-----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, LeOyOclacFgUpk1j461ohcHL5aWOL8sdefN8/nqfDKISNoGaM+lUWm8+Fq5X1cwV qmL31UOK1OZmJJRCzmnjRQ== 0000893877-96-000059.txt : 19960321 0000893877-96-000059.hdr.sgml : 19960321 ACCESSION NUMBER: 0000893877-96-000059 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEYER FRED INC CENTRAL INDEX KEY: 0000701169 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 930798201 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11274 FILM NUMBER: 96536523 BUSINESS ADDRESS: STREET 1: 3800 SE 22ND AVE CITY: PORTLAND STATE: OR ZIP: 97202 BUSINESS PHONE: 5032328844 MAIL ADDRESS: STREET 1: PO BOX 42121 CITY: PORTLAND STATE: OR ZIP: 97242 10-K405 1 FORM 10-K 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 February 3, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-15023 FRED MEYER, INC. (Exact name of registrant as specified in its charter) Delaware 93-0798201 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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: None 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. / X / Aggregate market value of Common Stock held by nonaffiliates of the Registrant at March 1, 1996: $413,383,974 Number of shares of Common Stock outstanding at March 1, 1996: 26,704,555 Documents Incorporated by Reference Part of Form 10-K into Document which incorporated - -------- ---------------------- Portions of Proxy Statement for Part III 1996 Annual Meeting of Shareholders TABLE OF CONTENTS Item of Form 10-K.........................................................Page PART I Item 1 - Business................................................. 1 Item 2 - Properties...............................................10 Item 3 - Legal Proceedings........................................10 Item 4 - Submission of Matters to a Vote of Security Holders.................................11 Item 4(a) - Executive Officers of the Registrant...........................................11 PART II Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters..........................13 Item 6 - Selected Financial Data..................................13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations............................................13 Item 8 - Financial Statements and Supplementary Data..............13 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................13 PART III Item 10 - Directors and Executive Officers of the Registrant........................................13 Item 11 - Executive Compensation...................................13 Item 12 - Security Ownership of Certain Beneficial Owners and Management....................................13 Item 13 - Certain Relationships and Related Transactions...........14 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................14 SIGNATURES..................................................................20 FINANCIAL INFORMATION............................................... F-1- F-17 PART I Item 1. Business. - ------ -------- General ------- Fred Meyer, Inc. (the "Company") is a leading regional retailer of a wide range of food, apparel, fine jewelry, and general merchandise products for the home. At February 3, 1996, the Company operated 136 stores in Oregon, Washington, Utah, Alaska, Idaho, Northern California, and Montana under the name "Fred Meyer." Of these stores, 102 are free-standing, multidepartment stores, averaging 144,500 square feet of retail space, that emphasize one-stop-shopping for necessities and items of everyday use. Of the 102 multidepartment stores, 94 contain food and nonfood departments, and 8 contain nonfood departments only. The multidepartment stores with food average 148,200 square feet. The Company's multidepartment stores accounted for approximately 98.7 percent and 97.2 percent of the Company's total sales and operating income, respectively, for the Company's 1995 fiscal year ended February 3, 1996. Of the 34 specialty stores, 29 are jewelry stores located in regional malls. The Company announced in January 1996 that it is acquiring up to 23 mall jewelry stores in California and Washington. The Company's multidepartment stores contain up to seven departments which include food, the home, apparel, home electronics, fine jewelry, health and beauty aids, and pharmacy. The Company's multidepartment stores are unique in the Pacific Northwest in combining food with a wide range of nonfood merchandise under one roof. For the 1995 fiscal year, food and nonfood sales were 41.0 percent and 59.0 percent of total sales, respectively. The Company's principal business strategy is to operate one-stop- shopping stores that provide convenient shopping for a broad selection of products in one location. Stores are organized into distinct departments that specialize in the sale of particular products. The Company believes that its business strategy has generated high per-store sales volume and frequent shopping by area residents, and that its departments achieve such sales volume because they are located within one-stop-shopping stores. The strength of the individual departments, with their breadth and depth of product selection, national- and private-label brands, and emphasis on products of everyday use, distinguishes the Company's stores from other retailers and enables the Company to compete successfully with supermarkets, drugstores, discount stores, mass merchandisers, department stores, and specialty stores. The Company promotes cross-shopping by providing convenient access between departments, making each department a strong competitor in the market for its products and by facilitating easy customer checkout through a cash register system that allows customers to purchase merchandise from any department at any checkout location ("common checkout"). During the past several years, the Company has committed substantial capital and management resources to improve its one-stop-shopping strategy, allowing it to better serve its customers and respond to the many new competitors entering its markets. In the past five years, 474 new competitor stores have opened in the Company's markets. They include Wal-Mart, Walgreens, Home Depot, HomeBase, Eagle, Sam's Club, Incredible Universe, Circuit City, Good Guys, Future Shops, Ernst, Price/Costco, Mervyn's, PayLess, Penneys, Kmart, Target, ShopKo, Toys-R-Us, Food 4 Less, Cub Foods, Safeway, Albertson's, Smiths Foods, Carrs, and Quality Food Centers. Total store sales for 1995 increased 9.6 percent, and comparable store sales increased 2.1 percent over the prior year. Sales growth in the last half of 1994, and continuing into 1995, was negatively affected by a strike which started on August 18, 1994 involving a multiemployer group of unionized food stores in the greater Portland, Oregon area, including 26 of the Company's stores. At approximately the same time, a series of strikes also began at the Company's Portland area distribution center, dairy plant, trucking operations, and corporate office. These strikes were settled during the period from September 23, 1994 to November 13, 1994. For additional information regarding the strikes, see "Employees" below and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." During the past five years, the Company remodeled 30 multidepartment stores, added food departments in 10 stores, and redesigned and remodeled many food departments to include in-store bakeries, delicatessens, and service fish markets to respond to customer shopping preferences. Beginning in 1987, the Company implemented an everyday low pricing strategy in its food operations. In 1989, the Company reorganized its operating management structure and for each store designated a store director responsible for store operations and profitability and departmental cross-merchandising. In 1992, the Company augmented its store management structure by establishing a regional management structure of six regional management teams closely aligned with the stores in the regions. Beginning in 1995, the Company began repositioning some of its departments to be more productive in the competitive environment it is facing. These changes included (1) reducing the space allocated to building materials in its stores and utilizing this space for other product categories, (2) eliminating computer hardware in most of its stores in an effort to improve other product selections in home electronics, and (3) refining its apparel selection to be more responsive to changes in how consumers shop for clothing. The Company's capital expenditure budget for its 1996 fiscal year is $118,000,000, net of estimated real estate financed on leases, compared with capital expenditures of $236,000,000 in 1995, net of real estate financed on leases. From 1993 through 1995, the Company increased new store development in its existing markets and increased the level of remodeling of existing stores from levels that existed for the period 1990 through 1992. In 1995, the Company opened six full-size stores and completed eight major remodels. In 1995, the Company made a determination to reduce its new and remodeled store activities from previously projected levels. As a result, the Company plans to open five new multidepartment stores and remodel four existing stores in 1996. Total retail space increased by approximately 4.7 percent in 1995 and 5.7 percent in 1994, after netting out the closures of old stores that were replaced by the new ones. No closures are scheduled for 1996. It is anticipated that total retail space will increase by an estimated 5.1 percent in 1996. The Company constructed a new flow-through retail service center in Chehalis, Washington in 1994 to distribute apparel, general merchandise, and music products, and opened a food distribution facility near Seattle, Washington in 1995. In addition, the Company is continuing its program to replace and upgrade its old MIS system with new architecture and application programs. The Company's new distribution facilities and new MIS system are designed to improve operations, permit better inventory management, and reduce distribution costs. The Company was incorporated in Delaware in 1981, as a successor to the business of a company which opened its first store in downtown Portland in 1922 and was incorporated in Oregon in 1923. The Company's principal executive offices are located at 3800 SE 22nd Avenue, Portland, Oregon 97202, and its telephone number is (503) 232-8844. References in this Form 10-K to the Company mean Fred Meyer, Inc., including its subsidiaries, unless the context requires otherwise. 2 The following table sets forth certain statistical information with respect to the Company's operations for the periods indicated:
Fiscal Year Ended -------------------------------------------------------------------------- February 3, January 28, January 29, January 30, February 1, 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Percent of net sales: Nonfood sales 59.0% 61.7% 62.5% 63.3% 63.7% Food sales 41.0% 38.3% 37.5% 36.7% 36.3% Sales per square foot of selling space (weighted average) $316 $304 $312 $304 $283 Total stores sales growth 9.6% 5.0%/4 4.4% 5.6% 9.2% Comparable store sales percentage increase:/2 Total Company 2.1%/1 (2.0%)/4 2.4% 3.0% 4.0% Food 6.6%/1 (3.0%)/4 3.4% 2.8% 4.5% Nonfood (0.9%)/1 (1.4%)/4 1.9% 3.2% 3.8% Number of multidepartment stores: Operated at end of period 102 100 97 94 94 Opened 6 5 5 2 3 Closed 4 2 2 2 3 Remodeled 8 7 7 5 3 Number of specialty stores: Operated at end of period 34 31 30 29 28 Opened 3 3 2 4 -- Closed -- 2 1 3 -- Total number of stores: Operated at end of period 136 131 127 123 122 Opened 9 8 7 6 3 Closed 4 4 3 5 3 Remodeled 8 7 7 5 3 Total retail square feet: At beginning of period 14,194,000 13,423,000 12,646,000 12,679,000 12,213,000 Added by new stores opened 948,000 795,000 811,000 295,000 584,000 Added by remodeling of existing stores 96,000 174,000 80,000 39,000 63,000 Less closed stores 381,000 198,000 114,000 367,000/3 181,000 At end of period 14,857,000 14,194,000 13,423,000 12,646,000 12,679,000 - ------------------ /1 The calculation for comparable store sales for the year ended February 3, 1996, a 53-week year, is computed by adding a 53rd week to 1994's sales base. /2 Includes only sales of stores operating throughout each of the periods compared. /3 Includes square footage for 30 restaurants that were converted to tenant space. /4 Affected by a series of labor disputes in the greater Portland, Oregon area in 1994.
