-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vz33gEwtxA6/Wj/AlQ/EY4KQVzj+y+g4PDNLM7EFaJdJlOGbtpmZr8nftDhWt0Iw 8fGUPDf9JneOtHAMfvZ8jA== 0000893877-98-000787.txt : 19981228 0000893877-98-000787.hdr.sgml : 19981228 ACCESSION NUMBER: 0000893877-98-000787 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981107 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRED MEYER INC CENTRAL INDEX KEY: 0001043273 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 911826443 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13339 FILM NUMBER: 98773187 BUSINESS ADDRESS: STREET 1: 3800 SE 22ND AVE CITY: PORTLAND STATE: OR ZIP: 97202 BUSINESS PHONE: 5032328844 MAIL ADDRESS: STREET 1: 3800 SE 22ND AVENUE CITY: PORTLAND STATE: OR ZIP: 97202 FORMER COMPANY: FORMER CONFORMED NAME: MEYER SMITH HOLDCO INC DATE OF NAME CHANGE: 19970730 10-Q 1 QUARTERLY REPORT ================================================================================ UNITED STATES 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 7, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-13339 FRED MEYER, INC. (Exact name of registrant as specified in its charter) Delaware 91-1826443 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3800 SE 22nd Avenue Portland, Oregon 97202 (Address of principal executive offices) (Zip Code) (503) 232-8844 (Registrant's telephone number, including area code) 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 [X] No [ ] Number of shares of Common Stock outstanding at December 5, 1998: 155,169,609 ================================================================================ Table of Contents - -------------------------------------------------------------------------------- Items of Form 10-Q Page Part I - FINANCIAL INFORMATION Item 1 Financial Statements .................................... 3 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................................. 19 Part II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K......................... 20 Signatures ............................................................... 21 2 Part I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Item 1. Financial Statements. - ----------------------------- Consolidated Statements of Income (Unaudited)
12 Weeks Ended 40 Weeks Ended --------------------------- -------------------------- November 7, November 8, November 7, November 8, 1998 1997 1998 1997 (In thousands, except per share data) ----------- ----------- ----------- ----------- Net sales $ 3,477,091 $ 1,945,543 $ 11,022,471 $ 4,996,582 Cost of goods sold 2,432,708 1,370,439 7,740,401 3,515,612 ----------- ----------- ------------ ---------- Gross margin 1,044,383 575,104 3,282,070 1,480,970 Operating and administrative expenses 833,836 488,660 2,668,306 1,272,227 Amortization of goodwill 22,930 6,514 66,166 8,269 Merger related costs 33,737 - 290,701 - ----------- ----------- ------------ ---------- Income from operations 153,880 79,930 256,897 200,474 Interest expense 92,945 30,174 284,720 66,189 ----------- ----------- ------------ ---------- Income (loss) before income taxes and extraordinary charge 60,935 49,756 (27,823) 134,285 Provision for income taxes 31,771 21,091 29,619 53,655 ----------- ----------- ------------ ---------- Income (loss) before extraordinary charge 29,164 28,665 (57,442) 80,630 Extraordinary charge, net of taxes (324) (91,210) (217,934) (91,210) ----------- ----------- ------------ ---------- Net income (loss) $ 28,840 $ (62,545) $ (275,376) $ (10,580) =========== =========== ============ ========== Basic earnings per common share: Income (loss) before extraordinary charge $ 0.19 $ 0.24 $ (0.38) $ 0.83 Extraordinary charge - (0.77) (1.45) (0.94) ----------- ----------- ------------ ---------- Net income (loss) $ 0.19 $ (0.53) $ (1.83) $ (0.11) =========== =========== ============ ========== Basic weighted average number of common shares outstanding 154,690 118,331 150,601 97,355 =========== =========== ============ ========== Diluted earnings per common share: Income (loss) before extraordinary charge $ 0.18 $ 0.23 $ (0.38) $ 0.79 Extraordinary charge - (0.74) (1.45) (0.89) ----------- ----------- ------------ ---------- Net income (loss) $ 0.18 $ (0.51) $ (1.83) $ (0.10) =========== =========== ============ ========== Diluted weighted average number of common and common equivalent shares outstanding 162,127 123,546 150,601 101,562 =========== =========== ============ ========== See Notes to Consolidated Financial Statements.
3 Consolidated Balance Sheets (Unaudited)
November 7, January 31, (In thousands) 1998 1998 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 186,045 $ 117,311 Receivables 140,291 108,496 Inventories 2,007,875 1,240,866 Prepaid expenses and other 60,540 70,536 Current portion of deferred taxes 218,318 90,804 ----------- ----------- Total current assets 2,613,069 1,628,013 Property and equipment--net 3,570,974 2,432,040 Other assets: Goodwill--net 3,684,442 1,279,130 Long-term deferred tax assets 272,573 - Other 170,919 83,753 ----------- ----------- Total other assets 4,127,934 1,362,883 ----------- ----------- Total assets $10,311,977 $ 5,422,936 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,294,311 $ 766,678 Accrued expenses and other 1,051,905 407,167 Current portion of long-term debt and lease obligations 134,650 19,650 ----------- ----------- Total current liabilities 2,480,866 1,193,495 Long-term debt 4,999,856 2,184,794 Capital lease obligations 173,341 82,782 Deferred lease transactions 30,175 38,556 Deferred income taxes - 83,183 Other long-term liabilities 478,492 137,766 Stockholders' equity: Common stock 1,550 1,288 Additional paid-in capital 1,895,533 1,173,760 Notes receivable from officers (335) (298) Unearned compensation (3,236) (466) Retained earnings 255,735 528,076 ----------- ----------- Total stockholders' equity 2,149,247 1,702,360 ----------- ----------- Total liabilities and stockholders' equity $10,311,977 $ 5,422,936 =========== =========== See Notes to Consolidated Financial Statements.
4 Consolidated Statements of Cash Flows (Unaudited)
40 Weeks Ended ------------------------------- November 7, November 8, (In thousands) 1998 1997 ----------- ----------- Cash flows from operating activities: Income (loss) before extraordinary charge $ (57,442) $ 80,630 Adjustments to reconcile income (loss) before extraordinary charge to net cash provided by operating activities: Depreciation and amortization of property and equipment 270,039 141,807 Amortization of goodwill 66,166 8,269 Deferred lease transactions (9,791) (8,884) Merger related asset write-offs 89,231 - Deferred income taxes 26,586 (1,140) Changes in operating assets and liabilities: Receivables (4,740) (10,156) Inventories (170,119) (189,050) Other current assets 12,896 12,780 Accounts payable 198,018 138,750 Accrued expenses and other liabilities (98) (5,953) Income taxes 19,628 6,235 Other 16,930 (35) ----------- ----------- Net cash provided by operating activities 457,304 173,253 Cash flows from investing activities: Cash acquired in acquisitions 66,519 71,476 Payments made for acquisitions (173,847) (419,402) Purchases of property and equipment (497,616) (250,302) Proceeds from sale of property and equipment 23,028 64,625 Other (27,096) 5,375 ----------- ----------- Net cash used for investing activities (609,012) (528,228) Cash flows from financing activities: Issuance of common stock - net 59,377 223,679 Net increase in notes receivable 319 928 Payment of deferred financing fees (69,571) - Long-term financing: Borrowings 4,514,075 1,989,653 Repayments (4,288,488) (1,728,105) Other 4,730 - ----------- ----------- Net cash provided by financing activities 220,442 486,155 ----------- ----------- Net increase in cash and cash equivalents for the period 68,734 131,180 Cash and cash equivalents at beginning of year 117,311 63,340 ----------- ----------- Cash and cash equivalents at end of period $ 186,045 $ 194,520 =========== =========== See Notes to Consolidated Financial Statements.
5 Notes to Consolidated Financial Statements 1. Organization Fred Meyer, Inc., a Delaware corporation, collectively with its subsidiaries ("Fred Meyer" or the "Company") is one of the largest food retailers in the United States, operating 830 supermarkets and multi-department stores located primarily in the Western portion of the United States. The Company operates multiple formats that appeal to customers across a wide range of income brackets including stores under the following banners: Fred Meyer, Smith's Food & Drug Centers, Smitty's, QFC, Ralphs, and Food 4 Less. 2. Recent Events On October 19, 1998, the Company announced the signing of a definitive merger agreement with The Kroger Co. ("Kroger"), the largest retail grocery chain in the United States. On that date, Kroger operated 1,398 food stores, 802 convenience stores and 34 manufacturing facilities that manufacture products for sale in all Kroger divisions, as well as to external customers. Under the terms of the merger agreement, Fred Meyer stockholders will receive one newly issued share of Kroger common stock for each share of Fred Meyer common stock. The transaction will be accounted for as a pooling of interests. It is expected to close in early 1999 subject to approval of Kroger and Fred Meyer stockholders and antitrust and other regulatory authorities and customary closing conditions. In anticipation of the intended merger with Kroger, the Company has secured approval from its banks to amend its 1998 Senior Credit Facility (as defined herein) as well as its operating lease facility. These proposed amendments are subject to completion of the merger and will be guaranteed by Kroger. The Company's outstanding senior notes due 2003 through 2008 are expected to remain outstanding after the merger. Additional information regarding the merger can be found in the Company's current report on Form 8-K dated October 20, 1998. On December 6, 1998, Ralphs Grocery Company, a subsidiary of the Company, sold 38 grocery stores located in Kansas and Missouri to Associated Wholesale Grocers, Inc., a member-owned grocery cooperative. 3. Acquisitions On March 9, 1998, Fred Meyer issued 41.2 million shares of Fred Meyer common stock for all the outstanding stock of Quality Food Centers, Inc. ("QFC"), a supermarket chain operating 89 stores in the Seattle/Puget Sound region of Washington state and 56 Hughes Family Markets stores in Southern California as of the date of the merger. As a result, QFC became a wholly owned subsidiary of Fred Meyer. The merger of Fred Meyer and QFC was accounted for as a pooling of interests and the accompanying financial statements reflect the consolidated results of Fred Meyer and QFC for all periods presented. The amounts included in the prior year results of operations from Fred Meyer and QFC are as follows (in thousands, except per share data):
Fred Meyer QFC Total Historical Historical Company ---------- ---------- ------- 12 Weeks Ended November 8, 1997 Net sales $1,460,372 $ 485,171 $ 1,945,543 Net income (loss) (72,933) 10,388 (62,545) Diluted earnings (loss) per common share (0.89) 0.25 (0.51) 40 Weeks Ended November 8, 1997 Net sales 3,611,323 1,385,259 4,996,582 Net income (loss) (40,554) 29,974 (10,580) Diluted earnings (loss) per common share (0.64) 0.79 (0.10)
6 On March 10, 1998, the Company acquired Food 4 Less Holdings, Inc. ("Ralphs/Food 4 Less"), a supermarket chain operating 409 stores primarily in Southern California on that date, which became a wholly-owned subsidiary of the Company. The Company issued 21.7 million shares of common stock of the Company for all of the equity interests of Ralphs/Food 4 Less. The acquisition is being accounted for under the purchase method of accounting. The financial statements reflect the preliminary allocation of the purchase price and assumption of certain liabilities and include the operating results of Ralphs/Food 4 Less from the date of acquisition. In conjunction with the acquisitions of Ralphs/Food 4 Less and QFC, the Company entered into a settlement agreement with the State of California in which it agreed to divest 19 specific stores in Southern California to settle potential antitrust and unfair competition claims. Currently, the Company has sold five of the stores and has sale agreements or letters of intent on another 13 stores. On September 9, 1997, the Company succeeded to the businesses of Fred Meyer Stores, Inc. ("Fred Meyer Stores" and known as Fred Meyer, Inc. prior to September 9, 1997) and Smith's Food & Drug Centers, Inc. ("Smith's"). At the closing on September 9, 1997, Fred Meyer Stores and Smith's, a regional supermarket and drug store chain operating 152 stores in the Intermountain and Southwestern regions of the United States on that date, became wholly owned subsidiaries of the Company. The Company issued 1.05 shares of common stock of the Company for each outstanding share of Class A Common Stock and Class B Common Stock of Smith's and one share of common stock of the Company for each outstanding share of common stock of Fred Meyer Stores. The Smith's acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of Smith's from the date of acquisition. In total, the Company issued 33.3 million shares of common stock to the Smith's stockholders. On August 17, 1997, the Company acquired substantially all of the assets and liabilities of Fox Jewelry Company ("Fox") in exchange for common stock with a fair value of $9.2 million. The Fox acquisition was accounted for under the purchase method of accounting. The results of operations of Fox do not have a material effect on the consolidated operating results, and therefore are not included in the pro forma data presented. On March 19, 1997, QFC acquired the principal operations of Hughes Markets, Inc. ("Hughes"), including the assets and liabilities related to 57 stores located in Southern California and a 50% interest in Santee Dairies, Inc., one of the largest dairy plants in California. The merger was effected through the acquisition of 100% of the outstanding voting securities of Hughes for approximately $360.5 million in cash and the assumption of approximately $33.2 million of indebtedness of Hughes. The Hughes acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of Hughes from the date of acquisition. On February 14, 1997, QFC acquired the principal operations of Keith Uddenberg, Inc. ("KUI"), including assets and liabilities related to 25 stores in the western and southern Puget Sound region of Washington. The merger was effected through the acquisition of 100% of the outstanding voting securities of KUI for $34.5 million cash, 1.7 million shares of common stock and the assumption of approximately $23.8 million of indebtedness of KUI. The KUI acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of KUI from the date of acquisition. Additionally, the Company completed the acquisition of food and fine jewelry stores during the 40 weeks ended November 7, 1998. On October 4, 1998, the Company acquired 123 Littman Jewelers and 9 Barclays Jewelers stores located primarily in 10 states on the East coast. On October 1, 1998, the Company acquired 13 Albertson's and Buttrey grocery stores in Montana and 7 Wyoming. These acquisitions were accounted for under the purchase method of accounting. The results of operations for these acquired stores do not have a material effect on the consolidated operating results, and therefore are not included in the pro forma data presented. The following unaudited pro forma information presents the results of the Company's operations assuming the Ralphs/Food 4 Less, Smith's, QFC, KUI, and Hughes acquisitions occurred at the beginning of each period presented. In addition, the following unaudited pro forma information gives effect to refinancing certain debt as if such refinancing occurred at the beginning of each period presented (in thousands, except per share data):
40 Weeks Ended ----------------------------- November 7, November 8, 1998 1997 ----------- ----------- Net sales $11,568,003 $11,285,962 Income (loss) before extraordinary charge (118,210) 55,684 Net loss (336,144) (161,926) Diluted earnings per common share: Income (loss) before extraordinary charge (0.77) 0.37 Net loss (2.19) (1.06)
The pro forma financial information does not reflect anticipated annualized operating savings and assumes all notes subject to the refinancings were redeemed pursuant to tender offers made. Additionally, each year includes an extraordinary charge of $217.9 million, net of the related tax benefit, on the extinguishment of debt as a result of refinancing certain debt. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the beginning of each period nor is it necessarily indicative of future operating results. The supplemental schedule of business acquisitions is as follows (in thousands):
40 Weeks Ended ---------------------------- November 7, November 8, 1998 1997 ----------- ----------- Fair value of assets acquired $ 2,165,950 $ 2,055,091 Goodwill recorded 2,397,030 1,221,141 Value of stock issued (652,514) (767,145) Liabilities assumed (3,736,619) (2,089,685) ----------- ----------- Cash paid $ 173,847 $ 419,402 =========== ===========
4. Summary of Significant Accounting Policies Basis of Presentation--The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature which are considered necessary for a fair presentation have been included. 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. 8 Fiscal Year--The Company's fiscal year ends on the Saturday closest to January 31. Fiscal year 1997 ended on January 31, 1998 ("1997") and fiscal year 1998 ends on January 30, 1999 ("1998"). As a result of its acquisition, QFC changed its year end to that of Fred Meyer beginning February 1, 1998, the first day of fiscal 1998. Revenues and expenses of QFC from the end of QFC's fiscal year 1997, ended on December 27, 1997, to February 1, 1998 (5 weeks) were immaterial and have been excluded from the statement of operations. Accordingly, net income of $3.3 million for that period has been added to retained earnings. Inventories--Inventories consist principally of merchandise held for sale and substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. Inventories on a first-in, first-out method, which approximates replacement cost, would have been higher by $66.9 million at November 7, 1998 and $51.8 million at January 31, 1998. The pretax LIFO charge in the third quarter was $4.1 million in 1998 and $2.1 million in 1997. The pretax LIFO charge for the first 40 weeks was $15.1 million in 1998 and $5.6 million in 1997. Goodwill--Goodwill is being amortized on a straight-line basis over 15 to 40 years. Goodwill recorded in connection with the acquisition of Ralphs/Food 4 Less, Smith's, Hughes, and KUI (see Note 3) is being amortized over 40 years. Goodwill recorded in connection with the Fox acquisition is being amortized over 15 years. Management periodically evaluates the recoverability of goodwill based upon current and anticipated net income and undiscounted future cash flows. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Income Taxes--Deferred income taxes are provided for those items included in the determination of income or loss in different periods for financial reporting and income tax purposes. Targeted jobs and other tax credits are recognized in the year realized. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred tax assets recognized by the Company are presented net of any deferred tax liabilities and valuation allowance and consist primarily of net operating loss carryforwards. The deferred tax assets will be used to offset future tax liabilities generated from taxable income. However, the amount available to offset the consolidated tax liability will be limited by each subsidiary's tax circumstances and availability of its net operating loss carryforwards. Earnings per Share--Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share are computed by dividing net income by the weighted average number of common and common equivalent shares outstanding which consist of outstanding stock options and warrants. Common equivalent shares are excluded from the diluted weighted average share and common equivalent shares outstanding for the first 40 weeks of 1998 due to the net loss. Reclassifications--Certain prior period amounts have been reclassified to conform to current period presentation. The reclassifications have no effect on reported net income. 9 5. Comprehensive Income Effective February 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires items previously reported as a component of stockholders' equity to be more prominently reported in a separate financial statement as a component of comprehensive income. Components of comprehensive income include net income (loss) and the income tax benefit the Company receives upon the exercise of stock options. Comprehensive income (loss) for the third quarter was $29.4 million in 1998 and $(60.4) million in 1997. Comprehensive loss for the first 40 weeks was $270.3 million in 1998 and $4.6 million in 1997. 6. Long-term Debt Long-term debt consisted of the following (in thousands):
