-----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, R/pbXjgN/QmSKFY5Je5KpAWzY3DbX7nPjy/AYBZtZO/QAMqmpkYwLnkN/BzO4Qh6 wHQPRvPYgeN2+LKZTOETyw== 0000893877-99-000276.txt : 19990416 0000893877-99-000276.hdr.sgml : 19990416 ACCESSION NUMBER: 0000893877-99-000276 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990415 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-K SEC ACT: SEC FILE NUMBER: 001-13339 FILM NUMBER: 99594038 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-K 1 FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 1999 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) Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of class on which registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Class $250,000,000 7.150% Notes Due March 1, 2003 $750,000,000 7.375% Notes Due March 1, 2005 $750,000,000 7.450% Notes Due March 1, 2008 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Common Stock held by nonaffiliates of the registrant at March 3, 1999: $8,306,683,149 Number of shares of Common Stock outstanding at March 3, 1999: 156,036,181 =============================================================================== Table of Contents - ------------------------------------------------------------------------------- Item of Form 10-K Page Part I Item 1 Business .................................................. 3 Item 2 Properties ................................................ 9 Item 3 Legal Proceedings ......................................... 9 Item 4 Submission of Matters to a Vote of Security Holders ....... 10 Part II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters ........................... 11 Item 6 Selected Financial Data ................................... 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... 13 Item 7A Quantitative and Qualitive Disclosures About Market Risks.. 19 Item 8 Financial Statements and Supplementary Data ............... 21 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................... 48 Part III Item 10 Directors and Executive Officers of the Registrant ........ 48 Item 11 Executive Compensation .................................... 53 Item 12 Security Ownership of Certain Beneficial Owners and Management ............................................ 58 Item 13 Certain Relationships and Related Transactions ............ 59 Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 61 Signatures ............................................................... 66 2 Part I - ------------------------------------------------------------------------------- Item 1. Business. - ---------------- Acquisition by Kroger Co. On October 18, 1998, the Company entered into an Agreement and Plan of Merger (the "Kroger Merger Agreement") with The Kroger Co., an Ohio corporation ("Kroger"), and Jobsite Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of Kroger ("Jobsite Holdings"). Under the terms of the Kroger Merger Agreement, Jobsite Holdings will merge with and into the Company (the "Kroger Merger"), subject to certain conditions being satisfied or waived including stockholder approval and clearance from the Federal Trade Commission and the U.S. Department of Justice. After the Kroger Merger, the Company will be a wholly owned subsidiary of Kroger. Under the Kroger Merger Agreement, each outstanding Kroger share of common stock, $.01 par value per share, of the Company ("Fred Meyer Common Stock"), will be converted into the right to receive one share of common stock, $1.00 par value per share, of Kroger ("Kroger Common Stock"). Holders of shares of Fred Meyer Common Stock will also have the right to receive together with each share of Kroger Common Stock issued at the effective time of the Merger, one associated right in accordance with the Rights Agreement, dated as of April 4, 1997, between Kroger and the Bank of New York, as Rights Agent. The Company expects the Kroger Merger to be completed in late April 1999. General Fred Meyer, Inc. is one of the largest domestic food retailers, operating 781 supermarkets and multi-department stores at January 30, 1999. In September 1997, the Company acquired Smith's Food & Drug Centers, Inc. ("Smith's") in a merger, and in March 1998, the Company acquired Quality Food Centers, Inc. ("QFC") and Food 4 Less Holdings, Inc. ("Ralphs/Food 4 Less") in two separate mergers. The Company is a geographically diversified food retailer that operates multiple formats that appeal to customers across a wide range of income brackets. In the Pacific Northwest, Southwest and Intermountain states, the Company operates multi-department stores principally under the Fred Meyer banner and food and drug combination stores principally under the Smith's Food & Drug Centers banner; in Southern California, the Company operates conventional supermarkets under the Ralphs banner and price-impact warehouse supermarkets under the Food 4 Less banner; and in the Seattle/Puget Sound Region and in Portland, Oregon, the Company also operates premium supermarkets principally under the QFC banner. The Company was incorporated in Delaware in 1997 and commenced operations on September 9, 1997 as the successor to Fred Meyer Stores, Inc. (formerly known as Fred Meyer, Inc.) and Smith's. The Company's principal executive offices are located at 3800 SE 22nd Avenue, Portland, Oregon 97202, and its telephone number is (503) 232-8844. The Company operates its business through four principal subsidiaries: Fred Meyer Stores, Inc. ("Fred Meyer Stores"), Smith's, QFC and Ralphs/Food 4 Less. Unless the context requires otherwise, references in this Annual Report on Form 10-K to the "Company" or "Fred Meyer" mean (a) before September 9, 1997, Fred Meyer Stores and its subsidiaries, (b) on and after September 9, 1997, Fred Meyer, Inc. and its subsidiaries (including Fred Meyer Stores and Smith's) and (c) on and after March 10, 1998, Fred Meyer, Inc. and its subsidiaries (including Fred Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less). This Annual Report on Form 10-K contains financial statements of Fred Meyer, Inc. as of and for the fiscal year ending January 30, 1999. This financial information includes the financial results of QFC for all years presented, Smith's since September 9, 1997, and Ralphs/Food 4 Less since March 10, 1998. Competitive Strengths Leading Market Shares in Fast-Growing Markets. By offering superior customer service and competitive pricing, the Company's banners have developed leading market shares in each of their principal markets. The Company has the number one market share in the Los Angeles, Orange County, Seattle, Las Vegas, Salt Lake City and Albuquerque markets and the number two market share in the Phoenix, Portland and Riverside/San Bernardino markets which are among the largest and fastest growing population centers in the United States. Well-Positioned and Modern Store Base. Management believes that the Company's store locations include many sites in developed urban and suburban locations which would be difficult to replicate. The Company has invested 3 significant capital in its store base over the last seven years through the addition of new stores and the remodeling of existing stores in order to improve the overall quality of its customer's shopping experience. As a result, approximately 77% of the Company's stores have been opened or remodeled within the past seven years. Modern Infrastructure. The Company believes it has state-of-the- industry warehousing and distribution systems which are conveniently located within the areas served by the Company. As a result of the recent mergers and the significant investment in its infrastructure over the last several years, management believes the Company will be able to lower its distribution costs as a percentage of net sales and maintain lower levels of inventory. Experienced Management Team. The senior operating management of Fred Meyer Stores, Smith's, QFC and Ralphs/Food 4 Less are continuing to operate their respective store bases supported in large part by centralized purchasing, distribution, and manufacturing. These senior operating managers have an average of over 24 years of experience in the food retailing industry. Moreover, many of the senior operating managers of the Company have spent much of their careers in their respective local markets. Members of the senior management team have successfully completed several acquisitions at their respective companies. The Company considers its senior management to be industry leaders in operating its principal store formats: one-stop shopping multi-department, food and drug combination, premium, conventional and price-impact supermarket stores. Fred Meyer Stores At January 30, 1999, the Company operated 118 multi-department stores in the Pacific Northwest and Intermountain regions under the Fred Meyer banner, including 45 stores in Oregon, 48 stores in Washington, 9 stores in Utah, 7 stores in Alaska, 8 stores in Idaho, and 1 store in Montana. The average Fred Meyer multi-department store is 143,500 square feet with a flexible store format offering a full-service food department and a variety of nonfood departments. The Company emphasizes customer satisfaction, large selections of highly popular products and competitive pricing in multi-department stores. These stores typically sell over 225,000 items, with an emphasis on necessities and items of everyday use. These stores are organized into departments and sections within departments that specialize in the sale of particular products such as food, apparel, home electronics, products for the home, general merchandise and fine jewelry. Most of the multidepartment store locations have complementary third-party tenants (such as banks, optical centers, gourmet coffee bars, restaurants and video rental stores). The Fred Meyer stores are generally positioned as the lowest priced full-service food retailer in each of Fred Meyer's major markets. Management believes that Fred Meyer's everyday low price food strategy increases the shopping frequency of customers, builds customer loyalty and increases customer traffic, thereby generating higher levels of sales in nonfood departments. The nonfood departments carry a broad selection of national and private label brands and employ a promotional pricing strategy. The nonfood departments have recently focused on developing selected specialty boutique departments which management believes have increased overall same store sales and resulted in higher gross margins. The Company operates 284 specialty stores consisting primarily of 280 mall jewelry stores under the names Fred Meyer Jewelers, Merksamer Jewelers, Fox's, Littman, and Barclay Jewelers. Smith's At January 30, 1999, the Company operated a total of 176 stores, averaging 64,900 square feet, (including 148 food and drug combination stores under the Smith's Food & Drug Centers banner, 18 multi-department stores under the Smitty's banner; and 10 price-impact warehouse format stores under the PriceRite banner) in a seven-state area as follows: Arizona (61), Utah (42), Nevada (27), New Mexico (19), Wyoming (10), Montana (8), Idaho (5), and Texas (4). Substantially all of the Smith's Food & Drug Centers offer shopping convenience through a food and drug combination format which features a full-line supermarket with drug and pharmacy departments as well as some or all of the following specialty departments: delicatessens, hot prepared food sections, in-store bakeries, video rental shops, floral shops, one-hour photo processing labs, full-service banking, and frozen yogurt shops. In addition, combination stores carry a wide variety of general merchandise, including pharmaceutical products, toys, hardware, giftware, greeting cards and small appliances. Smith's utilizes its "Fresh Values Frequent Shopper Card" in conjunction with its lower regular retail prices as the core of its marketing strategy. The "Fresh Values" frequent shopper program is intended to increase customer shopping frequency and transaction size and to provide valuable information about consumer 4 shopping habits. The 18 Smitty's multi-department stores offer an expanded selection of non-grocery merchandise in a format similar to Fred Meyer multi-department stores. The ten PriceRite Grocery Warehouse stores are targeted to price-conscious consumers rather than conventional supermarket consumers. The PriceRite stores offer lower prices, fewer stock keeping units ("SKUs") and fewer service departments than conventional supermarket stores. QFC At January 30, 1999, QFC operated 86 QFC stores mainly in the Seattle/Puget Sound Region. The QFC stores range in size from 14,000 to 68,000 square feet and average 34,100 square feet. During the past seven years, QFC has expanded its presence in the Seattle/Puget Sound Region and contiguous geographic markets by acquiring and successfully integrating 60 stores from 13 operators, including 12 stores acquired from Olson's Food Stores in 1995 and 25 stores acquired from Kieth Uddenberg, Inc. in 1997. Management believes that QFC has historically achieved strong margins which it attributes primarily to QFC's merchandising and operating practices combined with favorable customer demographics in its markets. Offering a wide variety of high-quality meat, seafood and produce to its customers is a fundamental tenet of QFC's merchandising strategy which also includes superior customer service and high quality convenience-oriented specialty departments and services. Management believes that QFCs strengths in merchandising have earned QFC stores a reputation for providing superior value to their customers. QFC has significantly expanded its selection of prepared foods and "home meal replacements" which management believes appeals to the increasing convenience orientation of its customers. Many QFC stores also offer natural food sections, video rentals, fresh juice bars and pharmacies. In addition, QFC has leased space within its stores to branded specialty food operators including Starbucks Coffee, Cinnabon World Famous Cinnamon Rolls and Noah's New York Bagels, as well as to full-service banks such as Seafirst National Bank. Ralphs/Food 4 Less Ralphs/Food 4 Less is the largest supermarket operator in Southern California, which is one of the largest food retailing markets in the United States with a population of 19 million. As of January 30, 1999, Ralphs/Food 4 Less' Southern California operations included 294 conventional supermarkets, averaging 36,900 square feet, under the Ralphs banner and 87 price-impact supermarkets in a warehouse format, averaging 52,400 square feet, under the Food 4 Less and Foods Co. banners. Operating two complementary formats allows Ralphs/Food 4 Less to serve a broader customer base than its competitors. Ralphs stocks between 35,000 and 45,000 merchandise items in its stores, including approximately 4,400 private-label products. Ralphs stores offer name-brand grocery products; quality and freshness in its produce, meat, seafood, delicatessen and bakery products and broad selection in all departments. Most Ralphs stores offer service delicatessen departments, on-premises bakery facilities and seafood departments. Ralphs emphasizes store ambiance and cleanliness, fast and friendly service, the convenience of debit and credit card payment (including many in-store branch banks) and 24-hour operations in most stores. Ralphs utilizes innovative and aggressive marketing programs in an effort to increase sales, market share and profitability, which emphasize Ralphs' lower regular retail prices in conjunction with its premier quality, wide selection and enhanced customer service. The marketing programs are designed to increase store traffic and sales by a coordinated use of media advertisement, double coupon offerings and targeted marketing efforts with the "Ralphs Club Card" program. The "Ralphs Club Card" program is a frequent shopper program intended to increase customer shopping frequency and transaction size and to provide valuable information about consumer shopping habits. Ralphs continues to emphasize its successful merchandising programs and exceptional product mix, including its home meal replacement program and strong private label program. Food 4 Less and Foods Co. are a warehouse-style, price-impact store which is positioned to offer the lowest overall prices in its marketing areas by passing on to the consumer savings achieved through labor efficiencies and lower overhead and advertising costs associated with the warehouse format, while providing the product selection and variety associated with a conventional format. In-store operations are designed to allow customers to perform certain labor-intensive services usually offered in conventional supermarkets. For example, merchandise is presented on warehouse style racks in full cartons, reducing labor intensive unpacking, and customers bag their own groceries. Management believes that there is a significant segment of the market, encompassing a wide range of demographic groups, which 5 prefers to shop in a warehouse format supermarket because of its lowest overall pricing. Ralphs/Food 4 Less also operates stores in Northern California. The Northern California division of Ralphs/Food 4 Less currently operates 20 conventional supermarkets in the greater San Francisco Bay area under the Cala and Bell banners. Distribution and Processing The Company has over 225,000 SKUs supplied by over 10,000 suppliers, none of which represents more than five percent of the Company's total purchases. Due to its many sources of supply, the Company believes that it has many alternative sources of supply for the products it purchases. The Company also believes its purchase terms are generally in line with industry practices. Fred Meyer Stores operates a 1.5 million square foot food and nonfood distribution center in Clackamas, Oregon, near Portland, a 310,000 square foot flow-through distribution facility in Chehalis, Washington and a 600,000 square foot food distribution center in Puyallup near Seattle, Washington. Fred Meyer Stores' flow-through retail service center in Chehalis serves as the centralized distribution facility for certain apparel, music, seasonal and other nonfood items. This facility minimizes the required handling and processing of goods received from vendors and distributed to Fred Meyer stores. It has improved inventory management and reduced distribution costs for the goods shipped through this facility. The Puyallup facility serves stores in the Puget Sound Region and Alaska. The facility reduces the cost of transporting goods into the Puget Sound and Alaska markets and affords Fred Meyer Stores increased forward-buying opportunities. In addition, Fred Meyer Stores operates a large fleet of trucks and trailers for distribution of goods to its retail stores. QFC is in the process of converting the purchasing and distribution of the majority of the items that it historically purchased from wholesale suppliers to utilize Fred Meyer Stores' warehousing and distributions infrastructure. Smith's operates a 1.1 million square foot distribution center in Tolleson, Arizona, a 573,000 square foot grocery warehouse in Layton, Utah, and a 634,000 square foot nonfood distribution center in Salt Lake City, Utah. In addition, Smith's operates a large fleet of trucks and trailers for distribution of goods to its retail stores. Ralphs/Food 4 Less operates a warehousing and manufacturing space consisting of a 675,000 square foot dry grocery service center, a 270,000 square foot refrigerated and frozen food facility and a 115,000 square foot creamery facility in Riverside, California. It also operates a 17 million cubic foot high-rise automated storage and retrieval system warehouse for non-perishable items, near Glendale, California and a 5.4 million cubic foot facility in Compton, California designed to process and store all perishable products. Due to its use of the Riverside facility, Ralphs/Food 4 Less has been able to consolidate its distribution operations, allowing it to reduce transportation costs, management overhead and outside storage costs and to improve inventory management. The Glendale facility can hold substantially more inventory and requires fewer employees to operate than a conventional warehouse of equal size. The Compton facility has provided Ralphs/Food 4 Less with the ability to deliver perishable products to its stores on a daily basis, thereby improving the freshness and quality of these products. In addition, Ralphs/Food 4 Less operates a large fleet of trucks and trailers for distribution of goods to its retail stores. The Company owns and operates several processing facilities to better support its stores and realize additional profit opportunities. Products processed by the Company are sold primarily through its own retail stores. Dairies located in Portland, Oregon, Layton, Utah, Tolleson, Arizona, Compton, California and Riverside, California process a variety of milk, milk products and fruit beverages under the Company's private labels. Bakeries located in Portland, Oregon and La Habra, California and a frozen dough plant located in Layton, Utah process bakery products for in-store bakeries and commercial bread categories. A cultured dairy products plant in Layton, Utah produces yogurt, cottage cheese, sour cream, and chip dip products. Ice cream processing plants in Layton, Utah and Compton, California supply stores with a wide variety of private label ice cream and novelty items. A commissary located in Vernon, California produces selected delicatessen and home meal replacement items. The Company believes that its current distribution and manufacturing facilities have the capacity to handle the Company's current stores and stores expected to be opened during 1999. The Company's facilities are capable of expansion to handle stores expected to be added over the next several years. 6 The Company has made significant capital investments in its distribution centers which, together with the management information systems ("MIS") improvements, are designed to improve operations, permit better inventory management and reduce distribution costs. The Company has established electronic data interchange ("EDI") and automated replenishment programs with many vendors. These quick response capabilities improve inventory management and reduce handling of inventory in the distribution process, which results in lower markdowns and lower distribution costs as a percentage of sales. The Company believes that its distribution and related information systems provide several additional advantages. First, they permit stores to maintain proper inventory levels for items supplied through its central distribution facilities. Second, centralized purchasing and distribution reduce the Company's cost of merchandise and related transportation costs. Third, because distribution can be made to stores frequently, the Company is able to reduce the in-store stockroom space and maximize the square footage available for retail selling. Management Information Systems The Company operates highly integrated information systems, using the latest technology to support store, warehouse and office locations. In addition to making significant progress on Year 2000 programs, the Company completed its integration of Hughes stores with Ralphs and continued its efforts to integrate Smith's and QFC into its existing operations. It also completed the integration of 123 acquired stores into its current fine jewelry operation. Significant projects completed in 1998 include network improvements in the California, Utah, and Washington operations, and rolling out new point-of-sale equipment to over 500 stores. These projects resulted in improved communications costs and processes, enhanced cashier productivity and improved Customer service. The Company also completed the rollout of its pharmacy system to all Smith's locations and started pharmacy implementations in selected Ralphs and QFC locations, which will be completed in 1999. New corporate purchasing and wireless radio-controlled warehouse implementations in California position the Company to reduce inventories, track deal purchases more effectively, and optimize vendor loads delivered to facilities. Flow through processing for key distribution centers, and other product sourcing projects completed by the Company supported the achievement of significant merger savings in the distribution of both food and non-food merchandise. Progress was made to consolidate data centers during 1998. One data center was eliminated during the year. The Company's initiative to combine all data centers into two, providing more cost effective operations and leveraging common systems between the subsidiaries, is expected to be completed by the third quarter of 1999. In addition to several financial consolidation projects, a corporate payroll and benefits application was rolled out to Smith's and QFC. The rollout to Ralphs has started and will be completed during the summer of 1999. Store Expansion and Development The Company enlarges, remodels, closes or sells stores in light of their past performance or the Company's assessment of their potential. The Company continually evaluates its position in various market areas to determine whether it should expand or consolidate its operations in those areas. New store sites are determined based on a review of information on demographics and the competitive environment for the market area in which a proposed site is located. The Company's expansion focus is in existing areas of operation, primarily in or near well-populated residential areas. The Company determines store size and designs stores with a view toward making each store a very convenient store in the area it serves. The Company is flexible in its store design where land sites require specialized designs, such as two-level or smaller stores. 7 The following table sets forth store expansions and acquisitions for the past three fiscal years ended January 30, 1999.
Full Size Specialty and Stores Jewelry Total --------- ------------- ----- Balance at February 3, 1996 102 34 136 Open 7 5 12 Acquired 71 71 --- --- ----- Balance at February 1, 1997 109 110 219 Open 9 15 24 Closed (2) (6) (8) Acquired 152 44 196 --- --- ----- Balance at January 31, 1998 268 163 431 Open 44 6 50 Closed (85) (8) (93) Acquired 554 123 677 --- --- ----- Balance at January 30, 1999 781 284 1,065 === === =====
The Company currently plans to open 35 to 40 stores in 1999 and to remodel 85 to 95 stores. Promotion and Advertising The Company maintains separate promotion and advertising operations for each of its subsidiary companies as dictated by geographical preferences and product offerings. The Company promotes sales through weekly advertising, primarily in local and area newspapers, radio, and television and direct mail. Advertising features many high-demand products at competitive sale prices. Some advertising emphasizes low prices every day for some departments or items and offers promotional pricing for other departments or items. 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. The national competitors of the Company include, among others, Safeway, Albertson's, Lucky, Costco, and Wal-Mart. 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. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. The Company emphasizes customer satisfaction, large selections of high-quality popular products and competitive pricing. In addition, the Company believes that the convenience, attractiveness and cleanliness of its stores, together with a sales staff knowledgeable in specialty areas, enhances its retail sales effort and competitive position. Employees At January 30, 1999, the Company had approximately 92,000 employees. The Company is party to more than 176 collective bargaining agreements with local unions covering approximately 60,000 employees representing approximately 65% of the Company's total employees. Among the contracts that have expired or will expire in 1999 are those covering 26,500 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 can be no assurance, however, that such agreements will be reached without work stoppages. A prolonged work stoppage 8 affecting a substantial number of stores could have a material adverse effect on the Company's results of operations or financial position. Item 2. Properties. - ------------------ The following table sets forth certain information regarding the Company's store base at January 30, 1999:
Number of Avg Sq Principal Banners Stores Owned Leased Formats Footage - -------------------------- ------ ------ ------ ------------------------- ------- Fred Meyer (1) 118 25 93 Multidepartment 143,500 Smith's Food & Drug Centers Smith's 148 105 43 Food and drug combination 60,400 Smitty's 18 10 8 Multidepartment 105,300 PriceRite 10 7 3 Price-impact warehouse 57,700 QFC 86 14 72 Premium 34,100 Ralphs 294 53 241 Conventional 36,900 Food 4 Less and Foods Co. 87 5 82 Price-impact warehouse 52,400 Other (2) 20 20 Conventional and price- 18,750 impact warehouse ----- ----- ----- TOTAL 781 219 562 ===== ===== ===== (1) Does not include 4 specialty stores and 280 jewelry stores. (2) Includes conventional format stores operated by Ralphs under the names Cala and Bell.
Approximately 76% of the Company's stores have been opened or remodeled within the past seven years. The Company owns additional facilities, including its corporate and Fred Meyer Stores headquarters in Portland, Oregon, its Ralphs/Food 4 Less headquarters in Compton, California, distribution and warehouse facilities in Chehalis and Puyallup, Washington, Compton and Glendale, California, Layton, Utah and Tolleson, Arizona, and Smith's distribution and administration facilities in Salt Lake City, Utah, and leases other facilities, including QFC's headquarters in Seattle, Washington and the Riverside, California distribution facility. Item 3. Legal Proceedings. - ------------------------- The Company and its subsidiaries are parties to various legal claims, actions and complaints which have arisen in the ordinary course of business. Although the Company is unable to predict with certainty whether 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. In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs/Food 4 Less and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and December 23, 1992, respectively. A class has been certified consisting of all purchasers of milk in Los Angeles from December 7, 1988. The defendants in the actions, including Ralphs/Food 4 Less, have reached tentative settlement agreements, and settlements are in the process of being approved by the trial court. On September 13, 1996 a class action lawsuit titled McCampbell, et al. v. Ralphs Grocery Company, et al. was filed in the Superior Court of the State of California, County of San Diego, against Ralphs/Food 4 Less and two other grocery store chains operating in the Southern California area. The complaint alleges, among other things, that Ralphs/Food 4 Less and others conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants' 9 actions violate provisions of the California Cartwright Act and constitute unfair competition. The plaintiffs seek damages they purport to have sustained as a result of the defendants' alleged actions, which damages may be trebled under the applicable statute, and an injunction from future actions in restraint of trade and unfair competition. A class, consisting of all retail purchasers of eggs in Los Angeles, Riverside, San Diego, Imperial and Orange Counties during a period from 1992 to 1997 has been certified. Management of the Company intends to defend this action vigorously and Ralphs/Food 4 Less has filed an answer to the complaint denying the Plaintiffs' allegations and setting forth several defenses. Environmental Matters The Company's Glendale facility property located in the Atwater area of Los Angeles, near Glendale, California, is within one of the areas that the U.S. Environmental Protection Agency (the "EPA") has designated in the San Fernando Valley as federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. The Company's Glendale facility consists of about 50 acres located in an area with a history of industrial and commercial use and groundwater contamination. The Company is part of a group (the "Glendale Respondents") of 28 parties which EPA has notified that it considers to be potentially responsible parties ("PRP's"). The Glendale Respondents are attempting to negotiate a consent decree with EPA to govern their implementation of an "interim" remedy to the groundwater contamination. Pursuant to a 1997 EPA Administrative Order, the Glendale Respondents have begun to implement the interim remedy. In 1998 an engineer retained by the Glendale Respondents estimated the present value of total costs through 2011 to implement and operate the EPA approved interim remedy, which involves remedial groundwater pumping and treatment, at approximately $54,000,000, of which approximately $24,000,000 are capital costs. The principal issue which is disputed in the consent decree negotiations is the amount to reimburse EPA for pre-1998 EPA response costs. For costs through December 30, 1997 EPA has claimed $13,266,949. On March 12, 1999, the Glendale PRP Group offered to settle at $11,000,000. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial statements. The Company removed underground storage tanks and remediated soil contamination at the Glendale facility property. In some instances, the removals and the contamination were associated with grocery business operations; in others, they were associated with prior property users. Although the possibility of other contamination from prior operations or adjacent properties exists at the Glendale facility property, management does not believe that the costs of remediating such contamination will have a material adverse effect on the Company's financial statements. The Company is subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders. - ----------------------------------------------------------- Not applicable 10 Part II - ------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. - ------------------------------------------------------------------------ Common Stock Information The Company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "FMY." At March 3, 1999, the Company had approximately 4,800 stockholders of record. The Company has not paid dividends since the incorporation of its predecessor in 1981, and it is the current policy of the Board of Directors that all available cash flow be used for reinvestment in the business of the Company and for the reduction of debt.