Business Strategy ----------------- The Company's principal business strategy is to operate one-stop- shopping stores that provide convenient shopping for a broad selection of products in one location. Stores are organized into distinct departments and sections within departments that specialize in the sale of particular products. The Company promotes cross-shopping through convenient access between departments, by making each department and section a strong competitor in the market for the products it sells and by providing easy customer checkout through its common checkout system that allows customers to purchase merchandise from any department at any checkout location. Breadth and Depth of Selection. In most of its stores, the Company sells over 225,000 items, including a wide selection of food, apparel, and products for the home, with an emphasis on necessities and items of everyday use. The Company takes advantage of the stores' high and diverse customer traffic to sell many categories of goods which are purchased on a discretionary basis, such as fine jewelry, home electronics, and fashion apparel. Within many categories of apparel, products for the jewelry, and home electronics, the Company offers customers the breadth of selection 3 normally afforded by department or specialty stores. Its selection of food and groceries is comparable to that of large supermarkets. The Company emphasizes the sale of popular brands and its own private-label brands. Multidepartment Stores. The Company's large stores are organized into departments and sections within departments that specialize in the sale of particular products. The Company endeavors to create individual, recognizable identities for each department and section through specialized design, fixtures, and decor. In most stores, common checkout areas allow the checkout of items from the Company's many departments at any cash register and facilitates convenient shopping. Most of the Company's departments and sections are self-service, except in areas where special assistance is required, such as service delicatessens, home electronics, fine jewelry, and pharmacy. Stores consist of a variety of departments and specialty sections that include full-service food, pharmacy, nutrition, housewares, domestics, paint and home decor items, plumbing and electrical items, hardware and tools, building materials, garden, floral, sporting goods, automotive, home office supplies and stationery, cards and books, toys, basic and fashion apparel for all ages, shoes, home electronics, and fine jewelry. Multidepartment stores that include food departments best represent the Company's strategy. In more recent years the Company has been adding food to previously nonfood multidepartment stores and replacing some of its older nonfood stores with new full-service stores including food departments. Store and Regional Management. Each of the Company's stores is managed by a sales director who is responsible for store sales, operations, and profitability and departmental cross-merchandising. Departments within multidepartment stores are managed by merchandising managers, who report to sales directors. Each sales director and department manager is supported by a regional supervisor and other senior managers who specialize in the market for products sold in the stores. In 1992, the Company augmented its store management structure by establishing regional management teams that work closely with the stores in their region to enhance sales and profit opportunities. As a result of its specialized management structure, the Company believes that each store and each department within the store better serves its customers and is able to respond quickly to market changes. Location and Store Design. New store sites are determined based on a review of information on demographics and the competitive environment for the market area in which the 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, one-stop-shopping store in the area it serves. The Company's standard store design in the future will be approximately 150,000 square feet. In 1996, the Company opened a 130,000 square-foot store in Tillamook, Oregon. This design will facilitate entry into smaller markets. The Company anticipates using a given prototype depending on the market to be served and the size of the site being developed. The Company is flexible in its store design where land sites require specialized designs. Promotion and Advertising. The Company aggressively promotes sales for all departments through weekly advertising, primarily in local and area newspapers, radio and television. Advertising often features many high-demand products at competitive prices. Sale items are usually items regularly sold in the departments. The Company emphasizes everyday low prices in its food departments, and generally offers promotional sale pricing in its nonfood departments. The Company believes that it is known for competitive pricing and its customer-friendly return policy. In 1995, the Company added a monthly coupon book with both food and nonfood offerings. Information Services. In 1991, the Company began a program to modernize its systems to better support its business. A new computer network was installed, allowing every store to be linked with the main office and distribution centers. In 1992, Quick Response inventory management was initiated through the introduction of automatic replenishment for certain goods and electronic data interchange ("EDI") with vendors. A new pharmacy 4 system was added in the Company's multidepartment stores. In 1993, the Company continued expanding its Quick Response capabilities by installing a new distribution system and by beginning the implementation of new inventory and merchandise management systems. In 1994, the Company's Continuous Replenishment Program was strengthened by the implementation of new jewelry, music and video, and item performance systems. In 1995, the Company improved its supply chain capabilities with a "flow-through" general merchandise distribution system and purchasing and distribution systems for meat, produce, and seafood. The Company expanded EDI systems to support data exchange with freight carriers, transmission of sales forecasts to vendors, and receipt of invoices directly into an accounts payable imaging system. In addition, in-store communications, check cashing, credit authorization, and point-of-sale systems were upgraded. In 1996, the Company plans to complete the rollout of its merchandising systems for its nonfood departments, followed by its food department in 1997. Also planned is the implementation of Electronic Benefits Transfer (EBT), debit card authorization, completion of direct store delivery systems, implementation of a new accounts payable system, and integration of all new systems into a new financial reporting system. The introduction of the Company's home page "http://www.fredmeyer.com" on the Internet enables exploration of new marketing opportunities. Retail Operations ----------------- The Company's multidepartment stores contain up to seven main departments. Within certain departments are a variety of merchandise sections operated like specialty businesses. The following table sets forth the number of departments (and lists certain of the sections within the Home and Apparel departments) in the Company's 102 multidepartment stores at February 3, 1996: Food...................................................94 Nonfood The Home..........................................102 Automotive Cards and Books Domestics Garden Home Decor Home Improvement Housewares Sporting Goods Toys Variety and Seasonal Home Electronics..................................102 Apparel...........................................102 Apparel Cosmetics Shoes Pharmacy..........................................101 Health and Beauty Aids............................102 Fine Jewelry.......................................93 The Food Department is typically the same size as free-standing super food stores of competitors and carries a wide variety of national brands together with the Company's private-label brands of grocery items, which are Fred Meyer, President's Choice, and FMV (Fred Meyer Value). Beginning in 1992, the Company implemented a program to increase sales of its private-label grocery items. As a result, sales of private-label grocery items as a percentage of total grocery sales have increased to a current level of over 20 percent from 12 percent in 1991. Private-label items generally are sold at lower prices to the customer and generate higher margins for the Company than national-brand products. The Company also carries fresh produce, meat, dairy 5 products, nutritional products, bakery products, candy, and tobacco, all sold on a self-selection basis. Most food departments contain a nutrition section that includes name brand and generic natural foods, dairy products, juices, vitamins, supplements, sugar-free and fat-free products, and meat substitutes. Certain items, such as grains, nuts, fruits, and natural snacks, are also displayed in bulk to enable customers to buy any amount and package their own purchases. In many multidepartment stores, the Company operates in-store bakeries and service departments that offer fresh seafood, delicatessen items, and meat products. The Company's newer stores include sit-down eating areas near the service delicatessens and take-out departments. The following table sets forth the number of nutrition, in-store bakery, and service departments at February 3, 1996: Nutrition............................................97 Bakery...............................................92 Service Delicatessen.................................93 Service Fish Market..................................72 Service Meat Market..................................41 The Home Department offers a wide selection of home decor, housewares, small appliances, domestics, furniture, sporting goods, greeting cards, books, floral products, power lawn mowers, garden tools, fertilizers and chemicals, toys, seasonal and holiday merchandise, hardware, tools, paint, building materials, plumbing and electrical fixtures, automotive supplies, and related accessories. Some of the national brands featured are Braun, Kitchen-Aid, Coleman, Glidden, and Weber. Home improvement, garden and automotive sections feature many items for the do-it-yourself customer. High-quality private-label products under our Fred Meyer, Northwest Home, Everyday Living, and Kraft King labels complement our national-brand offering. The Apparel Department offers moderately priced national-brand and private-label apparel, sportswear, cosmetics, accessories, and family and active shoes. Major national brands carried by the apparel departments include Levi's, Jockey, Maidenform, Vanity Fair, Nike, Reebok, Adidas, Gotcha, Eastland, Union Bay, Columbia Sportswear, Capezio, Lee, Bali, and Keds. High-quality private-label products such as Fred Bear, Katherine Bishop, and KB & Co. labels complement our national-brand offering. The Company's private-label sales in the Home and Apparel categories represents 12 to 13 percent of these categories' sales, with a goal of approximately 15 to 20 percent. The strategy employed in nonfood departments is to use private-label products for entry-level price points. The Home Electronics Department offers the latest name-brand high-technology merchandise, such as televisions, audio components, cellular phones, computer software, telephones, and a large selection of video games. Some of the national brands featured are SONY, JVC, Pioneer, and Magnavox. It also offers a large selection of compact discs, and for-sale video, and includes a photo-finishing section. One-hour photo-finishing has also been added to numerous locations. The Pharmacy Department sells a full line of name-brand and generic prescription drugs dispensed by full-time licensed pharmacists and participates with all major third-party Health Maintenance of Oregon and Preferred Provider Organization plans. The Health and Beauty Aids Department offers a wide selection of national- and private-label brands of health and beauty aid products. It also offers candy and confections and dietary food products. A new line of private-label toiletry and personal-care products called Personal Choice was introduced in 1995. The Fine Jewelry Department offers an extensive selection of bridal jewelry and diamond fashion jewelry, including precious and semi-precious stones. It also offers name-brand watches and an assortment of 14-carat gold chains and earrings. 