November 7, January 31, 1998 1998 ----------- ----------- 1997 Senior Credit Facility $ - $1,300,000 1998 Senior Credit Facility 2,448,750 - Senior notes, unsecured, due 2003 through 2008, fixed interest 1,750,000 - rate from 7.15% to 7.45% QFC Credit Facility 214,293 Commercial paper with maturities through February 10, 1999, 628,075 367,156 classified as long-term, interest rates of 5.78% to 6.10% at August 15, 1998 QFC 8.7% Senior Subordinated Notes, principal due 2007 with 3,065 150,000 interest payable semi-annually Long-term notes secured by trust deeds, due through 2016, 59,941 61,075 interest rates from 5.00% to 10.50% Uncommitted bank borrowings classified as long-term 85,000 79,000 Ralphs senior subordinated notes, due 2002 through 2007, 35,232 - fixed interest rates from 9.0% to 13.75% Ralphs senior notes, unsecured, due 2004, fixed interest rate 13,458 - of 10.45% Other 70,475 29,448 ----------- --------- Total 5,093,996 2,200,972 Less current portion 94,140 16,178 ----------- --------- Total $ 4,999,856 $2,184,794 =========== ==========
In conjunction with the acquisitions of QFC and Ralphs/Food 4 Less in March 1998, the Company entered into new financing arrangements that refinanced a substantial portion of the Company's principal debt facilities and indebtedness assumed in the acquisitions. The new financing arrangements included a new bank credit facility and a public issue of $1.75 billion senior unsecured notes. The new bank credit facility (the "1998 Senior Credit Facility") provided for a $1.875 billion five-year revolving credit agreement and a $1.625 billion five-year term note. All indebtedness under the 1998 Senior Credit Facility is guaranteed by certain of the Company's subsidiaries and secured by the stock in the subsidiaries. The revolving portion of the 1998 Senior Credit Facility is available for general corporate purposes, including the support of the commercial paper program of the Company. Commitment fees are charged at .30% on the unused portion of the five-year revolving credit facility. Interest on the 1998 Senior Credit Facility is at Adjusted LIBOR plus a margin of 1.0%. At November 7, 1998, the weighted average interest rate on the five year 10 term note and the amounts outstanding under the revolving credit facility were 6.5% and 6.3%, respectively. The unsecured senior notes issued on March 11, 1998, included $250 million of five-year notes at 7.15%, $750 million of seven-year notes at 7.38%, and $750 million of ten-year notes at 7.45% (the "Notes"). In connection with the issuance of the Notes, each of the Company's direct or indirect wholly-owned subsidiaries has jointly and severally guaranteed the Notes on a full and unconditional basis ("Subsidiary Guarantors"). The Subsidiary Guarantors are 100% wholly owned subsidiaries of the Company and constitute all of the Company's direct and indirect subsidiaries, other than inconsequential subsidiaries. The non-guaranteeing subsidiaries represent less than 3%, on an individual and aggregate basis, of the Company's consolidated assets, pretax income, cash flow and net investment in subsidiaries. The Company is a holding company with no independent operations or assets other than those relating to its investments in its subsidiaries. Separate financial statements of the Subsidiary Guarantors are not included because the guarantees are full and unconditional, the Subsidiary Guarantors are jointly and severally liable and the separate financial statements and other disclosures concerning the Subsidiary Guarantors are not deemed material to investors by management of the Company. No restrictions exist on the ability of the Subsidiary Guarantors to make distributions to the Company, except, however, the obligations of each Guarantor under its Guarantee are limited to the maximum amount as will result in obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law (e.g. adequate capital to pay dividends under corporate laws). The 1998 Senior Credit Facility requires the Company to comply with certain ratios related to indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") and fixed charge coverage. In addition, the 1998 Senior Credit Facility limits dividends on and redemption of capital stock. In conjunction with the Smith's acquisition in September 1997, the Company entered into a bank credit facility (the "1997 Senior Credit Facility") that refinanced a substantial portion of the Company's indebtedness and indebtedness assumed in the Smith's acquisition. The 1997 Senior Credit Facility was refinanced by the 1998 Senior Credit Facility. The Company has established uncommitted money market lines with five banks of $125.0 million. These lines, which generally have terms of approximately one year, allow the Company to borrow from the banks at mutually agreed upon rates, usually below the rates offered under the 1998 Senior Credit Facility. The Company also has $900.0 million of unrated commercial paper facilities with four commercial banks. The Company has the ability to support commercial paper and other debt on a long-term basis through its bank credit facilities and therefore, based upon management's intent, has classified these borrowings, which totaled $713.1 million at November 7, 1998, as long-term debt. The Company on occasion enters into various interest rate swap, cap and collar agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At November 7, 1998, the Company had outstanding one collar agreement which expires on July 24, 2003 and effectively sets interest rate limits on a notional principal amount of $300.0 million on the Company's floating rate long-term debt. The agreement limits the interest rate fluctuation of the 3-month adjusted LIBOR (as defined in the collar agreement) to a range between 4.10% and 6.50% and requires quarterly cash settlements for interest rate fluctuations outside of the limits. As of November 7, 1998, the 3-month adjusted LIBOR was 5.38%. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate collar agreement. The Company requires an "A" or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties. 11 Annual long-term debt maturities for the five fiscal years subsequent to November 7, 1998 are $18.1 million in 1998, $134.8 million in 1999, $240.9 million in 2000, $362.2 million in 2001, and 472.7 million in 2002. The Company recorded in the first 40 weeks of 1998 an extraordinary charge of $357.8 million less a $139.9 million income tax benefit which consisted of premiums paid in the prepayment of certain notes and bank facilities of Fred Meyer, QFC and Ralphs/Food 4 Less and the write-off of the related deferred financing costs. 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 statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------- This discussion and analysis should be read in conjunction with the Company's consolidated financial statements. RECENT EVENT On October 19, 1998, the Company announced the signing of a definitive merger agreement with The Kroger Co. ("Kroger"), the largest retail grocery chain in the United States. On that date, Kroger operated 1,398 food stores, 802 convenience stores and 34 manufacturing facilities that manufacture products for sale in all Kroger divisions, as well as to external customers. Under the terms of the merger agreement, Fred Meyer stockholders will receive one newly issued share of Kroger common stock for each share of Fred Meyer common stock. The transaction will be accounted for as a pooling of interests. It is expected to close in early 1999 subject to approval of Kroger and Fred Meyer stockholders and antitrust and other regulatory authorities and customary closing conditions. In anticipation of the intended merger with Kroger, the Company has secured approval from its banks to amend its 1998 Senior Credit Facility as well as its operating lease facility. These proposed amendments are subject to completion of the merger and will be guaranteed by Kroger. The Company's outstanding senior notes due 2003 through 2008 will remain outstanding after the merger. Additional information regarding the merger can be found in the Company's current report on Form 8-K dated October 20, 1998. RESULTS OF OPERATIONS The following discussion summarizes the Company's operating results for 1998 compared with 1997. However, 1998 results are not comparable to prior year results due to the three recent acquisitions (See Note 3 of Notes to Consolidated Financial Statements). The 1998 results include the results from Fred Meyer Stores, Smith's and QFC for the full period and include Ralphs/Food 4 Less from March 10, 1998. The 1997 results include Fred Meyer Stores and QFC for the full period and Smith's from September 9, 1997. 12 Comparison of the 12 and 40 weeks ended November 7, 1998 with the 12 and 40 weeks ended November 8, 1997 Net sales for the 12 weeks ended November 7, 1998 increased $1.5 billion to $3.5 billion from $2.0 billion for the 12 weeks ended November 8, 1997 and increased $6.0 billion to $11.0 billion in the 40 weeks ended November 7, 1998 from $5.0 billion in the 40 weeks ended November 8, 1997. The increases in sales were caused primarily by the recent acquisitions of Ralphs/Food 4 Less and Smith's. Sales at Smith's accounted for $203.9 million and $1.9 billion of the increases and Ralphs/Food 4 Less accounted for $1.5 billion and $4.3 billion of the increases for the 12 and 40 weeks ended November 7, 1998, respectively. Comparable store sales including the Ralphs/Food 4 Less and Smith's stores as if acquired at the beginning of the comparable periods and excluding the Hughes and Smitty's stores which are currently being converted to other formats increased 3.4% and 2.4% from the prior year for the 12 and 40 weeks ended November 7, 1998, respectively. Gross margin increased as a percentage of net sales from 29.6% for the 12 weeks ended November 8, 1997 to 30.0% for the 12 weeks ended November 7, 1998 and from 29.6% for the 40 weeks ended November 7, 1998 to 29.8% for the 40 weeks ended November 8, 1997. Increases in gross margin as a percent of sales were generated primarily from economies of scale resulting from the Company's increased sales offset almost entirely by changes in the Company's sales mix between food and nonfood. The amount of food sales, which have a lower gross margin percent, compared to total sales increased over the prior year due to the recent acquisitions. Operating and administrative expenses were $833.8 million and $488.7 million for the 12 weeks ended November 7, 1998 and November 8, 1997, respectively and were $2.7 billion and $1.3 billion for the 40 weeks ended November 7, 1998 and November 8, 1997, respectively. Operating and administrative expenses decreased as a percentage of sales 1.1% and 1.25% from the prior year for the 12 and 40 weeks ended November 7, 1998, respectively. The reduction of operating and administrative expenses as a percent of sales is due to economies of scale resulting from the Company's increased sales and lower operating and administrative expenses as a percent of sales at Smith's and Ralph's/Food 4 Less, which were recently acquired and are lower cost operations. Additionally, the Company benefited from the suspension of contributions to certain multi-employer pension and benefit plans totaling $15.2 million and $32.3 million in the 12 and 40 weeks ended November 7, 1998, respectively. Amortization of goodwill increased $16.4 million and $57.9 million from the prior year for the 12 and 40 weeks ended November 7, 1998, respectively, as a result of the recent acquisitions. Charges for merger related costs of $33.7 million and $290.7 million were recorded in the 12 and 40 weeks ended November 7, 1998 as a result of the recent acquisitions. Additional merger related costs will be recorded in future quarters as expenditures are incurred. Interest expense increased to $92.9 million from $30.2 million for the 12 weeks ended November 7, 1998 and November 8, 1997, respectively and increased to $284.7 million from $66.2 million for the 40 weeks ended November 7, 1998 and November 8, 1997, respectively. The increase in interest expense for the 12 and 40 week periods primarily reflect the increased amount of indebtedness assumed and/or incurred in conjunction with the acquisitions of Smith's and Ralphs/Food 4 Less. The effective tax rates are affected by increased goodwill amortization and certain merger costs which are not deductible for tax purposes. The effective tax rates for the income tax expense were 52.1% and 42.4% for the 12 weeks ended November 7, 1998 and November 8, 1997, respectively. For the 40 weeks ended November 7, 1998, the amount of nondeductible goodwill amortization and 13 merger costs was greater than the loss before income tax which resulted in taxable income and income tax expense. Income (loss) before extraordinary charge was $29.2 million and $(57.4) million for the 12 and 40 weeks ended November 7, 1998, respectively, compared to $28.7 million and $80.6 million for the 12 and 40 weeks ended November 8, 1997, respectively. The changes are a result of the above mentioned factors. The extraordinary charges of $.3 million and $217.9 million for the 12 and 40 weeks ended November 7, 1998, respectively, consist of fees incurred in conjunction with the prepayment of certain indebtedness and the write-off of related debt issuance costs. Net income increased to $28.8 million for the 12 weeks ended November 7, 1998 from a net loss of $62.5 million for the 12 weeks ended November 8, 1997 and decreased to a loss of $275.4 million for the 40 weeks ended November 7, 1998 from a loss of $10.6 million for the 40 weeks ended November 8, 1997 primarily due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company funded its working capital and capital expenditure needs in 1998 through internally generated cash flow and the issuance of unrated commercial paper, supplemented by borrowings under committed and uncommitted bank lines of credit and lease facilities. Cash provided by operating activities was $457.3 million for the 40 weeks ended November 7, 1998 compared to $173.3 million for the 40 weeks ended November 8, 1997. The increase in cash provided from operating activities is due primarily to an improvement in operating income resulting from the recent acquisitions. The Company's principal use of cash during the period is for seasonal purchases of inventory. Because of the inventory turnover rate, the Company is able to finance a substantial portion of the increased inventory through trade payables. Cash used for investing activities was $609.0 million for the 40 weeks ended November 7, 1998 compared to $528.2 million for the 40 weeks ended November 8, 1997. The investing activities consisted primarily of capital expenditures and business acquisitions. Capital expenditures of $497.6 million in the current period were for the construction of new stores, remodeling existing stores and additions to distribution centers and offices. During the 40 weeks ended November 7, 1998, the Company opened 17 new stores and completed the remodel of 72 stores. The Company intends to use the combination of cash flows from operations and borrowings under its credit facilities to finance its capital expenditure requirements for 1998, currently budgeted to be approximately $750.0 million, net of estimated real estate sales and stores financed on leases. If the Company determines that it is preferable, it may fund its capital expenditure requirements by mortgaging facilities, entering into sale/leaseback transactions, or by issuing additional debt or equity. The Company currently owns real estate with a net book value of approximately $1.6 billion. Additionally, the Company completed several business acquisitions which resulted in the use of cash for investing activities. See Note 3 of Notes to Consolidated Financial Statements for a discussion of the Company's acquisitions. Cash provided by financing activities was $220.4 million for the 40 weeks ended November 7, 1998. The financing activities consisted primarily of cash receipts on the exercise of stock options, principal payments on long-term debt and capital leases, and activity related to the debt refinancing completed in conjunction with the acquisitions of Ralphs/Food 4 Less and QFC. On March 11, 1998 the Company entered into new financing arrangements which included a public issue of $1.75 billion of senior unsecured notes (the "Notes") and a bank credit facility (the 14 "1998 Senior Credit Facility"). The 1998 Senior Credit Facility included a $1.875 billion five-year revolving credit agreement and a $1.625 billion five-year term loan. The Notes consisted of $250 million of five-year notes at 7.15%, $750 million of seven-year notes at 7.38% and $750 million of ten-year notes at 7.45%. Each of the Company's direct or indirect wholly-owned subsidiaries has jointly and severally guaranteed the Notes on a full and unconditional basis. No restrictions exist on the ability of the Subsidiary Guarantors to make distributions to the Company, except, however, the obligations of each Subsidiary Guarantor under its Guarantee are limited to the maximum amount as will result in obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law (e.g. adequate capital to pay dividends under corporate laws). The obligations of the Company under the 1998 Senior Credit Facility are guaranteed by certain subsidiaries and are also collateralized by the stock of certain subsidiaries. In addition to the 1998 Senior Credit Facility and Notes, the Company entered into a $500 million five-year operating lease facility, which refinanced $303 million in existing lease financing facilities. At November 7, 1998, $332.0 million was outstanding on this lease facility. The remaining balance of this lease facility will be used for land acquisition and construction costs for new stores. The obligations of the Company under the lease facility are guaranteed by certain subsidiaries and are also collateralized by the stock of certain subsidiaries. At November 7, 1998, the Company had $125.0 million of uncommitted money market lines with five banks and $900.0 million in unrated commercial paper facilities with four banks. The uncommitted money market lines 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 management information systems. At November 7, 1998, a total of approximately $265.6 million was available for borrowings under the 1998 Senior Credit Facility and the commercial paper facilities and $40.0 million was available for borrowings from the uncommitted money market lines. See Note 6 of Notes to Consolidated Financial Statements for a discussion of the Company's interest rate swap, cap and collar agreements. The Company had $44.3 million of outstanding Letters of Credit as of November 7, 1998. The Letters of Credit are used to support the importation of goods and to support the performance, payment, deposit or surety obligations of the Company. Effect of LIFO During 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 soft goods 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). At year-end, the Company makes the final adjustment reflecting the difference between the Company's prior quarterly estimates and actual LIFO amount for the year. Effect of Inflation While management believes that some portion of the increase in sales is due to inflation, it is difficult to segregate and to measure the effects of inflation because of changes in the types of merchandise sold year-to-year and other pricing and competitive influences. By attempting to control 15 costs and efficiently utilize resources, the Company strives to minimize the effects of inflation on its operations. Recent Accounting Changes There are no issued and pending accounting changes which are expected to have a material effect on the Company's financial reporting. Year 2000 The Company and each of its subsidiaries are dependent on computer hardware, software, systems, and processes ("Information Technology") and non-information technology systems such as telephones, clocks, scales, and refrigeration units or other equipment containing embedded microprocessor technology ("Non-IT Systems") in several critical operating areas, including store and distribution operations, product merchandise and procurement, manufacturing plant operations, inventory and labor management, and accounting. The Company is currently working to resolve the potential effect of the year 2000 on the processing of date-sensitive information within these various systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Company programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than 2000, which could result in a miscalculation or system failure. The date issue also applies to equipment with embedded microprocessor chips. The Company has developed a plan (the "Plan") to access and update its Information Technology systems and Non-IT Systems for year 2000 readiness and to provide for continued functionality. The Plan focuses on critical business areas, which are separated into three major categories: (1) Information Technology, which includes all hardware and software on all processing platforms; (2) merchandise and external entities, including product suppliers, service providers, and those with whom the Company exchanges information; and (3) Non-IT Systems. Additionally, the Plan consists of three phases: (1) creating an inventory of systems and assessing the scope of the year 2000 problem as it relates to those systems; (2) remediating any year 2000 problems; and (3) testing and implementing systems following remediation. The following table estimates the Company's completion status for each phase of the Plan as of November 7, 1998, based on information currently available:
Percent Complete ------------------------------- Category Phase 1 Phase 2 Phase 3 -------- ------- ------- ------- Information Technology 1 83% 55% 28% Merchandise and external entities 2 63% 28% 3% Non-IT Systems 3 63% 15% 5%
Phase 1 is expected to be completed by the end of the first quarter of 1999 for all three categories. Phase 2 and 3 will continue throughout calendar 1999. Systems are regularly monitored and procedures are in place to detect potential re-introduction of date problems. The Company's management is currently formulating contingency plans in the event that any critical elements of the Plan should fail, or any of the Company's vendors or service providers fail to be year 2000 ready. The contingency plans may be implemented to minimize the risk of interruption of the Company's business. We expect that contingency plans will be completed by the end of the third quarter of 1999. 16 The Company's principal vendors, service providers, and other third parties on which the Company relies for business operations have been contacted for a status on year 2000 readiness. Based on the Company's assessment of their responses, the Company believes that many of its principal vendors, service providers and other third parties are taking action for year 2000 readiness. However, the Company has limited ability to test and control such third parties' year 2000 readiness and no assurance can be given that failure of such third parties to address the year 2000 issue will not cause an interruption of the Company's business. The Company expects the Plan for critical systems to be substantially completed during the fourth calendar quarter of 1999. However, the Company's ability to timely execute its Plan may be adversely affected by a variety of factors, some of which are beyond the Company's control, including the potential for unforeseen implementation problems, delays in the delivery of products, and disruption of store operations resulting from a loss of power or communication links between stores, distribution centers, and headquarters. Based on currently available information, the Company is unable to determine if such interruptions are likely to have a material adverse effect on the Company's results of operations, liquidity, or financial condition. The Company has committed significant resources in connection with resolving its year 2000 issue. The total estimated costs of the Plan, exclusive of capital expenditures, are expected to be $25.0 to $30.0 million, of which approximately $3.0 million was expensed in 1997. Costs charged to operations for the 40 weeks ended November 7, 1998 totaled $4.0 million, which represents an immaterial portion of the Company's information services budget over the period. Estimated costs expected to be incurred and expensed are approximately $2.0 million in the fourth quarter of 1998 and $13.0 to $21.0 million thereafter. Forward-looking Statements; Factors Affecting Future Results Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. The Company may make other forward-looking statements from time to time. These forward-looking statements may include information regarding the Company's plans for future operations, expectations relating to cost savings and the Company's integration strategy with respect to its recent mergers, store expansion and remodeling, capital expenditures, inventory reductions and expense reduction. The following factors, as well as those discussed below, are among the principal factors that could cause actual results to differ materially from the forward-looking statements: business and economic conditions generally and in the regions in which the Company's stores are located, including the rate of inflation; population, employment and job growth in the Company's markets; demands placed on management by the substantial increase in the Company's size; loss or retirement of senior management of the Company or of its principal operating subsidiaries; changes in the availability of debt or equity capital and increases in borrowing costs or interest rates, especially since a substantial portion of the Company's borrowings bear interest at floating rates; competitive factors, such as increased penetration in the Company's markets by large national food and nonfood chains, large category-dominant stores and large national and regional discount retailers (whether existing competitors or new entrants) and competitive pressures generally, which could include price-cutting strategies, store openings and remodels; results of the Company's programs to decrease costs as a percent of sales; increases in labor costs and deterioration in relations with the union bargaining units representing the Company's employees; unusual unanticipated costs or unanticipated consequences relating to the recent mergers and integration strategy and any delays in the realization thereof; operational inefficiencies in distribution or other Company systems, including any that may result from the recent mergers; issues arising from addressing the year 2000 problem; legislative or regulatory changes adversely affecting the business in which the Company is engaged; and other opportunities or acquisitions which may be pursued by the Company. 17 Leverage; Ability to Service Debt. The Company is highly leveraged. As of November 7, 1998, the Company has total indebtedness (including current maturities and capital lease obligations) of $5.3 billion. Total indebtedness consists of long-term debt, including borrowings under the 1998 Senior Credit Facilities, and the notes, and capitalized leases. Total indebtedness does not reflect certain commitments and contingencies of the Company, including operating leases under the lease facility and other operating lease obligations. The Company has significant interest and principal repayment obligations and significant rental payment obligations, and the ability of the Company to satisfy such obligations is subject to prevailing economic, financial and business conditions and to other factors, many of which are beyond the Company's control. A significant amount of the Company's borrowings and rental obligations bear interest at floating rates (including borrowings under the 1998 Senior Credit Facilities and obligations under the lease facility), which will expose the Company to the risk of increased interest and rental rates. Merger Integration. The significant increase in size of the Company's operations resulting from the recent mergers has substantially increased the demands placed upon the Company's management, including demands resulting from the need to integrate the accounting systems, management information systems, distribution systems, manufacturing facilities and other operations of Fred Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less. In addition, the Company may experience additional unexpected costs from such integration and/or a loss of customers or sales as a result of the recent mergers. There is no assurance that the Company will be able to maintain the levels of operating efficiency which Fred Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less had achieved separately prior to the mergers. The failure to successfully integrate the operations of the acquired businesses, the loss of key management personnel and the loss of customers or sales could each have a material adverse effect on the Company's results of operations or financial position. Ability to Achieve Intended Benefits of the Recent Mergers. Management believes that significant business opportunities and cost savings are achievable as a result of the Smith's, QFC and Ralphs/Food 4 Less mergers. Management's estimates of cost savings are based upon many assumptions including future sales levels and other operating results, the availability of funds for capital expenditures, the timing of certain events as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Estimates are also based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. Estimates of potential cost savings are forward-looking statements that are inherently uncertain. Actual cost savings, if any, could differ from those projected and such differences could be material; therefore, undue reliance should not be placed upon such estimates. There is no assurance that unforeseen costs and expenses or other factors (whether arising in connection with the integration of the Company's operations or otherwise) will not offset the estimated cost savings or other components of the Company's plan or result in delays in the realization of certain projected cost savings. Competition. The retail merchandising business in general, and the supermarket industry in particular, is highly competitive and generally characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, discount stores, independent and specialty grocers, drug and convenience stores, large category-dominant stores and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores, "supercenters" and conventional department stores. Competitors of the Company include, among others, Safeway, Albertson's, Lucky, Costco, Wal-Mart and Target. Retail businesses generally compete on the basis of location, quality of products and service, price, product variety and store condition. The Company's ability to compete depends in part on its ability to successfully maintain and remodel existing stores and develop new stores in advantageous locations. 18 Labor Relations. The Company is party to more than 171 collective bargaining agreements with unions and locals, covering approximately 60,000 employees representing approximately 65% of the Company's total employees. Among the contracts that have expired or will expire in 1998 are those covering 15,500 employees. Typical agreements are three years in duration, and as such agreements expire, the Company expects to negotiate with the unions and to enter into new collective bargaining agreements. There is no assurance, however, that such agreements will be reached without work stoppages. A prolonged work stoppage affecting a substantial number of stores could have a material adverse effect on the Company's results of operations or financial position. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to publicly release the results of any revisions to any forward-looking statements which may be made to reflect subsequent events or circumstances or to reflect the occurrence of unanticipated events. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Not applicable. 19 Part II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits 10.G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended. 10.N Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and George Golleher. 10.R Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and certain officers. 10.S Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and certain officers. 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a report on Form 8-K dated October 18, 1998 to disclose information under Item 5 thereof. On November 5, 1998, the Company also filed a Form 8-K/A dated March 9, 1998 to amend certain financial statement information under Item 7. 20 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. Date: December 18, 1998 By JOHN STANDLEY ------------------------------------- John Standley Senior Vice President and Chief Financial Officer 21 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended. 10.N Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and George Golleher. 10.R Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and certain officers. 10.S Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and certain officers. 27 Financial Data Schedule EX-10.G 2 EMPLOYMENT AGREEMENT CONFORMED COPY -------------- EMPLOYMENT AGREEMENT [As Amended through Amendment No. 3 effective October 13, 1998] DATED: August 27, 1991 [original date] BETWEEN: FRED MEYER STORES, INC. 3800 SE 22nd Avenue Portland, OR 97202 "Company" AND: ROBERT G. MILLER 0305 SW Montgomery # F508 Portland, OR 97201 "Employee" The parties agree as follows: 1. General. This Agreement sets forth the terms upon which Employee shall be employed by the Company. Notwithstanding the foregoing, the Company may terminate the Employee's employment at any time, and Employee's employment hereunder will be considered "at will," subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 2. Employment. Employee shall be employed by Company on a full-time basis to perform duties as Chief Executive Officer and member of the Board of Directors of the Company. 3. Compensation and Disability Benefits. 3.1 Salary. For services performed during the term of Employee's employment with the Company, the Company shall pay Employee an annual salary (prorated for any portion of a year), payable in equal periodic installments not less than monthly, of $1,000,000, subject to annual review by the Compensation Committee of the Board of Directors of the Company. 1 3.2 Bonus. Employee will be eligible to participate in the Company's bonus plan on the same basis as other executives. Employee's bonuses for the Company's 1998 fiscal year and for fiscal years thereafter will be up to 60 percent (or such higher percent as may be determined by the Company's Board of Directors) of his annual salary, to be determined upon the achievement of financial objectives approved in advance by the Company's Board of Directors. 3.3 Insurance/Profit Sharing. Employee shall be entitled to participate as an executive officer in all existing Company insurance, profit sharing and other benefit plans in which executive officers may participate, including the Company's Excess Deferral Plan, on the same basis as other executive officers of the Company. 3.4 Long Term Disability Benefits. The Company will provide to Employee the long term disability benefits described in Appendix A to this Agreement. This benefit is in addition to benefits under any group disability benefit plan purchased by the Employee, but shall not be payable in the event of a termination under Paragraph 4. In the event of Total Disability as defined in Appendix A, Employee's salary provided for in Paragraph 3.1, will be continued during the elimination period. 3.5 Retiree Medical Benefits. After termination of Employee's employment for any reason, the Company shall pay Employee upon obtaining age 55, or shall pay Mrs. Sharon Miller (his Spouse) if she and Employee are married on his date of death and she survives him, as applicable, a medical supplement to the extent determined as follows: (a) The supplement shall compensate for the premium value to Employee of medical coverage comparable to that 2 provided under the Company's program applicable to retirees generally (the Fred Meyer Plan) during any period in which the following applies: (1) Neither Employee nor his surviving Spouse is eligible for coverage under the Fred Meyer Plan. (2) Neither employee nor his surviving Spouse is eligible under a plan of a successor employer for medical benefits that are reasonably comparable to benefits under the Fred Meyer Plan. (3) Employee is at least 55 years old. (b) The supplement shall not exceed the smallest of the following amounts, as applicable, reduced by the employee cost applicable at the time under the Fred Meyer Plan (references to Employee shall include his Spouse): (1) The cost of COBRA continuation coverage available from the Company that Employee could have received by timely election. (2) The cost to Employee for coverage if Employee had timely exercised all available conversion rights under the Company's medical program for active employees. 3 (3) The cost to Employee of the coverage actually in effect for Employee from time to time to the extent the coverage is reasonably comparable to coverage under the Fred Meyer Plan at the time. (c) The supplement shall be paid only with respect to benefits Employee would have received under the Fred Meyer Plan if Employee had terminated when eligible under that Plan. (d) The supplement shall be paid in cash to Employee or his surviving Spouse or, at the Company's election, by direct payment of the appropriate portion of the cost of coverage. The amount paid shall constitute compensation income to Employee or his surviving Spouse, shall be reported on IRS form W-2 and any applicable state form, and shall be subject to all applicable state and federal withholding as non-qualified deferred compensation. 4. Severance. 4.1 In the event Employee is terminated by the Company for any reason other than for Cause as defined in Paragraph 4.5, death or permanent disability and the termination is not a Qualifying Termination as defined in Paragraph 4.3, Employee shall be entitled to payment of compensation at Employee's last determined salary (payable on the Company's normal payroll dates and without interest) for two years or until the date of his death if earlier. 4 4.2 In the event Employee's employment with the Company ends in a Qualifying Termination, Employee shall receive Severance Compensation as provided below. 4.3 Qualifying Termination means: (a) Termination by the Company, for any reason other than for Cause, in anticipation of or within three years after a Change in Control. (b) Termination in anticipation of or within three years after a Change in Control, if such termination is initiated by Mr. Miller due to Constructive Discharge. Constructive Discharge means a material reduction (other than for Cause) in Employee's compensation, benefits or responsibilities in the capacity specified in Paragraph 2, or an irreconcilable disagreement with the Board of Directors of the Company over policy matters materially impairing Mr. Miller's ability to carry out his responsibilities as Chief Executive Officer of the Company. (c) Termination within 18 months after a Change in Control if such termination is initiated by Mr. Miller for any reason. 