Price Ranges of Common Stock (1) ------------------------------------------------------------------------------ 1998 1997 1996 Fiscal Quarter High Low High Low High Low - -------------- --------- --------- --------- --------- --------- --------- First $51 $35 $23 1/2 $16 13/16 $14 15/16 $11 1/8 Second 48 1/2 39 15/16 28 15/16 22 16 13 1/16 Third 55 3/16 36 5/8 33 1/2 25 18 13/16 14 3/8 Fourth 62 11/16 50 9/16 37 3/4 25 18 3/8 14 15/16 1 Prices have been adjusted for a two-for-one stock split effective the close of business on September 30, 1997.
11 Item 6. Selected Financial Data. - -------------------------------
Fiscal Year Ended ----------------------------------------------------------------------- (In thousands, except per-share data) January 30, January 31, February 1, February 3, January 28, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Income Statement Data Net sales $14,878,771 $ 7,359,202 $ 4,530,120 $ 4,152,574 $ 3,698,514 Gross margin 4,459,878 2,184,074 1,346,716 1,187,251 1,031,201 Operating and administrative expenses 3,628,372 1,842,224 1,163,859 1,056,047 938,593 Merger related costs 268,854 Writedown of California assets 15,978 ----------- ----------- ----------- ----------- ----------- Income from operations 562,652 341,850 182,857 131,204 76,630 Interest expense 378,236 102,094 48,855 48,716 24,924 Recapitalization fees 1,400 Provision for income taxes 129,244 96,445 50,039 30,586 18,161 ----------- ----------- ----------- ----------- ----------- Income before extraordinary charge 55,172 143,311 83,963 50,502 33,545 Extraordinary charge (1) (217,947) (91,210) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (162,775) $ 52,101 $ 83,963 $ 50,502 $ 33,545 =========== =========== =========== =========== =========== Basic earnings per common share: Income before extraordinary charge $ 0.36 $ 1.37 $ 1.05 $ 0.61 $ 0.37 Extraordinary charge (1) (1.43) (0.87) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (1.07) $ 0.50 $ 1.05 $ 0.61 $ 0.37 =========== =========== =========== =========== =========== Diluted earnings per common share: Income before extraordinary charge $ 0.34 $ 1.31 $ 1.00 $ 0.58 $ 0.35 Extraordinary charge (1.36) (0.83) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (1.02) $ 0.48 $ 1.00 $ 0.58 $ 0.35 =========== =========== =========== =========== =========== Balance Sheet Data Working capital $ 193,518 $ 434,518 $ 236,659 $ 288,385 $ 273,290 Total assets 10,151,214 5,422,936 1,996,037 1,953,753 1,771,283 Long-term debt 4,821,635 2,184,794 666,512 820,760 540,166 Stockholders' equity 2,314,405 1,702,360 642,702 614,762 696,798 1. Charge for early extinguishment of debt covering premiums paid and write-off of financing costs related to debt refinanced in the Smith's Acquisition for fiscal year ended January 31, 1998 and the QFC and Ralphs/Food 4 Less Acquisition for fiscal year ended January 30, 1999.
12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------ 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 April 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 and in the Company's Joint Proxy Statement/Prospectus dated March 8, 1999. MERGER RELATED COSTS The Company is in the process of implementing its plan to integrate its five primary operations (Fred Meyer Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes) resulting in merger related costs of $268.9 million for 1998. The integration plan includes the consolidation of distribution, information systems, and administrative functions, conversion of 78 store banners, closure or sale of seven stores, and transaction costs incurred to complete the mergers. The costs were reported in the periods in which cash was expended except for $25.9 million that was accrued for liabilities incurred to exit certain activities, sever employees, and retain certain key employees and an $82.9 million charge to write-down certain assets. The Company estimates that the total cost to implement this plan will be approximately $355 million, of which $268.9 was incurred in 1998. The remaining cost of $86 million includes $37 million to complete the systems integration, $4 million to complete the conversion of store banners, and $45 million to dispose of the Santee Dairy (see Disposal of Santee Dairy). Of the $86 million of remaining costs, approximately $45 million is expected to be incurred in the second quarter of 1999 and the remaining $41 million is expected to be incurred ratably in 1999. The Company estimates that successful completion of its integration plan will result in net annual cost savings and improvements attributable to operating synergies of $150 million by 2000. Such cost savings and improvements consist of reduced advertising costs from eliminating banners, reduced distribution costs by eliminating distribution centers and independent wholesalers, increased efficiencies from volume purchasing and merchandising, increased efficiencies from maximizing capacity at manufacturing facilities, and elimination of general and administrative costs by consolidating offices, processing centers, and levels of supervision. The distribution consolidation includes the transfer of purchasing and distribution functions from the Hughes facility to various Ralphs' facilities and transfer of QFC's distribution and manufacturing functions from wholesalers to various Fred Meyer facilities. Costs incurred to complete the distribution consolidation and close the Hughes facility include the write-down of assets held for sale to net realizable value, severance and incremental labor and other costs. The Company has substantially completed the distribution consolidation except for the disposition of the Hughes facility. The information systems integration plan is to consolidate into two processing platforms: a northern platform in Portland, Oregon and a southern platform in Los Angeles, California. The consolidation requires the conversion of all Smith's and QFC systems into Fred Meyer systems and the conversion of all Hughes systems into Ralphs' systems which will result in the closure of three duplicate processing facilities. Costs incurred to complete the information systems integration include the write-down of assets that have been abandoned or become obsolete, incremental operating costs during the integration process, payments to third parties, training costs and severance. Computer hardware and software that was abandoned in 1998 following the QFC merger was written-down to net realizable value. 13 Computer hardware and software that will be utilized until the end of the integration process is being written-down over its reduced estimated useful life. The conversion of Hughes systems into Ralphs' systems is complete and the conversion of Smith's and QFC's systems into Fred Meyer systems is expected to be completed by the end of 1999. The remaining costs are expected to include charges for asset write-downs, incremental operating costs, payments to third parties and training costs. The administrative plan is similar to the information systems integration plan except that in addition to Portland and Los Angeles, some administrative functions will remain in Salt Lake City resulting in the closure of two administrative offices. This integration includes the consolidation of accounting, payroll processing, benefits and risk administration, property management and legal services into the remaining administrative offices. Costs incurred to complete the administrative consolidation primarily consist of labor and severance costs. One of the two excess administrative offices is closed and the remainder of the administrative consolidation is expected to be completed by the end of 1999. The conversion of store banners includes the conversion of 55 Hughes stores to the Ralphs' banner, 15 Smitty's stores to the Fred Meyer banner, five QFC stores to the Fred Meyer banner and three Fred Meyer stores to the Smith's banner. Costs incurred to complete the banner conversions include incremental cash expenditures of $28.9 million for advertising and promotions to establish the banner, and $12.2 million for labor required to remerchandise the store inventory. The 55 Hughes stores have been converted to the Ralphs banner and the five QFC stores have been converted to the Fred Meyer banner. The remaining banner conversions are expected to be completed by the end of 1999. The remaining costs are expected to include charges for advertising and promotions costs incurred to establish the banner and labor to remerchandise the store. The closure or sale of seven stores includes three stores sold pursuant to a settlement agreement with the State of California (the "AG Stores") and four duplicate facilities. Costs incurred on these stores include the write-down of assets held for sale to net realizable value, the write-off of goodwill associated with the AG Stores and a charge for future contractual lease payments over the expected holding period, net of sublease income. The three AG Stores were sold during 1998. The remaining four duplicate stores have been closed and three have been sold as of January 31, 1999. All costs to close the stores have been charged to operations and expended in 1998 except for lease obligations. Transaction costs represent fees paid to outside parties, employee bonuses contingent upon the closing of the Kroger merger and an accrual for an employee stay bonus program. DISPOSAL OF SANTEE DAIRY The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee") and has a 10 year product supply agreement with Santee that requires the Company to purchase 9 million gallons of fluid milk and other products annually. The product supply agreement expires on July 29, 2007. Upon acquisition of Ralphs, Santee became excess capacity and a duplicate facility. The Company is currently engaged in efforts to dispose of its interest in Santee which may result in a loss of approximately $45 million in 1999. RESULTS OF OPERATIONS The following discussion summarizes the Company's operating results for 1998 compared with 1997 and 1997 compared with 1996. However, 1998 results are not comparable to 1997 results due to recent acquisitions (See Note 3 of Notes to Consolidated Financial Statements) and 1997 results are not comparable to 1996 results due to the Smith's and Hughes acquisitions. 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, Hughes from March 19, 1997 and Smith's from September 9, 1997. Comparison of the 52 weeks ended January 30, 1999 with the 52 weeks ended January 31, 1998 Net sales for the 52 weeks ended January 30, 1999 increased $7.5 billion, or 101% to $14.9 billion from $7.4 billion for the 52 weeks ended January 31, 1998. 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 $1.9 billion of the increase and Ralphs/Food 4 Less accounted for $5.0 billion of the increase for the 52 weeks ended January 30, 1999. 14 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 3.2% from the prior year for the 52 weeks ended January 30, 1999. Gross margin increased as a percentage of net sales from 29.7% for the 52 weeks ended January 31, 1998 to 30.0% for the 52 weeks ended January 30, 1999. The increase in gross margin as a percent of sales was generated primarily from economies of scale resulting from the Company's increased sales offset almost entirely by losses on liquidated inventory of $8.9 million incurred in connection with store banner conversions and distribution consolidations and 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 $3.5 billion and $1.8 billion for the 52 weeks ended January 30, 1999 and January 31, 1998, respectively. Operating and administrative expenses decreased as a percentage of sales 1.0% from the prior year. 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 Ralphs/Food 4 Less, which are lower cost operations. Additionally, the Company benefited from the suspension of contributions to certain multi-employer pension and benefit plans totaling $45.2 million for the 52 weeks ended January 30, 1999. Amortization of goodwill increased $75.9 million from the prior year as a result of the recent acquisitions. The merger related costs of $268.9 million for the 52 weeks ended January 30, 1999, were incurred in connection with the Company's plan to integrate its five primary operations. See "Merger Related Costs." Interest expense increased to $378.2 million from $102.1 million for the 52 weeks ended January 30, 1999 and January 31, 1998, respectively. The increase in interest expense primarily reflects 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 70.1% and 40.2% for the 52 weeks ended January 30, 1999 and January 31, 1998, respectively. Income before extraordinary charge was $55.2 million for the 52 weeks ended January 30, 1999, compared to $143.3 million for the 52 weeks ended January 31, 1998. The change is a result of the above mentioned factors. The extraordinary charges of $217.9 million and $91.2 million for the 52 weeks ended January 30, 1999 and January 31, 1998, respectively, consist of fees incurred in conjunction with the refinancing of certain indebtedness and the write-off of related debt issuance costs. Net income (loss) decreased to a loss of $162.8 million for the 52 weeks ended January 30, 1999 from income of $52.1 million for the 52 weeks ended January 31, 1998 primarily due to the factors discussed above. Results of Operations -- 1997 Compared with 1996 Net sales for the 52 weeks ended January 30, 1998 increased $2.8 billion, or 62%, to $7.4 billion from $4.5 billion in the 52 weeks ended February 1, 1997. Sales from acquired stores accounted for $2.3 billion of the increase. The remainder of the increase resulted from 6.5% comparable store sales growth (excluding Smith's) over the prior year. Gross margin increased primarily due to the economies of scale resulting from the Company's increased sales offset 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 acquisitions of Smith's and Hughes. Operating and administrative expenses were $1.8 billion and $1.2 billion for the 52 weeks ended January 31, 1998 and February 1, 1997, respectively. Operating and administrative expenses decreased as a percentage of sales 0.85% from the prior year primarily 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 Hughes, which are low cost operations. Interest expense increased to $102.1 million in 1997 from $48.9 million in 1996. The increase primarily reflects the increased amount of indebtedness incurred in conjunction with the acquisition of Smith's. 15 The effective tax rate was 40.2% for 1997 and 37.3% for 1996. The increase in the effective tax rate results from the increase in amortization of goodwill, which is not deductible for tax purposes. Income before extraordinary charge was $143.3 million for 1997 and $84.0 million for 1996. This increase is primarily the result of the above-mentioned factors. The extraordinary charge of $91.2 million recorded in the third quarter of 1997 consists of fees incurred in the prepayment of certain indebtedness and write-off of debt issuance costs. Net income was $52.1 million for 1997 and $84.0 million for 1996. This decrease is primarily the result of the increase in income before extraordinary charge offset by the extraordinary charge. 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 $727.9 million for the 52 weeks ended January 30, 1999 compared to $253.8 million for the 52 weeks ended January 31, 1998. 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 $723.8 million for the 52 weeks ended January 30, 1999 compared to $598.7 million for the 52 weeks ended January 31, 1998. The investing activities consisted primarily of capital expenditures and business acquisitions. Capital expenditures of $722 million in the current year were for the construction of new stores, remodeling existing stores and additions to distribution centers and offices. During the 52 weeks ended January 30, 1999, the Company opened [28] new stores and completed the remodel of 91 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 1999, currently budgeted to be approximately $760 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. 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 $56.5 million for the 52 weeks ended January 30, 1999. 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 "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 ("Subsidiary Guarantor"). 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. 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 16 1998 Senior Credit Facility limits dividends on and redemption of capital stock. At January 30, 1999, the Company is in compliance with these debt covenants. 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 January 30, 1999, $364.0 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 January 30, 1999, the Company had $125.0 million of uncommitted money market lines with five banks and $1.15 billion 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 January 30, 1999, a total of approximately $511.7 million was available for borrowings under the 1998 Senior Credit Facility and the commercial paper facilities and $20.0 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 $42.5 million of outstanding Letters of Credit as of January 30, 1999. 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 costs and efficiently utilize resources, the Company strives to minimize the effects of inflation on its operations. Recent Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for fiscal years beginning after June 15, 1999 and establishes accounting and reporting standards for derivative instruments. The Company is evaluating the effect of this statement on its financial position and results of operations. 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 17 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 January 30, 1999, based on information currently available:
Percent Complete -------------------------------------------- Category Phase 1 Phase 2 Phase 3 -------- ------- ------- ------- Information Technology 1 95% 72% 43% Merchandise and external entities 2 65% 40% 25% Non-IT Systems 3 71% 34% 10%
Phase 1 is expected to be completed by the end of the first quarter of 1999. Phases 2 and 3 will continue throughout 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 unseen implementation problems, delays in the delivery of products, or inefficiencies in store operations resulting from loss of power or communication links between stores, distribution centers, and headquarters. Critical business partners have been contacted for their status on year 2000 readiness. Based on the Company's assessment of their responses, the Company believes that the majority of its business partners are taking action for year 2000 readiness. Notwithstanding the substantial efforts by the Company and its key business partners, the Company could potentially experience disruptions to some aspects of its various activities and operations. Consequently, in conjunction with the Plan, the Company's management is formulating contingency plans for critical functions and processes, which may be implemented to minimize the risk of interruption to the Company's business in the event of a year 2000 occurrence. Contingency planning, which utilizes a business process approach, focuses on the following priorities: ability to sell products to customers, continuously replenish stores with goods (ordering and distribution), pay employees, collect and remit on outstanding accounts, meet other regulatory and administrative needs, and address merchandising objectives. We expect that documented contingency plans for critical business processes will be in place by the end of the third quarter of 1999. The Company has committed significant resources in connection with resolving the potential impact of year 2000. The total estimated costs of the Plan, exclusive of capital expenditures, are projected to be $25.0 to $30.0 million. Costs charged to operations for the 52 weeks ended January 30, 1999 totaled $6.0 million , which represented an immaterial portion of the Company's information services budget over the period, and were $3.0 million in 1997. Estimated costs expected to be incurred and expensed in 1999 are $12.0 to $17.0 million, based on available information. The costs of the Company's year 2000 efforts are funded from operating cash flow. 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. These forward-looking statements 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 Company may make other forward-looking statements from time to time. 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 18 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; adverse determinations by federal or state regulatory authorities, including adverse determinations in connection with the recent mergers or other acquisitions; operational inefficiencies in distribution or other Company systems, including any that may result from the recent mergers; issues arising from addressing year 2000 computer issues; legislative or regulatory changes adversely affecting the business in which the companies are engaged; and other opportunities or acquisitions which may be pursued by the Company. Leverage; Ability to Service Debt. The Company is highly leveraged. As of January 30, 1999, the Company has total indebtedness (including current maturities and capital lease obligations) of $5.2 billion. Total indebtedness consists of long-term debt, including borrowings under the 1998 Senior Credit Facility, 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 Facility 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 could experience unexpected costs from such integration and/or a loss of customers or sales as a result of the recent mergers, including as a result of the conversion of Hughes Family Markets banners to Ralphs. There can also be 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 can be 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. Information regarding intense competition in the retail merchandising industry is set forth under Item 1. Labor Relations. Information regarding employees and labor matters is set forth under Item 1. 19 Forward-looking statements speak only as of the date made. The Company undertakes no obligation to publicly release the result 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 7A. Quantitative and Qualitative Disclosures About Market Risks - -------------------------------------------------------------------- The Company manages interest rate risk through the strategic use of fixed and variable interest rate debt and, to a limited extent, interest rate derivatives. At January 30, 1999, the Company's derivative instrument consisted of an interest rate 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 fluctuation outside of the limits. The following table provides information by year of maturity about the Company's other financial instruments that are sensitive to interest rate changes (dollars in thousands):
Expected Year of Maturity ------------------------------------------------------------------------ 1999 2000 2001 2002 2003 Thereafter -------- -------- -------- -------- ---------- ---------- Long-term Debt: Fixed rate $ 29,539 $ 30,023 $ 14,752 $ 4,733 $ 253,156 $1,620,564 Average interest rate 5.95% 6.75% 6.30% 8.97% 7.16% 7.54% Variable rate 117,481 221,770 357,172 467,954 1,847,858 3,674 Average interest rate 5.87% 5.97% 6.08% 6.18% 6.30% 6.45%
20 Item 8. Financial Statements and Supplementary Data. - --------------------------------------------------- Consolidated Statements of Income
Fiscal Year Ended ------------------------------------------- January 30, January 31, February 1, (In thousands, except per share data) 1999 1998 1997 ----------- ----------- ----------- Net sales $14,878,771 $ 7,359,202 $ 4,530,120 Cost of goods sold: General 10,418,893 5,175,128 3,177,838 Related party lease (Note 5) 5,566 ----------- ----------- ----------- Total cost of goods sold 10,418,893 5,175,128 3,183,404 ----------- ----------- ----------- Gross margin 4,459,878 2,184,074 1,346,716 Operating and administrative expenses: General 3,536,104 1,784,128 1,111,520 Related party leases (Notes 5 and 9) - 41,709 50,954 Amortization of goodwill 92,268 16,387 1,385 Merger related costs (Note 4) 268,854 - - ----------- ----------- ----------- Total operating and administrative expenses 3,897,226 1,842,224 1,163,859 ----------- ----------- ----------- Income from operations 562,652 341,850 182,857 Interest expense 378,236 102,094 48,855 ----------- ----------- ----------- Income before income taxes and extraordinary charge 184,416 239,756 134,002 Provision for income taxes (Note 7) 129,244 96,445 50,039 ----------- ----------- ----------- Income before extraordinary charge 55,172 143,311 83,963 Extraordinary charge, net of taxes (Note 6) (217,947) (91,210) ----------- ----------- ----------- Net income (loss) $ (162,775) $ 52,101 $ 83,963 =========== =========== =========== Basic earnings per common share: Income before extraordinary charge $ 0.36 $ 1.37 $ 1.05 Extraordinary charge (1.43) (0.87) ----------- ----------- ----------- Net income (loss) $ (1.07) $ 0.50 $ 1.05 =========== =========== =========== Basic weighted average number of common shares outstanding 151,699 104,520 79,794 =========== =========== =========== Diluted earnings per common share: Income before extraordinary charge $ 0.34 $ 1.31 $ 1.00 Extraordinary charge (1.36) (0.83) - ----------- ----------- ----------- Net income (loss) $ (1.02) $ 0.48 $ 1.00 =========== =========== =========== Diluted weighted average number of common and common equivalent shares outstanding 160,218 109,591 84,068 =========== =========== =========== See Notes to Consolidated Financial Statements.
21 Consolidated Balance Sheets
January 30, January 31, (In thousands) 1999 1998 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 177,907 $ 117,311 Receivables 126,315 108,496 Inventories 1,820,186 1,240,866 Prepaid expenses and other 70,576 70,536 Current portion of deferred taxes (Note 7) 256,417 90,804 ----------- ----------- Total current assets 2,451,401 1,628,013 Property and equipment: Buildings, fixtures and equipment 3,805,462 2,802,757 Property held under capital leases 170,038 67,542 Land 589,542 414,616 ----------- ----------- Total property and equipment 4,565,042 3,284,915 Less accumulated depreciation and amortization 1,115,456 852,875 ----------- ----------- Property and equipment--net 3,449,586 2,432,040 Other assets: Goodwill--net 3,791,334 1,279,130 Long-term deferred tax assets (Note 7) 275,077 Other 183,816 83,753 ----------- ----------- Total other assets 4,250,227 1,362,883 ----------- ----------- Total assets $10,151,214 $ 5,422,936 =========== =========== See Notes to Consolidated Financial Statements.
22 Consolidated Balance Sheets
January 30, January 31, (In thousands, except per share data) 1999 1998 ----------- ----------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,140,386 $ 766,678 Current portion of long-term debt and lease obligations (Notes 6 and 9) 188,059 19,650 Accrued expenses: Compensation 317,175 188,417 Other 612,263 218,750 ----------- ----------- Total current liabilities 2,257,883 1,193,495 Long-term debt (Note 6) 4,821,635 2,184,794 Capital lease obligations (Note 9) 158,938 82,782 Deferred income taxes (Note 7) - 83,183 Other long-term liabilities (Note 10) 598,353 176,322 Commitments and contingencies (Notes 9 and 12) Stockholders' equity (Note 8): Preferred stock, $.01 par value (authorized, 100,000 shares; outstanding, none) Common stock, $.01 par value (authorized, 400,000 shares; issued 155,775 shares in 1998 and 128,809 shares in 1997; outstanding 155,770 shares in 1998 and 128,809 shares in 1997) 1,558 1,288 Additional paid-in capital 1,948,486 1,173,760 Other (3,991) (764) Treasury stock (5 shares in 1998) (249) Retained earnings 368,601 528,076 ----------- ----------- Total stockholders' equity 2,314,405 1,702,360 ----------- ----------- Total liabilities and stockholders' equity $10,151,214 $ 5,422,936 =========== =========== See Notes to Consolidated Financial Statements.