6 Most of the Company's multidepartment stores open from 7:00 a.m. to 9:00 a.m. and close between 10:00 p.m. and 11:00 p.m., seven days a week, including all holidays except Christmas. Most of the Company's multi- department store locations have unaffiliated tenants which offer goods and services complementing those offered by the Company, such as banks, optical centers, coffee shops, restaurants, self-service laundries, insurance agencies, and beauty and barber shops. The Company's specialty store hours vary depending on location. The Company honors most nationally recognized credit cards for sales in all of its departments. In addition, the Company has its own credit card program which is serviced by a national credit card processor. The Company also accepts debit cards that are associated with nationally recognized credit card processors. In 1996, the Company's stores in Utah began accepting debit cards that use personal identification number ("PIN") pads and can process electronic benefits online. It is anticipated that stores in other states will come online for such service later in 1996 and in 1997. 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 its various market areas to determine whether it should expand or consolidate its operations in those areas. In 1991 and 1992, new store openings, development, and remodeling activity declined to a two-year total of five new multidepartment stores and eight remodels while the Company focused on reducing expenses and improving profitability. For the period 1993 through 1995, the Company increased new store development in its existing markets and increased the level of remodeling of existing stores. The numbers of multidepartment stores opened, closed, and remodeled during 1993, 1994, and 1995 are as follows:
Including Replacement --------------------- Year Opened Closed Replaced Remodeled ---- ------ ------ -------- --------- 1993 5 2 1 7 1994 5 2 0 7 1995 6 4 1 8
Generally, the Company plans to open at least four new multidepartment stores and remodel at least four existing stores in each of the five years beginning in 1996. Total retail space, net of closures, increased 663,000 square feet during 1995, representing an increase of approximately 4.7 percent. New multidepartment store openings during 1995 were as follows:
Total Retail Space Location Square Footage Opened -------- -------------- --------------- Monroe, Washington................... 149,000 May, 1995 Lake City (Seattle), Washington...... 124,000 September, 1995 Renton (Seattle), Washington......... 167,000 September, 1995 West Jordan (Salt Lake City), Utah... 167,000 September, 1995 Salt Lake City, Utah................. 169,000 September, 1995 Kennewick, Washington................ 167,000 November, 1995
7 Planned new multidepartment store openings during 1996 are as follows:
Total Location Planned Location Square Footage* Opening -------- -------------- --------------- Tillamook, Oregon 130,000 March, 1996 Hillsboro, Oregon 168,000 May, 1996 Meridian, Idaho 177,000 June, 1996 Twin Falls, Idaho 181,000 June, 1996 Scappoose, Oregon 160,000 September, 1996 *Includes tenant space.
Distribution and Processing --------------------------- The Company operates a centralized distribution facility in a complex at Clackamas, Oregon, near Portland, containing 1,528,000 square feet, a 310,000 square-foot flow-through retail service center in Chehalis, Washington, and a 600,000 square-foot food distribution center in Puyallup, Washington. Approximately two-thirds of the merchandise the Company sells is currently shipped from these facilities, with the balance shipped directly by vendors to the Company's stores or, in the case of food products for its Idaho and Utah stores, purchased from a major wholesale supplier. As a result of its recent investment in information systems and distribution facility improvements, the Company has been able to establish EDI and automated replenishment programs with many vendors. These quick response capabilities are designed to improve inventory management and reduce handling of inventory in the distribution process, which the Company believes will result in lower markdowns and lower distribution costs. The Company believes that its distribution and related information systems provide several advantages. First, they permit stores to maintain proper inventory levels for more than 190,000 items supplied through its central distribution centers. Second, centralized purchasing and distribution reduces 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. Fourth, the Company is able to lower its total level of inventory investment and related financing costs. The Company opened its flow-through retail service center in April, 1994 in Chehalis, Washington to serve as the centralized processing facility for certain apparel, music, seasonal, and other nonfood items. This facility eliminated approximately 370,000 square feet of leased warehouse space, including the Company's 122,000 square-foot Salt Lake City facility. It also allows the Company to meet its nonfood distribution center needs past the year 2000. The Company's Chehalis facility minimizes the required handling and processing of goods received from vendors and distributed to the Company's stores. The Company believes that this flow-through system will enable it to improve inventory management and to further reduce the distribution costs for the goods shipped through this facility. In 1995 the Company opened the 600,000 square-foot centralized food distribution facility in Puyallup, Washington, near Seattle, to serve stores in the Puget Sound Region and Alaska. This facility reduces the cost of transporting goods into the Puget Sound and Alaska markets, and affords the Company increased forward-buying opportunities for its food operations. The Company operates a large fleet of trucks for distribution of goods to its retail stores and operates a central bakery and dairy. 8 Competition ----------- The retail merchandising business is highly competitive. Because of the broad range of merchandise sold by the Company, it competes with many types of retail companies, including national, regional, and local super-markets, discount stores, drug stores, conventional department stores, and specialty stores. The Company's competitive position in the retail business varies by type of goods and the communities in which its stores are located. In the past five years, 474 new competitor stores have opened in the Company's markets. They include Wal-Mart, Walgreens, Home Depot, HomeBase, Eagle, Sam's Club, Incredible Universe, Circuit City, Good Guys, Future Shops, Ernst, Price/Costco, Mervyn's, PayLess, Penneys, Kmart, Target, ShopKo, Toys-R-Us, Food 4 Less, Cub Foods, Safeway, Albertson's, Smiths Foods, Carrs, and Quality Food Centers. 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 efforts. Employees --------- The Company employs approximately 27,000 full- and part-time employees. Approximately 50 percent of the Company's employees are represented by 32 different labor unions or locals. These employees are covered by 110 different collective bargaining agreements, none of which covers more than 2,600 employees. Approximately 24 percent of the agreements, covering 12 percent of the labor force, will expire during 1996, including agreements covering employees in both large metropolitan and smaller nonmetropolitan areas where the Company operates. The last work stoppages the Company experienced involved the multiemployer bargaining unit for food clerks, checkers, and meatcutters in Portland, Oregon and Vancouver, Washington in 1994, which lasted 88 days. At the same time, Company union employees at its Clackamas distribution facilities, trucking operation, dairy and a small portion of its office employees went on strike. Coos Bay, Oregon nonfood employees went on strike in late 1994 and returned to work on January 14, 1995. There were no work stoppages in 1991, 1992, 1993, or 1995. The Company believes that it has good relations with the many unions representing its employees. In 1995, the Company reached agreement on its contracts covering nonfood and food workers in the Seattle/Tacoma area, among other agreements reached. While the Company is optimistic about reaching agreements on expiring labor agreements in the future, no assurance can be given that the parties will be able to reach a final conclusion without the occurrence of a work stoppage. Forward-looking Statements -------------------------- Information set forth in this Annual Report on Form 10-K regarding the Company's plans for future operations, including store expansion and remodeling, capital spending, and expense reduction efforts, constitute forward-looking statements that involve a number of risks and uncertainties. In addition, from time to time the Company may issue other forward-looking statements. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: business and economic conditions generally in the regions in which the Company's stores are located, including the rate of inflation; population and job growth in the Company's markets; competitive factors, such as increased penetration in the Company's markets of large national food and nonfood chains and large, single-category retailers and competitive pricing pressures generally; results of the Company's programs to decrease costs as a percent of sales; relations with the union bargaining units representing the Company's employees; factors that might affect the Company's cost and availability of capital; and unusual weather conditions. Any forward-looking statements should be considered in light of these factors. 9 Item 2. Properties. - ------ ---------- As a part of the leveraged buyout transaction in which the Company was incorporated in 1981, Real Estate Properties Limited Partnership ("Properties"), acquired the real estate assets of the corporation that was the predecessor to the Company. In 1986, the Company amended and restated 76 leases relating to 71 stores, its Clackamas distribution center, and four other facilities. The leases provide, among other things: (1) fixed rent expense in the aggregate for accounting purposes over the initial term of the leases at levels below rent expense under the prior leases for the fiscal year ended January 30, 1988; (2) initial lease terms generally averaging 20 years; (3) future rent from certain unrelated subtenants to be paid to the Company; and (4) seven five-year renewal options under leases for the 36 leased properties owned by Metropolitan Life Insurance Company (the "Institutional Investor") at rents for the first five option periods below the average rents during the initial term, and an option for the Company to purchase any of the leased properties at the end of the initial term and at the end of each option period. Properties sold to the Institutional Investor its interest in 36 of the 76 properties which were leased to the Company in 1986. The Institutional Investor is also an investor in Properties and FMI Associates. At March 1, 1996, FMI Associates beneficially owned approximately 38.0 percent of the Company's common stock. (See Items 12 and 13 under Part III.) Twenty-nine store locations and four other facilities are owned by the Company and its subsidiaries. The balance of the Company's locations are leased from the Institutional Investor, Properties or third parties. All of the Company's stores and its distribution and processing facilities are in good condition. Of the Company's 102 multidepartment stores, 88 percent have either been built or received a major remodel in the last ten years. The Company also owns three parcels of land, all of which are being held for development of future stores. Additionally, it owns one store and three parcels of land in California, two parcels of land in Washington, and one parcel of land in Utah which are being held for sale. The following table as of February 3, 1996, summarizes the remaining lease years, assuming the exercise of all options, for store locations and the Company's distribution facilities, warehouses, and plants.
