,335 28,373
====== ======
See notes to consolidated financial statements.
4
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
40 Weeks Ended
-------------------------------
November 9, November 4,
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 30,909 $ 11,447
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment.............................. 89,444 80,851
Amortization of goodwill............................... 237 237
Deferred lease transactions............................ (3,699) (2,740)
Deferred income taxes.................................. (1,384) ---
Other liabilities...................................... (1,089) (1,972)
Income taxes........................................... 7,805 9,835
Inventories............................................ (158,875) (105,968)
Other current assets................................... (11,898) 636
Accounts payable and accrued expenses.................. 193,080 82,252
Other.................................................. (8,821) 625
-------- --------
Net cash provided by operating activities................. 135,709 75,203
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net.............................. 1,188 2,276
Stock repurchase and related expenses..................... (69,911) ---
Increase (decrease) in outstanding checks................. 4,275 (12,420)
Decrease in notes receivable.............................. (149) (1,359)
Long-term financing:
Borrowings............................................. 90 134,461
Repayments............................................. (79,533) (695)
-------- --------
Net cash (used for) provided by financing
activities............................................. (144,040) 122,263
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net maturities of investment securities................... 12,340 1,510
Purchases of property and equipment....................... (124,185) (198,641)
Net proceeds from sale of real property................... 121,161 6,532
-------- --------
Net cash provided by (used for) investing
activities............................................. 9,316 (190,599)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase for the period............................... 985 6,867
Beginning of period....................................... 41,849 34,868
-------- --------
End of period............................................. $ 42,834 $ 41,735
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest............................................... $30,364 $31,309
Income taxes........................................... 12,279 (3,120)
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 forty weeks ended November 9,
1996 were:
(In thousands)
--------------
Stockholders' equity, February 3, 1996 $571,234
Issuance of common stock-net 1,188
Stock repurchase and related expenses (69,911)
Amortization of unearned compensation 70
Net income 30,909
--------
Stockholders' equity, November 9, 1996 $533,490
========
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.
---------------
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 40 weeks ended November 9, 1996 and November 4, 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 lines of credit,
and the sale of fixed rate five- and seven-year term notes.
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 $160,000,000 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 lines of credit 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 9, 1996, the Company had
unrated commercial paper outstanding in the amount of approximately
$327,546,000, and a total of approximately $172,454,000 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 9, 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.
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 has entered into swap and cap agreements to reduce the impact
of changes in rent expense on its two lease lines of credit. At November 9,
1996, the Company had outstanding seven rent 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
7
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.
On September 5, 1996, the Company closed a sale/leaseback with respect to
ten of its stores which generated $108,000,000 in net proceeds used to pay
down its credit lines. The leases are for an initial term of 21 years,
subject to renewal at the option of the Company; and the average rent,
including amortization of fees and a deferred gain, is approximately
$8,200,000 annually.
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,
currently budgeted to be approximately $160,000,000 in 1996, 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.
On September 30, 1996, the Company completed a public offering of 3,965,546
shares of its Common Stock held by FMI Associates, an affiliate of Kohlberg
Kravis Roberts & Co., L.P. The Company did not sell any shares in the
offering. Concurrently with the public offering, the Company repurchased
2,200,000 shares of its Common Stock from FMI Associates at a cost of
$69,911,000, including related expenses. The Company financed the cost of
the share repurchase with borrowings through its existing credit facilities
and sale/leaseback proceeds. Prior to the offering and share repurchase,
FMI Associates beneficially owned 10,700,038 shares, and after the offering
and repurchase beneficially owns 4,534,492 shares.
On December 2, 1996 the Company was notified by KKR Associates, the general
partner of FMI Associates, of its intent to dissolve FMI Associates on
December 31, 1996. Following dissolution the partnership will sell up to
approximately 260,000 shares of its stock in the open market in early 1997.
The partnership will distribute the balance of the shares to its partners,
including approximately 3,650,000 shares to Metropolitan Life Insurance
Company and approximately 580,000 shares to KKR Associates. Metropolitan
Life Insurance Company, which had requested that the partnership distribute
rather than sell its interests, will own approximately 14 percent of the
Company's outstanding shares following the partnership's dissolution. The
Company has also been advised that effective January 1, 1997, Michael
Michelson, Paul Raether, and Saul Fox will resign from the Company's board
of directors.
RESULTS OF OPERATIONS
Comparison of the 12 weeks ended November 9, 1996 with the 12 weeks ended
November 4, 1995.
Net sales for the third quarter of 1996 increased $86,127,000 or 11.5
percent over the corresponding quarter in 1995. The 1996 increase in sales
reflects openings of new stores, strong fall apparel sales and continued
strong food sales, and the acquisition of 71 mall jewelry stores.
Comparable store sales increased 4.1 percent for the third quarter of 1996.
Food comparable store sales increased 3.5 percent, and nonfood comparable
store sales increased 4.6 percent. The Company's food operations accounted
for 41.9 percent of the overall sales in 1996's third quarter and 42.5
percent in 1995's third quarter.