23 Consolidated Statements of Cash Flows
Fiscal Year Ended ------------------------------------------ January 30, January 31, February 1, (In thousands) 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Income before extraordinary charge $ 55,172 $ 143,311 $ 83,963 Adjustments to reconcile income before extraordinary charge to net cash provided by operating activities: Depreciation and amortization of property and equipment 323,029 195,318 134,946 Amortization of goodwill 92,268 16,387 1,385 Deferred lease transactions (12,770) (15,833) (4,944) Deferred income taxes (14,419) 17,090 10,548 Merger related asset write-downs 82,925 Changes in operating assets and liabilities: Inventories 5,513 (104,693) (83,841) Other current assets 26,704 6,592 (20,791) Accounts payable 44,665 (6,784) 143,282 Accrued expenses and other liabilities (35,526) (8,495) 14,537 Income taxes 158,060 33,369 2,459 Other 2,280 (12,565) (14,919) ---------- ---------- ---------- Net cash provided by operating activities 727,901 263,697 266,635 Cash flows from investing activities: Cash acquired in acquisitions 68,889 71,635 Payments made for acquisitions (155,329) (425,855) Purchases of property and equipment (722,188) (329,374 (179,898) Proceeds from sale of property and equipment 65,673 79,508 126,002 Other 19,141 5,375 12,340 ---------- ---------- ---------- Net cash used for investing activities (723,814) (598,711) (41,556) Cash flows from financing activities: Issuance of common stock - net 69,331 227,386 9,278 Stock repurchase and related expenses (70,099) Long-term financing: Borrowings 4,413,941 1,857,708 Repayments (4,432,498) (1,697,724) (154,749) Other 5,735 1,615 (63) ---------- ---------- ---------- Net cash provided by (used in) financing activities 56,509 388,985 (215,633) ---------- ---------- ---------- Net increase in cash and cash equivalents for the year 60,596 53,971 9,436 Cash and cash equivalents at beginning of year 117,311 63,340 53,904 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 177,907 $ 117,311 $ 63,340 ========== ========== ========== See Notes to Consolidated Financial Statements.
24 Consolidated Statements of Changes in Stockholders' Equity
Common Stock Treasury Stock --------------- ---------------- Number Additional Number of Paid-in of Retained (In thousands) Shares Amount Capital Shares Amount Other Earnings Total ------- ------ ---------- ------ ------- ------- --------- ---------- Balance at February 3, 1996 80,830 $813 $ 223,982 --- $ --- $(2,045) $ 392,012 $ 614,762 Issuance/purchase of common stock: Stock options exercised 3,507 35 7,966 8,001 Stock bonus 20 166 (566) (400) Tax benefits from stock options 877 877 Treasury stock (326) 4,400 (69,773) (70,099) Other 278 3 5,030 565 5,598 Net income 83,963 83,963 ------- ------ ---------- ------ ------- ------- --------- ---------- Balance at February 1, 1997 84,635 851 237,695 4,400 (69,773) (2,046) 475,975 642,702 Issuance of common stock: Stock options exercised 3,077 31 33,361 1 (29) 33,363 Stock bonus 12 238 (238) --- Tax benefits from stock options 12,690 12,690 Fox acquisition 332 3 9,201 9,204 Smith's acquisition 33,301 333 719,630 719,963 KUI acquisition 1,719 17 35,943 35,960 Hughes acquisition 9,833 98 191,976 192,074 Other 301 3 2,780 1,520 4,303 Retirement of treasury stock (4,401) (48) (69,754) (4,401) 69,802 Net income 52,101 52,101 ------- ------ ---------- ------ ------- ------- --------- ---------- Balance at January 31, 1998 128,809 1,288 1,173,760 --- --- (764) 528,076 1,702,360 Adjustment for QFC 118 1 311 3,323 3,635 Issuance of common stock: Stock options exercised 4,879 49 66,920 5 (249) 66,720 Stock bonus 64 1 2,857 (2,858) --- Tax benefits from stock options 47,373 47,373 Ralphs acquisition 21,671 217 652,811 (514) 652,514 Other 234 2 4,454 145 (23) 4,578 Net loss (162,775) (162,775) ------- ------ ---------- ------ ------- ------- --------- ---------- Balance at January 30, 1999 155,775 $1,558 $1,948,486 5 $ (249) $(3,991) $ 368,601 $2,314,405 ======= ====== ========== ====== ======= ======= ========= ========== See Notes to Consolidated Financial Statements.
25 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The Company--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 781 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. Principles of Consolidation--The accompanying financial statements include the consolidated accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Fiscal Year--The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years 1998, 1997, and 1996 ended on January 30, 1999, January 31, 1998 and February 1, 1997, respectively. Operating results for fiscal years 1998, 1997, and 1996 include 52 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. Business Segment--The Company's operations consist of one segment, retail sales. Cash and Cash Equivalents--The Company considers all highly liquid debt instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. 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 $57.7 million at January 30, 1999 and $51.8 million at January 31, 1998 , respectively. The pretax LIFO charge (income) was $5.9 million in 1998, ($3.7) million in 1997, and ($.9) million in 1996. Property and Equipment--Property and equipment is stated at cost. Depreciation on owned buildings and equipment is provided using the straight-line method over the estimated useful lives of the related assets of three to 31 years. Amortization of buildings and equipment under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years. Accumulated amortization of buildings and equipment under capitalized leases was $28 million at January 30, 1999 and $8.9 million at January 31, 1998. Goodwill--Goodwill is generally amortized on a straight-line basis over 40 years. Management periodically evaluates the recoverability of goodwill based upon current and anticipated net income and undiscounted future cash flows. Accumulated amortization was $115.5 million at January 30, 1999 and $23.1 million at January 31, 1998. Impairment of Long-lived Assets--The Company reviews and evaluates long-lived assets for impairment when events or circumstances indicate costs may not be recoverable. The net book value of long-lived assets is compared to expected undiscounted future cash flows. An impairment loss would be recorded for the excess of net book value over the fair value of the asset impaired. 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. Buying and Promotional Allowances--Vendor allowances and credits that relate to the Company's buying and merchandising activities are recognized as earned. Advertising--Advertising costs are expensed as incurred. Advertising costs were $148.1 million in 1998, $62.9 million in 1997and $40.0 million in 1996. Self-insurance--The Company is primarily self-insured for general liability, property loss, worker's compensation and non-union health and welfare. Liabilities for these costs are based on actual claims and actuarial statements for estimates of claims that have been incurred but not reported. Pre-opening Costs--All noncapital expenditures incurred in connection with the opening of new or acquired stores and other facilities or the remodeling of existing stores are expensed as incurred. Interest Costs--Interest costs are expensed as incurred, except for interest costs which have been capitalized as part of the cost of properties under development. The Company's cash payments for interest (net 26 of capitalized interest of approximately $1.7 million in 1998, $1.0 million in 1997 and $1.4 million in 1996) totaled $369.1 million in 1998, $97.8 million in 1997 and $49.5 million in 1996. 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 (see Note 7). Cash paid (refunded) for income taxes was $(21.1) million in 1998, $44.9 million in 1997 and $36.9 million in 1996. Stock-based Compensation--As allowed under SFAS No. 123, Accounting for Stock-based Compensation, the Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value based method, but provides pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123 had been applied in measuring compensation expense (see Note 8). Comprehensive Income--The Company does not have any other comprehensive income. Accordingly, comprehensive income (loss) is the same as reported net income. Earnings Per Common 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. Common equivalent shares relate to outstanding stock options and warrants. Reclassifications--Certain prior year amounts have been reclassified to conform to current year presentation. The reclassifications have no effect on previously reported net income. Recent Accounting Pronouncements--In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for fiscal years beginning after June 15, 1999 and establishes accounting and reporting standards for derivative instruments. The Company is evaluating the effect of this statement on its financial position, results of operations, and cash flows. 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 April 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. 27 3. Acquisitions and Dispositions 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 on that date. 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 Consolidated Historical Historical Company ---------- ---------- ------------ Fiscal 1997 Net sales $5,481,087 $1,878,115 $7,359,202 Net income 12,094 40,007 52,101 Diluted earnings per common share 0.17 1.95 0.48 Fiscal 1996 Net sales 3,724,839 805,281 4,530,120 Net income 58,545 25,418 83,963 Diluted earnings per common share 1.05 1.71 1.00
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 was 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 acquisition of Ralphs/Food 4 Less and merger with 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. At January 30, 1999, the Company has sold 13 of the stores and has sale agreements or letters of intent on the other six 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 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 below. 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 all 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 28 financial statements 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 all 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 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 52 weeks ended January 30, 1999. On October 4, 1998, the Company acquired 123 Littman Jewelers and Barclays Jewelers stores located primarily in 10 states on the East coast for $80.3 million in cash and assumption of $43.7 million in debt. On October 1, 1998, the Company acquired 13 Albertson's and Buttrey grocery stores in Montana and Wyoming for $31.3 million in cash. 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 below. 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, for $45.2 million which approximated book value. Sales from the 38 stores included in 1998 results were $217.2 million. The following unaudited pro forma information presents the results of the Company's operations assuming the Ralphs/Food 4 Less, Smith's, 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):
Fiscal Year Ended ------------------------------ January 30, January 31, 1999 1998 ----------- ----------- Net sales $15,424,303 $14,949,516 Income (loss) before extraordinary charge (5,597) 115,649 Net loss (223,544) (102,298) Diluted earnings per common share: Income (loss) before extraordinary charge (0.04) 0.75 Net loss (1.45) (0.66)
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):
Fiscal Year Ended ------------------------------ January 30, January 31, 1999 1998 ----------- ----------- Fair value of assets acquired $ 2,208,910 $ 1,985,604 Goodwill recorded 2,389,917 1,252,081 Value of stock issued (652,514) (765,126) Liabilities assumed (3,790,984) (2,046,704) ----------- ----------- Cash paid $ 155,329 $ 425,855 =========== ===========
29 In conjunction with purchase acquisitions, the Company accrued certain costs associated with closing and divesting of certain acquired facilities and severance payments to terminate employees of the acquired companies. The following table presents the activity in the Company's accrued purchase liabilities. (in thousands)
Facility Closure Employee Costs Severance Total -------- --------- -------- Balance at February 1, 1997 $ - $ - $ - Additions 22,498 8,903 31,401 Payments (3,767) (1,078) (4,845) -------- --------- -------- Balance at January 31, 1998 18,731 7,825 26,556 Additions 122,448 21,265 143,713 Payments (12,853) (2,082) (14,935) Reductions to goodwill (2,588) (2,588) -------- --------- -------- Balance at January 30, 1999 $128,326 $ 24,420 $152,746 ======== ========= ========
Facility Closure Costs--The Company acquired certain idle facilities in its purchase acquisitions including 63 closed stores, four closed warehouses and one vacant parcel all of which are leased facilities. The Company also acquired 16 stores that the California Attorney General required divestiture of and 17 stores that were duplicate facilities in purchase acquisitions. Divestiture of thirteen stores required by the California AG has been completed and 7 of the duplicate facilities have been closed. The remaining 10 duplicate stores are expected to close by the end of 1999. Facility closure costs accrued include obligations for future contractual lease payments, net of sublease income, and closure costs. Employee Severance--Employee severance relates to 24 employees that have been terminated and 73 employees that will be terminated in the future. Under severance agreements, the severance will be paid over a period not to exceed three years following the date of termination. 30 4. Merger Related Costs The Company is in the process of implementing its plan to integrate its five primary operations (Fred Meyer Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes) resulting in merger related costs of $268.9 million in 1998. The integration plan includes the consolidation of distribution, information systems, and administrative functions, conversion of 78 store banners, closure of seven stores, and transaction costs incurred to complete the mergers. The costs were reported in the periods in which cash was expended except for $25.9 million that was accrued for liabilities incurred to exit certain activities and retain certain key employees and an $82.9 million charge to write-down certain assets. The following table presents components of the merger related costs (in thousands):
Fiscal Year Ended January 30, 1999 ----------- Charges recorded as cash expended Distribution consolidation $ 15,844 Systems integration 50,408 Store Conversions 48,105 Transaction costs 33,436 Store closures 133 Administration integration 12,054 ---------- 159,980 Noncash asset write-down Distribution consolidation 28,588 Systems integration 25,620 Store conversions Transaction costs Store closures 25,491 Administration integration 3,226 ---------- 82,925 Accrued charges Distribution consolidation Systems integration 1,445 Store conversions Transaction costs 5,797 Store closures 6,686 Administration integration 12,021 ---------- 25,949 ---------- Total merger related costs $ 268,854 ========== Total charges Distribution consolidation $ 44,432 Systems integration 77,473 Store conversions 48,105 Transaction costs 39,233 Store closures 32,310 Administration integration 27,301 ---------- Total merger related costs $ 268,854 ==========
31 Distribution Consolidation--Represents costs to consolidate manufacturing and distribution operations and eliminate duplicate facilities. The costs include a $28.6 million write-down to estimated net realizable value for the Hughes distribution center in Southern California. Net realizable value was determined by a market analysis. The facilities are held for sale and depreciation expense for the closed Hughes distribution facility has been suspended. Additional depreciation expense in 1998 would have totaled $1.7 million if it had not been suspended. Efforts to dispose of the facilities are ongoing and a sale is expected in 1999. Also included are $12.9 million incurred for incremental labor during the closing of the distribution center and other incremental costs incurred as a part of the realignment of the Company's distribution system. Systems Integration--Represents the costs of integrating systems from QFC, Hughes and Smith's computer platforms into Fred Meyer and Ralphs' platforms and the related conversion of all corporate office and store systems. The asset write-down of $25.6 million includes $18.2 million for computer equipment and related software that have been abandoned and $7.4 million associated with computer equipment at QFC which is being written off over 18 months at which time it will be abandoned. Costs totaling $50.4 million were expensed as incurred and includes $26.4 million of incremental operating costs, principally labor, during the conversion process, $14.0 million paid to third parties, and $9.3 million of training costs. Also included are severance costs for system employees who will be terminated as the integration is completed. Store Conversions--Includes the costs to convert 55 Hughes stores to the Ralphs' banner, 15 Smitty's stores to the Fred Meyer banner, five QFC stores to the Fred Meyer banner, and three Fred Meyer stores to the Smith's banner. The conversion of the Hughes and QFC stores are substantially complete. Costs totaling $48.1 million represented incremental cash expenditures for advertising and promotions to establish the banner, changing store signage, labor required to remerchandise the store inventory and other services which were expensed as incurred. Transaction Costs--Represents $33.4 million for fees paid to outside parties and employee bonuses that were contingent upon the completion of the mergers and $5.8 million for an employee stay bonus program. The stay bonus program was accrued ratably in 1998 over the stay period and was paid in the fourth quarter of 1998. Store Closures--Includes the costs to close four stores identified as duplicate facilities and to sell three stores pursuant to a settlement agreement with the State of California ("AG Stores"). Annual sales and operating income for the four duplicate facilities and three AG Stores are approximately $133 million and $3 million, respectively. The asset write-down represents $6.0 million of book value in excess of sale proceeds, $18.5 million for the write-off of the goodwill associated with the AG Stores, and $6.7 million of lease termination costs. As of January 30, 1999, all stores were closed or sold except for one AG store which is expected to be sold in the first quarter of 1999. The net book value of the AG Stores representing building, fixtures and equipment was written down to an estimated net realizable value of $5.7 million. Depreciation expense continues to be recorded at the historical rate. Administration Integration--Includes $15.1 million for labor and severance costs of which $9.3 million has been expended and the employees have been terminated and $9.4 million to conform accounting policies of QFC and Hughes to Fred Meyer, including the calculation of bad debt and costs for real estate transactions. 32 The following table presents the activity in the reserve accounts for the year ended January 30, 1999. The beginning balance was zero (in thousands):
Reserve Charged Balance at to Cash Jan 30, Expense Payments Reclass 1999 ------- -------- ------- ---------- Systems integration Severance $ 1,445 $ 133 $ 1,312 Transaction costs Stay bonus program 5,797 5,797 - Store closures Lease obligation 6,686 1,717 4,969 Administration integration Severance 12,021 8,158 3,863 ------- -------- ------- -------- Total amounts included in Current Liabilities $25,949 $ 15,805 $ - $ 10,144 ======= ======== ======= ========
Severance--Severance relates to 183 Hughes administrative employees in Southern California and 75 QFC administrative employees in Seattle. As of year end, all of the Hughes employees have been terminated. The QFC employees have been notified and their termination dates will vary ranging from February 15, 1999 to December 31, 1999. Under severance agreements, the amount of severance will be paid over a period following the date of termination. Lease Obligation--Following the merger, the Company closed a QFC store and agreed to dispose of the AG Stores under a settlement agreement with the State of California. The lease obligation represents future contractual lease payments on these stores over the expected holding period, net of any sublease income. The Company is actively marketing the stores to potential buyers and sub-lease tenants. Stay Bonus Program--Represents amounts which were paid under a stay bonus program in the fourth quarter of 1998. 5. Related-party Transactions The Company leases certain store locations and previously leased a distribution center from MetLife, which was a major beneficial stockholder of the Company's stock during 1997 and 1996. Rents paid to MetLife and other related parties on leases totaled $34.9 million in 1997 and $61.8 million in 1996. Rents paid for store locations leased or subleased from related parties were included in operating and administrative expenses. Rents paid to related parties for the leased distribution center were included in cost of goods sold. The Company owns approximately 20% of the non-voting equity of the Associated Grocers, Inc. ("A.G., Inc.") cooperative, which is one of QFC's major suppliers. Additionally, the Company has a right to a seat on A.G., Inc.'s board of directors. Amounts paid to A.G., Inc. for products and services totaled $172.6 million in 1998, $191.6 million in 1997 and $57.7 million in 1996. The Company has a management agreement for management and financial services with The Yucaipa Companies ("Yucaipa"), whose managing general partner serves as the Company's chairman of the board. The agreement provides for annual management fees equal to $0.5 million plus reimbursement of all of Yucaipa's reasonable out-of-pocket costs and expenses. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, debt and equity financings, or any other services not otherwise covered by the agreement. In 1998, the Company paid to Yucaipa approximately $20 million for services rendered in conjunction with the Ralphs/Food 4 Less and QFC mergers and termination fees of Ralphs/Food 4 Less management agreement. 33 6. Long-term Debt Long-term debt consisted of the following (in thousands):
January 30, January 31, 1999 1998 ---------- ---------- 1997 Senior Credit Facility $1,300,000 1998 Senior Credit Facility $2,216,443 QFC Credit Facility 214,293 Commercial paper with maturities through August, 1999, classified as long-term, interest rates of 5.35% to 6.35% at January 30, 1999 689,107 367,156 QFC 8.7% Senior Subordinated Notes, principal due 2007 with interest payable semi-annually 3,065 150,000 Long-term notes secured by trust deeds, due through 2016, fixed interest rates from 5.25% to 12.0% 59,611 61,075 Uncommitted bank borrowings classified as long-term 105,000 79,000 Senior notes, unsecured, due 2000 through 2008, fixed interest rates from 7.15% to 11.0% 1,803,188 Other 92,263 29,448 ---------- ---------- Total 4,968,677 2,200,972 Less current portion 147,042 16,178 ---------- ---------- Total $4,821,635 $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 January 30, 1999, the weighted average interest rate on both the five year term note and the amounts outstanding under the revolving credit facility was 5.9%. 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 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). 34 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 has $105 million outstanding under the uncommitted money market lines at January 30, 1999. The Company also has $1.15 billion 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 $689.1 million at January 30, 1999, as long-term debt. At January 30, 1999, a total of approximately $511.7 million was available for borrowings under the 1998 Senior Credit Facility and the commercial paper facilities and $20.0 million was available for borrowings from the uncommitted money market lines. 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 January 30, 1999, the Company had outstanding one interest rate 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 January 30, 1999, the 3-month adjusted LIBOR was 4.94%. 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. In 1998, the Company recorded an extraordinary charge of $357.8 million less a $139.9 million income tax benefit which consisted of cash paid for premiums 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. In 1997, the Company recorded an extraordinary charge of $148.3 million less a $57.1 million income tax benefit which consisted of cash paid for premiums in the prepayment of certain notes and bank facilities of Fred Meyer Stores and Smith's and the write-off of their related deferred financing costs. Annual long-term debt maturities for the five fiscal years subsequent to January 30, 1999 are $147.0 million in 1999, $251.8 million in 2000, $371.9 million in 2001, $472.7 million in 2002, $2,101.0 million in 2003 and $1,624.2 thereafter. 7. Income Taxes The provision for income taxes includes the following (in thousands):
Fiscal Year Ended ------------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---------- ---------- ---------- Current $ 143,663 $ 80,479 $ 39,491 Deferred (14,419) 15,966 10,548 ---------- ---------- ---------- Total $ 129,244 $ 96,445 $ 50,039 ========== ========== ==========
35 A reconciliation between the 35% statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
Fiscal Year Ended ----------------- January 30, January 31, February 1, 1999 1998 1997 ---------- ---------- ---------- Federal income taxes at the statutory rate $ 64,546 $ 83,914 $ 46,901 State income taxes 19,752 7,297 2,833 Effect of non-deductible goodwill amortization 28,573 5,649 356 Merger related costs 15,157 Other 1,216 (415) (51) ---------- ---------- ---------- Provision for income taxes $ 128,028 $ 96,445 $ 50,039 ========== ========== ==========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 30, 1999 and January 31, 1998 were as follows (in thousands):
January 30, January 31, 1999 1998 ---------- ---------- Deferred tax assets: Compensation related costs $ 43,382 $ 16,776 Insurance related costs. 94,692 34,141 Lease accounting 34,157 - Property and equipment 1,910 - Net operating loss carryforwards 457,466 68,728 Tax credits 25,372 9,133 Other 70,554 24,660 ---------- ---------- Total deferred tax assets 727,533 153,438 Valuation allowance (157,333) (11,708) ---------- ---------- Net deferred tax assets 570,200 141,730 Deferred tax liabilities: Property and equipment - 87,822 Inventory related costs 38,706 31,527 Lease accounting 14,760 ---------- ---------- Total deferred tax liabilities 38,706 134,109 ---------- ---------- Net deferred income taxes - asset $ (531,494) $ (7,621) ========== ========== Current deferred income taxes--asset $ (256,417) $ (90,804) Noncurrent deferred income taxes--(asset) liability (275,077) 83,183 ---------- ---------- Net deferred income taxes--asset $ (531,494) $ (7,621) ========== ==========
At January 30, 1999, the Company has net operating loss carryforwards for federal income tax purposes of $1,257.4 million which expire from 2004 through 2017. In addition, the Company has net operating loss carryforwards for state income tax purposes of $641.4 million which expire from 1999 through 2017. The Company has federal Alternative Minimum Tax ("AMT") credit carryforwards of $8.6 million which are available to reduce future regular taxes in excess of AMT. These credits have no expiration date. The valuation allowance increased in 1998 due to the expected utilization of NOL carryforwards at Ralphs/Food 4 Less. 36 8. Stockholders' Equity At January 30, 1999, 17.1 million shares of common stock were reserved for issuance to employees, including officers and directors, and nonemployee agents, consultants and advisors, under stock incentive plans. These plans provide for the granting of incentive stock options, nonqualified stock options, stock bonuses, stock appreciation rights, cash bonus rights and performance units. Under the terms of the plans, the option price is determined by the Board of Directors at the time the option is granted. The option price for incentive stock options cannot be less than the fair value of the Company's stock on the date of grant. Nonqualified stock options may not be granted at less than 50% of the fair value on the date of grant. Stock Options--Activity under the plans was as follows (in thousands, except per share data):
Fiscal Year Ended ------------------------------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 --------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Option Price Option Price Option Price Shares Per Share Shares Per Share Shares Per Share ------ ------------ ------ ------------ ------ ------------ Outstanding at beginning of year 13,661 $ 17.26 10,272 $ 12.84 7,709 $ 12.41 Granted 1,788 37.43 5,188 25.09 4,749 14.58 Options added from acquired company 1,595 7.33 Exercised (4,972) 13.53 (3,075) 10.96 (375) 7.81 Cancelled (370) 26.55 (319) 13.17 (1,811) 16.65 ------ ------ ------ Outstanding at end of year 10,107 22.34 13,661 17.26 10,272 12.84 ====== ============ ====== ============ ====== ============ Exercisable at end of year 5,049 $ 15.37 7,452 $ 12.71 3,665 $ 10.90 ====== ============ ====== ============ ====== ============ Weighted-average fair value of options granted during the year $22.18 $13.30 $ 6.08 ====== ====== ======