Distribution Facilities Store Locations Warehouses & Plants --------------------------- ---------------------------- Remaining Number Square Ft. of % of Total Square Ft. of % of Total of Lease Years Retail Space Square Ft. Facility Space Square Ft. - ------------------- ------------- ---------- -------------- ---------- Less than 5 years 341,377 2.3% 125,104 4.1% 5 through 15 years 463,936 3.1% 0 0.0% 16 through 25 years 3,029,591 20.4% 0 0.0% Over 25 years 7,094,118 47.7% 1,527,875 50.2% ---------- ------ --------- ------ Total Leased 10,929,022 73.6% 1,652,979 54.3% ---------- ------ --------- ------ Owned Properties 3,928,403 26.4% 1,390,414 45.7% ---------- ------ --------- ----- Total 14,857,425 100.0% 3,043,393 100.0% ========== ===== ========= =====
The Company has no obligation to exercise any options beyond the primary lease terms. 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 position or consolidated results of operations. 10 Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- Not applicable. Item 4(a). Executive Officers of the Registrant. - --------- ------------------------------------ As of March 1, 1996, the executive officers of the Company were as set forth below.
Original Date of Name Age Position Employment ---- --- -------- ---------- Robert G. Miller 51 Chairman of the Board and 1991 Chief Executive Officer Curt A. Lerew, III 48 Executive Vice President, 1991 Sales and Operations Wayne W. Abbott 47 Senior Vice President, Home Group 1970 R. Eric Baltzell 55 Senior Vice President, Store Sales 1962 Roger A. Cooke 47 Senior Vice President, General Counsel 1992 and Secretary Edward A. Dayoob 56 Senior Vice President, Jewelry Group 1973 Michael H. Don 40 Senior Vice President, 1987 Strategic Planning and Logistics Sammy K. Duncan 44 Senior Vice President, Food Group 1992 Keith W. Lovett 52 Senior Vice President, 1992 Human Resources Ronald J. McEvoy 48 Senior Vice President, 1991 Chief Information Officer Norman O. Myhr 48 Senior Vice President, 1978 Sales Promotion and Marketing Cheryl D. Perrin 57 Senior Vice President, Public Affairs 1976 Mary F. Sammons 49 Senior Vice President, Apparel and Home Electronics Group 1973 Kenneth Thrasher 46 Senior Vice President, Finance and 1982 Chief Financial Officer Scott L. Wippel 42 Senior Vice President, 1992 Corporate Facilities
The executive officers of the Company are elected annually for one year and hold office until their successors are elected and qualified. There are no family relationships among the executive officers of the Company. Mr. Miller became Chairman of the Board and Chief Executive Officer of the Company in August of 1991. 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 has more than 30 years of experience in the retail food industry. Mr. Lerew became Senior Vice President, Food Group in October 1991 and was elected Executive Vice President, Sales and Operations in February 1996. Prior to that time he was employed by Albertson's, where his most recent positions were Senior Vice President and Regional Manager in 1991, Senior Vice President of Corporate Merchandising from 1990 to 1991, and Vice President, 11 Western Washington Division, from 1987 to 1990. Mr. Lerew has more than 30 years of experience in the retail food industry. Mr. Abbott became Senior Vice President, Home Group in February 1996. Prior to that time, he served as Vice President, Home Group from September 1994 through February 1996, and Vice President, Food Group from 1989 through August 1994. Mr. Baltzell served as Vice President, Food Operations of the Company from 1982 until his election as Senior Vice President, Store Sales and Operations Division in June 1989. In 1996, his title was changed to Senior Vice President, Store Sales. Mr. Cooke became Vice President, General Counsel and Secretary of the Company in August 1992. He was elected Senior Vice President in 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. Mr. Dayoob served as Vice President, Jewelry Division of the Company from 1979 until his election as Senior Vice President, Photo Electronics and Jewelry Division in June 1989. This Division was renamed the Home Electronics and Jewelry Group in 1990. The Home Electronics Division was merged into the General Group in 1993. Mr. Dayoob was named Senior Vice President, Jewelry Division in 1993. Mr. Don became Vice President, Corporate Treasurer in October 1987 and was elected Senior Vice President, Strategic Planning and Asset Management in June 1995. Beginning in February 1996, Mr. Don also assumed responsibilities for the Company's logistics, transportation, and traffic departments. Before joining the Company in 1987, he was controller and treasurer for two real estate development and management companies. Mr. Duncan became Senior Vice President, Food Group in February 1996. Prior to that time, he served as Food Group Division Vice President from 1994 to February 1996, and Vice President Grocery Merchandiser from 1992 to 1994. During 1991 and prior to joining the Company in 1992, he was Director of Operations for Albertson's. Mr. Lovett became Senior Vice President, Human Resources of the Company in February 1992. Prior to that time he was employed by Eagle Food Centers, where he was Senior Vice President of Human Resources and Vice President of Industrial Relations. Mr. McEvoy became Senior Vice President, Chief Information Officer in charge of the Company's Information Services in July 1991. For the year prior to that, he worked for IBM United States as a business advisor in the retail industry. From 1987 to 1990, he was Senior Vice President for Management Information Systems (MIS) for J.B. Ivey. He held the same position from 1983 to 1987 with John Wanamaker. He also held various MIS and financial positions with Hecht's from 1969 to 1983. Mr. Myhr served as Vice President, Sales Promotion of the Company from 1982 until his election as Senior Vice President, Strategic Marketing in June 1989. He now serves as Senior Vice President, Sales Promotion and Marketing. Ms. Perrin served as Vice President, Government Affairs from 1985 until her election as Vice President, Public Affairs in 1988. She was elected Senior Vice President, Public Affairs in April 1992. Ms. Sammons served as Vice President within the Soft Goods Division of the Company from 1980 until her election as Senior Vice President, Soft Goods Division in January 1986. In June 1989, she was elected Senior Vice President, General Merchandise Division. This Division was renamed the General Group in 1990. In 1995, she was named Senior Vice President, Apparel and Home Electronics Group. 12 Mr. Thrasher served as Vice President, Corporate Treasurer of the Company from 1982 until his election as Vice President - Finance, Chief Financial Officer, and Secretary in June 1987. He was elected Senior Vice President, Finance and Chief Financial Officer effective March 1989. Mr. Wippel became Vice President, Corporate Facilities in June 1992. He was elected Senior Vice President in April 1993. Prior to that, he was employed by Albertson's, where his most recent positions were Vice President of Real Estate from 1990 to 1992 and Director of Real Estate from 1988 to 1990. PART II Item 5. Market for the Registrant's Common Stock and Related - ------ Stockholder Matters. ---------------------------------------------------- The information required by this item is included under "Common Stock Information" on page F-5 of this Annual Report on Form 10-K. Item 6. Selected Financial Data. - ------ ----------------------- The information required by this item is included under "Selected Financial Data" on pages F-1 and F-2 of this Annual Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial - ------ Condition and Results of Operations. ------------------------------------------------- The information required by this item is included under "Management's Discussion and Analysis" on pages F-3 through F-5 of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The information required by this item is listed in Item 14 of Part IV of this Annual Report on Form 10-K. 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. - ------- -------------------------------------------------- Information with respect to directors of the Company is included under "Election of Directors" in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report. Item 11. Executive Compensation. - ------- ---------------------- Information with respect to executive compensation is included under "Executive Compensation" in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference, except for items appearing under the subheadings "Compensation Committee Report on Executive Compensation" and "Comparison of Five Year Cumulative Total Return" which are not incorporated herein. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------- -------------------------------------------------------------- As of March 1, 1996 the only person who or entity which, to the knowledge of the Board of Directors, beneficially owned more than 5 percent of the Common Stock of the Company was KKR Associates, 9 West 57th Street, New York, New York 10019. On such date, KKR Associates beneficially owned 10,700,038 shares of Common Stock of the Company, representing approximately 38 percent of the outstanding shares. 13 KKR Associates is a limited partnership of which Paul E. Raether, Michael W. Michelson, and Saul A. Fox, directors of the Company, are three of twelve general partners. Jerome Kohlberg, Jr., a director of the Company, is a limited partner of KKR Associates. The shares described as beneficially owned by KKR Associates are owned of record by FMI Associates Limited Partnership ("FMI Associates"), of which KKR Associates is the sole general partner and as to which it possesses 100 percent of the voting power and investment power. Shares described as beneficially owned by KKR Associates include 1,566,441 shares which FMI Associates has the right to acquire pursuant to a presently exercisable option. The FMI Associates limited partnership agreement is, by its terms, to dissolve on December 31, 1996 unless amended by all of the limited partners to extend the term beyond such date. There can be no assurance that KKR Associates will seek such amendments, or, if sought, that they will be approved by the limited partners. In the event of the winding up and dissolution of FMI Associates, KKR Associates will have sole discretion regarding the disposition of such Common Stock, including public or private sales of such Common Stock, the distribution of such Common Stock to the limited partners of FMI Associates, or a combination of the foregoing. If shares of Common Stock are distributed to the limited partners of FMI Associates, each limited partner will thereafter have sole discretion with respect to its Common Stock. Additional information with respect to security ownership of certain beneficial owners and management is included under "Voting Securities and Principal Shareholders" and "Election of Directors" in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- Information required by this item is included under "Certain Transactions" in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ------- ---------------------------------------------------------------- (a)(1) Financial Statements. -------------------- The following documents are included in this Annual Report on Form 10-K at the pages indicated: Page in this Annual Report ------------- Fred Meyer, Inc. and Subsidiaries: Statements of Consolidated Operations - F-6 Years Ended February 3, 1996, January 28, 1995, and January 29, 1994 Consolidated Balance Sheets - February 3, 1996 and January 28, 1995 F-7 and F-8 Statements of Consolidated Cash Flows - Years Ended February 3, 1996, January 28, 1995, and January 29, 1994 F-9 Statements of Changes in Consolidated Stockholders' Equity - Years Ended January 29, 1994, January 28, 1995, and February 3, 1996 F-10 Notes to Consolidated Financial Statements F-11 through F-16 Management's Report on Responsibility for Financial Statements F-17 Independent Auditors' Report F-17 14 (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. -------- 3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33-49638. 