4.4 "Severance Compensation" means: (a) Lump sum payment within 15 days after termination of employment of the amount determined by adding Employee's Monthly Pay Rate (MPR) projected for 36 months 5 and converted to an immediate lump sum payment using an interest assumption equal to the Prime Rate published in the Wall Street Journal on the date of termination (or on the date next published in the Wall Street Journal if not published on the date of termination). Subject to the following sentence, MPR means 1.6 times Employee's highest annualized base salary rate during his employment with the Company, divided by 12. If, on or after January 1, 1999, the bonus rate applicable under the Company's executive bonus plan referred to in Paragraph 3.2 with respect to the plan year during which the termination of employment occurs is higher than 60 percent (but not above 100 percent), the fraction above 1.0 shall be increased to reflect the increased percentage. For example, if the bonus percentage is 80 percent for the applicable year, the MPR will be 1.8. Elective deferred compensation, if any is deferred from base salary, shall be attributed to the period when earned. Bonuses and all other taxable income or non-taxable income from sources other than base salary (such as stock options, fringe benefits and other non-salary compensation of any kind) shall be disregarded. Salary reductions, if any, set by the Board of Directors after October 16, 1998 shall be disregarded. (b) Payment within 15 days after termination of employment (or as soon thereafter as the amount can reasonably 6 be calculated) of the Employee's Imputed Retirement Benefits (IRB) projected for 36 months and converted to an immediate lump sum payment, using the interest rate specified in (a). IRB means benefits Employee would have earned under all qualified and non-qualified pension and savings plans of the Company in which Employee was participating immediately prior to the Qualifying Termination or the Change in Control relating to the Qualifying Termination, whichever is more favorable to Employee. The 36-month projection shall be made in accordance with the applicable plan terms, assuming no change in Employee's pay rate, plan terms and other pertinent factors. Severance Compensation paid under this agreement shall not be counted as covered compensation under any benefit plan of the Company. (c) Subject to Paragraph 4.6, during the three year period following the Qualifying Termination, the Company will continue to provide Employee and his dependents who are eligible for coverage as at the Qualifying Termination with all health and welfare benefit coverage in effect for him (and for his eligible dependents as applicable) to the fullest extent possible as though Employee's eligible employment continued during the three-year period, except that fringe benefits associated with ongoing employment such as automobile and 7 other transportation and club memberships shall not be continued. All such coverage shall be provided at the level in effect when the Qualifying Termination occurred, or when the Change of Control occurred if more favorable to Employee and his dependents. Where continued coverage under the terms of the Company's health and welfare plans is not possible, the Company shall secure alternative benefit coverage which is comparable in terms to that provided under such plans, for Employee and his eligible dependents. Such continuation shall be contingent upon ongoing payment of any co-payments and application of any deductibles required to be paid under the applicable terms of each benefit program. This continuation shall apply before commencement of retiree medical coverage for Employee as provided in Paragraph 3.5. (d) A single sum payment, to be paid to Employee as soon as reasonably practicable, but in no event more than 15 days following the effective date of the Qualified Termination, of a cash amount equal to the sum of (i) any accrued but unpaid salary and (ii) the product of (A) the annual incentive bonus to which Employee would have been entitled under the executive bonus plan or arrangement of the Company in effect for Employee for the plan year that includes such effective date had Employee continued in employment until the last day of such 8 plan year (or other date required to be eligible to receive an annual bonus for such year) and assuming that the maximum performance objectives for such plan year had been achieved, multiplied by (B) a fraction, the numerator of which equals the number of days in the plan year that have elapsed as of such effective date and the denominator of which equals 365. (e) Payment to Employee at a suitable time or times of the amount or amounts specified in Appendix B as an excise tax Gross-Up Payment in connection with this Agreement. In this connection, the Company and Executive agree to the provisions of Appendix B, which are incorporated herein by this reference. 4.5 "Cause" is defined for the purposes of this Agreement as: (a) Conviction of a felony which in the judgment of the Board of Directors of the Company adversely affects the business or reputation of the Company; (b) Material and willful dishonesty, extreme misconduct or other failure to perform substantial duties as Chief Executive Officer or as a member of the Board of Directors, that is demonstrably and materially injurious to the Company and which has not been cured within 30 days after a written demand for substantial performance is delivered to Employee by or on behalf of the Board of Directors, which 9 demand specifically identifies the manner in which the Board of Directors believes that Employee has not substantially performed his duties. 4.6 Employee will not have any duty to mitigate the costs to the Company of the Severance Compensation. Any compensation payable to Employee by an employer unaffiliated with the Company with respect to employment after a Qualifying Termination will not offset Severance Compensation payable or require return of Severance Compensation paid under this Agreement, except that health or welfare benefit coverage provided to Employee will be reduced to the extent that he (and his eligible dependents, if applicable) receive comparable health or welfare benefit coverage from subsequent employment. This provision does not limit the application of Paragraph 4.7. 4.7 Except as provided below, Employee's receipt and retention of any and all Severance Compensation is conditioned on Employee's not making unauthorized disclosure of confidential information relating to the Company for a period of three years after a Qualifying Termination, and not engaging directly or indirectly in competition with the Company, whether as an employee, sole proprietor, partner, independent contractor, director or otherwise, within the geographical area in which the Company has offices or other business locations for a period of three years after a Qualifying Termination. Membership by Employee on the board of directors of a publicly held corporation, if such membership has continued for at least six months as of the date of the Qualifying Termination, may be continued and such continuation shall not constitute competition (but Employee still must not disclose confidential information). Competition means providing services or information or material financing, without prior written approval of the Board of 10 Directors of the Company, to any enterprise other than the Company if the enterprise is engaged in the same business as the Company and has sales or gross income of $250,000,000 or more in a year during which the competition occurs, or in any of the five prior years. Financing includes lending money to or owning stock or other securities or any partnership or other ownership interest in an enterprise, but shall not include purchase or ownership of securities of an enterprise (including a publicly held or privately held corporation) so long as Employee does not own in the aggregate more than 5 percent of the outstanding securities of the enterprise at the time of purchase of any such securities. For purposes of this Paragraph 4.7, the term "Company" includes all affiliates of the Company as of the date of the Qualifying Termination or, if earlier, the date immediately before the Change in Control to which the Qualifying Termination relates. If the Board of Directors of the Company reasonably determines that Employee has violated this provision, it shall notify Employee in writing of the violation and Employee shall have 60 days from the date of the notice to cure the violation. If the violation is not so cured by the end of the 60-day period, the Board of Directors may refuse to pay any as yet unpaid portion of Severance Compensation and Employee shall return to the Company all Severance Compensation Employee has received, thereby forfeiting all benefit from such Severance Compensation. The three year limitation referred to in the foregoing sentences does not limit or otherwise qualify Employee's general obligations of loyalty to the Company and duty not to compete with the Company or disclose confidential information arising as a result of Employee's service as an employee, officer and director of the Company. Any forfeiture of Severance Compensation under this provision shall not be an offset against claims for damages or impair other remedies the Company may 11 have as a result of any unauthorized disclosure or competition in violation of those general obligations of Employee to the Company. 5. Pension and Benefits. 5.1 Normal Retirement Benefit. Employee's normal retirement benefit shall be a pension starting at the end of the first month after Employee's normal retirement date or termination of employment if later and continuing for Employee's life equal to $25,000 per month. Normal retirement date is the later of age 62 or the third anniversary of Employee's Qualifying Termination if that anniversary is after Employee reaches age 62. 5.2 Early Retirement Benefit. Employee may elect to receive the accrued normal retirement benefit starting at the end of any month following termination of employment provided that no such early retirement benefit shall be payable before age 55 or during the three-year period following a Qualifying Termination. If benefits start before the end of the first month after normal retirement date, the amount referred to in Paragraph 5.1 shall be reduced 5/12 of one percent for each month by which the benefit starts early. 5.3 Spouse's Death Benefit. If Employee dies while married to his Spouse, she shall receive a monthly pension for her life as follows: (a) If Employee had retired and was receiving benefits or dies during the first month for which benefits were to be paid, one half of Employee's monthly benefit shall continue to the Spouse. (b) If (a) does not apply, the Spouse may elect to start a benefit as of the end of any month after the later of the date of death or the date Employee would have reached age 55. 12 The benefit shall be one half of the amount Employee would have received if he had terminated just before death and elected to start benefits at the date benefits start to the Spouse. 5.4 Additional Benefit. Retirement and Spouse's death benefit under 5.1 through 5.3 shall be in addition to and shall not reduce or be reduced by any benefits under the Supplemental Income Plan, the Excess Deferral Plan, the Profit Sharing Plan or any other plan maintained by the Company or an affiliate. 6. Miscellaneous Benefits. 6.1 Club Membership. The Company shall pay the cost of one club membership for Employee during the terms of Employee's employment with the Company. 6.2 Automobile. The Company will provide an automobile for Employee's use while he is employed by the Company. The Company will also pay all operating expenses associated with the automobile. 6.3 Vacation. Employee will be entitled to five weeks of vacation annually. 6.4 Medical Expenses. Beginning on the date Employee commences employment with the Company, the Company will provide reimbursement for medical expenses of Employee and his dependents under the Company's medical reimbursement plan, without any waiting or qualification period and without exclusions for any existing conditions. 7. Change in Control. 7.1 Subject to 7.2, Change in Control means the occurrence of any of the following events: 13 (a) The shareholders of the Company approve: (i) any merger, statutory plan of exchange or other business combination involving the Company, other than any such transaction immediately following which the holders of the Company's capital stock immediately prior to such transaction continue to own equity securities of the surviving entity representing more than 50 percent of the equity securities of such entity entitled to vote generally in the election of directors of such entity, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption by the Company of any plan or proposal for the liquidation or dissolution of the Company; (b) The commencement of a tender or exchange offer (other than one made by the Company) for any capital stock of the Company (or securities convertible into such capital stock), provided a Change in Control shall be deemed to have occurred only if such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities 14 representing at least 20 percent of the voting power of outstanding securities of the Company; (c) A report on Schedule 13D of the Exchange Act is filed with the Securities and Exchange Commission or is received by the Company reporting the beneficial ownership by any person of securities representing 20 percent or more of the voting power of outstanding securities of the Company, except that if such report shall be filed or so received during a tender offer or exchange offer described in subparagraph (b) above, the provisions of such subparagraph shall apply in determining whether a Change in Control occurs; or (d) During any period of 12 consecutive months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors of the Company cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 7.2 Notwithstanding anything in 7.1 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Employee, or a group (within the meaning of Section 13(d)(3) of the Exchange Act) of persons which includes Employee, acquiring, directly or indirectly, 15 securities representing 20 percent or more of the voting power of outstanding securities of the Company. 8. Successors and Assigns; Entire Agreement. 8.1 The rights and benefits of Employee under this Agreement are personal to him and, except as may be set forth herein, may not be transferred or assigned voluntarily or involuntarily. 8.2 This Agreement shall be binding on the Company, its successors and assigns, including any person acquiring control of the Company's business and operations. 8.3 This Agreement contains the entire agreement and understanding by and between the Employee and the Company with respect to the employment of Employee and the payments provided for in this Agreement shall be in lieu of any other claims of Employee relating to his employment or benefits, including claims relating to termination of employment. 9. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Oregon. AGREEMENT DATED AUGUST 27, 1991 EXECUTED AS FOLLOWS: - --------------------------------------------------- FRED MEYER, INC. By: KENNETH THRASHER, SR. V.P. ---------------------------------------- ROBERT G. MILLER --------------------------------------------- Robert G. Miller 16 AMENDMENT NO. 1 DATED AUGUST 1, 1994 EXECUTED AS FOLLOWS: - -------------------------------------------------------- FRED MEYER, INC. By: ROGER A. COOKE ---------------------------------------- Executed: July 14, 1994 ROBERT G. MILLER --------------------------------------------- Robert G. Miller Executed: July 19, 1994 AMENDMENT NO. 2 DATED SEPTEMBER 9, 1997 EXECUTED AS FOLLOWS: - ----------------------------------------------------------- FRED MEYER STORES, INC. By: ROGER A. COOKE ---------------------------------------- Executed: December 5, 1997 ROBERT G. MILLER --------------------------------------------- Robert G. Miller Executed: December 5, 1997 AMENDMENT NO. 3 DATED OCTOBER 13, 1998 EXECUTED AS FOLLOWS: - ---------------------------------------------------------- FRED MEYER STORES, INC. By: ROGER A. COOKE --------------------------------------- Executed: October 18, 1998 ROBERT G. MILLER --------------------------------------------- Robert G. Miller Executed: October 18, 1998 17 APPENDIX A TO EMPLOYMENT AGREEMENT BETWEEN FRED MEYER STORES, INC. (the "Company") and ROBERT MILLER ("Employee") LONG TERM DISABILITY BENEFITS 1. Definition of "Total Disability". "Total Disability" means the complete inability of an employee to perform any and every duty of his or her regular occupation for up to 24 months. After 24 months, the term "Total Disability" means the complete inability of an employee to perform any and every duty of any gainful occupation for which he or she is reasonably fitted by training, education, or experience, or may reasonably become qualified based on his or her training, education, or experience. 2. Long Term Disability Benefits. 2.1 Upon receipt of proof that Employee has suffered a Total Disability as a direct result, independent of all other causes, of an injury or illness, monthly benefits will be effective after the expiration of the elimination period, which is the period of six consecutive months of continuous Total Disability. 2.2 The benefit in the event of Total Disability will be $4,500 per month. 2.3 The monthly benefit will be reduced by the following: 1. The amount available under any Worker's Compensation law or similar law. 2. The amount of disability provided under any plan to which the Company makes contributions on behalf of the Employee. 3. Any disability income benefits provided under an act or law. 1 4. Disability income benefits provided or available from any pension plan participated in by the Company. 5. Social Security Disability benefits provided or available. 6. Any salary, sick pay, or other income replacement benefits provided by the employer. 7. Any retirement income provided or available from the Employment Agreement between the Company and Employee, or from any Company sponsored pension or retirement plan, including Social Security retirement income. 8. Any retirement income provided or available from any prior employer of Employee. 3. General Limitations. 3.1 No benefits shall be paid with respect to any injury or sickness: 1. Resulting from suicide, attempted suicide, or intentionally self- inflicted injury, while sane or insane. 2. Resulting from war, whether declared or undeclared, or any act or hazard of war. 3. Resulting from being engaged in an illegal occupation, commission of, or attempted commission of an assault or other illegal act, or resulting from injury caused by participation in a civil insurrection, rebellion and/or riot. 4. Sustained while on full-time active duty in any branch of the Armed Forces of any country, except for temporary active duty assignments of note more than 90 days. 5. Sustained while learning to operate an aircraft, operating or serving as a crew member of an aircraft, while traveling or flying in any aircraft 2 operated by or under the direction of any military authority, or while in any aircraft being used for test or experimental purposes. 6. Resulting from or related to alcoholism, narcotism or the abuse of other controlled substances. 3.2 Mental Illness Limitation - No benefits are provided with respect to disabilities due to neuroses, psychoneuroses, psychopathies, psychoses, and emotional diseases and disorders of any type. 4. Notice and Proof of Claim. To make a claim for benefits proof of disability must be submitted to and received by the Company within 20 days after Employee suffers a Total Disability. 