Stock options granted in 1996, 1997, and 1998 expire in 10 years. The options vest over five years, 20 percent each year, beginning at the end of the first year. In conjunction with the Smith's acquisition, option holders could elect to accelerate to the closing date of September 9, 1997 the vesting of previously unvested options. Accordingly, nearly all options outstanding became fully vested at the closing date. Options outstanding at Smith's became fully vested at the closing date and were converted at the exchange ratio into options exercisable in the Company's Common Stock expiring on the original terms. In conjunction with the QFC acquisition, all options outstanding at QFC were converted at the exchange ratio into options exercisable in the Company's Common Stock expiring on the original terms. In addition, 629,803 options at QFC became fully vested at March 9, 1998. All stock options granted in 1998 and 1996 were granted at an amount equal to or greater than the fair market value on the date prior to the grant date. Accordingly, no compensation was recorded for options granted in 1998 and 1996. Compensation expense for options granted in 1997 at an amount below the fair market value was recorded for the amortization of the difference between the market value on the date of grant and the grant price. The amortization was determined on a straight-line basis over the vesting period. The amount charged to operations in 1998 and 1997 was immaterial. 37 The following table summarizes information concerning outstanding and exercisable options at January 30, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------- --------------------------------- Range of Number Weighted Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price -------- -------------- ---------------- -------------- -------------- -------------- $3 to $13 2,625 4.9 $ 10.90 2,432 $ 10.87 13 to 17.25 2,048 7.2 15.18 1,411 15.52 17.30 to 28.25 2,895 8.5 24.90 1,031 22.29 28.30 to 48 2,539 9.1 37.04 175 35.94 ------ ----- 3 to 48 10,107 7.4 22.34 5,049 15.37 ====== =====
Shares available for future option grants were 6.8 million as of January 30, 1999 and 8.5 million as of January 31, 1998. The Company issued a replacement grant election program in 1996 that allowed stock option holders with options granted at more than $13.00 per share to reset the price at $13.00, on up to 1,968,000 options that were previously granted at prices ranging from $13.62 to $20.63. For those who elected to reset their option price to $13.00, the vesting period started over. The Company applies the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for stock options granted at the market value on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the estimated fair value of the options at the date of grant, the Company's pro forma net income and income per share would have been as follows:
Fiscal Year Ended ------------------------------------------------------------------------------ January 30, 1999 January 31, 1998 February 1, 1997 -------------------------- ------------------------ ---------------------- Actual Pro forma Actual Pro forma Actual Pro forma -------------------------- ------------------------ ---------------------- Net income (loss) (in thousands) $(162,775) $(187,911) $52,101 $ 25,849 $83,963 $ 79,231 Diluted net income (loss) per common share (1.02) (1.17) 0.48 0.24 1.00 0.95
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model based on historical assumptions from Fred Meyer and QFC. The fair value of each option grant in 1998 was estimated on the date of grant using the Black-Scholes option-pricing model based on historical assumptions from Fred Meyer. The following assumptions were used for grants awarded in each year:
Fiscal Year Ended ------------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---------- ---------- ---------- Fred Meyer Weighted average expected volatility (based on historical volatility) 39.37% 33.67% 34.97% Weighted average risk-free interest rate 5.32% 6.10% 5.77% Expected term 5 years 5 years 5 years QFC Weighted average expected volatility (based on historical volatility) n/a 43.50% 44.70% Weighted average risk-free interest rate n/a 5.50% 5.12% Expected term n/a 5 years 5 years
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to stock options granted prior to 1995. It is anticipated that additional stock options will be granted in future years. 38 Other Option--FMI Associates, which was the Company's principal shareholder in 1996, exercised an option in 1996 for the purchase of 3.1 million shares with an aggregate value of $5.1 million. Warrant--As part of the Smith's acquisition, the Company converted a warrant for Smith's stock into a warrant for Fred Meyer stock. The warrant, issued to Yucaipa, is for the purchase of up to 3.9 million shares of Common Stock at an exercise price of $23.81 per share. Half of the warrant expires in 2005 and half expires in 2006. Additionally, at the option of Yucaipa, the warrant is exercisable without the payment of cash consideration. Under this condition, the Company will withhold upon exercise the number of shares having a market value equal to the aggregate exercise price from the shares issuable. Management Bonus--In 1996, the Company awarded a stock bonus to a corporate officer for 20,000 shares totaling $291,250. Shares vest annually over five years. In 1997, the Company awarded stock bonuses to corporate officers for 3,000 shares totaling $60,562 that vest annually over five years and 8,606 shares totaling $177,498 that vest annually over three years. In 1998, the Company awarded stock bonuses to corporate officers for 64,499 shares totaling $2,858,280 that vest annually over three years. Nonemployee Directors Stock Compensation Plan--In 1996, the Company purchased 25,116 shares of its common stock at market prices for the benefit of six of its nonemployee directors in lieu of a portion of current and future Board of Director fee payments. The cost of the shares totaled $400,103 and became fully vested in conjunction with the Smith's acquisition. In 1998, the Company awarded under the plan 17,326 newly issued shares of its common stock to twelve of its nonemployee directors. The value at the date of award was $700,219. 39 9. Leases The Company leases or subleases property and equipment used in its operations. The terms of certain leases include renewal options, escalation clauses, percentage rents based on sales, or payment of executory costs such as property taxes, utilities, insurance and maintenance. Portions of certain properties are subleased to others for periods of from one to 20 years. At January 30, 1999, minimum rentals under noncancelable leases for future fiscal years were as follows (in thousands):
Operating Capitalized Less Net Fiscal Year Leases Leases Subleases Rentals - ---------------------------------------- ---------- ----------- --------- ---------- 1999 $ 343,592 $ 50,055 $ 33,870 $ 359,777 2000 333,457 41,527 29,875 345,109 2001 316,231 30,366 23,709 322,888 2002 286,269 25,332 20,884 290,717 2003 278,912 22,846 17,653 284,105 Thereafter 2,726,575 212,254 66,224 2,872,605 ---------- ----------- --------- ---------- Total $4,285,036 382,380 $ 192,215 $4,475,201 ========== ========= ========== Less imputed interest 182,542 ----------- Present value of minimum rental payments 199,838 Less current portion 40,900 ----------- Capitalized lease obligations $ 158,938 ===========
Rent expense under operating leases, including executory costs, were as follows (in thousands):
Fiscal Year Ended ------------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---------- ---------- ---------- Minimum rent expense $ 294,475 $ 152,393 $ 104,595 Contingent rent expense 7,832 4,589 2,962 Rent income from subleases (41,273) (23,179) (16,259) ---------- ---------- ---------- Net rent expense $ 261,034 $ 133,803 $ 91,298 ========== ========== ==========
At January 30, 1999, deferred lease transactions consisted of unamortized gains on lease financing transactions and cumulative net excess of rent expense over cash rents. The gains on lease financing transactions included the differences between property held under capital leases and capital lease obligations at the time of amendments to the capital leases which resulted in the leases qualifying as operating leases and gains resulting from sale-leaseback transactions. The gains are being amortized over the remaining life of the respective leases. The excess rent expense over cash rents results from charging to operations the average rent over the primary lease term on leases with escalating rent payments. On February 4, 1997, in a series of transactions with MetLife, the Company purchased, for approximately $49.0 million, six stores previously leased from MetLife and an option to purchase parcels at 18 of the 29 stores which the Company will continue to lease from MetLife. Additionally, the Company entered into new 25-year leases on these remaining 29 stores that will result in reduced rents. A distribution center that was leased to the Company by MetLife was sold to a third party who leased the center to the Company at reduced rates. In 1996 and 1997, the Company completed sale-leaseback transactions on 13 stores. The proceeds from the transactions were used to repay outstanding indebtedness on credit lines and for general working capital purposes. The initial lease terms are for 21 to 23 years and are subject to renewal at the option of the Company. The annual rent obligation, including amortization of fees and deferred gain, is approximately $12.1 million. On March 11, 1998, the Company entered into a $500.0 million five-year operating lease facility which refinanced $303.0 million in existing lease financing facilities. Lease payments are based on LIBOR applied to the utilized portion of the facility. As of January 30, 1999, the Company had utilized $364.0 million on the facility primarily for leasing 30 stores and one distribution center. 40 10. Employee Benefit Plans Employees' Profit-sharing Plan--Profit-sharing contributions under this Plan, which covers nonunion employees of Fred Meyer Stores, are made to a trust fund held by a third-party trustee. Contributions are based on the Company's pretax income, as defined, at rates determined by the Board of Directors and are not to exceed amounts deductible under applicable provisions of the Internal Revenue Code. The Plan also has an annual 1% basic contribution to all eligible employees' accounts subject to normal plan vesting. The Company expensed $10.8 million in 1998, $9.1 million in 1997and $7.7 million in 1996 for these contributions. The Company also maintains a defined contribution profit-sharing plan which covers nonunion employees of QFC who meet certain service requirements. Contributions to the plan are based on a percentage of gross wages and are made at the discretion of the Company. The Company expensed $1.0 million in 1998, $0.9 million in 1997 and $0.6 million in 1996. Defined Contribution Plan--The Company sponsors a 401(k) Plan covering substantially all Ralphs/Food 4 Less employees who are not covered by collective bargaining agreements and who have at least one year of service during which 1,000 hours has been worked. The Company has committed to match a minimum of 20 percent of an employee's contribution to the 401(k) Plan that does not exceed 5 percent of the employee's eligible compensation. In 1998, the expense recorded for the 401(k) Plan was $0.8 million. Multiemployer Pension Plans--The Company contributes to multiemployer pension plan trusts at specified rates in accordance with collective bargaining agreements. Contributions to the trusts were $47.3 million in 1998, $35.1 million in 1997 and $13.6 million in 1996. The Company's relative positions in these plans with respect to the actuarial present value of the accumulated benefit obligation and the projected benefit obligation, net assets available for benefits and the assumed rates of return used by the plans are not determinable. Employee Stock Purchase Plan--The Company has a noncontributory employee stock purchase plan that allows employees to purchase stock in the Company at market prices via payroll deductions. The Company pays all brokerage fees associated with the purchase of the stock and administrative fees. The Company also pays a ten percent cash bonus at year end based on the number of shares purchased and held during the previous calendar year and the market price at year end. The plan is available to all employees over age 18 who have completed six months of continuous employment with the Company. Supplemental Retirement Programs--The Company has supplemental retirement programs for senior management, selected vice presidents and selected key individuals. Program provisions are as follows: Senior Management--The plan is funded with life insurance contracts on the lives of the participants. The Company is the owner of the contracts and made annual contributions per participant of $35,000 in 1998 and 1997 and $25,000 in 1996. Total contributions were $773,000 in 1998, $865,000 in 1997, and $400,000 in 1996. Retirement age under the plan is normally 62 with an alternative age of 65, at which point the Company will make 15 annual benefit payments to the executive. Selected Vice Presidents and Selected Key Individuals--The Company will contribute annually a percentage of each participant's gross salary. The plan is funded with life insurance contracts on participants age 54 and younger and variable annuity contracts for participants age 55 and older. Each participant is the owner of his/her respective contract. Selected Key Officers and Individuals at Ralphs/Food 4 Less--The Company maintains both a Supplemental Executive Retirement Plan ("SERP") and a Retirement Supplement Plan. The changes in benefit obligations and plan assets, the weighted average assumptions and the components of net pension cost since March 10, 1998 are included in the tables below. 41 Pension and Other Postretirement Benefit Plans--The Company maintains defined benefit pension plans for all permanent, nonunion employees of Smith's and Ralphs/Food 4 Less and retiree health plans for postretirement health care coverage at Fred Meyer Stores and Ralphs/Food 4 Less. Aggregated information for the SERP, Supplemental Retirement Benefit Plan, Pension and Postretirement Benefit Plan is presented below (in thousands):
Pension Benefits Postretirement Benefits -------------------------- -------------------------- January 30, January 31, January 30, January 31, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Benefit obligation at beginning of the year $ 46,058 $ - $ 7,407 $ 5,764 Additions to benefit obligation from acquisitions 94,038 39,453 15,676 - Service cost 9,377 1,066 807 454 Interest cost 8,624 1,184 800 455 Plan participants' contributions 159 (210) Amendments (10,644) 868 Actuarial loss 2,293 4,579 2,163 76 Benefits paid (7,257) (224) (650) - ---------- ---------- ---------- ---------- Benefit obligation at end of the year 153,133 46,058 15,718 7,407 Fair value of plan assets at beginning of the year 58,266 - - - Addition to plan assets from acquisitions 62,591 56,832 - - Actual return on plan assets 14,853 1,658 - - Employer contributions 7,678 491 133 Plan participants' contribuions 159 76 Benefits paid (7,257) (224) (650) (209) ---------- ---------- ---------- ---------- Fair value of plan assets at end of the year 136,131 58,266 - - ---------- ---------- ---------- ---------- Funded status (17,002) 12,208 (15,718) (7,407) Unrecognized net actuarial loss 3,464 4,897 2,774 610 Unrecognized prior service cost - - (9,755) 241 Unrecognized net transition obligation - - 1,086 1,169 ---------- ---------- ---------- ---------- Prepaid (accrued) benefit obligation at end of the year $ (13,538) $ 17,105 $ (21,613) $ (5,387) ========== ========== ========== ========== Amounts recognized in the balance sheet consist of: Accrued benefits in prepaid expense $ 15,461 $ 17,105 Accrued benefits costs included in: Accrued compensation (23,070) Other long-term liabilities (5,929) - $ (21,613) $ (5,387) ---------- ---------- ---------- ---------- $ (13,538) $ 17,105 $ (21,613) $ (5,387) ========== ========== ========== ==========
42 The weighted average assumptions are as follows:
Pension Benefits Postretirement Benefits -------------------------- -------------------------- January 30, January 31, January 30, January 31, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Discount rate 7.5% 7.0% 6.5% 6.8% Expected return on plan assets 9.0% 9.0% N/A N/A Rate of compensation increase 5.0% N/A N/A N/A
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits for participants under age 65 was assumed for this current fiscal year, decreasing .05% per year to 6.0%. A 6.0% annual rate of increase in the per capita cost of covered health care benefits for participants over age 65 was assumed for all years. Net pension and post retirement costs charged to operations includes the following components (in thousands):
Pension Benefits for Postretirement Benefits Fiscal Year Ended for Fiscal Year Ended -------------------------- ------------------------------------------ January 30, January 31, January 30, January 31, February 1, 1999 1998 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- Service cost $ 9,377 $ 1,066 $ 807 $ 454 $ 411 Interest cost 8,624 1,184 800 455 410 Actual return on plan assets (10,644) (1,658) - - - Amortization of prior service - - (648) 42 41 Amortization of transition obligation 208 - 84 84 84 Recognized net actuarial loss (gain) 1,048 (318) - - - ---------- ---------- ---------- ---------- ---------- Net pension and post retirement costs $ 8,613 $ 274 $ 1,043 $ 1,035 $ 946 ========== ========== ========== ========== ==========
Assumed health care costs trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects on 1998 amounts presented:
One-Percentage- One-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total service and interest cost components $ 411 $ (502) Effect on postretirement benefit obligation 3,880 (3,148)
11. Estimated Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies as shown below. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could actually realize. Management is not aware of any factors that would significantly change the estimated fair value amounts shown below. A comprehensive revaluation for purposes of these financial statements has not been performed since January 30, 1999, and current estimates of fair value may differ from the amounts presented herein. The Company is not subjected to a concentration of credit risk. Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other Current Assets, Other Long-term Assets, Outstanding Bank Overdrafts and Accounts Payable--The carrying amounts of these items are a reasonable estimate of their fair value because of the short time until realization. Long-term Debt and Interest Rate Agreements--The amount of long-term debt included in the balance sheet is $175.2 million less than its fair value at January 30, 1999. At January 31, 1998, the amount of long-term debt included in the balance sheet approximates its fair value. The fair value of notes, mortgages and real estate 43 assessments payable is estimated by discounting expected future cash flows. The discount rate used is the rate currently available to the Company for issuance of debt with similar terms and remaining maturities. The amounts for commercial paper and bid lines of credit under the revolving credit agreement (see Note 6) approximates fair value at January 30, 1999 and January 31, 1998. The fair value of the interest rate collar agreement is the estimated settlement amount. At January 30, 1999, the Company could settle the collar agreement at a loss of $6.0 million at January 30, 1999 and a loss of $699,000 at January 31, 1998. The value is determined based on the notional amount of the collar, its term and the difference in rates between the date of measurement and when the collar was initiated. 12. 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. The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee") and has a 10 year product supply agreement with Santee that requires the Company to purchase 9 million gallons of fluid milk and other products annually. The product supply agreement expires on July 29, 2007. Upon acquisition of Ralphs, Santee became excess capacity and a duplicate facility. The Company is currently engaged in efforts to dispose of its interest in Santee which may result in a loss of approximately $45 million in 1999. 44 13. Selected Quarterly Financial Data (Unaudited) (in thousands, except per share data)
First Second Third Fourth(1) Total ---------- ---------- ---------- ---------- ----------- Fiscal 1998 Net sales $4,040,448 $3,504,932 $3,477,091 $3,856,300 $14,878,771 Gross margin 1,185,255 1,045,814 1,042,130 1,186,679 4,459,878 Income from operations 15,776 131,529 153,880 261,467 562,652 Income (loss) before extraordinary charge (68,582) 8,947 29,164 85,643 55,172 Extraordinary charge (216,441) (1,169) (324) (13) (217,947) Net income (loss) (285,023) 7,778 28,840 85,630 (162,775) Basic earnings per common share: Income (loss) before extraordinary charge(2) $ (0.47) $ 0.06 $ 0.19 $ 0.55 $ 0.36 Extraordinary charge (0.01) (1.43) ---------- ---------- ---------- ---------- ----------- Net income (loss)(2) $ (0.47) $ 0.05 $ 0.19 $ 0.55 $ (1.07) ========== ========== ========== ========== =========== Weighted average number of shares outstanding 145,141 153,551 154,690 155,357 151,699 ========== ========== ========== ========== =========== Diluted earnings per common share: Income (loss) before extraordinary charge(2) $ (0.47) $ 0.06 $ 0.18 $ 0.52 $ 0.34 Extraordinary charge (1.49) (0.01) (1.36) ---------- ---------- ---------- ---------- ----------- Net income (loss)(2) $ (4.96) $ 0.05 $ 0.18 $ 0.52 $ (1.02) ========== ========== ========== ========== =========== Weighted average number of shares outstanding 145,141 161,979 162,127 163,886 160,218 ========== ========== ========== ========== =========== First Second Third Fourth(3) Total ---------- ---------- ---------- ---------- ----------- Fiscal 1997 Net sales $1,593,437 $1,457,602 $1,945,543 $2,362,620 $ 7,359,202 Gross margin 472,084 433,782 575,104 703,104 2,184,074 Income from operations 55,297 65,247 79,930 141,376 341,850 Income before extraordinary charge 22,513 29,452 28,665 62,681 143,311 Extraordinary charge (91,210) (91,210) Net income (loss) 22,513 29,452 (62,545) 62,681 52,101 Basic earnings per common share: Income before extraordinary charge4 $ 0.27 $ 0.32 $ 0.24 $ 0.49 $ 1.37 Extraordinary charge (0.77) (0.87) ---------- ---------- ---------- ---------- ----------- Net income (loss)(4) $ 0.27 $ 0.32 $ (0.53) $ 0.49 $ 0.50 ========== ========== ========== ========== =========== Weighted average number of shares outstanding 84,758 93,175 118,331 128,319 104,520 ========== ========== ========== ========== =========== Diluted earnings per common share: Income before extraordinary charge4 $ 0.25 $ 0.30 $ 0.23 $ 0.46 $ 1.31 Extraordinary charge (0.74) (0.83) ---------- ---------- ---------- ---------- ----------- Net income (loss)(4) $ 0.25 $ 0.30 $ (0.51) $ 0.46 $ 0.48 ========== ========== ========== ========== =========== Weighted average number of shares outstanding 88,335 97,207 123,546 136,007 109,591 ========== ========== ========== ========== =========== 1 The LIFO adjustment in the fourth quarter of 1998 increased gross margin and income from operations by $9,151, income before extraordinary charge and net income by $5,573 and diluted earnings per common share by $.03. Additionally, the Company recorded an adjustment in the fourth quarter of 1998 reducing depreciation expense to reflect adjusted values resulting from the acquisition of Ralphs/Food 4 Less. The consolidated depreciation expense recorded was $323.0 million for 1998 and $53.0 million for the fourth quarter. 2 In 1998, the sum of the four quarters earnings per common share does not equal the annual amount due to the acquisition of Ralphs/Food 4 Less in the first quarter. 3 The LIFO adjustment in the fourth quarter of 1997 increased gross margin and income from operations by $9,417, income before extraordinary charge and net income by $5,814 and diluted earnings per common share by $.04. 4 In 1997, the sum of the four quarters earnings per common share does not equal the annual amount due to the acquisition of Smith's and the two-for-one stock split in the third quarter.
45 Management's Report on Responsibility for Financial Statements The management of Fred Meyer, Inc. has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements. The Company's financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Management has established and maintains an internal control structure that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The internal control structure provides for the appropriate division of responsibility, which is monitored for compliance. The Company maintains an internal auditing program that assesses the effectiveness of the internal control structure and recommends improvements. Deloitte & Touche LLP also considered the internal control structure in connection with its audit. Management has considered the internal auditors' and Deloitte & Touche LLP's recommendations concerning the Company's internal control structure and has taken the appropriate actions to respond to these recommendations. The Company's principles of business conduct address, among other things, potential conflicts of interests and compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information. The Board of Directors pursues its responsibility for the quality of the Company's financial reporting primarily through its Audit Committee, which is comprised of outside directors. The Audit Committee meets approximately three times a year with management, the corporate internal audit manager, and the independent auditors to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and accounting and financial reporting. The corporate internal audit manager and independent auditors have unrestricted access to the Audit Committee. John T. Standley Senior Vice President, Chief Financial Officer 46 Independent Auditors' Report To the Shareholders and Board of Directors of Fred Meyer, Inc.: We have audited the accompanying consolidated balance sheets of Fred Meyer, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fred Meyer, Inc. and subsidiaries at January 30, 1999 and January 31, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Portland, Oregon March 10, 1999 47 Item 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure. ------------------------ Not applicable. Part III - ------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant. - ----------------------------------------------------------- Board of Directors The Board of Directors currently consists of seventeen members and is divided into three classes pursuant to the Company's Bylaws. The following table identifies the Directors.
Name and Year Principal Occupation or Year First Elected to Board Position with Company Age Elected Director - ---------------- ----------------------- --- ---------------- Class A (Term Ending 2001) ---------------- Vivian A. Bull President, Linfield College 64 1996 Carlton J. Jenkins Chairman, President and Chief Executive 43 1998 Officer of Founders National Bank of Los Angeles John G. King Former President and Chief Executive 60 1997 Officer of Legacy Health System Steven R. Rogel President and Chief Executive Officer of 56 1996 Weyerhaeuser Company Stuart M. Sloan Former Chairman of the Board of QFC; 55 1998 Principal of Sloan Capital Companies Class B (Term Ending 1999) ---------------- James J. Curran Retired Chairman of the Board and Chief 58 1996 Executive Officer of First Interstate Bank, Northwest Region George G. Golleher President and Chief Operating Officer of 49 1998 the Company Bruce Karatz Chairman of the Board, President and 52 1997 Chief Executive Officer of Kaufman & Broad Home Corporation Jeffrey P. Smith Former Chairman of the Board of Smith's 48 1997 Samuel Zell Chairman of Equity Group Investments, 56 1998 Inc. Bertram R. Zweig Administrative Partner, Jones, Day, 63 1998 Reavis & Pogue 48 Name and Year Principal Occupation or Year First Elected to Board Position with Company Age Elected Director - ---------------- ----------------------- --- ---------------- Class C (Term Ending 2000) ---------------- Robert D. Beyer Group Managing Director, Trust Company 38 1998 of the West Ronald W. Burkle Chairman of the Board of the Company; 45 Managing General Partner of The Yucaipa Companies A. M. Gleason Retired Chief Executive Officer of 68 1992 PacifiCorp Roger S. Meier President, AMCO, Inc. 72 1985 Robert G. Miller Vice Chairman and Chief Executive 54 1991 Officer of the Company Marc H. Rapaport Chairman and Lead Investor of LA Soccer 41 1998 Partners L.P.