4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670. 4B Credit Agreement dated as of June 30, 1994, among Fred Meyer, Inc., various banks named therein, and Bank of America as Agent. Incorporated by reference to Exhibit 4B to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4C Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670. 4D Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4E Credit Agreement dated as of March 6, 1995, among Fred Meyer, Inc., various financial institutions named therein, and The Bank of Nova Scotia as Agent. Incorporated by reference to Exhibit 4E to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4F Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023). 4G Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023). 15 *10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023). *10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023). *10B Fred Meyer, Inc. Bonus Plan Description, as amended. 10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139. *10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. *10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. *10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994. *10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. *10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; 16 and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). 10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Fred Meyer, Inc., Lessee for the Stadium Parking Lot. Incorporated by reference to Exhibit 10J(6) to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 10L Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 10M Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). 10N Lease Agreement, dated February 1, 1990, relating to additional property adjacent to Oak Grove store location between REC Resolution Co. as successor in interest to Vanoak Corporation, Lessor, and Fred Meyer, Inc., Lessee. Incorporated by reference to Exhibit 10P to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023). 10O Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the 17 Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023). 10P Lease Agreement, dated December 12, 1988, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Fifth Avenue Corporation, as Lessor, for the Burlingame store. Incorporated by reference to Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023). 10Q Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10R Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. 10S Lease Assignment Agreement between Real Estate Properties Limited Partnership (REPL) as assignor, and the Company as assignee, dated as of March 14, 1995, pursuant to which the Company has agreed to purchase the leasehold interest of REPL in the Hawthorne, Hazel Dell and Raleigh Hills stores; and a related Real Estate Purchase and Sale Agreement between REC Resolution Co. as seller and the Company as purchaser, dated as of March 14, 1995, pursuant to which the Company has agreed to purchase the fee interest of REC Resolution Co., (an affiliate of REPL) in the Hawthorne, Hazel Dell and Raleigh Hills stores. Incorporated by reference to Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10T Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023). 10U Lease Agreement Tax Retention Operating Lease dated May 5, 1995 between First Security Bank of Utah, N.A. not individually but solely as Owner Trustee under FM Trust 1995-1, as Lessor and Fred Meyer, Inc., as Lessee, Appendix A to Participation Agreement and Lease Supplements nos. 1, 2, and 3 dated as of May 3, 1995 between First Security Bank of Utah, N.A. lessor, and Fred Meyer, Inc., lessee. Incorporated by reference to Exhibit 10U to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0- 15023). 10V Lease Agreement Tax Retention Operating Lease dated as of December 1, 1995 between First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FM Trust 1995-2, as Lessor and Fred Meyer, Inc. as Lessee, and Appendix A to Participation Agreement. 18 10W Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. 11 Computation of Earnings per Common Share. 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. (b) Reports on Form 8-K. ------------------- No reports on Form 8-K were filed by the Company during the last quarter of the year ended February 3, 1996. 19 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. FRED MEYER, INC. Date: March 20, 1996 By KENNETH THRASHER ------------------------------ Kenneth Thrasher, Chief Financial Officer, Senior Vice President - Finance 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 March 20, 1996. Signature Title --------- ----- (1) Principal Executive Officer ROBERT G. MILLER Chairman of the Board - ------------------------------ and Chief Executive Officer Robert G. Miller (2) Principal Financial Officer KENNETH THRASHER Chief Financial Officer, - ------------------------------ Senior Vice President - Finance Kenneth Thrasher (3) Principal Accounting Officer THOMAS R. HUGHES Vice President and Controller - ------------------------------ Thomas R. Hughes (4) Directors * JEROME KOHLBERG, JR. Director - ------------------------------ Jerome Kohlberg, Jr. 20 * PAUL E. RAETHER Director - ------------------------------ Paul E. Raether * SAUL A. FOX Director - ------------------------------ Saul A. Fox * MICHAEL W. MICHELSON Director - ------------------------------ Michael W. Michelson * ROGER S. MEIER Director - ------------------------------ Roger S. Meier * A.M. GLEASON Director - ------------------------------ A.M. Gleason * By KENNETH THRASHER ------------------------- Kenneth Thrasher As Attorney in Fact 21 SELECTED FINANCIAL DATA (Page 1 of 3) (1993-1996)
Fiscal Year Ended -------------------------------------------------------- February 3, January 28, January 29, January 30, (In thousands, except per-share data and statistical information) 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Net sales................................................................... $3,428,664 $3,128,432 $2,979,082 $2,853,962 Gross margin................................................................ 979,460 867,117 890,514/5 857,262 Operating and administrative expenses....................................... 891,033 813,721 752,408 743,022 Writedown of California assets/restructuring charge (reversal).............. -- 15,978/4 -- -- Income from operations ..................................................... 88,427 37,418/4 138,106/5 114,240 Interest expense, net of interest income/1.................................. 39,578 25,857 17,604 18,070 Income (loss) before income taxes........................................... 48,849 11,561/4 120,502 96,170 Provision for (benefit from) income taxes................................... 18,563 4,393/4 49,598/6 35,583 Net income (loss) before cumulative effect of accounting change or extraordinary item.................................................... 30,286 7,168/4 70,904/5,6 60,587 Cumulative effect of accounting change...................................... -- -- (2,588)7 -- Extraordinary item.......................................................... -- -- -- -- ------------------------------------------------------- Net income (loss)........................................................... $ 30,286 $ 7,168/4 $ 68,316/5,6,7 $60,587 ------------------------------------------------------- Earnings (loss) per common share: Net income (loss) before cumulative effect of accounting change or extraordinary item.................................................. $1.07 $.25/4 $2.50/5,6 $2.21 Cumulative effect of accounting change................................... -- -- (.09)/7 -- Extraordinary item....................................................... -- -- -- -- ------------------------------------------------------- Net income (loss)........................................................ $1.07 $.25/4 $2.41/5,6,7 $2.21 ------------------------------------------------------- BALANCE SHEET DATA Total assets................................................................ $1,671,592 $1,562,672 $1,326,076 $1,081,627 Capitalization: Long-term debt .......................................................... $ 656,260 $ 540,166 $ 321,398 $ 195,837 Lease obligations........................................................ 58,318 63,229 65,955 70,313 Stockholders' equity..................................................... 571,234 538,620 527,686 450,128 ------------------------------------------------------- Total.................................................................. $1,285,812 $1,142,015 $ 915,039 $ 716,278 ------------------------------------------------------- STATISTICAL INFORMATION Percent of net sales: Nonfood sales............................................................ 59.0% 61.7% 62.5% 63.3% Food sales .............................................................. 41.0% 38.3% 37.5% 36.7% Total stores sales growth................................................... 9.6% 5.0% 4.4% 5.6% Comparable stores sales percentage increase (decrease)...................... 2.1%/2,3 (2.0)%/3 2.4%/3 3.0%/3 Long-term debt as a percent of total capitalization......................... 55.6% 52.8% 42.3% 37.2% Net income (loss) as a percent of net sales................................. .9% .2%/4 2.3%/5,6,7 2.1% Number of multidepartment and specialty stores opened during year........... 9 8 7 6 Number of multidepartment and specialty stores closed during year........... 4 4 3 5 Number of multidepartment and specialty stores operated at end of year...... 136 131 127 123 Total retail square feet at end of year..................................... 14,857,000 14,194,000 13,423,000 12,646,000 Selling square feet at end of year.......................................... 10,817,000 10,490,000 9,999,000 9,471,000 Sales per selling square foot (weighted average)............................ $316 $304 $312 $304 Common shares outstanding (weighted average)................................ 28,333,000 28,625,000 28,375,000 27,446,000 - ------------------------------------------------------------------------------------------------------------------------------------