5. Termination of Coverage. The Long Term Disability benefits provided above will only be provided if Employee is employed by the Company at the time he suffers a Total Disability. APPENDIX B TO EMPLOYMENT AGREEMENT BETWEEN FRED MEYER STORES, INC. (the "Company") and ROBERT MILLER ("Employee") Gross-Up Payment 1. Subject to the following provisions of this Appendix B, but otherwise anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of the Agreement or otherwise, but determined without regard to any additional payments required under this Appendix B (a "Payment") would be subject to the excise tax imposed by 3 Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall make a payment (a "Gross-Up Payment") to Employee in an amount such that, after payment by Employee of all income or other taxes (and any interest and penalties imposed with respect thereto) and Excise Taxes imposed on the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. 2. Subject to the provisions of paragraph 3 of this Appendix B, all determinations required to be made under this Appendix B, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm designated by Employee (the Employee Accounting Firm) which shall provide detailed supporting calculations both to the Company and to Employee within fifteen business days of the receipt of notice from Employee that there has been a Payment, or such earlier times as is requested by Employee. If the Employee Accounting Firm determines that no Excise Tax is payable by Employee, it shall, upon the written request of Employee, furnish Employee with a written opinion that failure to report the Excise Tax on the Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The calculations prepared by the Employee Accounting Firm shall be reviewed on behalf of the Company by the Company's independent auditors (the "Company Accounting Firm") which shall provide its conclusions, together with detailed supporting calculations, both to the Company and Employee within fifteen business days after receipt of the calculations and supporting materials prepared by the Employee Accounting Firm. In the 4 event of a dispute between the Employee Accounting Firm and the Company Accounting firm, such firms shall, within five business days of receipt of the conclusions and supporting materials prepared by the Company Accounting Firm, jointly select a third nationally recognized certified public accounting firm (the "Third Accounting Firm") to resolve the dispute. The Third Accounting Firm shall submit its conclusions to the Company and Employee within fifteen business days after receipt of notice of its appointment hereunder and the decision of the Third Accounting Firm shall be final, binding and conclusive upon Employee and the Company. All fees and expenses of all such accounting firms shall be borne sole by the Company. Any Gross-Up Payment shall be paid by the Company to Employee within five business days after the earlier of acceptance by the Company of the calculations prepared by the Employee Accounting Firm or the Company's receipt of the Third Accounting Firm's determination. 3. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination of whether any Gross-Up Payment should be made hereunder, it is possible that a Gross-Up Payment will have been due but not made by the Company (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant this Appendix B and Employee thereafter is required to make a payment of any Excise Tax, the Employee's Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee. 4. Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than 5 ten business days after Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the thirty day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (a) Give the Company any information reasonably requested by it relating to such claim; (b) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and acceptable to Employee; (c) Cooperate with the Company in good faith in order effectively to contest such claim; and (d) Permit the Company to participate in any proceedings relating to such claim. 5. The Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with a contest of a claim under Paragraph 4 of this Appendix B and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and 6 expenses. Without limitation on the foregoing provisions of this Appendix B, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine. If the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance. Any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6. If, after the receipt by Employee of an amount advanced by the Company pursuant to this Appendix B, Executive becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of this Appendix B) promptly pay to the Company the amount such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by the Company pursuant to this Appendix B, a 7 determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of thirty days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8 EX-10.N 3 EMPLOYMENT PROTECTION AGREEMENT EMPLOYMENT PROTECTION AGREEMENT This Agreement (this "Agreement") is made as of the 22nd day of September, 1998, among Fred Meyer, Inc., a corporation organized under the laws of the State of Delaware (together with any successor thereto, "Fred Meyer"), Ralphs Grocery Company, a Delaware corporation and wholly owned subsidiary of Fred Meyer (together with any successor thereto, "Employer"), and George Golleher ("Executive"). WITNESSETH THAT: WHEREAS, Executive is currently employed as a member of the executive management team of the Company and is currently party to an Executive Severance Agreement, dated March 10, 1998 (the "Current Agreement"); WHEREAS, the Company considers it essential to its best interests and the best interests of the shareholders of Fred Meyer to foster the continued employment of the members of the Company's executive management team, including Executive, and to reinforce and encourage the continued attention and dedication of such individuals to their respective assigned duties without distraction in the event that the possibility of a change in control exists; WHEREAS, the Company recognizes that the possibility of a change in control exists and that such possibility and the uncertainty and questions which may arise among members of its executive management team regarding the consequences of any such change in control may result in the distraction or departure of one or more of such individuals, to the detriment of the Company and the shareholders of Fred Meyer; NOW, THEREFORE, to provide Executive an incentive to continue his dedication to the Company and to make available to the Company his advice and counsel notwithstanding the possibility of a change in control of the Company, and to encourage Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and Executive hereby agree as follows: 1. Definitions. (i) "Annual Cash Compensation" shall mean an amount equal to the sum of (x) Executive's annual base salary, at the annual rate in effect immediately prior to the Qualifying Termination, and (y) the percentage of such base salary payable to Executive under the terms of the Company's annual bonus plan for its senior executives as in effect for the plan year which includes the Closing Date and assuming that the maximum performance objectives for such plan year had been achieved; provided that, if Executive's employment is terminated by Executive following a reduction in Executive's annual base salary or the percentage of such base salary 1 payable to Executive as an annual bonus, Annual Cash Compensation shall be determined on the basis of Executive's annual base salary at the rate in effect immediately prior to such reduction and the percentage thereof payable to Executive as an annual bonus in effect prior to any reduction thereof. (ii) "Cause," when used in connection with the termination of Executive's employment by Employer shall mean the occurrence of any of the following events: (a) Executive's material dishonesty or misappropriation in connection with the performance of the duties of his position with the Company that adversely affects the Company or its property or funds; (b) Executive's extreme misconduct, including reckless or willful destruction of Company property, unauthorized disclosure of confidential information or sexual, racial or other actionable harassment; (c) Executive's conviction of or plea of nolo contendere to a felony or any other crime involving moral turpitude; or (d) Executive's illegal, immoral, dishonest or fraudulent conduct in connection with the performance of the duties of his position with the Company that results in material harm to the business reputation of the Company or subjects the Company to material financial loss or material loss of business. (iii) "Change in Control" shall mean the occurrence of any of the following events: (a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan of exchange or other business combination involving Fred Meyer, other than any such transaction immediately following which the holders of Fred Meyer capital stock immediately prior to such transaction continue to own equity securities of the surviving entity representing more than 50 per cent of the equity securities of such entity entitled to vote generally in the election of directors of such entity, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption by Fred Meyer of any plan or proposal for the liquidation or dissolution of the Company; (b) the commencement of a tender or exchange offer (other than one made by Fred Meyer) for any capital stock of Fred Meyer (or securities convertible into such capital stock), provided a Change in Control shall be deemed to have occurred only if such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities representing at least 20 percent of the voting power of outstanding securities of Fred Meyer; (c) a report on Schedule 13D of the Exchange Act is filed with the Securities and exchange Commission or is received by Fred Meyer reporting the beneficial ownership by any person of securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer, except that if such report shall be filed or so received during a tender offer or exchange offer described in subparagraph (b) above, the provisions of such subparagraph shall apply in determining whether a Change in Control occurs; or 2 (d) during any period of 12 consecutive months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors of Fred Meyer cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. Notwithstanding anything in the foregoing to the contrary, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Executive, or a group (within the meaning of section 13(d)(3) of the Exchange Act) of persons which includes Executive, acquiring, directly or indirectly, securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer. (iv) "Closing Date" shall mean the date of the consummation of a transaction constituting a Control in Control, provided, that if the Change in Control transaction is effected through a series of transactions or other occurrences, the term "Closing Date" shall mean the date on which the first such transaction is consummated or the date of the first such occurrence. (v) "Company" shall mean, collectively, Fred Meyer, Employer and their respective subsidiaries and affiliates and any successor to any such entity. (vi) "Contract Period" shall mean the period commencing on any Closing Date and ending on the eighteen month anniversary of such Closing Date. (vii) "Disability," when used in connection with the termination of Executive's employment with Employer, shall mean Executive's failure to substantially perform the duties of his employment with Employer due to Executive's illness or incapacity lasting for a period of six consecutive months after notice thereof has been delivered by Employer to Executive. The determination of Executive's disability shall be made by the Board of Directors of Fred Meyer in good faith based upon the advice and evidence of Executive's personal physician and a competent medical expert retained for such purpose by the Board. (viii) "Qualifying Termination" shall have the meaning specified in Section 2(ii) hereof. (ix) "Severance Period" shall mean the period commencing on the Termination Date and ending on the three year anniversary of the Termination Date. (x) "Termination Date" shall mean, in the case of a termination of Executive's employment with Employer (a) by Employer for Cause, immediately upon receipt by Executive of written notice of such termination, (b) by Employer Without Cause or by Executive, as of the date specified in the written notice of such termination delivered by Employer or Executive, as the case may be, to the other, which date shall not be less than 14 days nor more than 28 days following the date of delivery thereof, (c) by Employer due to Executive's Disability, the date which is at least 30 days following the date written notice of such termination and the specific reasons therefore is delivered to Executive, or (d) due to Executive's death, the date of death. 3 (xi) "Without Cause," when used in connection with the termination of Executive's employment with Employer, shall mean any termination of Executive's employment by Employer that is not a termination for Cause or a termination due to Executive's Disability or death. 2. Termination of Employment of Executive. (i) At all times, each of Employer and Executive shall have the right by written notice delivered to the other to terminate Executive's employment with Employer for any reason. Following any termination of Executive's employment with Employer, Employer shall immediately pay to Executive all accrued and unpaid compensation for periods prior the Termination Date and Executive shall be entitled to all accrued benefits and coverages under the terms of any employee compensation or benefit plan of the Company in which Executive was a participant at any time during the period of his employment with the Company. (ii) In the event that the employment of Executive with Employer is terminated (x) by Employer Without Cause (i) prior to the Contract Period and in anticipation of a Change in Control or (ii) during the Contract Period or (y) by Executive for any or no reason during the Contract Period (any such termination under clause (x) or (y), a "Qualifying Termination"), Executive shall be entitled to receive the compensation and benefits provided in Section 3 of this Agreement. Executive shall have no right to receive any compensation or benefits under Section 3 of this Agreement upon any other termination of Executive's employment prior to or during the Contract Period. 3. Severance Compensation and Benefits Payable Upon Qualifying Termination. (i) In the event of a Qualifying Termination, Employer shall pay or provide to Executive as severance, and Executive shall be entitled to, the following compensation and benefits in lieu of any other base or annual bonus compensation or benefits for periods subsequent to the Termination Date payable under any plan or agreement of the Company (other than the Current Agreement), provided that all cash compensation provided under this Section 3 shall be reduced on a dollar for dollar basis by the amount of comparable cash compensation paid to Executive by the Company as severance pursuant to the Current Agreement, if any, and any benefits provided under this Section 3 shall be reduced by and to the extent of any comparable benefits provided to Executive by the Company as an additional severance benefit pursuant to the Current Agreement, if any: a) continued payments of installments of Executive's Annual Cash Compensation for the Severance Period, such payments to be made to Executive in accordance with the Company's regular payroll practices in effect for its senior executives; b) a single lump sum payment, to be paid to Executive as soon as reasonably practicable, but in no event more than 20 days, following the Termination Date, of a cash amount equal to the product of (x) the annual incentive bonus to which Executive would have been entitled under the executive bonus plan 4 or arrangement of the Company in effect for Executive for the plan year that includes the Termination Date had Executive continued in employment until the last day of such plan year (or other date required to be eligible to receive an annual bonus for such year) and assuming that the maximum performance objectives for such plan year had been achieved multiplied by (y) a fraction, the numerator of which equals the number of days in the plan year that have elapsed as of the Termination date and the denominator of which equals 365; c) continued coverage of Executive and his or her eligible dependents during the Severance Period under the Company's executive and employee medical, health and other welfare benefit plans in which Executive was a participant immediately prior to the Termination Date, subject to payment by Executive of all premiums and other copayment amounts required under the terms of such plans to be paid by participants therein of comparable position and seniority to Executive, provided that if Executive's employment is terminated by Executive following a reduction in the coverage of Executive or his or her eligible dependents under any such plan, coverage under this subparagraph (c) shall be provided in accordance with the terms of the applicable plan or plans as in effect prior to any reduction thereof; d) in determining the benefits payable to Executive under the Ralphs Grocery Company Retirement Supplement Plan and the Ralphs Grocery Company Supplemental Executive Retirement Plan, in the event of a Qualifying Termination, Executive shall be credited with service through the end of the Severance Period, provided that if Employer amends either plan to cease accruals thereunder and includes Executive under a different supplemental plan, Executive shall be entitled to coverage under such different plan during the Severance Period in lieu of the foregoing service credit, and e) in accordance with the terms of the Current Agreement, all of Executive's stock options that are outstanding immediately prior to the Termination Date shall become fully vested and exercisable as of the Termination Date and shall thereafter remain exercisable in accordance with the applicable provisions of the relevant option agreement. (ii) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), Employer shall make a payment (a "Gross-Up Payment") to Executive in an amount such that, after payment by Employee of all income or other taxes (and any interest and penalties imposed with respect thereto) and 5 Excise Taxes imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. a) Subject to the provisions of Section 3(ii)(b), all determinations required to be made under this Section 3(ii),including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to Fred Meyer and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by Executive. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, upon the written request of Executive, furnish Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The calculations prepared by the Accounting Firm shall be reviewed on behalf of Employer and Fred Meyer by Fred Meyer's independent auditors (the "Fred Meyer Accounting Firm") which shall provide its conclusions, together with detailed supporting calculations, both to Fred Meyer and to Executive within 15 business days after receipt of the calculations and supporting materials prepared by the Accounting Firm. In the event of a dispute between the Accounting Firm and the Fred Meyer Accounting Firm, such firms shall, within five business days of receipt of the conclusions and supporting materials prepared by the Fred Meyer Accounting Firm, jointly select a third nationally recognized certified public accounting firm (the "Third Accounting Firm") to resolve the dispute. The Third Accounting Firm shall submit its conclusions to Fred Meyer and Executive within 15 business days after receipt of notice of its appointment hereunder and the decision of the Third Accounting Firm shall be final, binding and conclusive upon Executive, Employer and Fred Meyer. All fees and expenses of all such accounting firms shall be borne solely by Employer. Any Gross-Up Payment shall be paid by Employer to Executive within five business days after the earlier of acceptance by Fred Meyer of the calculations prepared by the Accounting Firm or Fred Meyer's receipt of the Third Accounting Firm's determination. b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination of whether any Gross-Up Payment should be made hereunder, it is possible that a Gross-Up Payment will have been due but not made by Employer (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that Fred Meyer exhausts its remedies pursuant to this Section 3(ii) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Employer to or for the benefit of Executive. 