The business experience of the Directors of the Company is set forth below. Robert D. Beyer has been the Group Managing Director at Trust Company of the West, an investment management firm, since 1995. From 1991 to 1995, Mr. Beyer was the co-Chief Executive Officer of Crescent Capital Corporation, an investment management firm that he co-founded in 1991. Mr. Beyer is also a member of the Board of Directors of American Restaurant Group, Inc., TCW Asset Management Company and a member of the board of trustees of Harvard Westlake School. Vivian A. Bull has been President of Linfield College since August 1992. Prior to that time she was in the Department of Economics at Drew University from 1960 to 1992. Dr. Bull is a director of the Oregon Independent College Foundation and a member of the Executive Committee of the Oregon Independent College Association. Dr. Bull is a former Director of Chemical Bank in New Jersey and Horizon Bank. Ronald W. Burkle has been Chairman of the Board of the Company since September 1997. He is the Managing General Partner of The Yucaipa Companies, a private investment group specializing in the acquisition and management of supermarket chains, which he founded in 1986. Until its merger with the Company in March 1998, Mr. Burkle served as director and Chairman of the Board of Ralphs/Food 4 Less. From May 1996 to September 1997, Mr. Burkle was a director and the Chief Executive Officer of Smith's. Mr. Burkle also serves as Chairman of the Boards of Dominick's Supermarkets, Inc., D.A.R.E. America (Drug Abuse Resistance Eductation) and Trustee of the National Urban League, Founder and Chairman of the Board of Trustees of Ralphs/Food 4 Less Foundation and the Chairman of the Dominicks/Omni Foundation. and as a director of Kaufman & Broad Home Corporation. James J. Curran retired from First Interstate Bancorp in April 1996. At the time of his retirement he was a member of the Executive Operating Committee of First Interstate Bancorp and Chairman and Chief Executive Officer of First Interstate Bank, Northwest Region. Mr. Curran is a director of Coeur d'Alene Mines Corp. A. M. Gleason retired from PacifiCorp, a diversified public utility, in May 1995. At the time of his retirement he was Vice Chairman of PacifiCorp, having previously served as its President and Chief Executive Officer. Prior to that time he served as Chairman and Chief Executive Officer of Pacific Telecom, Inc., a former PacifiCorp subsidiary. Mr. Gleason is a director of Tektronix, Inc., Comdial Corporation, Oregon Coast Aquarium, Nature Conservancy and President of the Port of Portland. George G. Golleher has been President and Chief Operating Officer of the Company since July 1998. He was President and Chief Executive Officer of Ralphs/Food 4 Less from January 1996 to July 1998 and was Vice Chairman from June 1995 to January 1996. He was a Director of Food 4 Less Supermarkets from its inception in 1989 and was the President and Chief Operating Officer of Food 4 Less Supermarkets from January 1990 until June 1995. From 1986 through 1989, Mr. Golleher served as Senior Vice President - Finance and Administration of The Boys Markets, Inc. 49 Carlton J. Jenkins has served as Chairman, President and Chief Executive Officer of Founders National Bank of Los Angeles since January 1991. Mr. Jenkins is also a Trustee of the Children Bureau of Los Angeles Foundation, board member of the Los Angeles Urban League, The Great Los Angeles Zoo Association, Govenors of Town Hall, Los Angeles, Los Angeles Area Chamber of Commerce, Los Angeles Educational Partnership, and a member of the Board of Regents of Children's Hospital of Los Angeles and Junior Achievement of Los Angeles. Bruce Karatz has been the Chairman of the Board of Kaufman & Broad Home Corporation since July 1993 and its President, Chief Executive Officer and a director since 1986. Mr. Karatz is also a director of Honeywell, Inc. and National Golf Properties, Inc. and a Trustee of the RAND Corporation. John G. King was President and Chief Executive Officer of Legacy Health System, a health care provider, from 1991 unitl 1999 and has over 30 years experience in hospital and health care administration. Mr. King is also a director of Regence Blue Cross, Blue Shield of Oregon, Health East in Minnesota and Advisory Boards of Boston Scientific Governance 100. Roger S. Meier has been President and Chief Executive Officer of AMCO, Inc., a privately owned investment enterprise, for more than twenty years. During that time Mr. Meier was Chairman of the State of Oregon Investment Council, a member of the Board of Directors of Red Lion Inns, Ltd. and a Director of Key Bank of Oregon. He is trustee of Acorn Fund, Acorn International and Acorn USA. He is also an Advisory Board Member of Key Bank of Oregon and Chairman of the Investment Committee for Legacy Health System. Robert G. Miller became Vice Chairman of the Company in June 1998. He served as President in since April 1997 and has been Chief Executive Officer of the Company since 1991. He was Chairman of the Board from August 1991 to July 1997. Prior to that time he was employed by Albertson's, where his most recent positions were Executive Vice President of Retail Operations from 1989 to 1991 and Senior Vice President and Regional Manager from 1985 to 1989. Mr. Miller is a director of PacifiCorp, Pathmark Stores, Inc. and Supermarkets General Holdings Corp. Marc H. Rapaport has been the Chairman and Lead Investor of LA Soccer Partners L.P., since 1994. Mr. Rapaport is the founder of the Los Angeles Galaxy of Major League Soccer. From 1990 to 1994, Mr. Rapapor served as Executive Vice President and Director of Corporate Finance of the Capital Division of Jefferies & Company, Inc. (which he co-founded in 1990). Mr. Rapaport is a member of the Board of Governors of Cedars-Sinai Hospital. Steven R. Rogel has been President and Chief Executive Officer and a director of Weyerhaeuser since December 1997. Prior to that time he was Chief Executive Officer, President and a director of Willamette Industries, Inc. He served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, prior to that time, as an executive and group vice president for more than five years. He serves on various boards, including the American Forest & Paper Association, World Forestry Center, and the Cascade Pacific Council Boy Scouts of America. Stuart M. Sloan has been the owner of Sloan Capital Companies, a private investment company, since 1984. He served as the Chairman of the Board of QFC from October 1986 until QFC merged with the Company in March 1998. Mr. Sloan currently serves on the Board of Directors of Anixter International, Inc. and a member of the Advisory Board of SeaFirst Bank and a trustee of the Swedish Medical Center in Seattle. Jeffrey P. Smith was Chairman of the Board of Smith's from 1988 until Smith's became a subsidiary of the Company in September 1997. He served as Chief Executive Officer of Smith's from 1988 until May 1996 and as Chief Operating Officer and President of Smith's from 1984 to 1988. Samuel Zell has been Chairman of the Board of Directors of Equity Group Investments, Inc., a private investment company, since 1986. Mr. Zell is an indirect general partner of Zell/Chilmark Fund, LP, a private investment firm, which was the beneficial owner of approximately 17% of QFC's common stock prior to its merger with the Company in March 1998. Mr. Zell is Chairman of the Board of Directors of American Classic Voyages Co., Anixter International, Inc., Jacor Communications, Inc. and Manufactured Home Communities, Inc. He is Chairman of the Board of Trustees of Capital Trust, Equity Office Properties Trust and Equity Residential Properties Trust. He is also a director of Ramco Energy PLC, TeleTech Holdings, Inc. and Chart House Enterprises, Inc. Bertram R. Zweig has been a partner in the Los Angeles office of Jones, Day, Reavis & Pogue since 1995, and prior to that, from 1962 to 1978. Between August 1992 and June 1995, Mr. Zweig was a partner with the law firm of Graham and James, and from January 1988 to July 1992 he was a partner with the law firm of Stroock & Stroock 50 & Lavan. He is a member of the Board of Directors of E* Capital Corporation, the parent of Wedbush Morgan Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig is also a member of the Board of Directors of Aquatic Water Systems Incorporated, Nature Coast Industries, Inc.and The Dashew International Student Center of UCLA. Executive Officers The executive officers of the Company are as set forth below.
Original Date of Name Position Age Employment - ----------------------------------------------------------------------------------------------------------------- Robert G. Miller Vice Chairman and Chief Executive Officer 54 1991 George G. Golleher President and Chief Operating Officer 49 1998 Mary F. Sammons President and Chief Executive Officer of Fred Meyer Stores 50 1973 Abel T. Porter President and Chief Executive Officer of Smith's 39 1997 Micheal E. Huse President of QFC 43 1998 Sammy K. Duncan President of Ralphs 47 1992 Harold McIntire President of Food 4 Less 53 1998 Kenneth Thrasher Executive Vice President and Chief Administrative Officer 47 1982 Kenneth A. Martindale Executive Vice President, Purchasing 38 1997 George A. Schnug Executive Vice President, Distribution and Manufacturing 53 1998 David R. Jessick Executive Vice President. Finance and Investor Relations 44 1997 Roger A. Cooke Executive Vice President, Regulatory and Legal Affairs and Secretary 50 1992 John T. Standley Senior Vice President and Chief Financial Officer 36 1998
The business experience of the executive officers of the Company is set forth below. There are no family relationships among the executive officers or directors of the Company. Information relating to Messrs. Miller and Golleher, directors of the Company, is set forth above. Mary F. Sammons became President and Chief Executive Officer of Fred Meyer Stores in January 1998. Prior to that time she was Executive Vice President - Nonfood Group of Fred Meyer. Ms. Sammons joined the Company in 1973 and became a buyer in 1975. She was promoted to Vice President and Merchandiser in 1980, Senior Vice President of the Softgoods Division in 1989 and Senior Vice President of Apparel and Home Electronics in 1995. Abel T. Porter has been President and Chief Executive Officer of Smith's since January 1998. Prior to that time, he was Senior Vice President and Regional Manager for Smith's, a position which he also held from 1990 to 1993. In the years prior to this appointment, Mr. Porter worked in both the Intermountain and Southwest regions in several positions. Michael E. Huse was appointed President of QFC in September 1998. Prior to that time, he was Senior Vice President and Chief Operating Officer of QFC from June 1997 to September 1998, Vice President Store Operations from October 1993 to June 1997and District Manager from September 1986 to October 1993. Sammy K. Duncan has been President of Ralphs since April 1998. Prior to that time he was Executive Vice President of the Food Group for Fred Meyer Stores, Inc. Harold McIntire became President of Food 4 Less in July 1996. From December 1991 until July 1996 to that he held the position of Senior Vice President/General Manager. Kenneth Thrasher became Executive Vice President and Chief Administrative Officer in January 1997. Prior to that time, he was Senior Vice President, Finance and Chief Financial Officer from March 1989 until January 1997, Vice President, Finance, Chief Financial Officer and Secretary from 1987 until 1989 and Vice President, Corporate Treasurer from 1982 until 1987. Kenneth A. Martindale has been Executive Vice President of Purchasing and Procurement since January 1998. Prior to that time, Mr. Martindale was Senior Vice President of Sales and Procurement of Smith's. He served as Vice President of Merchandising in Smith's California region from 1991 to 1995. From 1984 to 1991, he served as a district manager for Smith's Intermountain region. 51 George A. Schnug has been Executive Vice President, Distribution and Manufacturing since March 1998. Prior to that time, Mr. Schnug was Group Senior Vice President, Support Operations of Ralphs since January 1996. He served as Senior Vice President, Manufacturing and Construction from June 1995 to January 1996. From 1992 to June 1995, he served as Senior Vice President, Corporate Operations of Food 4 Less. David R. Jessick has been Executive Vice President, Finance and Investor Relations since June 1998. He served as Senior Vice President, Finance and Chief Financial Officer from January 1997 to June 1998. Prior to that time, he was employed by Thrifty PayLess Holdings Inc., where his most recent positions were Executive Vice President and Chief Financial Officer from 1994 to 1996 and Senior Vice President, Finance and Chief Financial Officer from 1990 until 1994. Roger A. Cooke became Executive Vice President, Regulatory and Legal Affairs in September 1998. Prior to that he served as Senior Vice President, General Counsel and Secretary. Prior to that time he was Vice President, General Counsel and Secretary of the Company from August 1992 until April 1993. From 1982 to 1992, he was an officer of Pan American World Airways, Inc., serving as Senior Vice President and General Counsel from 1990 to 1992. From 1973 to 1980, he was associated with the law firm Simpson Thacher and Bartlett. John T. Standley became Senior Vice President and Chief Financial Officer in July 1998. From January 1997 until July 1998 he was Senior Vice President and Chief Financial Officer of Food 4 Less. Compliance with Section 16(a) Beneficial Ownership Reporting Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required, the Company believes that during the fiscal year ended January 30, 1999 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with except that one statement of changes in beneficial ownership was inadvertently filed late on behalf of Mr. Jeffrey P. Smith involving one reportable transaction. 52 Item 11. Executive Compensation. Summary Compensation Table The following table sets forth compensation paid to the Chief Executive Officer of the Company and the other four most highly compensated executive officers of the Company for services in all capacities to the Company and its subsidiaries during each of the last three fiscal years.
Annual Compensation Long Term Compensation ------------------------------- ----------------------------------- Awards Payouts ----------------------- --------- Securities Other Underlying Long-Term Annual Restricted Options Incentive All Other Name and Compen- Stock (# of Plan Compen- Principal Position Year Salary(1) Bonus(1) sation Awards Shares) Payouts sation(6) - ------------------ ---- ---------- -------- ------- ---------- ---------- ---------- --------- Robert G. Miller 1998 $1,000,000 $660,000 -- -- -- -- $ 118,257 Chief Executive 1997 731,923 274,377 -- $382,742(2) 500,000 -- 79,787 Officer 1996 581,923 196,329 -- 49,046(3) 150,000 -- 59,593 George G. Golleher(4) 1998 893,939 660,000 -- -- 250,000 -- 1,600 President and Chief 1997 -- -- -- -- -- -- -- Operating Officer 1996 -- -- -- -- -- -- -- Mary F. Sammons 1998 400,000 230,800 -- -- -- -- 65,035 President, Fred 1997 301,154 103,021 -- 156,940(2) 150,000 -- 53,304 Meyer Stores 1996 287,308 56,422 -- 14,066(3) -- -- 41,398 Kenneth A. Martindale(5) 1998 399,995 220,000 -- -- -- -- 24,205 Executive Vice 1997 88,366 126,330 -- -- -- -- 37,139 President, Purchasing 1996 -- -- -- -- -- -- -- Abel T. Porter(5) 1998 399,995 194,433 -- -- -- -- 24,331 President, Smith's 1997 88,366 94,312 -- -- -- -- 36,943 1996 -- -- -- -- -- -- -- - -------------- (1) Includes compensation deferred at the election of the executive under the Company's Profit Sharing Plan and under the Company's Excess Deferral Plan. Under the Company's Profit Sharing Plan, officers and other employees of the Company may elect to defer up to the lesser of $9,500 or 15% of their compensation, subject to limitations under the Internal Revenue Code. Under the Excess Deferral Plan, officers and other employees of the Company may elect to defer up to 50% of base salary and up to 100% of any bonus award. Amounts under these plans are generally paid to employees upon retirement. (2) Represents restricted stock grants made to Mr. Miller and Ms. Sammons in the amounts of 8,187 and 3,357 shares, respectively. The amount included in the table represents the market value of the shares at March 17, 1998, the date of the award. Vesting occurs over three years. The total number of shares of restricted stock held on January 30, 1999 and the market value of such shares on that date were as follows: Mr. Miller - 9,771 shares ($610,688) and Ms. Sammons -3,811 shares ($238,188). (3) Represents restricted stock grants made to Mr. Miller and Ms. Sammons in the amounts of 2,378 and 682 shares, respectively. The amount included in the table represents the market value of the shares at March 31, 1997. 53 (4) The amounts included in the table represent compensation paid to Mr. Golleher since March 10, 1998, the date of acquisition of Ralphs/Food 4 Less by the Company. (5) The amounts included in the table represent compensation paid to Messrs. Martindale and Porter since September 9, 1997, the date of acquisition of Smith's by the Company. (6) Amounts shown for 1998 consist of: (i) Company contributions of $77,187 and $26,806 to Mr. Miller and Ms. Sammons, respectively, under the Profit Sharing Plan and Excess Deferral Plan, (ii) $6,070, $0, $3,229, $2,205, and $2,331 paid by the Company for the above-named executive officers, respectively, as premiums under its Long-Term Disability Plan; and (iii) $35,000, $0, $35,000, $22,000, and $22,000 paid by the Company for the above-named executive officers, respectively, for life insurance under the Supplemental Income Plan.
Stock Option Grants in Last Fiscal Year The following table provides information as to options to purchase Common Stock granted to the Chief Executive Officer and the other four most highly compensated executive officers during 1998 pursuant to the Company's 1990 Stock Incentive Plan and 1997 Stock Incentive Plan. No SARs were granted during 1998.
Potential Realizable Value at Number of Percentage Assumed Annual Rates of Securities Total Options of Exercise Stock Price Appreciation Underlying Granted to Price For Option Term(3) Options Employees in Per Expiration --------------------------------------- Name Granted(4) Fiscal Year Share(4) Date 0% 5% 10% ---- ---------- ------------- ----------- ---------- ----------- ----------- ----------- George G. Golleher 100,000 (1) 5.6% $ 35.937 3/08 $ 1,006,300 $ 3,899,200 $ 8,337,500 150,000 (2) 8.4% 43.062 6/08 4,062,150 10,294,500 (1) Options were approved for grants to employees of Fred Meyer, Smith's, QFC and Ralphs/Food 4 Less on January 20, 1998, with an exercise price of $35.937 per share, which was from the market price on that date. However the options approved for employees of QFC and Ralphs/Food 4 Less became effective in March 1998 on completion of the merger. The options, which have terms of ten years, become exercisable 20% per year on the first five anniversaries of the original grant date. If the employment of the optionee is terminated within one year after a change in control of the Company, the options become exercisable in full. (2) Options were granted for the numbers of shares indicated at an exercise price equal to the fair market value of the Common Stock on the date of grant. The options, which have terms of ten years, become exercisable 20% per year on the first five anniversaries of the original grant date. If the employment of the optionee is terminated within one year after a change in control of the Company, the options become exercisable in full. (3) The dollar amounts under these columns are the result of calculations of the 0%, 5% and 10% rates required by the Securities and Exchange Commission for the maximum option term of 10 years and therefore are not intended to and may not accurately forecast possible future appreciation, if any, of the Company's Common Stock price.
54 Stock Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table indicates (i) stock options exercised by certain executive officers during 1998, including the value realized on the date of exercise, (ii) the number of shares subject to exercisable (vested) and unexercisable (unvested) stock options as of January 30, 1999, and (iii) the value of "in-the-money" options, which represents the positive spread between the exercise price of existing stock options and the year-end price of the Common Stock.
Number of Value of Securities Underlying Unexercised In-the-Money Unexercised Options Held Options Held at January 30, 1999 at January 30,1999(2) Shares Acquired Value --------------------------- --------------------------- Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable ---- --------------- ----------- ----------- ------------- ----------- ------------- Robert G. Miller 35,696 $ 1,274,668 786,722 400,000 $49,170,125 $25,000,000 George G. Golleher -- -- -- 250,000 -- 5,572,000 Mary F. Sammons 37,690 1,365,170 -- 135,380 -- 5,449,744 Kenneth A. Martindale 52,500 2,420,621 20,000 80,000 625,004 2,500,016 Abel T. Porter 52,500 2,673,258 20,000 80,000 592,500 2,370,000 (1) Aggregate market value on the exercise date of the shares covered by the option, less the aggregate exercise price. (2) Calculated based on the January 29, 1999 stock price of $62.50.
Retirement Benefits The Company has a nonqualified Supplemental Income Plan to provide supplemental retirement and death benefits to key employees. The plan is administered by the Compensation Committee. Any key executive of the Company who holds a position of Senior Vice President or higher is eligible to participate in this plan. The Committee selects participants from those eligible employees recommended by the Company's Chief Executive Officer. A participant is entitled to receive full benefits under the Supplemental Income Plan upon normal retirement by termination of employment after age 62. A participant is also entitled to receive reduced benefits if the participant voluntarily terminates his or her employment, is terminated without cause or dies before age 62. The normal retirement benefit under the Supplemental Income Plan is a projected annual amount, to be paid in equal monthly installments for 15 years, based upon the estimated cash surrender value, less the premiums paid and other expenses of the Company, of a Company-owned life insurance policy purchased on the life of the executive. The actual benefit will vary from the projected benefit based on actual dividend experience. The Company guarantees each participant a minimum benefit equal to at least 60 percent of the projected benefit. Based on certain assumptions, the projected annual benefits payable to Mr. Miller, Ms. Sammons, Mr. Martindale and Mr. Porter upon retirement at normal retirement age would be $60,427, $100,551, $251,688 and $238,055, respectively. Mr. Martindale and Mr. Porter will also receive benefits under a retirement plan sponsored by Smith's (the "Smith's Plan") which is funded entirely by the Company's contributions. An employee's monthly benefit under the Smith's Plan is determined by multiplying a fixed dollar amount by the number of years of the employee's employment. The fixed dollar amount, which has varied from year to year, is currently $30 per month and is not subject to reduction for social security benefits. The estimated annual amounts payable following retirement to Messers, Martindale and Porter under the Smith's Plan are $14,328 and $13,884, respectively. Mr. Golleher is entitled to retirement benefits under the Ralphs Grocery Company Retirement Plan, the Ralphs Grocery Company Supplemental Executive Retirement Plan and the Ralphs Grocery Company Retirement Supplement Plan (collectively, the "Ralphs Plans"). Benefits payable under the Ralphs Plans are based on compensation which consists of salary and bonus. At normal retirement age, the amount of annual retirement benefit is determined by multiplying the average compensation for the highest three years of the ten year preceding retirement by 2% multiplied by the number of years of credited service (not to exceed 30 years of credited service). Severance Agreements The Company has agreed to pay certain benefits to Mr. Miller in connection with his employment, including certain death, disability, retiree medical, retirement and severance benefits. Under Mr. Miller's employment agreement, originally dated August 27, 1991, and last amended on October 13, 1998, the Company pays Mr. Miller an annual base salary of $1 million and a target annual bonus equal to 60% of his base salary. Assuming Mr. Miller retires at age 62, he 55 will be entitled to receive an additional monthly retirement benefit of $25,000 for the remainder of his life. In the event of Mr. Miller's termination for any reason other than cause, death, permanent disability or in connection with a "change of control", Mr. Miller is entitled to payment of two years of compensation at his then current annual salary. The Company also agreed to pay Mr. Miller severance compensation and benefits upon a "qualifying termination" in connection with a "change in control." A "change of control," generally, is when the majority of the Company's stockholders or board changes. The approval of the Kroger Merger by the Company's stockholders will constitute a change in control under the agreement. A qualifying termination includes any: - resignation by Mr. Miller for any reason within 18 months after the completion of the change of control, - resignation initiated by Mr. Miller due to "constructive discharge" outside the 18-month period referred to above if the resignation is in anticipation of or within three years after the change of control, and - termination of Mr. Miller's employment by the Company for any reason, other than for cause, in anticipation of or within three years after the change of control. Constructive discharge is defined as a material reduction, other than for cause, in Mr. Miller's compensation, benefits or responsibilities as Chief Executive Officer of the Company and a member of the Company's board of directors. Constructive discharge also includes an irreconcilable disagreement with the Company's board of directors over policy matters materially impairing his ability to carry out his responsibilities as Chief Executive Officer of the Company. Severance compensation due under the agreement upon a qualifying termination consists of: - accrued and unpaid compensation through the date of termination, - a pro rata bonus for the year of termination, - a lump sum payment equivalent to three times his highest base salary and applicable bonus rate, discounted to present value over a three-year period, - a payment equal to the actuarially determined present value of his projected accruals from three years of ongoing participation in Company-sponsored qualified and non-qualified retirement plans, - continuation of health and welfare benefit coverage for 36 months, and - an additional payment to make him whole for any excise tax Mr. Miller must pay under the IRS rules relating to compensation Mr. Miller receives after a change of control. Under Mr. Miller's agreement, Fred Meyer will pay him severance compensation only if he meets the following conditions: - he may not make unauthorized disclosure of confidential information relating to the Company or its affiliates for a period of three years after termination, and - he may not compete with the Company or its affiliates during that three-year period. The Company has entered into employment protection and severance agreements (the "Severance Agreements") with Messrs. Golleher, Martindale, Porter and Ms. Sammons (the "Named Officers"). Under these agreements, the Company must pay severance compensation if the Company terminates an executive's employment without cause or if the executive terminates employment for good reason in anticipation of a change of control or during the 18 month period following a change of control. Under the agreement with George G. Golleher, the Company must also pay severance if Mr. Golleher terminates his employment for any reason within 18 months following a change of control. Severance compensation consists of: - accrued and unpaid compensation through the date of termination, - a pro rata bonus for the year of termination, - continued payment for two or three years following the date of termination of the executive's annual base salary plus the target percentage of this base salary that was payable under the terms of the Company's annual bonus plan for its senior executives for the year in which the merger is completed, - continued health and welfare benefits for two or three years, 56 - for some Named Officers, accelerated vesting of outstanding stock options held by the executive under Fred Meyer's stock option and stock incentive plans, and - an additional payment to compensate the executives for any excise tax the executive must pay under the Internal Revenue Service rules relating to change of control. Executives will also continue to accrue annual retirement allocations and other benefits under the Company's Supplemental Income Plan or other supplemental retirement plans applicable to them for the two or three years following the date of termination. Cash compensation under these agreements will be reduced on a dollar for dollar basis by the amount of comparable cash compensation paid to the executives under any other severance agreement applicable to the executive. Other benefits provided by the employment protection agreements will be similarly reduced. Compensation of Directors Directors who are not employees of the Company receive an annual fee of $40,000 and can elect to participate in the Non-Employee Directors' Deferred Compensation Plan. Such directors also receive a fee of $1,000 per board or committee meeting attended. Under the Non-Employee Directors' Deferred Compensation Plan (the Directors' Plan"), directors who are not employees may elect to have all or part of their annual cash retainers and meeting fees credited to a deferred compensation account. Participants may elect to receive their deferred compensation in the form of cash or shares of the Company's Common Stock. If a participant elects to receive all or part of his or her deferred compensation in the form of the Company's Common Stock, the amount of compensation credited quarterly to his or her account shall be the number of shares of the Company's Common Stock which can be purchased with 110% of the compensation so deferred at the median of the high and low trading prices of the Company's Common Stock as quoted on the New York Stock Exchange Composite Transactions on such date. Each participant's deferral account is increased quarterly prior to distribution (i) to reflect interest on the amount obtained by the cash deferral account balance at an average prime rate, and (ii) to reflect any dividends paid on Common Stock in the participant's deferral account. With respect to deferred amounts, a participant may specify (i) the date of the event on which payment of such deferred compensation is to commence (which, other than death, disability or termination may not be earlier than the later of two years from the date of the deferral election or termination of service as a director) and (ii) whether such payment is to be paid out in a single lump sum or in approximately equal annual installments over a period not to exceed 15 years. The Company will annually issue stock to the Fred Meyer Deferred Compensation Trust to cover all outstanding stock credits under the Directors' Plan. Compensation Committee Interlocks and Insider Participation Messrs. Burkle, Gleason, Rogel, and Smith served on the Company's Compensation Committee until June 1998. Messrs. Karatz, Meier, Rapaport, Rogel, Sloan and Smith have served on the Company's Compensation Committee since June 1998. See Item 13 for information relating to a Management Services Agreement between The Yucaipa Companies, an affiliate of Mr. Burkle, and the Company. 57 Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The following table shows ownership of shares of Common Stock of the Company on March 3, 1999, except as noted, with respect to (i) each director of the Company who beneficially owns shares; (ii) each executive officer of the Company named in the Summary Compensation Table who beneficially owns shares; (iii) all directors and executive officers of the Company as a group; and (iv) each beneficial owner who, to the knowledge of the Board of Directors, beneficially owned more than 5% of the Common Stock.