F-1 SELECTED FINANCIAL DATA (Page 2 of 3) (1989-1992)
Fiscal Year Ended ------------------------------------------------------- February 1, February 2, February 3, January 28, (In thousands, except per-share data and statistical information) 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Net sales................................................................... $2,702,721 $2,476,055 $2,284,535 $2,073,544 Gross margin................................................................ 809,900 741,720 671,044 610,415 Operating and administrative expenses....................................... 726,617 674,212 620,953 544,225 Writedown of California assets/restructuring charge (reversal).............. (8,289)/8 -- 49,277/8 -- Income from operations ..................................................... 91,572/9 67,508 814/11 66,190 Interest expense, net of interest income1................................... 20,577 15,974 13,947 9,291 Income (loss) before income taxes........................................... 70,995/8,9 51,534 (13,133)/11 56,899 Provision for (benefit from) income taxes................................... 25,768 17,951 (6,285)/11 20,238 Net income (loss) before cumulative effect of accounting change or extraordinary item..................................................... 45,227/8,9 33,583 (6,848)/11 36,661 Cumulative effect of accounting change...................................... -- -- -- -- Extraordinary item.......................................................... -- -- -- -- ------------------------------------------------------- Net income (loss)........................................................... $ 45,227/8,9 $ 33,583 $ (6,848)/11 $ 36,661 ------------------------------------------------------- Earnings (loss) per common share: Net income (loss) before cumulative effect of accounting change or extraordinary item.................................................. $1.80/8,9 $1.37 $(.28)/11 $1.50 Cumulative effect of accounting change................................... -- -- -- -- Extraordinary item....................................................... -- -- -- -- ------------------------------------------------------- Net income (loss)........................................................ $1.80/8,9 $1.37 $(.28)/11 $1.50 ------------------------------------------------------- BALANCE SHEET DATA Total assets................................................................ $ 974,780 $ 905,756 $ 796,894 $ 686,806 Capitalization: Long-term debt .......................................................... $ 240,968 $ 232,881 $ 188,441 $ 92,180 Lease obligations........................................................ 67,387 67,664 66,393 50,774 Stockholders' equity..................................................... 335,154 285,299 251,546 258,188 ------------------------------------------------------- Total.................................................................. $ 643,509 $ 585,844 $ 506,380 $ 401,142 ------------------------------------------------------- STATISTICAL INFORMATION Percent of net sales: Nonfood sales............................................................ 63.7% 64.3% 66.8% 68.2% Food sales .............................................................. 36.3% 35.7% 33.2% 31.8% Total stores sales growth................................................... 9.2% 11.6%/10 8.4%/10 12.2% Comparable stores sales percentage increase (decrease)...................... 4.0%/3 3.6%/3,10 4.5%/3,10 7.9%/3 Long-term debt as a percent of total capitalization......................... 47.9% 51.3% 50.3% 35.6% Net income (loss) as a percent of net sales................................. 1.7% 1.4% (.3)%/11 1.8% Number of multidepartment and specialty stores opened during year........... 3 5 15 14 Number of multidepartment and specialty stores closed during year........... 3 8 2 1 Number of multidepartment and specialty stores operated at end of year...... 122 122 125 112 Total retail square feet at end of year..................................... 12,679,000 12,213,000 11,743,000 10,925,000 Selling square feet at end of year.......................................... 9,657,000 9,361,000 9,056,000 8,388,000 Sales per selling square foot (weighted average)............................ $283 $269 $261/10 $253 Common shares outstanding (weighted average)................................ 25,182,000 24,500,000 24,801,000 24,470,000 - ------------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 3 of 3) (1986-1988)
Fiscal Year Ended --------------------------------------- January 30, January 31, February 1, (In thousands, except per-share data and statistical information) 1988 1987 1986 - -------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Net sales................................................................... $1,847,843 $1,688,208 $1,583,796 Gross margin................................................................ 547,157 487,829 447,960 Operating and administrative expenses....................................... 485,822 430,469 397,841 Writedown of California assets/restructuring charge (reversal).............. -- -- -- Income from operations ..................................................... 61,335 57,360 50,119 Interest expense, net of interest income1................................... 7,449 11,945 17,652 Income (loss) before income taxes........................................... 53,886 45,415 32,467 Provision for (benefit from) income taxes................................... 21,850 21,350 13,000 Net income (loss) before cumulative effect of accounting change or extraordinary item..................................................... 32,036 24,065 19,467 Cumulative effect of accounting change...................................... -- -- -- Extraordinary item.......................................................... -- (1,530)/12 -- --------------------------------------- Net income (loss)........................................................... $ 32,036 $ 22,535 $ 19,467 --------------------------------------- Earnings (loss) per common share: Net income (loss) before cumulative effect of accounting change or extraordinary item.................................................. $1.31 $1.15 $1.06 Cumulative effect of accounting change................................... -- -- -- Extraordinary item....................................................... -- (.07)/12 -- --------------------------------------- Net income (loss)........................................................ $1.31 $1.08 $1.06 --------------------------------------- BALANCE SHEET DATA Total assets................................................................ $ 626,522 $ 533,986 $ 568,531 Capitalization: Long-term debt .......................................................... $ 87,730 $ 76,874 $ 130,940 Lease obligations........................................................ 46,904 36,093 89,236 Stockholders' equity..................................................... 221,056 186,692 98,395 --------------------------------------- Total.................................................................. $ 355,690 $ 299,659 $ 318,571 --------------------------------------- STATISTICAL INFORMATION Percent of net sales: Nonfood sales............................................................ 67.6% 66.1% 65.6% Food sales .............................................................. 32.4% 33.9% 34.4% Total stores sales growth................................................... 9.5% 6.6% 11.2%/13 Comparable stores sales percentage increase (decrease)...................... 6.6%/3 4.3%/3 4.1%/3,13 Long-term debt as a percent of total capitalization......................... 37.9% 37.7% 69.1% Net income (loss) as a percent of net sales................................. 1.7% 1.3% 1.2% Number of multidepartment and specialty stores opened during year........... 8 1 4 Number of multidepartment and specialty stores closed during year........... 2 1 1 Number of multidepartment and specialty stores operated at end of year...... 99 93 93 Total retail square feet at end of year..................................... 10,494,000 9,738,000 9,536,000 Selling square feet at end of year.......................................... 8,064,000 7,497,000 7,309,000 Sales per selling square foot (weighted average)............................ $239 $228 $228 Common shares outstanding (weighted average)................................ 24,403,000 20,870,000 18,355,000 - --------------------------------------------------------------------------------------------------------------------- /1 Interest income was $1,060, $885, $707, $544, $517, $467, $482, $336, $350, $1,679, and $2,983, respectively. Excludes interest expense related to occupancy. /2 The calculation for comparable store sales for the year ended February 3, 1996, a 53-week year, is computed by adding a 53rd week to 1994's sales base. /3 Includes only sales of stores operating throughout each of the periods compared. /4 In 1994, the Company recorded a pretax charge of $15,978 to writedown to their estimated net realizable value one multidepartment store and three land parcels in California. Excluding this writedown, income from operations, income before income taxes, provision for income taxes, net income and earnings per common share would be $53,396; $27,539; $10,465; $17,074; and $.60, respectively; and net income as a percent of net sales would be .6%. /5 Includes a nonrecurring LIFO credit of $6,178. /6 Includes $3,588 from the resolution of an IRS audit, ($2,286) related to the LIFO credit, and a 38% tax rate. /7 Effect of adopting Statement of Financial Accounting Standards No. 109 relating to income taxes. /8 In 1989, the Company took a pretax charge of $49,277 related to closing some of its stores and for conversion of its management information systems from Honeywell to IBM. In 1991, the Company reversed $8,289 of this charge based on a decision not to close as many stores as previously provided for. /9 Excluding the benefit from the restructuring charge reversal of $8,289 and a charge against expenses for previously capitalized software development costs of $8,748, income from operations, net income, and earnings per common share would be $92,031; $45,516; and $1.81, respectively. /10 Excludes 53rd week in the fiscal year ended February 3, 1990. /11 Excluding the restructuring charge of $49,277, income from operations, income before income taxes, provision for income taxes, net income, earnings per common share, and net income as a percent of net sales would be $50,091; $36,144; $11,947; $24,197; $.98; and 1.1%, respectively. /12 Prepayment costs of $1,530 ($.07 per share) from early extinguishment of 17% Senior and Subordinated Notes, net of taxes. /13 Excludes 53rd week in the fiscal year ended February 2, 1985.