6 c) Executive shall notify Fred Meyer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise Fred Meyer of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period of following the date on which it gives such notice to Fred Meyer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Fred Meyer notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (1) give Fred Meyer any information reasonably requested by it relating to such claim; (2) take such action in connection with contesting such claim as Fred Meyer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Fred Meyer and acceptable to Executive; (3) cooperate with Fred Meyer in good faith in order effectively to contest such claim; and (4) permit Fred Meyer to participate in any proceedings relating to such claim; provided, however, that Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3(ii), Fred Meyer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Fred Meyer shall determine; provided, however, that if Fred Meyer directs Executive to pay such claim and sue for a refund, Employer shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to 7 such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Fred Meyer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d) If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Employer's and Fred Meyer's complying with the requirements of this Section 3(ii)) promptly pay to Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Employer does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (iii) Executive shall not be required to mitigate the amount of any compensation, benefits or other payments provided for in this Agreement by seeking other employment or otherwise. Further, the amount of any cash compensation provided for in this Agreement shall not be reduced or offset by any compensation or other amounts paid to or earned by Executive in connection with any alternative employment obtained by Executive (including self-employment). To the extent Executive and his or her eligible dependents obtains in connection with any subsequent employment benefit coverage comparable to that provided to Executive pursuant to Section 3(i)(c) hereof and for a concurrent period, the benefit coverage provided hereunder will be reduced or, if applicable, eliminated. (iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no amounts paid pursuant to this Agreement will constitute compensation for any purpose under any retirement plan or other employee benefit plan, program, arrangement or agreement of the Company. 4. Assignment; Assumption of Agreement. This Agreement is personal to Executive and Executive may not assign or transfer any part of his rights or duties hereunder, or any payments due to him hereunder, to any other person, except that this Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees or beneficiaries. This Agreement shall be binding on any successor to Fred Meyer or Employer, as the case may be, and may not be assigned by Fred Meyer or Employer without the prior written consent of Executive. Fred Meyer and Employer shall each require any successor thereto (whether by merger, liquidation, dissolution or otherwise 8 by operation of law), by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform their respective obligations under this Agreement in the same manner and to the same extent that Fred Meyer or Employer, as the case may be, would be required to perform such obligations if no such succession had occurred. Failure of Fred Meyer or Employer to obtain a satisfactory assumption agreement from any successor will be deemed to be a termination of Executive's employment by Employer Without Cause and in anticipation of a Change in Control entitling Executive to all compensation and benefits specified in Section 3 hereof. 5. Modification; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by Executive and by an officer of each of Fred Meyer and Employer thereunto expressly authorized by the Board of Directors of Fred Meyer and Employer, respectively. Waiver by any party of any breach of or failure to comply with any provision of this Agreement by any other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement. 6. Arbitration of Disputes. (i) Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration. It is specifically understood and agreed that any such disagreement, dispute or controversy which cannot be resolved between the parties, including without limitation any matter relating to interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy would otherwise be considered justiciable or ripe for resolution by a court or arbitral tribunal. (ii) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association ("AAA"). (iii) The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within 30 days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (a) maintains his principal place of business within 30 miles of the City of Portland, Oregon and (b) has substantial experience in executive compensation. The parties shall each pay an equal portion of the fees, if any, and expenses of such arbitrator. (iv) The arbitration shall be conducted within 30 miles of the City of Portland, Oregon or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent. (v) At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of any opposing party. No evidence of any witness shall be presented unless the 9 opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure. (vi) Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive to the extent permitted by law any rights to appeal or to seek review of such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction. (vii) Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to or subtract from any of the provisions of this Agreement. (viii) If any dispute is not resolved within 60 days from the date of the commencement of an arbitration, then Fred Meyer shall, at its option, elect to pay Executive either (a) within 5 days after the end of such 60-day period, the amount or amounts which would have been payable to Executive had there been no dispute, subject to reimbursement to the extent consistent with the final disposition of the dispute or (b) following final disposition of the dispute, the amount determined in such final disposition to have been payable, together with Interest from the date when such sums were originally payable to the date of actual payment. For purpose of this paragraph (viii) the term "Interest" means interest at a rate equal to 6% per annum, compounded monthly. (ix) Notwithstanding anything to the contrary in this Agreement, the arbitration provisions set forth in this Section 7 shall be governed exclusively by the Federal Arbitration Act, Title 9, United States Code. 7. Guaranty. Each and every covenant and obligation of Employer hereunder shall be guaranteed by Fred Meyer. 8. Notice. All notices, requests, demands and other communications required or permitted to be given by either party to the other party to this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as follows: If to Fred Meyer, to: Fred Meyer, Inc. 3800 S.E. 22nd Street Portland, Oregon 97202-2999 Attention: General Counsel 10 If to Employer, to Ralphs Grocery Company C/O Fred Meyer, Inc., above If to Executive, to: George G. Golleher Ralphs Grocery Company 1100 West Artesia Boulevard Compton, CA 90220 Any party hereto may change its address for purposes of this Section 8 by giving fifteen (15) days' prior notice 9. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of this Agreement. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original. 12. Governing Law. This Agreement has been executed and delivered in the State of Oregon and shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Oregon, without reference to its principles of conflicts of law. 13. Certain Withholdings. Employer shall withhold from any amounts payable to Executive hereunder all federal, state, city and other taxes and withholdings that are required to be withheld pursuant to any applicable law or regulation. 14. Entire Agreement. This Agreement supersedes any and all other oral or written agreements heretofore made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof. 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FRED MEYER, INC. RALPHS GROCERY COMPANY ROBERT G. MILLER ROGER A. COOKE ------------------------------ ------------------------ By: Robert G. Miller By: Roger A. Cooke Title: Title: EXECUTIVE GEORGE GOLLEHER ------------------------------ 12 EX-10.R 4 EMPLOYMENT PROTECTION AGREEMENT The Employment Protection Agreement in the form attached has been entered into by certain officers including David Jessick and Kenneth Thrasher. EMPLOYMENT PROTECTION AGREEMENT This Agreement (this "Agreement") is made as of the 22nd day of September, 1998, among Fred Meyer, Inc., a corporation organized under the laws of the State of Delaware (together with any successor thereto, "Fred Meyer"), Fred Meyer Stores, Inc., a Delaware corporation and wholly owned subsidiary of Fred Meyer (together with any successor thereto, "Employer"), and _______________________ ("Executive"). WITNESSETH THAT: WHEREAS, Executive is currently employed as a member of the executive management team of the Company and is currently party to an Executive Severance Agreement, dated October 15, 1997 (the "Current Agreement"); WHEREAS, the Company considers it essential to its best interests and the best interests of the shareholders of Fred Meyer to foster the continued employment of the members of the Company's executive management team, including Executive, and to reinforce and encourage the continued attention and dedication of such individuals to their respective assigned duties without distraction in the event that the possibility of a change in control exists; WHEREAS, the Company recognizes that the possibility of a change in control exists and that such possibility and the uncertainty and questions which may arise among members of its executive management team regarding the consequences of any such change in control may result in the distraction or departure of one or more of such individuals, to the detriment of the Company and the shareholders of Fred Meyer; NOW, THEREFORE, to provide Executive an incentive to continue his dedication to the Company and to make available to the Company his advice and counsel notwithstanding the possibility of a change in control of the Company, and to encourage Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and Executive hereby agree as follows: 1. Definitions. (i) "Annual Cash Compensation" shall mean an amount equal to the sum of (x) Executive's annual base salary, at the annual rate in effect immediately prior to the Qualifying Termination, and (y) the percentage of such base salary payable to Executive under the terms of the Company's annual bonus plan for its senior executives as in effect for the plan year which includes the Closing Date and assuming that the maximum performance objectives for such plan year had been achieved; provided that, if Executive's employment is terminated by Executive for Good Reason as a result of a reduction in Executive's annual base salary or the percentage of 1 such base salary payable to Executive as an annual bonus, Annual Cash Compensation shall be determined on the basis of Executive's annual base salary at the rate in effect immediately prior to such reduction and the percentage thereof payable to Executive as an annual bonus in effect prior to any reduction thereof. (ii) "Cause," when used in connection with the termination of Executive's employment by Employer shall mean the occurrence of any of the following events: (a) Executive's material dishonesty or misappropriation in connection with the performance of the duties of his position with the Company that adversely affects the Company or its property or funds; (b) Executive's extreme misconduct, including reckless or willful destruction of Company property, unauthorized disclosure of confidential information or sexual, racial or other actionable harassment; (c) Executive's conviction of or plea of nolo contendere to a felony or any other crime involving moral turpitude; or (d) Executive's illegal, immoral, dishonest or fraudulent conduct in connection with the performance of the duties of his position with the Company that results in material harm to the business reputation of the Company or subjects the Company to material financial loss or material loss of business. (iii) "Change in Control" shall mean the occurrence of any of the following events: (a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan of exchange or other business combination involving Fred Meyer, other than any such transaction immediately following which the holders of Fred Meyer capital stock immediately prior to such transaction continue to own equity securities of the surviving entity representing more than 50 per cent of the equity securities of such entity entitled to vote generally in the election of directors of such entity, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption by Fred Meyer of any plan or proposal for the liquidation or dissolution of the Company; (b) the commencement of a tender or exchange offer (other than one made by Fred Meyer) for any capital stock of Fred Meyer (or securities convertible into such capital stock), provided a Change in Control shall be deemed to have occurred only if such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities representing at least 20 percent of the voting power of outstanding securities of Fred Meyer; (c) a report on Schedule 13D of the Exchange Act is filed with the Securities and exchange Commission or is received by Fred Meyer reporting the beneficial ownership by any person of securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer, except that if such report shall be filed or so received during a tender offer or exchange offer described in subparagraph (b) above, the provisions of such subparagraph shall apply in determining whether a Change in Control occurs; or 2 (d) during any period of 12 consecutive months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors of Fred Meyer cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. Notwithstanding anything in the foregoing to the contrary, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Executive, or a group (within the meaning of section 13(d)(3) of the Exchange Act) of persons which includes Executive, acquiring, directly or indirectly, securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer. (iv) "Closing Date" shall mean the date of the consummation of a transaction constituting a Control in Control, provided, that if the Change in Control transaction is effected through a series of transactions or other occurrences, the term "Closing Date" shall mean the date on which the first such transaction is consummated or the date of the first such occurrence. (v) "Company" shall mean, collectively, Fred Meyer, Employer and their respective subsidiaries and affiliates and any successor to any such entity. (vi) "Contract Period" shall mean the period commencing on any Closing Date and ending on the eighteen month anniversary of such Closing Date. (vii) "Disability," when used in connection with the termination of Executive's employment with Employer, shall mean Executive's failure to substantially perform the duties of his employment with Employer due to Executive's illness or incapacity lasting for a period of six consecutive months after notice thereof has been delivered by Employer to Executive. The determination of Executive's disability shall be made by the Board of Directors of Fred Meyer in good faith based upon the advice and evidence of Executive's personal physician and a competent medical expert retained for such purpose by the Board. (viii) "Good Reason," when used in connection with the termination of Executive's employment with Employer by Executive, shall mean the occurrence of any of the following events: (a) any change in Executive's title with the Company in effect immediately prior to the Closing Date or such change, other than any such change to which Executive has given his or her prior written consent, or a substantial reduction of the powers or functions associated with Executive's positions, duties, responsibilities or status with the Company immediately prior to the Closing Date or such reduction; or (b) a reduction in Executive's aggregate compensation from the level in effect immediately prior to the Closing Date or such reduction; (ix) "Qualifying Termination" shall have the meaning specified in Section 2(ii) hereof. 3 (x) "Severance Period" shall mean the period commencing on the Termination Date and ending on the three year anniversary of the Termination Date. (xi) "Termination Date" shall mean, in the case of a termination of Executive's employment with Employer (a) by Employer for Cause, immediately upon receipt by Executive of written notice of such termination, (b) by Employer Without Cause or by Executive for or without Good Reason, as of the date specified in the written notice of such termination delivered by Employer or Executive, as the case may be, to the other, which date shall not be less than 14 days nor more than 28 days following the date of delivery thereof, (c) by Employer due to Executive's Disability, the date which is at least 30 days following the date written notice of such termination and the specific reasons therefore is delivered to Executive, or (d) due to Executive's death, the date of death. (xii) "Without Cause," when used in connection with the termination of Executive's employment with Employer, shall mean any termination of Executive's employment by Employer that is not a termination for Cause or a termination due to Executive's Disability or death. 2. Termination of Employment of Executive. (i) At all times, each of Employer and Executive shall have the right by written notice delivered to the other to terminate Executive's employment with Employer for any reason. Following any termination of Executive's employment with Employer, Employer shall immediately pay to Executive all accrued and unpaid compensation for periods prior the Termination Date and Executive shall be entitled to all accrued benefits and coverages under the terms of any employee compensation or benefit plan of the Company in which Executive was a participant at any time during the period of his employment with the Company. (ii) In the event that the employment of Executive with Employer is terminated by Employer Without Cause or by Executive for Good Reason (a) prior to the Contract Period and in anticipation of a Change in Control or (b) during the Contract Period (any such termination, a "Qualifying Termination"), Executive shall be entitled to receive the compensation and benefits provided in Section 3 of this Agreement. Executive shall have no right to receive any compensation or benefits under Section 3 of this Agreement upon any other termination of Executive's employment prior to or during the Contract Period. 