Number of Approximate Name Shares (1) Percent (2) ---- ------------- ------------ FMR Corp. 19,084,664 (3) 12.2% 82 Devonshire Street Boston, Massachusetts 97202 Ronald W. Burkle 14,463,978 (4) 9.0% 1000 Santa Monica Boulevard, Fifth Floor Los Angeles, California 90067 Massachusetts Financial Services Company 12,581,646 (5) 8.1% 500 Boylston Street Boston, Massachuestts 02116 Stuart M. Sloan 1,722,879 (6) * Robert G. Miller 860,891 (7) * Samuel Zell 351,656 (8) * George G. Golleher 283,876 (9) * Jeffrey P. Smith 185,484 * Mary F. Sammons 130,711 (10) * Abel T. Porter 75,715 (11) * Kenneth A. Martindale 65,887 (12) * Robert D. Beyer 57,825 (13) * A. M. Gleason 55,213 (14) * Roger S. Meier 46,173 (15) * Marc H. Rapaport 20,815 (16) * James J. Curran 9,426 (17) * Steven R. Rogel 7,073 (18) * Vivian A. Bull 4,394 * John G. King 4,104 (19) * Bruce Karatz 2,912 (20) * Bertram R. Zweig 2,659 (21) * Carlton J. Jenkins 242 (20) * All directors and executive officers as a group (28 individuals) 18,593,644 (22) 11.5% -------------- * Less than 1% (1) Shares held directly with sole voting and sole investment power unless otherwise indicated. (2) Percentages based on 156,036,181 shares outstanding, which was the total number of shares outstanding as of March 3, 1999. (3) This information is based on a Scheudle 13G filed with the Securities and Exchange Commission reporting that, as of December 31, 1998, FMR Corp. and its subsidiaries had sole voting power as to 914,590 of such shares and sole dispositive power with respect to all of such shares. 58 (4) Includes 13,636,658 shares owned by affiliates of Mr. Burkle as follows: (a) The Yucaipa Companies -- 4,377,743 (including a warrant to purchase 3,869,366 shares); (b) Yucaipa Arizona Partners, L.P. - 355,877; (c) Yucaipa Smitty's Partners, L.P. - 391,109; (d) Yucaipa Smitty's Partners II, L.P. - 177,940; (e) Yucaipa SSV Partners, L.P. - 1,699,887; (f) F4L Equity Partners, L.P. - 2,352,925; (g) FFL Partners - 266,358; (h) Ronald W. Burkle Foundation - 66,390; (i) Yucaipa Capital Fund - 335,711; (j) Yucaipa/F4L Partners - 79,718, (k) GNHT 1, LLC - 1,071,900, (l) GNHT 2, LLC - 714,600, (m) GNHT 3, LLC - 714,000, (n) GNHT 4, LLC - 714,600, and (o) GNHT 5, LLC - 357,300. Mr. Burkle disclaims beneficial ownership as to these shares (except to the extent of his pecuniary interest therein). Mr. Burkle has the sole power to vote or to direct the vote, and to dispose or direct the disposition of shares beneficially held by him. The Yucaipa Companies is the record holder of a currently exercisable warrant entitling it to purchase up to 3,869,366 shares of Common Stock. See "Certain Relationships and Related Transactions." (5) This information is based on a Scheudle 13G filed with the Securities and Exchange Commission reporting that, as of December 31, 1998, Massachusetts Financial Services Company had sole voting power as to 12,468,576 of such shares and sole dispositive power with respect to all of such shares. (6) Includes 586,910 shares which are subject to immediately exercisable options and 968 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (7) Includes 786,722 shares subject to options that are currently exercisable for become exercisable within 60 days of the date of this table. (8) Includes 968 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan and 333,651 shares held by Samstock/SIT, L.L.C., a Delaware limited liability company, which is wholly owned by Robert M. Levin as trustee of Sam Investment Trust. Mr. Zell is a primary beneficiary of the Trust and may be deemed to be beneficiary of the Trust amd my be deemed to be beneficial owner of the shares. (9) Includes 20,000 shares subject to options that are currently exercisable for become exercisable within 60 days of the date of this table and 185,299 shares held by Yucaipa Smitty's Partners II, L.P. of which Mr. Golleher is a limited partner. Beneficial ownership is disclaimed as to such shares. (10) Includes 616 shares held by Ms. Sammons' spouse. Beneficial ownership as to such shares is disclaimed. (11) Includes 20,000 shares subject to immediately exercisable options. (12) Includes 8,904 shares by his sons of which Mr. Martindale is custodian. Also includes 20,000 shares subject to immediately exercisable options. (13) Includes 947 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan and 56,878 shares held by Yucaipa Arizona Partners, L.P. Mr. Beyer is a general partner of a partnership which is a limited partner of Yucaipa Arizona Partners, L.P. Beneficial ownership is disclaimed as to such shares. (14) Includes 2,600 shares owned by Mr. Gleason's spouse as to which beneficial ownership is disclaimed and 1,855 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (15) Includes 1,615 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan, 14,000 shares owned by Mr. Meier's spouse, and 5,000 shares owned by a family partnership of which Mr. Meier is general partner. Beneficial ownership is disclaimed as to such shares. (16) Includes 816 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (17) Includes 1,630 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan and 7,796 shares held in a family trust as to which beneficial ownership is disclaimed. (18) Includes 1,679 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (19) Includes 1,604 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (20) Shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (21) Includes 2,135 shares held in the Fred Meyer, Inc. Non-Employee Directors' Deferred Compensation Plan. (22) Includes 5,574,886 shares subject to options that are currently exercisable or become exercisable within 60 days of the date of this table. Includes 14,079,277 shares for which beneficial ownership is disclaimed.
59 Item 13. Certain Relationships and Related Transactions. - -------------------------------------------------------- In September 1997, Fred Meyer acquired Smith's (the "Smith's Merger"). Ronald W. Burkle, Jeffrey P. Smith and Bruce Karatz were elected to the Fred Meyer Board of Directors pursuant to the terms of the Smith's Merger Agreement. Mr. Burkle is the founder, managing partner and a principal owner of The Yucaipa Companies ("Yucaipa"). At the closing of the Smith's Merger, the Company and Yucaipa entered into a Management Services Agreement. Under the terms of the Management Services Agreement, Yucaipa provides management consultation and advice to the Company for a term of five years. The Company pays Yucaipa an annual management fee of $500,000 and has agreed to reimburse Yucaipa for its reasonable out-of-pocket costs and expenses incurred in connection with the performance of its obligations under the Management Services Agreement. If during the term of the Management Services Agreement, the Board of Directors of the Company requests Yucaipa to provide (i) consulting services in connection with any proposed acquisition or divestiture transaction or any debt or equity financing or (ii) any other services not otherwise covered by the Management Services Agreement, Yucaipa will be entitled to such additional compensation for such services as may be agreed upon by Yucaipa and the Company (and approved by a majority of the Company's disinterested directors). In connection with Yucaipa's services, Mr. Burkle serves as the Chairman of the Board of Directors of the Company and has the right to do so during his initial three year term as a director of the Company. Mr. Burkle does not receive any compensation for serving in such capacity beyond the compensation paid to Yucaipa under the Management Services Agreement. During fiscal 1998, the Company paid Yucaipa $500,000 in fees under the Management Services Agreement and approximately $20 million for services rendered in conjunction with the Ralphs/Food 4 Less and QFC mergers and termination fees of Ralphs/Food 4 Less management agreement. It is expected that the Management Services Agreement will be terminated in connection with the Kroger Merger, and Yucaipa will receive a termination fee of approximately $3.4 million, calculated pursuant to the terms of the Management Services Agreement. In March 1998, the Company acquired Ralphs/Food 4 Less. Robert D. Beyer and Carlton J. Jenkins were elected to the Fred Meyer Board of Directors pursuant to the Food 4 Less merger agreement. In March 1998, the Company acquired QFC. Samuel Zell and Stuart M. Sloan were elected as directors of the Company pursuant to the QFC merger agreement. 60 Part IV - ------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements. The information required by this item is listed in Item 8, Part II of this Annual Report on Form 10-K. (a)(2) Financial Statement Schedules. All schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes thereto. (a)(3) Exhibits. Exhibit No. Description ------- ----------- 2A Agreement and Plan of Merger among Quality Food Centers, Inc., Q-Acquisition Corp. and Fred Meyer, Inc. dated as of November 6, 1997, as amended as of January 20, 1998. Incorporated by reference to Appendix A of the Joint Proxy and Consent Solicitation Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-44871, filed on January 26, 1998. 2B Agreement and Plan of Merger among Food 4 Less Holdings, Inc., FFL Acquisition Corp. and Fred Meyer, Inc. dated as of November 6, 1997, as amended as of January 20, 1998. Incorporated by reference to Appendix B of the Joint Proxy and Consent Solicitation Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-44871, filed on January 26, 1998. 2C Agreement and Plan of Merger by and between Smith's Food & Drug Centers, Inc. and Fred Meyer, Inc. dated as of May 11, 1997. Incorporated by reference to Appendix A of the Joint Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-32927, filed on August 6, 1997. 2D Agreement and Plan of Merger, dated as of October 18, 1998, among The Kroger Co., Jobsite Holdings, Inc. and Fred Meyer, Inc. Incorporated by reference to Appendix A of the Company's Joint Proxy Statement/ Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 2E Stock Option Agreement, dated as of October 18, 1998, between Fred Meyer, Inc. and The Kroger Co. (Fred Meyer, Inc. as Issuer) . Incorporated by reference to Appendix B of the Company's Joint Proxy Statement/Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 2F Stock Option Agreement, dated as of October 18, 1998, between The Kroger Co. and Fred Meyer, Inc. (The Kroger Co. as Issuer). Incorporated by reference to Appendix C of the Company's Joint Proxy Statement/ Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 3A Restated Certificate of Incorporation, as amended, of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A of the Company's Form 10-Q for the quarter ended May 23, 1998, SEC File No. 1-13339. 3B Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. 4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-4, Registration No. 333-32927, filed on August 6, 1997. 4B-1 Guarantee, dated as of March 11, 1998, made by the Guarantors referred to therein in favor of Bankers Trust Company, as Administrative Agent and Collateral Agent, The Chase Manhattan Bank, as Syndication Agent, The Various Financial Institutions Identified as Lenders in the Participation Agreement, as Lenders 61 and The Various Financial Institutions Identified as Investors in the Participation Agreement, as Investors. Incorporated by reference to Exhibit 4B-1 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-2 Participation Agreement among Fred Meyer, Inc., as Lessee and as Construction Agent, FMS Trust 1997-1, a Delaware business trust, as Lessor, Wilmington Trust Company, not in its individual capacity, except as expressly specified therein, but solely as Owner Trustee under the FMS Trust 1997-1, the Investors party to the Trust Agreement, Bankers Trust Company, as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Lenders Parties thereto, dated as of March 11, 1998; Chase Securities Inc. and BT Alex. Brown, as Arrangers. Incorporated by reference to Exhibit 4B-2 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-3 Lease, Security Agreement and Financing Statement between Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee under the FMS Trust 1997-1, as Lessor, and Fred Meyer, Inc., dated as of March 11, 1998. Incorporated by reference to Exhibit 4B-3 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-4 Construction Agency Agreement, dated as of March 11, 1998, between FMS Trust 1997-1, a Delaware business trust, and Fred Meyer, Inc., a Delaware corporation. Incorporated by reference to Exhibit 4B-4 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-5 Credit Agreement among FMS Trust 1997-1, as Borrower, The Several Lenders from Time to Time Parties Thereto, Bankers Trust Company, as Administrative Agent and The Chase Manhattan Bank, as Syndication Agent, dated as of March 11, 1998. Incorporated by reference to Exhibit 4B-5 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-6 Lease Guarantee, dated as of March 11, 1998, made by Fred Meyer, Inc., as Lessee Guarantor, in favor of FMS Trust 1997-1, as Lessor, Bankers Trust Company, as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, The Various Financial Institutions Identified as Lenders in the Participation Agreement, as Lenders, and The Various Financial Institutions as Investors in the Participation Agreement Therein, as Investors. Incorporated by reference to Exhibit 4B-6 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-7 Pledge Agreement, dated as of March 11, 1998, entered into by Fred Meyer, Inc., a Delaware corporation, and each of the undersigned subsidiaries of Fred Meyer, Inc. in favor of Bankers Trust Company, as administrative agent and collateral agent, for the Beneficiaries. Incorporated by reference to Exhibit 4B-7 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-8 Intercreditor and Collateral Agency Agreement, dated as of March 11, 1998, among Bankers Trust Company, as Administrative Agent under the Loan Agreement, as Administrative Agent under the Synthetic Lease Facility, and as Collateral Agent, Fred Meyer, Inc. and the Subsidiary Pledgors. Incorporated by reference to Exhibit 4B-8 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-9 Subsidiary Guarantee, dated as of March 11, 1998, executed by each of the Guarantors listed on the signature page thereof for the benefit of Bankers Trust Company, as Administrative Agent under the Loan Agreement, and each Lender named therein. Incorporated by reference to Exhibit 4B-9 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-10 $3,500,000,000 Loan Agreement, dated as of March 11, 1998, among Fred Meyer, Inc., as Borrower, and The Lenders Party Thereto; Bankers Trust Company, as Administrative Agent, and The Chase Manhattan Bank, as Syndication Agent; Chase Securities Inc. and BT Alex. Brown, as Arrangers. Incorporated by reference to Exhibit 4B-10 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-11 Amendment and Restatement, dated as of December 18, 1998, of Loan Agreement among Fred Meyer, and the other parties thereto. Incorporated by reference to Exhibit 10.10 of Amendment No. 3 to the 62 Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-12 Amendment and Restatement, dated as of December 18, 1998, of Participation Agreement among Fred Meyer and other parties thereto. Incorporated by reference to Exhibit 10.11 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-13 Amendment and Restatement, dated as of December 18, 1998, of Credit Agreement among FMS Trust 1997-1 and the other parties thereto. Incorporated by reference to Exhibit 10.12 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-14 Amendment and Restatement, dated as of December 18, 1998, of Lease, Security Agreement and Financing Statement among Wilmington Trust Company, as Lessor, and Fred Meyer, as Lessee. Incorporated by reference to Exhibit 10.13 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4C-1 Notes Indenture, dated as of March 11, 1998, among Fred Meyer, Inc., the Guarantors named therein and First National Bank of Chicago, Trustee. Incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-3, as amended, No. 333-44537, filed on January 20, 1998. 4C-2 Notes First Supplemental Indenture, dated as of March 11, 1998, among Fred Meyer, Inc., the Guarantors named therein and First National Bank of Chicago, Trustee. Incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K, dated March 4, 1998, SEC File No. 1-13339. 4D-1 Registration Rights Agreement dated September 9, 1997 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4D-1 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. l-13339. 4D-2 Amendment to Registration Rights Agreement dated September 9, 1997 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4D-2 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4E Registration Rights Agreement dated March 9, 1998 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4E of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4F Registration Rights Agreement dated March 10, 1998 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4F of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant agrees to furnish to the Commission upon request copies of agreements relating to other indebtedness. *10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D of the Company's Annual Report on Form 10-K for the year ended January 28, 1989, SEC File No. 0-15023. *10A-2 Amended Fred Meyer, Inc.1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 of the Company's Form 10-Q for the quarter ended August 12, 1995, SEC File No. 0-15023. *10A-3 Fred Meyer, Inc. 1997 Stock Incentive Plan. Incorporated by reference to Appendix I to Exhibit 99.1 of the Company's Current Report on Form 8-K dated September 9, 1997, SEC File No. 1-13339. *10A-4 Quality Food Centers, Inc. Amended and Restated 1987 Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Quality Food Centers, Inc.'s Registration Statement on Form S-8, No. 333-19913, filed on January 16, 1997. *10A-5 Quality Food Centers, Inc. 1993 Executive Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Quality Food Centers, Inc.'s Registration Statement on Form S-8, No. 33-69514, filed on September 28, 1993. *10A-6 Quality Food Centers, Inc. 1997 Stock Option Plan. Incorporated by reference to Exhibit 10.10 of Quality Food Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1997, SEC File No. 0-15590. 63 *10A-7 Smith's Food & Drug Centers, Inc. Amended and Restated 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Smith's Food & Drug Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1991, SEC File No. 1-10252. *10A-8 First Amendment to the Amended and Restated 1989 Stock Option Plan dated as of February 7, 1995. Incorporated by reference to Exhibit 20.1 of Smith's Food & Drug Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, SEC File No. 1-10252. *10B Fred Meyer, Inc. Bonus Plan Description, as amended to January 30, 1999. *10C Form of Executive Severance Agreement among Fred Meyer, Inc. and certain executive officers. Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10D Non-Employee Directors' Deferred Compensation Plan. Incorporated by reference to Appendix J to Exhibit 99.1 of the Company's Current Report on Form 8-K, dated September 9, 1997, SEC File No. 1-13339. *10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10E of the Company's Annual Report on Form 10-K for the year ended January 30, 1993, SEC File No. 0-15023. *10F Fred Meyer, Inc. Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H of the Company's Annual Report on Form 10-K for the year ended January 29, 1994, SEC File No. 0-15023. *10G-1 Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended. Incorporated by reference to Exhibit 10.11 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10G-2 Amended Employment Agreement of Robert G. Miller, dated October 18, 1998, between Robert G. Miller and Fred Meyer, Inc. Incorporated by reference to Exhibit 10.G of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. *10H Form of Employment Agreement among Smith's Food & Drug Centers, Inc. and certain executive officers. Incorporated by reference to Exhibit 10H of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. *10I Fred Meyer, Inc. Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T of the Company's Form 10-Q for the quarter ended November 4, 1995, SEC File No. 1-11274. 10J Management Services Agreement dated September 9, 1997 between Fred Meyer, Inc. and The Yucaipa Companies. Incorporated by reference to Exhibit 10L of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 10K Yucaipa Warrant Agreement. Incorporated by reference to Exhibit 10.3 of Smith's Food & Drug Centers, Inc.'s Registration Statement on Form S-3, No. 333-14953, filed on October 28, 1996. Supplemental Warrant, dated as of September 9, 1997 among Fred Meyer, Inc. (formerly Meyer-Smith Holdco, Inc.) and the Yucaipa Companies. Incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10L-1 Employment Agreement dated as of June 14, 1995 between Food 4 Less Holdings, Inc., Ralphs Grocery Company and George G. Golleher. Incorporated by reference to Exhibit 10.11 of Food 4 Less Holdings, Inc.'s Form 10-Q for the quarter ended July 16, 1995, SEC File No. 33-59212. *10L-2 Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and George Golleher. Incorporated by reference to Exhibit 10.N. of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. 65 *10M-1 Ralphs Grocery Company Retirement Supplement Plan, effective as of January 1, 1994. Incorporated by reference to Exhibit 10.15.1 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-2 Amendment to the Retirement Supplement Plan, effective as of January 1, 1995. Incorporated by reference to Exhibit 10.15.2 of Ralphs Grocery Company Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-3 Second Amendment to the Retirement Supplement Plan, effective as of June 14, 1995, by and between Ralphs Grocery Company and Ralphs Grocery Company Retirement Supplement Plan. Incorporated by reference to Exhibit 10.15.3 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-4 Amendment 1999-1 to Ralphs Grocery Company Retirement Supplement Plan effective March 31, 1999. *10N-1 Ralphs Grocery Company Supplemental Executive Retirement Plan, amended and restated as of April 9, 1994. Incorporated by reference to 10.16.1 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-2 Amendment to the Amended and Restated Supplemental Executive Retirement Plan, effective as of January 1, 1995. Incorporated by reference to Exhibit 10.16.2 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-3 Second Amendment to the Supplemental Executive Retirement Plan, dated as of June 14, 1995, by and between Ralphs Grocery Company and Ralphs Grocery Company Supplemental Executive Retirement Plan. Incorporated by reference to Exhibit 10.16.3 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-4 Third Amendment to the Ralphs Grocery Company Supplemental Executive Retirement Plan, effective as of July 1, 1995. Incorporated by reference to Exhibit 10.16.4 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10O-1 Quality Food Centers, Inc. Deferred Compensation Plan, as amended. Incorporated by reference to Exhibit 10Q of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. *10O-2 Amendment Nos. 1 and 2 to Quality Food Centers, Inc. Deferred Compensation Plan, as amended, dated December 1995 and January 1, 1999. *10P Fred Meyer, Inc. 401(k) Restoration Plan, dated April 1, 1999. *10Q Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and Certain Officers. Incorporated by reference to Exhibit 10.R of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. *10R Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and Certain Officers. Incorporated by reference to Exhibit 10.S of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. 10S Voting Agreement, dated as of October 18, 1998 between Robert G. Miller and The Kroger Co. Incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961. 10T Voting Agreement, dated as of October 18, 1998 among the Stockholders identified on Annex A thereto and The Kroger Co. Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961. 21 List of Subsidiaries. 23 Consent of Deloitte & Touche LLP 24 Powers of Attorney 65 27 Financial Data Schedule. *This Exhibit constitutes a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. None. 66 Signatures - ---------- Pursuant to the requirements of Section 13 or 15(d) 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. Date: April 14, 1999 FRED MEYER, INC. By JOHN T. STANDLEY -------------------------------------- Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 14, 1998. Signature Title --------- ----- (1) Principal Executive Officer *ROBERT G. MILLER Vice Chairman, Chief Executive ----------------------------- Officer, and a Director Robert G. Miller (2) Principal Financial and Accounting Officer JOHN T. STANDLEY Senior Vice President and Chief ----------------------------- Financial Officer John T. Standley (3) Directors *RONALD W. BURKLE Director ----------------------------- Ronald W. Burkle *ROBERT D. BEYER Director ----------------------------- Robert D. Beyer *VIVIAN A. BULL Director ----------------------------- Vivian A. Bull *JAMES J. CURRAN Director ----------------------------- James J. Curran *A.M. GLEASON Director ----------------------------- A.M. Gleason *GEORGE G. GOLLEHER Director ----------------------------- George G. Golleher *CARLTON J. JENKINS Director ----------------------------- Carlton J. Jenkins *BRUCE KARATZ Director ----------------------------- Bruce Karatz 67 *JOHN G. KING Director ----------------------------- John G. King *ROGER S. MEIER Director ----------------------------- Roger S. Meier *MARC RAPAPORT Director ----------------------------- Marc Rapaport *STEVEN R. ROGEL Director ----------------------------- Steven R. Rogel *STUART M. SLOAN Director ----------------------------- Stuart M. Sloan *JEFFREY P. SMITH Director ----------------------------- Jeffrey P. Smith *SAMUEL ZELL Director ----------------------------- Samuel Zell *BERTRAM R. ZWEIG Director ----------------------------- Bertram R. Zweig *By ROGER A. COOKE ----------------------------- Roger A. Cooke As Attorney in Fact 68 EXHIBIT INDEX Exhibit No. Description ------- ----------- 2A Agreement and Plan of Merger among Quality Food Centers, Inc., Q-Acquisition Corp. and Fred Meyer, Inc. dated as of November 6, 1997, as amended as of January 20, 1998. Incorporated by reference to Appendix A of the Joint Proxy and Consent Solicitation Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-44871, filed on January 26, 1998. 2B Agreement and Plan of Merger among Food 4 Less Holdings, Inc., FFL Acquisition Corp. and Fred Meyer, Inc. dated as of November 6, 1997, as amended as of January 20, 1998. Incorporated by reference to Appendix B of the Joint Proxy and Consent Solicitation Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-44871, filed on January 26, 1998. 2C Agreement and Plan of Merger by and between Smith's Food & Drug Centers, Inc. and Fred Meyer, Inc. dated as of May 11, 1997. Incorporated by reference to Appendix A of the Joint Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, No. 333-32927, filed on August 6, 1997. 2D Agreement and Plan of Merger, dated as of October 18, 1998, among The Kroger Co., Jobsite Holdings, Inc. and Fred Meyer, Inc. Incorporated by reference to Appendix A of the Company's Joint Proxy Statement/ Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 2E Stock Option Agreement, dated as of October 18, 1998, between Fred Meyer, Inc. and The Kroger Co. (Fred Meyer, Inc. as Issuer) . Incorporated by reference to Appendix B of the Company's Joint Proxy Statement/Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 2F Stock Option Agreement, dated as of October 18, 1998, between The Kroger Co. and Fred Meyer, Inc. (The Kroger Co. as Issuer). Incorporated by reference to Appendix C of the Company's Joint Proxy Statement/ Prospectus dated March 8, 1999, SEC File No. 1-13339, filed on March 10, 1999. 3A Restated Certificate of Incorporation, as amended, of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A of the Company's Form 10-Q for the quarter ended May 23, 1998, SEC File No. 1-13339. 3B Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. 4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-4, Registration No. 333-32927, filed on August 6, 1997. 