F-2 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion summarizes Fred Meyer, Inc.'s (the "Company") operating results for the fiscal year ended February 3, 1996 ("1995") compared with the fiscal year ended January 28, 1995 ("1994") and for 1994 compared with the fiscal year ended January 29, 1994 ("1993"). Also included are discussions of the Company's liquidity, capital resources, effect of LIFO, effect of inflation, recent accounting changes, stock data, and dividend policy. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements. RESULTS OF OPERATIONS-- 1995 COMPARED WITH 1994 Net sales for 1995 (53 weeks) increased $300,232,000, or 9.6%, over 1994 (52 weeks). This increase reflects openings of six full-size multidepartment stores, three jewelry stores in malls, and the addition of food to three previously nonfood stores, offset in part by the closure of four multidepartment stores. Comparable store sales increased 2.1% for 1995. Comparable food sales increased 6.6%, and comparable nonfood sales decreased .9%. These sales comparisons were aided by the negative impact of labor strikes on 1994 sales. Excluding store sales during the three-month period in 1994 affected by the strikes, total comparable store sales decreased .6% in 1995, with comparable food sales increasing 3.1% and comparable nonfood sales decreasing 3.0%. Comparable sales are measured on a 53-week corresponding period for both years. Food sales as a percent of net sales were 41.0% and 38.3%, respectively, for 1995 and 1994. The increase in food sales as a percent of net sales was primarily due to an increase in the number of the Company's stores that sell food. Gross margin as a percent of net sales was 28.6% in 1995 compared with 27.7% in 1994. Gross margins increased as a percent of sales in 1995's fourth quarter primarily due to the comparison to the reduced 1994 fourth quarter margins, which were affected by factors associated with the labor strikes and increased promotional activities. Gross margins for 1995, however, were negatively affected by slow nonfood sales, a high level of nonfood promotions, and a greater portion of sales being in food where margins are typically lower, partially offset by a lower LIFO charge and the impact of increased utilization of new flow-through distribution facilities. Operating and administrative expenses increased 9.5% to $891,033,000 in 1995 from $813,721,000 in 1994, and as a percent of net sales were 26.0% for both years. This comparison was prior to reflecting 1994's writedown of California assets of $15,978,000, covering one store and three land parcels. Net interest expense was $39,578,000 for 1995 and $25,857,000 for 1994, an increase of 53.1%. This increase primarily reflects interest on debt associated with increased capital spending, and to a lesser extent, interest on debt incurred as a result of 1994's labor disputes. The effective tax rate was 38.0% for both 1995 and 1994. Net income was $30,286,000 for 1995 and $7,168,000 for 1994. This increase is primarily the result of the above-mentioned factors. Excluding the writedown of California assets, 1994 net income was $17,074,000. RESULTS OF OPERATIONS-- 1994 COMPARED WITH 1993 Net sales for 1994 increased $149,350,000 or 5.0% over 1993. This increase reflects openings of five full-size multidepartment stores, three jewelry stores in malls, and the addition of food to four previously nonfood stores, offset by the closure of two multidepartment stores and two specialty stores. Comparable store sales decreased 2.0% for 1994, with food comparable store sales down 3.0% and nonfood comparable store sales decreasing 1.4%. This decrease reflects the effect of an 88-day food industry strike in the greater Portland, Oregon and Vancouver, Washington area, in which the Company's stores were the only stores picketed, plus strikes at the Company's Portland area distribution center, trucking operations, dairy, and corporate office. These labor disputes were all settled early in the fourth quarter. Excluding the stores affected by the strikes, total comparable store sales increased 1.5%, with food comparable store sales up 1.7% and nonfood comparable store sales up 1.3%. Food sales as a percent of net sales were 38.3% and 37.5%, respectively, for 1994 and 1993. The increase in food sales as a percent of net sales was primarily due to an increase in the number of the Company's stores that sell food. F-3 Gross margin as a percent of net sales was 27.7% in 1994, compared with 29.9% in 1993. This decrease is primarily due to the impact of the strikes and high markdowns that were taken during the promotional Christmas period. 1993's gross margin was favorably affected by a one-time LIFO credit of $6,178,000. Operating and administrative expenses increased 8.1% to $813,721,000 in 1994 from $752,408,000 in 1993, and as a percent of net sales were 26.0% in 1994 compared with 25.3% in 1993. Expenses as a percent of sales increased in the areas of labor and fixed costs due to lower sales volumes in the stores affected by the strikes. The Company recognized a $15,978,000 charge to its 1994 operating results reflecting its decision to exit the California market except for its jewelry locations. The charge represents a writedown of assets to their estimated realizable value for one multidepartment store and three land parcels. Net interest expense was $25,857,000 for 1994 and $17,604,000 for 1993, an increase of 46.9%. This increase reflects higher interest rates and increased debt due to capital spending for accelerated growth and the strikes. The effective tax rate was 38.0% for 1994 and 41.2% for 1993. The effective tax rate for 1993 was 38.0% when excluding the impact of a tax settlement. Net income was $7,168,000 for 1994 and $68,316,000 for 1993. This decrease is primarily the result of the above-mentioned strikes. Excluding the effect of the writedown of California assets, 1994 net income was $17,074,000. LIQUIDITY AND CAPITAL RESOURCES The Company funded its working capital and capital expenditure needs in 1995 through internally generated cash flow, supplemented by borrowings under committed and uncommitted bank lines of credit and unrated commercial paper. Cash provided by operating activities was approximately $80,000,000 higher in 1995 than 1994. This was mainly due to an increase in net income, a decrease in income taxes paid, and an increase in depreciation. Cash provided by operating activities was $68,000,000 lower in 1994 than 1993 primarily as a result of lower net income due to the 1994 labor disputes. Changes in cash flows from investing and financing activities are primarily the result of the timing of borrowing and capital expenditures. On April 25, 1995, the Company issued an unsecured senior note in the amount of $50,000,000 to a life insurance company. The note matures on April 25, 2002 and bears interest at 7.770%. On May 17, 1995, the Company issued a $20,000,000 unsecured note due May 17, 2000, which bears interest at 6.775%. The Company entered into a new credit facility in 1995 with several domestic and foreign banks for a committed line of credit which provides for borrowings of up to $500,000,000. This agreement continues through June 30, 2000, at which time the agreement terminates and any outstanding amounts must be paid in full. In addition to this committed credit facility, the Company had $100,000,000 of uncommitted money market lines with several foreign banks and $92,000,000 of uncommitted money market lines with banks which are also in the committed credit facility. The bank 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 the development of management information systems ("MIS"). At February 3, 1996 the Company had unrated commercial paper outstanding in the amount of $283,344,000, borrowings under uncommitted borrowing facilities of $123,500,000, and a total of approximately $93,156,000 available for borrowings that would be supported by its committed credit facilities. In 1995, the Company entered into operating lease agreements covering existing leased stores and the construction of new stores, with costs aggregating $160,000,000. Lease payments are based on a spread over LIBOR on the utilized portion of the facility. As of February 3, 1996, $57,176,000 was utilized under the agreement. After the initial five-year noncancelable lease term, the leases may be extended by agreement of the parties or the Company may purchase the properties. In 1992, the Company's Board of Directors adopted a derivative policy recognizing derivative financial instruments as an integral part of its risk management system. Management periodically reviews the use of derivative transactions and market positions, including assessments of compliance with the policy. F-4 The Company has entered into interest rate swap and cap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At February 3, 1996, the Company had outstanding six interest rate contracts with commercial banks, having a total notional principal amount of $100,000,000. The three swap agreements effectively fix the Company's interest rate on unrated commercial paper, floating rate facilities, and uncommitted lines of credit at rates between 4.625% and 7.595% on a notional principal amount of $50,000,000. These contracts expire through 1998. The three cap agreements effectively limit the maximum interest rate the Company will pay at rates between 5.0% and 9.0% on notional principal amounts totaling $50,000,000. These contracts expire through 1999. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swap and cap agreements. The Company requires an A or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties. During 1995, capital expenditures totaled $236,052,000, net of real estate financed on leases. The Company opened six new multidepartment stores and closed four multidepartment stores. Eight stores underwent major remodels, three of which included the addition of food departments to previously nonfood stores. The Company also completed construction of a food distribution center near Seattle, Washington. Other capital projects in 1995 included improvements to the main distribution center, central bakery, and dairy plants, and continuation of the Company's MIS improvement program. During 1995, the Company also began construction of five multidepartment stores scheduled to open in 1996. At least four major remodels are planned for completion in 1996, in addition to the acquisition of 23 jewelry stores. The Company believes that a combination of cash flow from operations, proceeds from sale-leasebacks, and borrowings under its credit facilities will permit it to finance its capital expenditure requirements for 1996, budgeted at $118,000,000, net of estimated real estate financed on leases. 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 ACCOUNTING CHANGES The Financial Accounting Standards Board has issued Statement of Financial Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Adoption of these standards will not have a significant effect on the Company's financial position or results of operations. COMMON STOCK INFORMATION The Company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "FMY." At February 3, 1996, the Company had 1,400 shareholders of record. The Company has not paid dividends since its incorporation 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 ---------------------------------------------------- 1995 1994 1993 ---------------- ----------------- ----------------- Fiscal Quarter High Low High Low High Low - ------------------------------------------------------------------------------- First......................$33 3/8 $23 1/2 $42 1/2 $35 5/8 $33 7/8 $27 7/8 Second..................... 29 23 1/2 38 3/4 35 35 5/8 29 1/4 Third ..................... 26 7/8 18 5/8 37 3/8 31 1/4 37 31 Fourth..................... 23 5/8 17 3/8 35 3/4 29 1/4 38 1/2 34 1/2 - -------------------------------------------------------------------------------