Gross margin as a percent of net sales was 29.3 percent for the third
quarter of 1996, compared with 27.7 percent for 1995's third quarter. Gross
margins increased in the third quarter of 1996 primarily due to lower
markdowns, the
8
improved sales mix in nonfood products, the impact on margins of the two
multistore jewelry acquisitions, lower distribution center and delivery
costs as a percent of sales, low inflation, and improved plant profits.
Operating and administrative expenses as a percent of net sales were 27.1
percent for the third quarter of 1996, compared with 27.0 percent for
1995's third quarter. Expenses that increased were due to the Company's
commitment to improved customer service through added sales staffing at
store level and the impact on expenses of the two jewelry acquisitions,
offset by lower costs associated with new stores and closures that affected
last year's third quarter results, and lower 1996 advertising and corporate
overhead expenses as a percent of sales. Third quarter 1996 expenses were
also higher due to the early completion of Christmas merchandising and
costs associated with rolling out a new Sensormatic store security system.
Net interest expense in the third quarter of 1996 was $8,324,000, a
decrease of 8.7 percent from the $9,117,000 reported for 1995. The decrease
primarily reflects lower borrowings due to the impact of the Company's
recently completed $108 million sale/leaseback of ten stores and to
improved cash flow from operations, offset in part by the repurchases of
$69,911,000 of common Stock from FMI Associates, an affiliate of Kohlberg
Kravis Roberts & Co., L.P.
The effective tax rate for the third quarters of 1996 and 1995 was 38.0
percent.
Net income was $6,292,000 in the third quarter of 1996, compared with a net
loss of $2,309,000 in the third quarter of 1995. Earnings per share for the
third quarter of 1996 were $.23 based on 27,693,000 shares outstanding,
compared with a net loss per share of $.08 for the prior year's third
quarter based on 28,254,000 shares outstanding.
Comparison of the 40 weeks ended November 9, 1996 with the 40 weeks ended
November 4, 1995.
Net sales for the first 40 weeks of 1996 increased $270,016,000 or 11.0
percent to $2,729,084,000. This increase reflects openings of new stores,
strong food sales and improving nonfood sales, and the acquisition of 71
mall jewelry stores. Comparable store sales increased 4.1 percent, with
food comparable sales up 5.1 percent and nonfood comparable store sales up
3.4 percent. The Company's food operations accounted for 42.5 percent of
the overall sales for the first 40 weeks of 1996 compared with 42.1 percent
for the first 40 weeks of 1995.
Gross margin as a percent of net sales was 29.4 percent for the first 40
weeks of 1996 compared with 28.2 percent for 1995. Gross margins increased
in the first 40 weeks of 1996 primarily due to lower markdowns, lower
distribution center and delivery costs as a percent of sales, the impact on
margins of the two multistore jewelry acquisitions, the improved sales mix
in nonfood products, low inflation, and improved plant profits.
Operating and administrative expenses as a percent of net sales were 26.4
percent for the first 40 weeks of 1996 compared with 26.3 percent for the
first 40 weeks of 1995. Expenses that increased were due to the Company's
commitment to improved customer service through added sales staffing at
store level and the impact on expenses of the two jewelry acquisitions,
offset by lower costs associated with new stores and closures that affected
last year's results and lower 1996 corporate overhead and advertising costs
as a percent of sales.
Net interest expense in the first 40 weeks of 1996 was $30,606,000, an
increase of 8.2 percent from the $28,288,000 for 1995. The increase
primarily reflects higher borrowings due to the Company's new store
construction and remodel plan.
The effective tax rate for the first 40 weeks of 1996 and 1995 was 38.0
percent.
Net income increased 170.0 percent to $30,909,000 in the first 40 weeks of
1996 from $11,447,000 in 1995. Earnings per share were $1.09 for the first
40 weeks of 1996 based on 28,335,000 shares outstanding, compared with $.40
for the prior year's period based on 28,373,000 shares outstanding.
9
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
-------
10X. Bond Lease Agreement, dated September 5, 1996 by and
between Texas Commerce Bank National Association, as
Trustee (Landlord), and Fred Meyer, Inc., a Delaware
corporation, and Roundup Co., a Washington corporation,
as tenants (Tenants), including Guaranty, dated September
5, 1996 of Fred Meyer, Inc., as Guarantor.
10Y. Rent Rebate Agreement, dated September 5, 1996 between
Texas Commerce Bank National Association (Landlord) and
Fred Meyer, Inc. and Roundup Co. (Tenants).
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, 1996 KENNETH THRASHER
---------------- -----------------------------------
Kenneth Thrasher
Senior Vice President - Finance
Chief Financial Officer
12
EXHIBIT INDEX
Exhibit Sequential
Number Document Description Page Number
- ------ -------------------- -----------
10X. Bond Lease Agreement, dated September 5, 1996
by and between Texas Commerce Bank National
Association, as Trustee (Landlord), and Fred
Meyer, Inc., a Delaware corporation, and
Roundup Co., a Washington corporation, as
tenants (Tenants), including Guaranty, dated
September 5, 1996 of Fred Meyer, Inc., as
Guarantor..
10Y. Rent Rebate Agreement, dated September 5, 1996
between Texas Commerce Bank National
Association (Landlord) and Fred Meyer, Inc.
and Roundup Co. (Tenants).
11. Computation of Earnings (Loss) per Common Share.
27. Financial Data Schedule.