4B-1 Guarantee, dated as of March 11, 1998, made by the Guarantors referred to therein in favor of Bankers Trust Company, as Administrative Agent and Collateral Agent, The Chase Manhattan Bank, as Syndication Agent, The Various Financial Institutions Identified as Lenders in the Participation Agreement, as Lenders and The Various Financial Institutions Identified as Investors in the Participation Agreement, as Investors. Incorporated by reference to Exhibit 4B-1 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-2 Participation Agreement among Fred Meyer, Inc., as Lessee and as Construction Agent, FMS Trust 1997-1, a Delaware business trust, as Lessor, Wilmington Trust Company, not in its individual capacity, except as expressly specified therein, but solely as Owner Trustee under the FMS Trust 1997-1, the Investors party to the Trust Agreement, Bankers Trust Company, as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Lenders Parties thereto, dated as of March 11, 1998; Chase Securities Inc. and BT Alex. Brown, as Arrangers. Incorporated by reference to Exhibit 4B-2 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-3 Lease, Security Agreement and Financing Statement between Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee under the FMS Trust 1997-1, as Lessor, and Fred Meyer, Inc., dated as of March 11, 1998. Incorporated by reference to Exhibit 4B-3 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-4 Construction Agency Agreement, dated as of March 11, 1998, between FMS Trust 1997-1, a Delaware business trust, and Fred Meyer, Inc., a Delaware corporation. Incorporated by reference to Exhibit 4B-4 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-5 Credit Agreement among FMS Trust 1997-1, as Borrower, The Several Lenders from Time to Time Parties Thereto, Bankers Trust Company, as Administrative Agent and The Chase Manhattan Bank, as Syndication Agent, dated as of March 11, 1998. Incorporated by reference to Exhibit 4B-5 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-6 Lease Guarantee, dated as of March 11, 1998, made by Fred Meyer, Inc., as Lessee Guarantor, in favor of FMS Trust 1997-1, as Lessor, Bankers Trust Company, as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, The Various Financial Institutions Identified as Lenders in the Participation Agreement, as Lenders, and The Various Financial Institutions as Investors in the Participation Agreement Therein, as Investors. Incorporated by reference to Exhibit 4B-6 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-7 Pledge Agreement, dated as of March 11, 1998, entered into by Fred Meyer, Inc., a Delaware corporation, and each of the undersigned subsidiaries of Fred Meyer, Inc. in favor of Bankers Trust Company, as administrative agent and collateral agent, for the Beneficiaries. Incorporated by reference to Exhibit 4B-7 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-8 Intercreditor and Collateral Agency Agreement, dated as of March 11, 1998, among Bankers Trust Company, as Administrative Agent under the Loan Agreement, as Administrative Agent under the Synthetic Lease Facility, and as Collateral Agent, Fred Meyer, Inc. and the Subsidiary Pledgors. Incorporated by reference to Exhibit 4B-8 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-9 Subsidiary Guarantee, dated as of March 11, 1998, executed by each of the Guarantors listed on the signature page thereof for the benefit of Bankers Trust Company, as Administrative Agent under the Loan Agreement, and each Lender named therein. Incorporated by reference to Exhibit 4B-9 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-10 $3,500,000,000 Loan Agreement, dated as of March 11, 1998, among Fred Meyer, Inc., as Borrower, and The Lenders Party Thereto; Bankers Trust Company, as Administrative Agent, and The Chase Manhattan Bank, as Syndication Agent; Chase Securities Inc. and BT Alex. Brown, as Arrangers. Incorporated by reference to Exhibit 4B-10 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4B-11 Amendment and Restatement, dated as of December 18, 1998, of Loan Agreement among Fred Meyer, and the other parties thereto. Incorporated by reference to Exhibit 10.10 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-12 Amendment and Restatement, dated as of December 18, 1998, of Participation Agreement among Fred Meyer and other parties thereto. Incorporated by reference to Exhibit 10.11 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-13 Amendment and Restatement, dated as of December 18, 1998, of Credit Agreement among FMS Trust 1997-1 and the other parties thereto. Incorporated by reference to Exhibit 10.12 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4B-14 Amendment and Restatement, dated as of December 18, 1998, of Lease, Security Agreement and Financing Statement among Wilmington Trust Company, as Lessor, and Fred Meyer, as Lessee. Incorporated by reference to Exhibit 10.13 of Amendment No. 3 to the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961, filed on March 5, 1999. 4C-1 Notes Indenture, dated as of March 11, 1998, among Fred Meyer, Inc., the Guarantors named therein and First National Bank of Chicago, Trustee. Incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-3, as amended, No. 333-44537, filed on January 20, 1998. 4C-2 Notes First Supplemental Indenture, dated as of March 11, 1998, among Fred Meyer, Inc., the Guarantors named therein and First National Bank of Chicago, Trustee. Incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K, dated March 4, 1998, SEC File No. 1-13339. 4D-1 Registration Rights Agreement dated September 9, 1997 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4D-1 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. l-13339. 4D-2 Amendment to Registration Rights Agreement dated September 9, 1997 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4D-2 of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4E Registration Rights Agreement dated March 9, 1998 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4E of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 4F Registration Rights Agreement dated March 10, 1998 between Fred Meyer, Inc. and the signatories thereto. Incorporated by reference to Exhibit 4F of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant agrees to furnish to the Commission upon request copies of agreements relating to other indebtedness. *10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D of the Company's Annual Report on Form 10-K for the year ended January 28, 1989, SEC File No. 0-15023. *10A-2 Amended Fred Meyer, Inc.1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 of the Company's Form 10-Q for the quarter ended August 12, 1995, SEC File No. 0-15023. *10A-3 Fred Meyer, Inc. 1997 Stock Incentive Plan. Incorporated by reference to Appendix I to Exhibit 99.1 of the Company's Current Report on Form 8-K dated September 9, 1997, SEC File No. 1-13339. *10A-4 Quality Food Centers, Inc. Amended and Restated 1987 Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Quality Food Centers, Inc.'s Registration Statement on Form S-8, No. 333-19913, filed on January 16, 1997. *10A-5 Quality Food Centers, Inc. 1993 Executive Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Quality Food Centers, Inc.'s Registration Statement on Form S-8, No. 33-69514, filed on September 28, 1993. *10A-6 Quality Food Centers, Inc. 1997 Stock Option Plan. Incorporated by reference to Exhibit 10.10 of Quality Food Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1997, SEC File No. 0-15590. *10A-7 Smith's Food & Drug Centers, Inc. Amended and Restated 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.1 of Smith's Food & Drug Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1991, SEC File No. 1-10252. *10A-8 First Amendment to the Amended and Restated 1989 Stock Option Plan dated as of February 7, 1995. Incorporated by reference to Exhibit 20.1 of Smith's Food & Drug Centers, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, SEC File No. 1-10252. *10B Fred Meyer, Inc. Bonus Plan Description, as amended to January 30, 1999. *10C Form of Executive Severance Agreement among Fred Meyer, Inc. and certain executive officers. Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10D Non-Employee Directors' Deferred Compensation Plan. Incorporated by reference to Appendix J to Exhibit 99.1 of the Company's Current Report on Form 8-K, dated September 9, 1997, SEC File No. 1-13339. *10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10E of the Company's Annual Report on Form 10-K for the year ended January 30, 1993, SEC File No. 0-15023. *10F Fred Meyer, Inc. Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H of the Company's Annual Report on Form 10-K for the year ended January 29, 1994, SEC File No. 0-15023. *10G-1 Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended. Incorporated by reference to Exhibit 10.11 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10G-2 Amended Employment Agreement of Robert G. Miller, dated October 18, 1998, between Robert G. Miller and Fred Meyer, Inc. Incorporated by reference to Exhibit 10.G of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. *10H Form of Employment Agreement among Smith's Food & Drug Centers, Inc. and certain executive officers. Incorporated by reference to Exhibit 10H of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. *10I Fred Meyer, Inc. Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T of the Company's Form 10-Q for the quarter ended November 4, 1995, SEC File No. 1-11274. 10J Management Services Agreement dated September 9, 1997 between Fred Meyer, Inc. and The Yucaipa Companies. Incorporated by reference to Exhibit 10L of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. 10K Yucaipa Warrant Agreement. Incorporated by reference to Exhibit 10.3 of Smith's Food & Drug Centers, Inc.'s Registration Statement on Form S-3, No. 333-14953, filed on October 28, 1996. Supplemental Warrant, dated as of September 9, 1997 among Fred Meyer, Inc. (formerly Meyer-Smith Holdco, Inc.) and the Yucaipa Companies. Incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended November 8, 1997, SEC File No. 1-13339. *10L-1 Employment Agreement dated as of June 14, 1995 between Food 4 Less Holdings, Inc., Ralphs Grocery Company and George G. Golleher. Incorporated by reference to Exhibit 10.11 of Food 4 Less Holdings, Inc.'s Form 10-Q for the quarter ended July 16, 1995, SEC File No. 33-59212. *10L-2 Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and George Golleher. Incorporated by reference to Exhibit 10.N. of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. *10M-1 Ralphs Grocery Company Retirement Supplement Plan, effective as of January 1, 1994. Incorporated by reference to Exhibit 10.15.1 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-2 Amendment to the Retirement Supplement Plan, effective as of January 1, 1995. Incorporated by reference to Exhibit 10.15.2 of Ralphs Grocery Company Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-3 Second Amendment to the Retirement Supplement Plan, effective as of June 14, 1995, by and between Ralphs Grocery Company and Ralphs Grocery Company Retirement Supplement Plan. Incorporated by reference to Exhibit 10.15.3 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10M-4 Amendment 1999-1 to Ralphs Grocery Company Retirement Supplement Plan effective March 31, 1999. *10N-1 Ralphs Grocery Company Supplemental Executive Retirement Plan, amended and restated as of April 9, 1994. Incorporated by reference to 10.16.1 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-2 Amendment to the Amended and Restated Supplemental Executive Retirement Plan, effective as of January 1, 1995. Incorporated by reference to Exhibit 10.16.2 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-3 Second Amendment to the Supplemental Executive Retirement Plan, dated as of June 14, 1995, by and between Ralphs Grocery Company and Ralphs Grocery Company Supplemental Executive Retirement Plan. Incorporated by reference to Exhibit 10.16.3 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10N-4 Third Amendment to the Ralphs Grocery Company Supplemental Executive Retirement Plan, effective as of July 1, 1995. Incorporated by reference to Exhibit 10.16.4 of Ralphs Grocery Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996, SEC File No. 33-31152. *10O-1 Quality Food Centers, Inc. Deferred Compensation Plan, as amended. Incorporated by reference to Exhibit 10Q of the Company's Annual Report on Form 10-K for the year ended January 31, 1998, SEC File No. 1-13339. *10O-2 Amendment Nos. 1 and 2 to Quality Food Centers, Inc. Deferred Compensation Plan, as amended, dated December 1995 and January 1, 1999. *10P Fred Meyer, Inc. 401(k) Restoration Plan, dated April 1, 1999. *10Q Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and Certain Officers. Incorporated by reference to Exhibit 10.R of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. *10R Employment Protection Agreement dated September 22, 1998 between Fred Meyer, Inc. and Certain Officers. Incorporated by reference to Exhibit 10.S of the Company's Form 10-Q for the quarter ended November 7, 1998, SEC File No. 1-13339. 10S Voting Agreement, dated as of October 18, 1998 between Robert G. Miller and The Kroger Co. Incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961. 10T Voting Agreement, dated as of October 18, 1998 among the Stockholders identified on Annex A thereto and The Kroger Co. Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-4 of The Kroger Co., No. 333-66961. 21 List of Subsidiaries. 23 Consent of Deloitte & Touche LLP 24 Powers of Attorney 27 Financial Data Schedule. *This Exhibit constitutes a management contract or compensatory plan or arrangement. EX-10.B 2 FRED MEYER, INC. BONUS PLAN DESCRIPTION EXHIBIT 10B FRED MEYER, INC. BONUS PLAN DESCRIPTION AS AMENDED TO JANUARY 30, 1999 INTRODUCTION: Fred Meyer, Inc.'s Subsidiaries' Bonus Plans for the year ended January 30, 1999 compensates selected employees based on goals and objectives determined periodically by the Company. Under the Bonus Plan, bonuses are allocated based on programs prescribed for each of two categories of participants: (1) Regional/District and Store bonusable participants, and (2) all other bonusable participants. REGIONAL/DISTRICT AND STORE BONUSABLE PARTICIPANTS PROGRAM: Awards for regional/district and store bonusable participants are based upon predetermined and preapproved objectives for store contribution income and in some cases sales, inventory control, and corporate pretax income. For each mid-year payment period and year-end bonus payments the Company sets objectives for sales, contribution income, inventory, and pretax income based upon the Company's projections, each region/district and store manager's projections and historical results. These objectives are reviewed and approved by Subsidiary Senior Management and the Company's Compensation Committee. The actual bonus awarded each payment period and for the year-end bonus payments generally is based on a predefined percentage of the participant's regular salary for the year, as adjusted for actual versus budgeted results. Budgeted results give rise to a target bonus, while greater than budgeted results give rise to a larger than target bonus. Lower than budgeted results will result in a smaller bonus (as low as 0 percent of target bonus). Each participant's bonus is generally calculated on how well the participant's area of responsibility does, and in some cases a smaller portion of the bonus is based on how well the Company does. ALL OTHER BONUSABLE PARTICIPANTS PROGRAM: The program applicable to all other management/supervisory and other bonusable participants not included in the regional/district and store program is based on the following formula: The bonus paid is based on the Company's objectives for operating income and pretax income, and in some cases on sales, inventory, and various departmental budgets as prepared by the department's management, and approved by Subsidiary Senior Management and by the Compensation Committee. The bonus amount paid is generally determined as a percentage of each participant's salary (target bonus), adjusted upward or downward based on performance. Participants can achieve in excess of 100 percent of their target bonus for exceeding their performance goals or as low as 0 percent of target bonus for lower than predefined results. YEAR-END REVIEW AND PAYMENT: Final bonus payments are generally paid in March following the year in which performance goals are measured. Senior Management of each Subsidiary and the Compensation Committee approve the final amount of total bonuses to be paid and the amount paid to executive officers prior to such payment. The Compensation Committee of the Board of Directors can approve discretionary amounts resulting from unusual circumstances affecting the Company, such as special efforts performed in achieving merger-related synergies. EX-10.M-4 3 AMENDMENT TO RALPHS RETIREMENT SUPPLEMENT PLAN AMENDMENT 1991-1 TO THE RALPHS GROCERY COMPANY RETIREMENT SUPPLEMENT PLAN This Amendment to the Ralphs Grocery Company Retirement Supplement Plan is effective March 31, 1999. Article 4 is amended by adding a new Section 4.8 to read as follows: "4.8 Cessation of Benefit Accruals Notwithstanding anything in this Plan to the contrary, benefit accruals under this Plan shall cease effective March 31, 1999." Executed this 5th day of March, 1999. RALPHS GROCERY COMPANY By ROGER A. COOKE -------------------------------- Roger A. Cooke Vice President By KENNETH THRASHER -------------------------------- Kenneth Thrasher Vice President EX-10.O-2 4 AMENDMENTS TO QFC DEFERRED COMPENSATION PLAN FIRST AMENDMENT TO QUALITY FOOD CENTERS, INC. DEFERRED COMPENSATION PLAN Pursuant to the authority provided in Section 9.1 of the Quality Food Centers, Inc. Deferred Compensation Plan, as adopted effective December 1, 1994 (the "Plan") Quality Food Centers, Inc. (the "Company") hereby adopts this First Amendment to the Plan, to be effective immediately upon adoption. I. The first sentence of Section 3.1 is amended in its entirety to read as follows: Participation in the Plan shall be limited to employees selected by the Board of Directors (or by the Committee pursuant to authority delegated by the Board of Directors) who elect to participate in the Plan by filing an Agreement with the Committee and timely making the elections as provided in this Section 3. The election to participate shall be effective upon receipt by the Committee of an Agreement that is properly completed and executed in conformity with the Plan. Notwithstanding anything to the contrary herein, designation by the Board of Directors (or the Committee) of an employee as eligible to participate in the Plan does not ensure such employee's continued eligibility for participation if the Board of Directors (or the Committee) elects to terminate such employee's participation for a later period. II. A new Section 9.3 is added to the Plan as follows: 9.3 This Plan is intended to be an unfunded plan maintained for a "select group of management or highly compensated employees" (a "top-hat group") under Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and therefore to be exempt from parts 2, 3 and 4 of ERISA. Accordingly, in the event that it is determined by a court of competent jurisdiction or by an opinion of counsel that a Participant is not a member of such a top-hat group this Plan shall immediately terminate as to such Participant and all amounts credited to the account of such Participant shall be paid out to such Participant within 30 days of such determination. - 1 - Except as amended above, the Plan shall continue in full force and effect. Executed this _______________________ day of December, 1995. QUALITY FOOD CENTERS, INC. By: E. MARK EVANGER ------------------------------------- Its: Vice President and Chief Financial Officer -------------------------------- - 2 - AMENDMENT TWO TO THE QUALITY FOOD CENTERS, INC. DEFERRED COMPENSATION PLAN Quality Food Centers, Inc. a Washington corporation 10116 NE 8th Bellevue, WA 98004 QFC QFC adopted the Quality Food Centers, Inc. Deferred Compensation Plan (the "Plan") to allow a select group of management or highly compensated employees of QFC and of adopting affiliates to defer income that would otherwise be payable to them. QFC has become a wholly owned subsidiary of Fred Meyer, Inc., a Delaware corporation (the "Parent"). The Parent has resolved to reduce the number of nonqualified deferred compensation plans sponsored by the Parent and its affiliates. Accordingly, QFC adopts this amendment to provide for the transfer of accumulated account balances to the Fred Meyer, Inc. Cash Balance Restoration Plan for any employee who continues to be eligible to participate in the Parent's plan, and to distribute the account balances of all other employees who are Participants in the Plan. 1. Discontinuation of Deferrals 1.1 As of March 31, 1999, all further deferrals under the Plan shall be discontinued. QFC shall notify each employee who is a Participant in the Plan of the discontinuance of deferrals and shall adjust each Participant's pay accordingly. 1.2 QFC shall take all steps necessary to wind up the affairs of the Plan as soon as administratively feasible following the discontinuance of all contributions. 2. Valuation of Accounts 2.1 Pursuant to 3.7 of the Plan, the balance in each Participant's deferred benefit account shall be determined as of the March 31, 1999 Determination Date. 2.2 The value of each Participant's account shall be determined under 3.6 of the Plan. 1 3. Transfer of Deferred Compensation Account Balances 3.1 Subject to 4.1, as soon as practicable following the determination of the value of Participant accounts under 2.1, the account balances of each Continuing Participant shall be transferred to the Fred Meyer Cash Balance Restoration Plan effective as of April 1, 1999. 3.2 A "Continuing" Participant" is any Participant who, as of March 31, 1999, has been determined by QFC as a member of a select group of highly compensated or managerial employees, or was such a member immediately prior to termination of employment. 4. Distribution of Account Balances of Ineligible Participants 4.1 The account balance of any Discontinued Participant shall be distributed as soon as practicable following the valuation of account balances in 2.1. 4.2 A "Discontinued Participant" is any Participant who is not a Continuing Participant. 4.3 Distributions under 4.1 of this Amendment Two shall include earnings through March 31, 1999 and shall be made in a single lump sum cash payment, subject to tax withholding required by 4.7 of the Plan. 5. Termination of Plan The Plan shall terminate immediately following the transfer of liabilities to the Fred Meyer Cash Balance Restoration Plan under 3.1 and the distribution under 4.3 of the account balance of each Discontinued Participant. 6. Effective Date This Amendment Two shall be effective as of January 1, 1999. Company Quality Food Centers, Inc. by MICHAEL E. HUSE -------------------------------------- its President ---------------------------------- Executed: 3/31 , 1999 ------------------------- 2 ACCEPTANCE OF TRANSFERRED ACCOUNTS BY SUCCESSOR PLAN Fred Meyer, Inc., as the sponsor of the Fred Meyer, Inc. Cash Balance Restoration Plan, hereby agrees to accept the transfer of accounts transferred from the QFC Deferred Compensation Plan to the Cash Balance Restoration Plan pursuant to 3.1 of the Second Amendment to the QFC Deferred Compensation Plan. Adopted: 3/31, 1999 FRED MEYER, INC. By KEITH W. LOVETT -------------------------------------- Its Sr. Vice President ---------------------------------- APPENDIX 1 TO THE FRED MEYER, INC. CASH BALANCE RESTORATION PLAN This Appendix 1 documents the terms of the Merged Plan Transition Account established under 4.2 of the Plan with respect to any participant whose benefit was transferred from the QFC Deferred Compensation Plan. 1. The opening balance of a Merged Plan Transition Account with respect to any benefit under the QFC Deferred Compensation Plan (the "QFC Plan") shall be the balance in that account, valued as of March 31, 1999, under 3.6 of the QFC Plan. 2. The manner of payment under 7.2 of any amount in a participant's Merged Plan Transition Account derived from the QFC Plan of the Plan shall be based on the election made by the participant pursuant to the original election agreement for the year in which the amounts credited to the Merged Plan Transition Account were deferred. EX-10.P 5 FRED MEYER 401(K) RESTORATION PLAN CONFORMED COPY FRED MEYER, INC. 401(k) RESTORATION PLAN April 1, 1999 Fred Meyer, Inc. an Oregon corporation PO Box 42121 Portland, Oregon 97242 Fred Meyer TABLE OF CONTENTS Section Page - ------- ---- 1. Purposes; Administration; Plan Year......................................1 2. Eligibility..............................................................1 3. Compensation Deferral....................................................2 4. Elective and Matching Contribution Credits...............................3 5. Deferred Compensation Account; Vesting...................................5 6. Irrevocable Trust........................................................6 7. Time and Manner of Payment...............................................8 8. Withdrawals..............................................................9 9. Death or Disability.....................................................10 10. Termination; Amendment..................................................12 11. Claims Procedure........................................................13 12. General Provisions......................................................13 13. Effective Date..........................................................15 i FRED MEYER, INC. 401(k) RESTORATION PLAN April 1, 1999 Fred Meyer, Inc. an Oregon corporation PO Box 42121 Portland, Oregon 97242 Fred Meyer 1. Purposes; Administration; Affiliates; Plan Year 1.1 This Plan is maintained to permit eligible employees of Fred Meyer and any of its participating Affiliates under 1.4 to defer a portion of what would otherwise be current compensation in amounts exceeding the elective deferrals allowed under the Fred Meyer, Inc. 401(k) Savings Plan (the 401(k) Savings Plan). The Plan also provides deferred compensation credits for amounts by which eligible employees' elective and matching contributions under the 401(k) Savings Plan are curtailed by legally-required limits applicable to such tax qualified retirement plan. The Plan is designed to provide unfunded deferred compensation for a select group of highly compensated or management employees and to qualify as such a plan under Section 2520.104-23 and related provisions of Department of Labor regulations under the Employee Retirement Income Security Act of 1974, as amended. 1.2 This Plan supersedes the Fred Meyer Excess Deferral and Benefit Equalization Plan and its predecessors. 1.3 The plan shall be administered by a Compensation Committee appointed by the Board of Directors of Fred Meyer, by action of the Chair of the Board, the Vice Chair of the Board or otherwise as the Board may decide. The Committee shall interpret the plan and make determinations about participation and benefits. Any decision by the Committee within its authority shall be final and binding on all parties. The Committee shall have absolute discretion in carrying out its responsibilities in accordance with the provisions of this plan and applicable law. The Committee may delegate all or part of its authority. 1.4 The plan shall apply to Fred Meyer and its Affiliates. An Affiliate is a corporation or other entity that has been designated an Affiliate for this purpose by the Committee. The term "Employer" refers to Fred Meyer and all designated Affiliates. 1.5 The plan year shall be same as the plan year of the 401(k) Savings Plan, which is initially the 12 month period ending March 31, 2000. The 401(k) Savings Plan provides that if approved by the Internal Revenue Service, after its initial 12-month plan year ending March 31, 2000 its plan year will change to a calendar year, with a short plan year for the period from April 1, 2000 to December 31, 2000. 2. Eligibility 2.1 An employee of an Employer shall be eligible to participate for a plan year if the employee is designated by the Committee to participate in the plan. If an employee is designated for participation but has a change in employment status or is no longer approved by the Committee for participation (so the employee is no longer among the group of employees described in 1.1 above), participation in compensation deferrals under 3 below and in elective and matching contribution credits under 4 below shall end as of the date of such change. Such discontinuation of contribution credits shall not constitute a termination of employment and shall not trigger a distribution of benefits, nor will it interrupt the affected participant's ability to select among guideline investment reference options (if any) on the same basis as other participants. 2.2 An employee eligible under 2.1 must enroll to begin participation in this Plan. Such enrollment shall constitute acceptance of any changes associated with merging a deferred compensation account from a prior plan into this plan, if applicable. 2.3 An employee eligible under 2.1 may participate in elective deferrals and related matching credits by filing a deferral election as provided in 3.2. 2.4 A person having an Account under the plan shall be known as a participant. 