3. Severance Compensation and Benefits Payable Upon Qualifying Termination. (i) In the event of a Qualifying Termination, Employer shall pay or provide to Executive as severance, and Executive shall be entitled to, the following compensation and benefits in lieu of any other base or annual bonus compensation or benefits for periods subsequent to the Termination Date payable under any plan or agreement of the Company (other than the Current Agreement), provided that all cash compensation provided under this Section 3 shall be reduced on a dollar for dollar basis by the amount of comparable cash compensation paid to Executive by the Company as severance pursuant to the Current Agreement, if any, and any 4 benefits provided under this Section 3 shall be reduced by and to the extent of any comparable benefits provided to Executive by the Company as an additional severance benefit pursuant to the Current Agreement, if any: a) continued payments of installments of Executive's Annual Cash Compensation for the Severance Period, such payments to be made to Executive in accordance with the Company's regular payroll practices in effect for its senior executives; b) a single lump sum payment, to be paid to Executive as soon as reasonably practicable, but in no event more than 20 days, following the Termination Date, of a cash amount equal to the product of (x) the annual incentive bonus to which Executive would have been entitled under the executive bonus plan or arrangement of the Company in effect for Executive for the plan year that includes the Termination Date had Executive continued in employment until the last day of such plan year (or other date required to be eligible to receive an annual bonus for such year) and assuming that the maximum performance objectives for such plan year had been achieved multiplied by (y) a fraction, the numerator of which equals the number of days in the plan year that have elapsed as of the Termination date and the denominator of which equals 365; c) continued coverage of Executive and his or her eligible dependents during the Severance Period under the Company's executive and employee medical, health and other welfare benefit plans in which Executive was a participant immediately prior to the Termination Date, subject to payment by Executive of all premiums and other copayment amounts required under the terms of such plans to be paid by participants therein of comparable position and seniority to Executive, provided that if Executive's employment is terminated by Executive for Good Reason as a result of a reduction in the coverage of Executive or his or her eligible dependents under any such plan, coverage under this subparagraph (c) shall be provided in accordance with the terms of the applicable plan or plans as in effect prior to any reduction thereof; d) in determining the benefits payable to Executive under the Fred Meyer Supplemental Income Plan (the "Supplemental Plan"), Executive will be deemed to have continued to accrue annual retirement allocations and other benefits under the Supplemental Plan during the Severance Period and to have terminated employment within the meaning of Section 5.2 of the Supplemental Plan on the last day of the Severance Period, in each case, in accordance with the terms of the Supplemental Plan in effect on the date of this Agreement; e) in accordance with the terms of the Current Agreement, all of Executive's stock options that are outstanding immediately prior to the Termination Date shall become fully vested and exercisable as of the Termination Date and shall thereafter remain exercisable in accordance with the applicable provisions of the relevant option agreement. 5 (ii) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), Employer shall make a payment (a "Gross-Up Payment") to Executive in an amount such that, after payment by Employee of all income or other taxes (and any interest and penalties imposed with respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. a) Subject to the provisions of Section 3(ii)(b), all determinations required to be made under this Section 3(ii),including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to Fred Meyer and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by Executive. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, upon the written request of Executive, furnish Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The calculations prepared by the Accounting Firm shall be reviewed on behalf of Employer and Fred Meyer by Fred Meyer's independent auditors (the "Fred Meyer Accounting Firm") which shall provide its conclusions, together with detailed supporting calculations, both to Fred Meyer and to Executive within 15 business days after receipt of the calculations and supporting materials prepared by the Accounting Firm. In the event of a dispute between the Accounting Firm and the Fred Meyer Accounting Firm, such firms shall, within five business days of receipt of the conclusions and supporting materials prepared by the Fred Meyer Accounting Firm, jointly select a third nationally recognized certified public accounting firm (the "Third Accounting Firm") to resolve the dispute. The Third Accounting Firm shall submit its conclusions to Fred Meyer and Executive within 15 business days after receipt of notice of its appointment hereunder and the decision of the Third Accounting Firm shall be final, binding and conclusive upon Executive, Employer and Fred Meyer. All fees and expenses of all such accounting firms shall be borne solely by Employer. Any Gross-Up Payment shall be paid by Employer to Executive within five business days after the earlier of acceptance by Fred Meyer of the calculations prepared by the Accounting Firm or Fred Meyer's receipt of the Third Accounting Firm's determination. 6 b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination of whether any Gross-Up Payment should be made hereunder, it is possible that a Gross-Up Payment will have been due but not made by Employer (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that Fred Meyer exhausts its remedies pursuant to this Section 3(ii) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Employer to or for the benefit of Executive. c) Executive shall notify Fred Meyer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise Fred Meyer of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period of following the date on which it gives such notice to Fred Meyer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Fred Meyer notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (1) give Fred Meyer any information reasonably requested by it relating to such claim; (2) take such action in connection with contesting such claim as Fred Meyer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Fred Meyer and acceptable to Executive; (3) cooperate with Fred Meyer in good faith in order effectively to contest such claim; and (4) permit Fred Meyer to participate in any proceedings relating to such claim; provided, however, that Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3(ii), Fred Meyer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any 7 and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Fred Meyer shall determine; provided, however, that if Fred Meyer directs Executive to pay such claim and sue for a refund, Employer shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Fred Meyer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d) If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Employer's and Fred Meyer's complying with the requirements of this Section 3(ii)) promptly pay to Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Employer does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (iii) Executive shall not be required to mitigate the amount of any compensation, benefits or other payments provided for in this Agreement by seeking other employment or otherwise. Further, the amount of any cash compensation provided for in this Agreement shall not be reduced or offset by any compensation or other amounts paid to or earned by Executive in connection with any alternative employment obtained by Executive (including self-employment). To the extent Executive and his or her eligible dependents obtains in connection with any subsequent employment benefit coverage comparable to that provided to Executive pursuant to Section 3(i)(c) hereof and for a concurrent period, the benefit coverage provided hereunder will be reduced or, if applicable, eliminated. 8 (iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no amounts paid pursuant to this Agreement will constitute compensation for any purpose under any retirement plan or other employee benefit plan, program, arrangement or agreement of the Company. 4. Assignment; Assumption of Agreement. This Agreement is personal to Executive and Executive may not assign or transfer any part of his rights or duties hereunder, or any payments due to him hereunder, to any other person, except that this Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees or beneficiaries. This Agreement shall be binding on any successor to Fred Meyer or Employer, as the case may be, and may not be assigned by Fred Meyer or Employer without the prior written consent of Executive. Fred Meyer and Employer shall each require any successor thereto (whether by merger, liquidation, dissolution or otherwise by operation of law), by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform their respective obligations under this Agreement in the same manner and to the same extent that Fred Meyer or Employer, as the case may be, would be required to perform such obligations if no such succession had occurred. Failure of Fred Meyer or Employer to obtain a satisfactory assumption agreement from any successor will be deemed to be a termination of Executive's employment by Employer Without Cause and in anticipation of a Change in Control entitling Executive to all compensation and benefits specified in Section 3 hereof. 5. Modification; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by Executive and by an officer of each of Fred Meyer and Employer thereunto expressly authorized by the Board of Directors of Fred Meyer and Employer, respectively. Waiver by any party of any breach of or failure to comply with any provision of this Agreement by any other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement. 6. Arbitration of Disputes. (i) Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration. It is specifically understood and agreed that any such disagreement, dispute or controversy which cannot be resolved between the parties, including without limitation any matter relating to interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy would otherwise be considered justiciable or ripe for resolution by a court or arbitral tribunal. (ii) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association ("AAA"). (iii) The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within 30 days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator 9 shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (a) maintains his principal place of business within 30 miles of the City of Portland, Oregon and (b) has substantial experience in executive compensation. The parties shall each pay an equal portion of the fees, if any, and expenses of such arbitrator. (iv) The arbitration shall be conducted within 30 miles of the City of Portland, Oregon or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent. (v) At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross- examine the witnesses of any opposing party. No evidence of any witness shall be presented unless the opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure. (vi) Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive to the extent permitted by law any rights to appeal or to seek review of such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction. (vii) Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to or subtract from any of the provisions of this Agreement. (viii) If any dispute is not resolved within 60 days from the date of the commencement of an arbitration, then Fred Meyer shall, at its option, elect to pay Executive either (a) within 5 days after the end of such 60-day period, the amount or amounts which would have been payable to Executive had there been no dispute, subject to reimbursement to the extent consistent with the final disposition of the dispute or (b) following final disposition of the dispute, the amount determined in such final disposition to have been payable, together with Interest from the date when such sums were originally payable to the date of actual payment. For purpose of this paragraph (viii) the term "Interest" means interest at a rate equal to 6% per annum, compounded monthly. (ix) Notwithstanding anything to the contrary in this Agreement, the arbitration provisions set forth in this Section 7 shall be governed exclusively by the Federal Arbitration Act, Title 9, United States Code. 7. Guaranty. Each and every covenant and obligation of Employer hereunder shall be guaranteed by Fred Meyer. 8. Notice. All notices, requests, demands and other communications required or permitted to be given by either party to the other party to this Agreement (including, without 10 limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as follows: If to Fred Meyer, to: Fred Meyer, Inc. 3800 S.E. 22nd Street Portland, Oregon 97202-2999 Attention: General Counsel If to Employer, to Fred Meyer Stores, Inc. C/O Fred Meyer, Inc., above If to Executive, to: [-----------------------] Fred Meyer Stores, Inc. 3800 S.E. 22nd Avenue Portland, OR 97202 Any party hereto may change its address for purposes of this Section 8 by giving fifteen (15) days' prior notice 9. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid 'or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of this Agreement. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original. 12. Governing Law. This Agreement has been executed and delivered in the State of Oregon and shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Oregon, without reference to its principles of conflicts of law. 11 13. Certain Withholdings. Employer shall withhold from any amounts payable to Executive hereunder all federal, state, city and other taxes and withholdings that are required to be withheld pursuant to any applicable law or regulation. 14. Entire Agreement. This Agreement supersedes any and all other oral or written agreements heretofore made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FRED MEYER, INC. FRED MEYER STORES, INC. ROGER A. COOKE ROGER A. COOKE ------------------------------------ ---------------------------------- By: Roger A. Cooke By: Roger A. Cooke Title: Executive Vice President, Title: Executive Vice President General Counsel and Secretary and Secretary EXECUTIVE ------------------------------------ 12 EX-10.S 5 EMPLOYMENT PROTECTION AGREEMENT The Employment Protection Agreement in the form attached has been entered into by certain officers including Mary F. Sammons and Sammy K. Duncan. EMPLOYMENT PROTECTION AGREEMENT This Agreement (this "Agreement") is made as of the 22nd day of September, 1998, among Fred Meyer, Inc., a corporation organized under the laws of the State of Delaware (together with any successor thereto, "Fred Meyer"), Fred Meyer Stores, Inc., a Delaware corporation and wholly owned subsidiary of Fred Meyer (together with any successor thereto, "Employer"), and _______________________ ("Executive"). WITNESSETH THAT: WHEREAS, Executive is currently employed as a member of the executive management team of the Company and is currently party to an Executive Severance Agreement, dated October 15, 1997 (the "Current Agreement"); WHEREAS, the Company considers it essential to its best interests and the best interests of the shareholders of Fred Meyer to foster the continued employment of the members of the Company's executive management team, including Executive, and to reinforce and encourage the continued attention and dedication of such individuals to their respective assigned duties without distraction in the event that the possibility of a change in control exists; WHEREAS, the Company recognizes that the possibility of a change in control exists and that such possibility and the uncertainty and questions which may arise among members of its executive management team regarding the consequences of any such change in control may result in the distraction or departure of one or more of such individuals, to the detriment of the Company and the shareholders of Fred Meyer; NOW, THEREFORE, to provide Executive an incentive to continue his dedication to the Company and to make available to the Company his advice and counsel notwithstanding the possibility of a change in control of the Company, and to encourage Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and Executive hereby agree as follows: 1. Definitions. (i) "Annual Cash Compensation" shall mean an amount equal to the sum of (x) Executive's annual base salary, at the annual rate in effect immediately prior to the Qualifying Termination, and (y) the percentage of such base salary payable to Executive under the terms of the Company's annual bonus plan for its senior executives as in effect for the plan year which includes the Closing Date and assuming that the maximum performance objectives for such plan year had been achieved; provided that, if Executive's employment is terminated by Executive for Good Reason as a result of a reduction in Executive's annual base salary or the percentage of 1 such base salary payable to Executive as an annual bonus, Annual Cash Compensation shall be determined on the basis of Executive's annual base salary at the rate in effect immediately prior to such reduction and the percentage thereof payable to Executive as an annual bonus in effect prior to any reduction thereof. (ii) "Cause," when used in connection with the termination of Executive's employment by Employer shall mean the occurrence of any of the following events: (a) Executive's material dishonesty or misappropriation in connection with the performance of the duties of his position with the Company that adversely affects the Company or its property or funds; (b) Executive's extreme misconduct, including reckless or willful destruction of Company property, unauthorized disclosure of confidential information or sexual, racial or other actionable harassment; (c) Executive's conviction of or plea of nolo contendere to a felony or any other crime involving moral turpitude; or (d) Executive's illegal, immoral, dishonest or fraudulent conduct in connection with the performance of the duties of his position with the Company that results in material harm to the business reputation of the Company or subjects the Company to material financial loss or material loss of business. (iii) "Change in Control" shall mean the occurrence of any of the following events: (a) the shareholders of Fred Meyer approve: (i) any merger, statutory plan of exchange or other business combination involving Fred Meyer, other than any such transaction immediately following which the holders of Fred Meyer capital stock immediately prior to such transaction continue to own equity securities of the surviving entity representing more than 50 per cent of the equity securities of such entity entitled to vote generally in the election of directors of such entity, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption by Fred Meyer of any plan or proposal for the liquidation or dissolution of the Company; (b) the commencement of a tender or exchange offer (other than one made by Fred Meyer) for any capital stock of Fred Meyer (or securities convertible into such capital stock), provided a Change in Control shall be deemed to have occurred only if such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities representing at least 20 percent of the voting power of outstanding securities of Fred Meyer; (c) a report on Schedule 13D of the Exchange Act is filed with the Securities and exchange Commission or is received by Fred Meyer reporting the beneficial ownership by any person of securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer, except that if such report shall be filed or so received during a tender offer or exchange offer described in subparagraph (b) above, the provisions of such subparagraph shall apply in determining whether a Change in Control occurs; or 2 (d) during any period of 12 consecutive months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors of Fred Meyer cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. Notwithstanding anything in the foregoing to the contrary, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Executive, or a group (within the meaning of section 13(d)(3) of the Exchange Act) of persons which includes Executive, acquiring, directly or indirectly, securities representing 20 percent or more of the voting power of outstanding securities of Fred Meyer. (iv) "Closing Date" shall mean the date of the consummation of a transaction constituting a Control in Control, provided, that if the Change in Control transaction is effected through a series of transactions or other occurrences, the term "Closing Date" shall mean the date on which the first such transaction is consummated or the date of the first such occurrence. (v) "Company" shall mean, collectively, Fred Meyer, Employer and their respective subsidiaries and affiliates and any successor to any such entity. (vi) "Contract Period" shall mean the period commencing on any Closing Date and ending on the eighteen month anniversary of such Closing Date. (vii) "Disability," when used in connection with the termination of Executive's employment with Employer, shall mean Executive's failure to substantially perform the duties of his employment with Employer due to Executive's illness or incapacity lasting for a period of six consecutive months after notice thereof has been delivered by Employer to Executive. The determination of Executive's disability shall be made by the Board of Directors of Fred Meyer in good faith based upon the advice and evidence of Executive's personal physician and a competent medical expert retained for such purpose by the Board. (viii) "Good Reason," when used in connection with the termination of Executive's employment with Employer by Executive, shall mean the occurrence of any of the following events: (a) any change in Executive's title with the Company in effect immediately prior to the Closing Date or such change, other than any such change to which Executive has given his or her prior written consent, or a substantial reduction of the powers or functions associated with Executive's positions, duties, responsibilities or status with the Company immediately prior to the Closing Date or such reduction; (b) a reduction in Executive's aggregate compensation from the level in effect immediately prior to the Closing Date or such reduction; or (c) a change in Executive's principal work location other than any such change to another location within the metropolitan area in which Executive was located immediately prior to the Closing Date or such change. (ix) "Qualifying Termination" shall have the meaning specified in Section 2(ii) hereof. 