3. Compensation Deferral 3.1 An eligible employee may elect for each plan year (or part plan year under 3.2(a)) to defer a portion of regular compensation paid for the year or part year as follows: (a) The amount deferred may be expressed as a whole percentage of salary and bonus or either or both, or a percentage of bonus over a certain dollar amount. Separate percentages may be stated for salary and bonuses. The percentage(s) designated shall apply automatically to any pay changes in the year. (b) A bonus deferral shall be governed by the election for the year for which the bonus is payable. If the bonus year does not correspond with the plan year, the bonus year shall be matched to the plan year during which the bonus year begins, except for the 1999-2000 plan 2 year. For the 1999-2000 plan year, an election may be made by March 31, 1999 (or by the deadline under 3.2(a) for a newly eligible participant) for the bonus period from February 1, 1999 through January 31, 2000. To be effective for the bonus period beginning February 1, 2000, an election would have to be submitted by January 31, 2000 (or by the deadline under 3.2(a) for a newly eligible participant). (c) The maximum deferral for any year will be 50 percent of regular salary and 100 percent of bonus pay before reductions for contributions under this plan or the 401(k) Savings Plan. (d) The amount deferred shall automatically be offset by the maximum elective deferral the employee could make under the provisions of the 401(k) Savings Plan, recognizing to the extent applicable the legally-required reduction to comply with the annual dollar limit on elective deferrals, the actual deferral percentage test, the limit on annual additions and adjustments to avoid top-heavy status. Actual deferrals under the 401(k) Savings Plan by the participant shall not affect the participant's offset under this provision, except to the extent that such deferrals may have affected general plan calculations under actual deferral percentage testing or top-heavy plan testing. 3.2 Deferral elections under the plan shall be made in writing to the Committee on a form provided for that purpose. Elections shall be effective as follows: (a) An employee who becomes eligible on the April 1, 1999 effective date of the plan may participate with respect to future compensation by filing an election by March 31, 1999. An employee who later becomes eligible during a plan year may participate with respect to future compensation by filing an election within 30 days after the effective date of eligibility. (b) Except as provided in (a) above, in 3.1(b) and in this provision, an election shall be effective for the plan year starting after the plan year in which the election 3 is received by the Committee. For a bonus period that starts during a plan year, an election may be filed up to and including the day before the start of the bonus period even though that day occurs after the start of the plan year. (c) An election shall be irrevocable after the start of the plan year or bonus period for which it applies. An election may not be revoked, even prospectively, with respect to a plan year or bonus period to after the start of the applicable plan year or bonus period. (d) The Committee may provide for an election that is effective for more than one year or bonus period as specified in the election. A new election shall be required to continue or resume deferrals after such an election expires or is revoked. A continuing election may be revoked or changed prospectively for a future plan year or bonus period by a new election under (b). 4. Elective and Matching Contribution Credits 4.1 Under the 401(k) Savings Plan, Employer makes an Elective Contribution and a Matching Contribution for each participant each year as follows: (a) The Elective Contribution is made pursuant to elective salary deferrals under the 401(k) Savings Plan. (b) The Matching Contribution rate is 100% of elective salary deferrals up to 3% of pay for the plan year and 50% of elective salary deferrals up to the next 2% of pay for the plan year. 4.2 Elective or Matching Contributions for a participant under the 401(k) Savings Plan may be reduced in any year as follows: (a) Elective Contributions may be reduced because of one or more of the following reasons: (1) Ineligibility to participate in the plan. 4 (2) The limit under Code section 401(a)(17) on compensation considered for allocations. (3) The limit under Code section 415 on annual additions. (4) An adjustment to avoid top-heavy status. (5) The effect of deferral of compensation under this plan. (b) Matching Contributions may be reduced because the participant may be prevented from making elective deferrals under the 401(k) Savings Plan of 5 percent of compensation due to any of the reasons listed in (a) above. 4.3 All participants under this plan shall be considered as though they have elected the greatest amount of elective contributions permitted for them under the 401(k) Savings Plan, regardless of their actual rate of participation in that plan. If Elective or Matching Contributions, or both, are reduced under 4.2 with respect to any plan year of the 401(k) Savings Plan for an employee eligible to participate under 2.1 with respect to the corresponding plan year of this plan, the participant shall receive a corresponding credit or credits to the participant's Account in this plan as follows: (a) The Matching Contribution credit with respect to each plan year shall be determined at year end and shall equal the additional Matching Contribution, if any, the participant would have been allocated under the 401(k) Savings Plan if the amounts actually deferred under this plan had been allowed as elective deferrals under the 401(k) Savings Plan. The amount credited shall be controlled by the deferral election under 3.2 in effect for the year to which the Matching Contribution relates. (b) The Elective Contribution Credit shall equal the amount of Elective Contribution reduction for the participant for the year under 4.2(a), unless the participant has elected not to have such reduction affect the rate of elective contributions under this plan. 5 (c) The Elective or Matching Contribution credit shall be reserved by Employer or paid to the trust under 6 below at a time fixed by the Committee. Amounts shall be credited for accounting and guideline investment purposes when paid or reserved. 4.4 Elective and Matching Contribution credits under 4.3 shall be recorded, adjusted for investment guideline credits and paid out in accordance with this plan. 5. Deferred Compensation Account; Vesting 5.1 As of the end of each payroll accounting period, Employer shall credit a participant's Account with the amount deferred for that payroll accounting period pursuant to the participants' election. 5.2 Employer shall credit a participant's Account with a Matching Contribution credit at the time(s) specified in 4.3(a). 5.3 Employer shall make guideline investment adjustments with respect to each participant's Account, until the entire Account has been paid out, as follows: (a) The Committee shall establish guideline investment funds with investment objectives fixed by the Committee. The guideline funds may parallel the investment funds created under the 401(k) Savings Plan, funds or other investments available under any insurance policy or policies purchased by the Company in connection with this plan, funds available under any irrevocable trust established under Section 6, below, or other investment indexes established from time to time by the Committee with reference to investment reference standards published in the Wall Street Journal (such as the Dow Jones Indusrial Average, or the Standard and Poors 500 indexes). (b) Each participant shall, under procedures established by the Committee, elect among available guideline fund(s) or index(s) for the participant's Accounts under this plan, including amounts attributable to Elective and Matching Contribution Credits. In the absence of a proper election, a balanced guideline fund will be used. 6 Participant elections may be changed at such times and subject to such limits as may be fixed by the Committee. (c) The Committee shall adjust all Accounts in accordance with the elected guidelines in accordance with procedures established by the Committee to reaonably approximate the time that participant accounts are adjusted under the 401(k) Savings Plan. For this purpose, Accounts shall be treated as though Elective Contribution Credits had been made at the times as of which such contributions would have been credited to participant's accounts if made under the 401(k) Savings Plan. Matching Contribution credits shall be made as of the end of each plan year as provided in 4.3(a) above. (d) When an Account is in pay status, the Committee may require use of a cash equivalent guideline fund to the extent necessary to allow more frequent adjustments to coincide with the timing of pay distributions. 5.4 Each participant's Account shall be maintained on the books of the Fred Meyer or other Employer designated by Fred Meyer until full payment has been made to the participant or beneficiaries under Sections 7 and 8 and the following shall apply, subject to 6.3: (a) Employer shall not be obligated to set aside or earmark any funds for the Account, which shall be purely a bookkeeping device. (b) All amounts of deferred compensation under this plan shall remain at all times the unrestricted assets of the Employer, and the promise to pay the deferred amounts shall at all times remain unfunded as to the participants. 5.5 A participant's Account, including Elective and Matching Contribution credits, shall be 100 percent vested at all times. 5.6 Amounts deferred or credited as Elective or Matching Contribution credits are treated as wages for FICA and FUTA taxes and withholding as follows: 7 (a) Subject to (b) and (c), required withholding shall be imposed on other current pay of the participant, not on the amount deferred or otherwise credited. (b) A participant may, under rules of the Committee, elect to have any required withholding satisfied by reducing the credits under this plan or by direct payment by the participant. (c) If the participant's other current pay is insufficient to cover the required withholding, the difference shall be satisfied from the amount otherwise credited unless timely paid by the participant under Committee rules. (d) Guideline investment adjustments are not intended to be subject to FICA or FUTA tax or withholding and are not intended to trigger currently taxable gains or losses for income tax purposes when they occur under a participant's Account in this plan. 6. Irrevocable Trust 6.1 Employer may but shall not be required to establish an irrevocable trust to assume the liabilities to participants in certain circumstances, and may transfer cash to such a trust. 6.2 If Employer creates a trust under 6.1 above, assets transferred to the trust shall be invested as follows: (a) Investment of such assets shall be at the absolute discretion of the Committee, the trustee, or both on a shared basis, as provided in the trust. (b) The guideline investment funds under 5.3 shall be purely for measuring the amount of time-value adjustments for Accounts. (c) Neither employer nor the trustee shall be required to invest in such funds in accordance with participants' elections. Employer and the trustee may, however, choose, in their discretion, to invest in the 8 elected guideline funds in accordance with the elections, and shall incur no liability for doing so. 6.3 The trust under 6.1 shall be a grantor's trust and all assets held in trust shall be assets of Employer subject to the trust terms. All assets of the trust shall at all times be subject to the claims of creditors of Employer in circumstances described in the trust. Participants will not receive a vested priority interest in the trust assets ahead of such creditors. Participants' interests in the trust will be governed by the trust terms at all times. 7. Time and Manner of Payment 7.1 Subject to 7.3 and 8.1 a participant's Payment Date shall be one of the following as selected under 7.3: (a) The date the participant's employment has terminated under 7.5 for any reason. (b) The date the participant's employment has terminated under 7.5 and has reached an age up to 70 specified in the deferral election. A date (up to the participant's 70th birthday) may be specified in lieu of an age. 7.2 A participant's Account shall be paid in one of the following ways as selected under 7.3 and 7.4: (a) In a lump sum within 30 days after the Payment Date. (b) In a lump sum within 30 days after the January 1 following the Payment Date. (c) In installments under 7.4 starting the first of the month after the Payment Date. (d) In installments under 7.4, starting the January 1 following the Payment Date. 7.3 In the deferral election a participant shall select the Payment Date under 7.1 and the form of payment under 7.2. The selection shall be irrevocable for the portion of the Account attributable to amounts deferred under the election. If different selections are made in deferral elections applicable to different years, the Account shall be appropriately divided for 9 distribution. A participant may have up to five different combinations of choices under 7.1 and 7.2 in effect. Once five different elections have been made, the range of choices for future elections shall be limited to the five already in effect. 7.4 If installments are selected, the payout period shall be specified in the deferral election. The payout period may be a whole number of years up to 20, based on the anniversary of the benefit starting date. The installment size shall be fixed as of the benefit starting date and each later January 1 as though equal installments were to be paid for the balance of the payment period including investment guideline credits at a rate estimated as of the date of calculation. The installment period may be monthly, quarterly or annually, as elected by the participant at termination of employment. If participant fails to make an election within 30 days after notification that an election must be made, installment payments shall automatically be made on an annual basis, with the first installment on the benefit starting date and each later installment as of January 1. 7.5 A participant terminates employment when no longer employed by an Employer or by a nonparticipating Affiliate of an Employer. A transfer from one Employer or Affiliate to another shall not constitute a termination of employment. 7.6 The Employer may withhold from any payments any income tax or other amounts as required by law. Payments are generally not subject to FICA or FUTA tax or related withholding. 8. Withdrawals 8.1 A participant may withdraw amounts from the participant's Account (including all subaccounts under 7.3) as follows: (a) Upon approval of the Committee, up to 100 percent of the amount reasonably necessary to meet an unforeseeable emergency under 8.2, as determined by the Committee (an Emergency Withdrawal). (b) At the participant's option, 100 percent of the full Account balance less a forfeiture of 10 percent of the amount withdrawn (a Forfeiture Withdrawal). The participant shall be permanently ineligible to participate after a Forfeiture Withdrawal. Partial withdrawals are not allowed under this provision. (c) Withdrawals under (a) or (b) may be made before or after a participant's Payment Date. 10 8.2 "Unforseen emergency" means a participant's severe financial hardship that cannot be met from other reasonably available resources and is caused by one or more of the following: (a) Illness or accident of the participant or a dependent under Internal Revenue Code section 152(a). (b) Loss of the participant's property due to casualty. (c) Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. 8.3 Other resources are reasonably available if assets can be liquidated without that itself creating severe financial hardship, if insurance or other reimbursement is available, or if deferrals under this plan can be stopped. 8.4 The Committee shall establish guidelines and procedure for implementing withdrawals. An application for withdrawal shall be written, shall be signed by the participant and shall include the following: (a) For Hardship Withdrawal, a statement of the facts causing the financial hardship and any other facts as may be required by the Committee. (b) For Forfeiture Withdrawal, an acknowledgment of the forfeiture and future ineligibility. 8.5 The withdrawal date shall be fixed by the Committee. The Committee may require a minimum advance notice and may limit the amount, time and frequency of withdrawals. 8.6 Amounts forfeited under 8.1(b) shall be applied at the first opportunity to offset contributions by Employer that may otherwise be payable to a trust created under 6.1. 9. Death or Disability 9.1 A Participant's Account shall be payable under this Section on the participant's death or disability regardless of the provisions of Section 7. 9.2 On death the Account shall be paid under 9.3 within 30 days as follows: 11 (a) If the recipient is the surviving spouse and the participant had selected payment by installments, the surviving spouse shall receive payment by installments in accordance with the selection. (b) In all other cases, by a lump sum as soon as practicable. 9.3 An amount payable on death of a participant shall be paid to the participant's beneficiary in the following order of priority: (a) To the surviving beneficiaries designated by the participant in writing to the Committee. The beneficiary designation provisions under the 401(k) Savings Plan shall apply to designating beneficiaries under this plan, including any applicable provisions automatically changing designations upon change in marital status. (b) To the surviving beneficiaries designated by the participant to receive death benefits under the 401(k) Savings Plan. (c) To the participant's surviving spouse. (d) To the participant's surviving children in equal shares. (e) To the participant's estate. 9.4 If a surviving spouse is receiving installments and dies when a balance remains, the balance shall be paid in a lump sum to the spouse's estate. 9.5 If a participant is temporarily disabled while employed or is receiving long-term disability benefits under a plan described in 9.6 the following shall apply: (a) The participant shall be treated as employed until age 65, and no payments will be made from the Account before age 65 except as provided below. 12 (b) If disability benefits stop and disability continues, the Account shall be paid in accordance with the election under Section 7. (c) If the participant dies, the provisions applicable to death shall be followed. (d) If the participant ceases to be disabled and does not resume employment, the provisions applicable to termination of employment shall be followed. 9.6 A participant is disabled if the Committee determines that either of the following applies: (a) The participant is eligible to receive long-term disability benefits under a plan maintained by the Employer or an Affiliate or would have been eligible if covered by the plan maintained by the Employer or Affiliate employing the participant. (b) In the absence of a plan under (a), the participant is permanently and totally disabled on the basis of criteria established by the Committee. 10. Termination; Amendment 10.1 The Committee may terminate this plan effective the first day of any month after notice to the participants or earlier as provided in 12.4. On termination the following shall apply except as provided in 10.3: (a) Amounts deferred through the last month before the effective date of termination shall remain deferred and be credited to the Accounts in accordance with the plan. (b) Deferral elections shall terminate as of the effective date of termination, and no further deferrals shall be allowed. (c) Amounts in an Account shall remain to the credit of the Account, shall continue to receive investment 13 guideline credits and shall be paid out in accordance with Sections 7, 8 and 9. 10.2 The Committee may amend this plan effective the first day of any month by notice to the participants. An amendment may be retroactive within the plan year in which notice is given except that the right of participants to defer compensation may not be reduced for the portion of the plan year through the month in which the notice is given. 10.3 If the Internal Revenue Service issues a final ruling that any amounts deferred under this plan will be subject to current income tax, all amounts to which the ruling is applicable shall be paid to the participants within 30 days. 11. Claims Procedure 11.1 Any person claiming a benefit, requesting an interpretation or ruling under the plan, or requesting information under the plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable. 11.2 If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the plan provisions on which the denial is based. (b) A description of any additional materials or information required and an explanation of why it is necessary. 11.3 The initial notice of denial shall normally be given within 90 days after receipt of the claim. If special circumstances require an extension of time, the claimant shall be so notified and the time limit shall be 180 days. 11.4 Any person whose claim or request is denied or who has not received a response within 30 days may request review by notice in writing to the Committee. The original decision shall be reviewed by the Committee which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. 11.5 The decision on review shall ordinarily be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be 120 days. The decision shall be in writing and shall state the 14 reasons and the relevant plan provisions. Subject to 11.6, all decisions on review shall be final and bind all parties concerned. 11.6 If Employer creates a trust under 6.1, a decision of the Committee shall be subject to review by the Trustee to the extent provided for under the trust agreement. 12. General Provisions 12.1 If suit or action is instituted to enforce any rights under this plan, the prevailing party may recover from the other party reasonable attorneys' fees at trial and on any appeal. 12.2 Any notice or directions under this plan shall be in writing and shall be effective when actually delivered or, if mailed, when deposited postage prepaid as first class mail. Mail shall be directed to Fred Meyer at the address stated in this plan, to the participant at the address stated in the deferral election or to such other address as a party may specify by notice to the other parties. Notices to an Employer or the Committee shall be sent to Fred Meyer's address. 12.3 The rights of a participant under this plan are personal. Except for the limited provisions of 9.3 and 12.5, no interest of a participant or any beneficiary or representative of a participant may be directly or indirectly transferred, encumbered, seized by legal process or in any other way subjected to the claims of any creditor. 12.4 If an Employer merges, consolidates, or otherwise reorganizes or if its assets or business are acquired by another company, this plan shall continue with respect to those eligible employees who continue in the employ of the successor company. The transition of Employers shall not be considered a termination of employment for purposes of this plan. In such an event, however, a successor corporation may terminate this plan as to its employees on the effective date of the succession by notice to eligible employees within 30 days after the succession. 12.5 The Committee may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the person's best interest to make payments to others for the benefit of the person entitled to payment. In that event the Committee may in its discretion direct that payments be made to one or more of the following: (a) To a parent or spouse or a child of legal age. (b) To a legal guardian. 15 (c) To one furnishing maintenance, support, or hospitalization. 13. Effective Date This Plan shall be effective April 1, 1999. Adopted March 31, 1999. Fred Meyer, Inc. By ROBERT G. MILLER -------------------------------------- Executed: March 31, 1999 ------------------------------- 16 EX-21 6 LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES OF FRED MEYER, INC. January 30, 1999 Jurisdiction of Name of Incorporation Subsidiary or Organization - ---------- --------------- Fred Meyer Stores, Inc. Delaware B&B Stores, Inc. Montana B&B Pharmacy, Inc. Montana CB&S Advertising Agency, Inc. Oregon Distribution Trucking Company Oregon FM, Inc. Utah FM Holding Corporation Delaware Grand Central, Inc. Utah FM Retail Services, Inc. Washington Fred Meyer, Inc. Washington Fred Meyer of Alaska, Inc. Alaska Fred Meyer of California, Inc. California Fred Meyer HK Limited Hong Kong Fred Meyer Jewelers, Inc. Delaware Merksamer Jewelers, Inc. California Natur Glo, Inc. Oregon Roundup Co. Washington JH Properties, Inc. Washington Smith's Food & Drug Centers, Inc. Delaware Richie's, Inc. Texas Smith's Beverage of Wyoming, Inc. Wyoming Smitty's Supermarkets, Inc. Delaware Smitty's Super Valu, Inc. Delaware Compare, Inc. Delaware Saint Lawrence Holding Company Delaware SLHC2, Inc. Delaware Smitty's Equipment Leasing, Inc. Delaware Treasure Valley Land Company, L.C. Idaho Western Property Investment Group, Inc. California Fred Meyer Foundation, a Nonprofit corporation Oregon Healthy Options, Inc. Delaware Quality Food Centers, Inc. Washington Hughes Markets, Inc. California Hughes Realty, Inc. California KU Acquisition Corporation Washington Quality Food, Inc. Delaware Quality Food Holdings, Inc. Delaware QFC Sub, Inc. Washington Second Story, Inc. Washington Art's Food Centers, Inc. Washington Food 4 Less Holdings, Inc. Delaware Ralphs Grocery Company Delaware Cala Co. Delaware Bay Area Warehouse Stores, Inc. California Bell Markets, Inc. California Cala Foods, Inc. California Crawford Stores, Inc. California Food 4 Less of Southern California, Inc. Delaware Alpha Beta Company California Food 4 Less GM, Inc. California Food 4 Less of California, Inc. California Food 4 Less Merchandising, Inc. California EX-23 7 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-35199, 333-36473, and 333-47523 of Fred Meyer, Inc., all on Form S-8, and Registration Statement Nos. 333-44537, 333-46835, and 333-56637 of Fred Meyer, Inc. on Form S-3, of our report dated March 10, 1999, included in the Annual Report on Form 10-K of Fred Meyer, Inc. for the year ended January 30, 1999. DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Portland, Oregon April 14, 1999 EX-24 8 POWERS OF ATTORNEY POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 ROBERT D. BEYER ----------------------------------------- (Signature) Robert D. Beyer ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 VIVIAN A. BULL ----------------------------------------- (Signature) Vivian A. Bull ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 JAMES J. CURRAN ----------------------------------------- (Signature) James J. Curran ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 A.M. GLEASON ----------------------------------------- (Signature) A.M. Gleason ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 GEORGE GOLLEHER ----------------------------------------- (Signature) George Golleher ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 CARLTON J. JENKINS ----------------------------------------- (Signature) Carlton J. Jenkins ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 BRUCE KARATZ ----------------------------------------- (Signature) Bruce Karatz ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 JOHN G. KING ----------------------------------------- (Signature) John G. King ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 ROGER S. MEIER ----------------------------------------- (Signature) Roger S. Meier ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 ROBERT G. MILLER ----------------------------------------- (Signature) Robert G. Miller ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 MARC RAPAPORT ----------------------------------------- (Signature) Marc Rapaport ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 STUART M. SLOAN ----------------------------------------- (Signature) Stuart M. Sloan ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 JEFF SMITH ----------------------------------------- (Signature) Jeff Smith ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 SAMUEL ZELL ----------------------------------------- (Signature) Samuel Zell ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 BERTRAM R. ZWEIG ----------------------------------------- (Signature) Bertram R. Zweig ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 RONALD W. BURKLE ----------------------------------------- (Signature) Ronald W. Burkle ----------------------------------------- (Type or Print Name) POWER OF ATTORNEY ----------------- The undersigned, an officer and/or director of Fred Meyer, Inc. (the "Company"), appoints Kenneth Thrasher, Roger A. Cooke, David R. Jessick and James C. Aalberg, and each of them, his or her attorney and agent, to execute in his or her name as an officer or director of the Company the 1998 Annual Report on Form 10-K and any amendments thereto, and to file the Annual Report with the Securities and Exchange Commission; and the undersigned confirms all that each of the named attorneys and agents shall do or cause to be done by virtue of this Power of Attorney. Any one of the named attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 25, 1999 STEVEN R. ROGEL ----------------------------------------- (Signature) Steven R. Rogel ----------------------------------------- (Type or Print Name) EX-27 9 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS JAN-30-1999 JAN-30-1999 177,907 0 126,315 0 1,820,186 2,451,401 4,565,042 1,115,456 10,151,214 2,257,883 4,821,635 0 0 1,558 2,312,847 10,151,214 14,878,771 14,878,771 10,418,893 3,628,372 268,854 0 378,236 184,416 129,244 55,172 0 (217,947) 0 (162,775) (1.07) (1.02)
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