3 (x) "Severance Period" shall mean the period commencing on the Termination Date and ending on the three year anniversary of the Termination Date. (xi) "Termination Date" shall mean, in the case of a termination of Executive's employment with Employer (a) by Employer for Cause, immediately upon receipt by Executive of written notice of such termination, (b) by Employer Without Cause or by Executive for or without Good Reason, as of the date specified in the written notice of such termination delivered by Employer or Executive, as the case may be, to the other, which date shall not be less than 14 days nor more than 28 days following the date of delivery thereof, (c) by Employer due to Executive's Disability, the date which is at least 30 days following the date written notice of such termination and the specific reasons therefore is delivered to Executive, or (d) due to Executive's death, the date of death. (xii) "Without Cause," when used in connection with the termination of Executive's employment with Employer, shall mean any termination of Executive's employment by Employer that is not a termination for Cause or a termination due to Executive's Disability or death. 2. Termination of Employment of Executive. (i) At all times, each of Employer and Executive shall have the right by written notice delivered to the other to terminate Executive's employment with Employer for any reason. Following any termination of Executive's employment with Employer, Employer shall immediately pay to Executive all accrued and unpaid compensation for periods prior the Termination Date and Executive shall be entitled to all accrued benefits and coverages under the terms of any employee compensation or benefit plan of the Company in which Executive was a participant at any time during the period of his employment with the Company. (ii) In the event that the employment of Executive with Employer is terminated by Employer Without Cause or by Executive for Good Reason (a) prior to the Contract Period and in anticipation of a Change in Control or (b) during the Contract Period (any such termination, a "Qualifying Termination"), Executive shall be entitled to receive the compensation and benefits provided in Section 3 of this Agreement. Executive shall have no right to receive any compensation or benefits under Section 3 of this Agreement upon any other termination of Executive's employment prior to or during the Contract Period. 3. Severance Compensation and Benefits Payable Upon Qualifying Termination. (i) In the event of a Qualifying Termination, Employer shall pay or provide to Executive as severance, and Executive shall be entitled to, the following compensation and benefits in lieu of any other base or annual bonus compensation or benefits for periods subsequent to the Termination Date payable under any plan or agreement of the Company (other than the Current Agreement), provided that all cash compensation provided under this Section 3 shall be reduced on a dollar for dollar basis by the amount of comparable cash compensation paid to Executive by the Company as severance pursuant to the Current Agreement, if any, and any 4 benefits provided under this Section 3 shall be reduced by and to the extent of any comparable benefits provided to Executive by the Company as an additional severance benefit pursuant to the Current Agreement, if any: a) continued payments of installments of Executive's Annual Cash Compensation for the Severance Period, such payments to be made to Executive in accordance with the Company's regular payroll practices in effect for its senior executives; b) a single lump sum payment, to be paid to Executive as soon as reasonably practicable, but in no event more than 20 days, following the Termination Date, of a cash amount equal to the product of (x) the annual incentive bonus to which Executive would have been entitled under the executive bonus plan or arrangement of the Company in effect for Executive for the plan year that includes the Termination Date had Executive continued in employment until the last day of such plan year (or other date required to be eligible to receive an annual bonus for such year) and assuming that the maximum performance objectives for such plan year had been achieved multiplied by (y) a fraction, the numerator of which equals the number of days in the plan year that have elapsed as of the Termination date and the denominator of which equals 365; c) continued coverage of Executive and his or her eligible dependents during the Severance Period under the Company's executive and employee medical, health and other welfare benefit plans in which Executive was a participant immediately prior to the Termination Date, subject to payment by Executive of all premiums and other copayment amounts required under the terms of such plans to be paid by participants therein of comparable position and seniority to Executive, provided that if Executive's employment is terminated by Executive for Good Reason as a result of a reduction in the coverage of Executive or his or her eligible dependents under any such plan, coverage under this subparagraph (c) shall be provided in accordance with the terms of the applicable plan or plans as in effect prior to any reduction thereof; d) in determining the benefits payable to Executive under the Fred Meyer Supplemental Income Plan (the "Supplemental Plan"), Executive will be deemed to have continued to accrue annual retirement allocations and other benefits under the Supplemental Plan during the Severance Period and to have terminated employment within the meaning of Section 5.2 of the Supplemental Plan on the last day of the Severance Period, in each case, in accordance with the terms of the Supplemental Plan in effect on the date of this Agreement; e) in accordance with the terms of the Current Agreement, all of Executive's stock options that are outstanding immediately prior to the Termination Date shall become fully vested and exercisable as of the Termination Date and shall thereafter remain exercisable in accordance with the applicable provisions of the relevant option agreement. 5 (ii) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this subparagraph (ii)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the 1986 Internal Revenue Code, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), Employer shall make a payment (a "Gross-Up Payment") to Executive in an amount such that, after payment by Employee of all income or other taxes (and any interest and penalties imposed with respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. a) Subject to the provisions of Section 3(ii)(b), all determinations required to be made under this Section 3(ii),including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to Fred Meyer and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by Executive. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, upon the written request of Executive, furnish Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The calculations prepared by the Accounting Firm shall be reviewed on behalf of Employer and Fred Meyer by Fred Meyer's independent auditors (the "Fred Meyer Accounting Firm") which shall provide its conclusions, together with detailed supporting calculations, both to Fred Meyer and to Executive within 15 business days after receipt of the calculations and supporting materials prepared by the Accounting Firm. In the event of a dispute between the Accounting Firm and the Fred Meyer Accounting Firm, such firms shall, within five business days of receipt of the conclusions and supporting materials prepared by the Fred Meyer Accounting Firm, jointly select a third nationally recognized certified public accounting firm (the "Third Accounting Firm") to resolve the dispute. The Third Accounting Firm shall submit its conclusions to Fred Meyer and Executive within 15 business days after receipt of notice of its appointment hereunder and the decision of the Third Accounting Firm shall be final, binding and conclusive upon Executive, Employer and Fred Meyer. All fees and expenses of all such accounting firms shall be borne solely by Employer. Any Gross-Up Payment shall be paid by Employer to Executive within five business days after the earlier of acceptance by Fred Meyer of the calculations prepared by the Accounting Firm or Fred Meyer's receipt of the Third Accounting Firm's determination. 6 b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination of whether any Gross-Up Payment should be made hereunder, it is possible that a Gross-Up Payment will have been due but not made by Employer (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that Fred Meyer exhausts its remedies pursuant to this Section 3(ii) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Employer to or for the benefit of Executive. c) Executive shall notify Fred Meyer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise Fred Meyer of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period of following the date on which it gives such notice to Fred Meyer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Fred Meyer notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (1) give Fred Meyer any information reasonably requested by it relating to such claim; (2) take such action in connection with contesting such claim as Fred Meyer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Fred Meyer and acceptable to Executive; (3) cooperate with Fred Meyer in good faith in order effectively to contest such claim; and (4) permit Fred Meyer to participate in any proceedings relating to such claim; provided, however, that Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3(ii), Fred Meyer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any 7 and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Fred Meyer shall determine; provided, however, that if Fred Meyer directs Executive to pay such claim and sue for a refund, Employer shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Fred Meyer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d) If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Employer's and Fred Meyer's complying with the requirements of this Section 3(ii)) promptly pay to Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Employer pursuant to this Section 3(ii), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Employer does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (iii) Executive shall not be required to mitigate the amount of any compensation, benefits or other payments provided for in this Agreement by seeking other employment or otherwise. Further, the amount of any cash compensation provided for in this Agreement shall not be reduced or offset by any compensation or other amounts paid to or earned by Executive in connection with any alternative employment obtained by Executive (including self-employment). To the extent Executive and his or her eligible dependents obtains in connection with any subsequent employment benefit coverage comparable to that provided to Executive pursuant to Section 3(i)(c) hereof and for a concurrent period, the benefit coverage provided hereunder will be reduced or, if applicable, eliminated. 8 (iv) Except as required pursuant to Section 3(i)(c) or 3(i)(d), no amounts paid pursuant to this Agreement will constitute compensation for any purpose under any retirement plan or other employee benefit plan, program, arrangement or agreement of the Company. 4. Assignment; Assumption of Agreement. This Agreement is personal to Executive and Executive may not assign or transfer any part of his rights or duties hereunder, or any payments due to him hereunder, to any other person, except that this Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees or beneficiaries. This Agreement shall be binding on any successor to Fred Meyer or Employer, as the case may be, and may not be assigned by Fred Meyer or Employer without the prior written consent of Executive. Fred Meyer and Employer shall each require any successor thereto (whether by merger, liquidation, dissolution or otherwise by operation of law), by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform their respective obligations under this Agreement in the same manner and to the same extent that Fred Meyer or Employer, as the case may be, would be required to perform such obligations if no such succession had occurred. Failure of Fred Meyer or Employer to obtain a satisfactory assumption agreement from any successor will be deemed to be a termination of Executive's employment by Employer Without Cause and in anticipation of a Change in Control entitling Executive to all compensation and benefits specified in Section 3 hereof. 5. Modification; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by Executive and by an officer of each of Fred Meyer and Employer thereunto expressly authorized by the Board of Directors of Fred Meyer and Employer, respectively. Waiver by any party of any breach of or failure to comply with any provision of this Agreement by any other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement. 6. Arbitration of Disputes. (i) Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration. It is specifically understood and agreed that any such disagreement, dispute or controversy which cannot be resolved between the parties, including without limitation any matter relating to interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy would otherwise be considered justiciable or ripe for resolution by a court or arbitral tribunal. (ii) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association ("AAA"). (iii) The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within 30 days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator 9 shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (a) maintains his principal place of business within 30 miles of the City of Portland, Oregon and (b) has substantial experience in executive compensation. The parties shall each pay an equal portion of the fees, if any, and expenses of such arbitrator. (iv) The arbitration shall be conducted within 30 miles of the City of Portland, Oregon or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent. (v) At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross- examine the witnesses of any opposing party. No evidence of any witness shall be presented unless the opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure. (vi) Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive to the extent permitted by law any rights to appeal or to seek review of such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction. (vii) Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to or subtract from any of the provisions of this Agreement. (viii) If any dispute is not resolved within 60 days from the date of the commencement of an arbitration, then Fred Meyer shall, at its option, elect to pay Executive either (a) within 5 days after the end of such 60-day period, the amount or amounts which would have been payable to Executive had there been no dispute, subject to reimbursement to the extent consistent with the final disposition of the dispute or (b) following final disposition of the dispute, the amount determined in such final disposition to have been payable, together with Interest from the date when such sums were originally payable to the date of actual payment. For purpose of this paragraph (viii) the term "Interest" means interest at a rate equal to 6% per annum, compounded monthly. (ix) Notwithstanding anything to the contrary in this Agreement, the arbitration provisions set forth in this Section 7 shall be governed exclusively by the Federal Arbitration Act, Title 9, United States Code. 7. Guaranty. Each and every covenant and obligation of Employer hereunder shall be guaranteed by Fred Meyer. 8. Notice. All notices, requests, demands and other communications required or permitted to be given by either party to the other party to this Agreement (including, without 10 limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as follows: If to Fred Meyer, to: Fred Meyer, Inc. 3800 S.E. 22nd Street Portland, Oregon 97202-2999 Attention: General Counsel If to Employer, to Fred Meyer Stores, Inc. C/O Fred Meyer, Inc., above If to Executive, to: [-----------------------] Fred Meyer Stores, Inc. 3800 S.E. 22nd Avenue Portland, OR 97202 Any party hereto may change its address for purposes of this Section 8 by giving fifteen (15) days' prior notice 9. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid 'or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of this Agreement. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original. 12. Governing Law. This Agreement has been executed and delivered in the State of Oregon and shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Oregon, without reference to its principles of conflicts of law. 11 13. Certain Withholdings. Employer shall withhold from any amounts payable to Executive hereunder all federal, state, city and other taxes and withholdings that are required to be withheld pursuant to any applicable law or regulation. 14. Entire Agreement. This Agreement supersedes any and all other oral or written agreements heretofore made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FRED MEYER, INC. FRED MEYER STORES, INC. ROGER A. COOKE ROGER A. COOKE ------------------------------------ ---------------------------------- By: Roger A. Cooke By: Roger A. Cooke Title: Executive Vice President, Title: Executive Vice President General Counsel and Secretary and Secretary EXECUTIVE ------------------------------------ 12 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JAN-30-1999 NOV-7-1998 186,045 0 140,291 0 2,007,875 2,613,069 4,673,910 1,102,936 10,311,977 2,480,866 4,999,856 0 0 1,550 2,147,697 10,311,977 11,022,471 11,022,471 7,740,401 2,734,472 290,701 0 284,720 (27,823) 29,619 (57,442) 0 (217,934) 0 (275,376) (1.83) (1.83)
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