F-5 STATEMENTS OF CONSOLIDATED OPERATIONS
Fiscal Year Ended ------------------------------------------ February 3, January 28, January 29, (In thousands, except per-share data) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Net Sales....................................................................... $3,428,664 $3,128,432 $2,979,082 ------------------------------------------ Cost of Goods Sold: General......................................................................... 2,443,558 2,255,669 2,082,989 Related party lease (Note 3).................................................... 5,646 5,646 5,579 ------------------------------------------ Total cost of goods sold........................................................ 2,449,204 2,261,315 2,088,568 ------------------------------------------ Gross Margin.................................................................... 979,460 867,117 890,514 Operating and Administrative Expenses: General......................................................................... 835,432 756,685 694,466 Related party leases (Notes 3 and 8)............................................ 55,601 57,036 57,942 ------------------------------------------ Total operating and administrative expenses..................................... 891,033 813,721 752,408 ------------------------------------------ Writedown of California Assets (Note 4)......................................... -- 15,978 -- ------------------------------------------ Income From Operations.......................................................... 88,427 37,418 138,106 Interest Expense, net of interest income of $1,060, $885, and $707.............. 39,578 25,857 17,604 ------------------------------------------ Income Before Income Taxes ..................................................... 48,849 11,561 120,502 Provision For Income Taxes (Note 6)............................................. 18,563 4,393 49,598 ------------------------------------------ Net Income Before Cumulative Effect of Accounting Change........................ 30,286 7,168 70,904 Cumulative Effect of Accounting Change (Note 6)................................. -- -- (2,588) ------------------------------------------ Net Income...................................................................... $ 30,286 $ 7,168 $ 68,316 ------------------------------------------ Earnings Per Common Share: Net income before cumulative effect of accounting change........................ $1.07 $.25 $2.50 Cumulative effect of accounting change.......................................... -- -- (.09) ------------------------------------------ Net Income...................................................................... $1.07 $.25 $2.41 ------------------------------------------ Weighted Average Number of Common Shares Outstanding ........................... 28,333 28,625 28,375 - -------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
F-6 CONSOLIDATED BALANCE SHEETS
ASSETS February 3, January 28, (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------ Current Assets: Cash and cash equivalents....................................................... $ 41,849 $ 34,868 Receivables..................................................................... 24,683 20,025 Inventories..................................................................... 520,555 514,473 Prepaid expenses and other...................................................... 23,680 42,092 Income taxes receivable......................................................... -- 15,021 Current portion of deferred taxes (Note 6)...................................... 22,046 15,116 ---------------------------- Total current assets............................................................ 632,813 641,595 ---------------------------- Property and Equipment: Buildings, fixtures and equipment............................................... 1,366,511 1,164,953 Property held under capital leases (Note 8)..................................... 17,523 18,209 Land............................................................................ 160,657 159,393 ---------------------------- Total property and equipment ................................................... 1,544,691 1,342,555 Less accumulated depreciation and amortization ................................. 530,543 446,116 ---------------------------- Property and equipment--net .................................................... 1,014,148 896,439 ---------------------------- Other Assets: Goodwill--net................................................................... 4,907 5,215 Other........................................................................... 19,724 19,423 ---------------------------- Total other assets.............................................................. 24,631 24,638 ---------------------------- Total assets.................................................................... $1,671,592 $1,562,672 - ------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
F-7 CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY February 3, January 28, (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------ Current Liabilities: Outstanding checks.............................................................. $ 63,177 $ 81,341 Accounts payable................................................................ 193,896 230,703 Current portion of long-term debt and lease obligations (Notes 5 and 8)......... 1,468 1,623 Income taxes payable............................................................ 4,857 -- Accrued expenses: Compensation................................................................. 48,743 43,119 Insurance and other.......................................................... 37,590 35,295 ---------------------------- Total current liabilities....................................................... 349,731 392,081 ---------------------------- Long-term Debt (Note 5)......................................................... 656,260 540,166 ---------------------------- Capital Lease Obligations (Note 8).............................................. 13,298 13,823 ---------------------------- Deferred Lease Transactions (Note 8)............................................ 42,271 45,655 ---------------------------- Deferred Income Taxes (Note 6).................................................. 30,814 22,258 ---------------------------- Other Long-term Liabilities (Notes 8 and 10).................................... 7,984 10,069 ---------------------------- Commitments and Contingencies (Notes 8 and 12).................................. ---------------------------- Stockholders' Equity (Note 7): Preferred stock, $.01 par value (authorized, 5,000 shares; outstanding, none)... -- -- Common stock, $.01 par value (authorized, 100,000 shares; issued, 1995--26,995 shares, and 1994--26,858 shares; outstanding, 1995--26,705 shares, and 1994--26,568 shares)................................ 270 268 Additional paid-in capital...................................................... 199,363 197,087 Treasury stock--290 shares; and other........................................... (3,976) (4,026) Retained earnings............................................................... 375,577 345,291 ---------------------------- Total stockholders' equity...................................................... 571,234 538,620 ---------------------------- Total liabilities and stockholders' equity...................................... $1,671,592 $1,562,672 - ------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
F-8 STATEMENTS OF CONSOLIDATED CASH FLOWS
Fiscal Year Ended ---------------------------------------- February 3, January 28, January 29, (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income ..................................................................... $ 30,286 $ 7,168 $ 68,316 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment...................... 107,077 89,474 70,547 Writedown of California assets............................................... -- 15,978 -- Deferred lease transactions.................................................. (3,384) (2,599) 3,469 Deferred income taxes........................................................ 1,626 (3,526) (5,708) Other liabilities............................................................ (2,085) (347) 721 Inventories.................................................................. (6,082) (37,358) (51,490) Other current assets......................................................... 13,705 1,552 71 Accounts payable and accrued expenses........................................ (28,890) 11,613 37,124 Income taxes................................................................. 19,878 (33,681) 3,242 Other........................................................................ 921 1,766 (8,164) ---------------------------------------- Net cash provided by operating activities....................................... 133,052 50,040 118,128 ---------------------------------------- Cash Flows from Financing Activities: Issuance of common stock - net.................................................. 2,278 3,369 8,647 Collection of notes receivable.................................................. 515 364 264 Increase in notes receivable ................................................... (2,391) (213) (1,402) (Decrease)/increase in outstanding checks....................................... (18,162) 8,968 1,962 Long-term financing: Borrowings................................................................... 158,529 258,871 126,310 Repayments................................................................... (42,681) (40,093) (1,015) ---------------------------------------- Net cash provided by financing activities....................................... 98,088 231,266 134,766 ---------------------------------------- Cash Flows from Investing Activities: Net sales (purchases) of investment securities.................................. 1,110 (935) (1,745) Purchases of property and equipment............................................. (236,052) (284,193) (253,920) Proceeds from sale of property and equipment.................................... 10,783 4,636 4,941 ---------------------------------------- Net cash used for investing activities.......................................... (224,159) (280,492) (250,724) ---------------------------------------- Net Increase in Cash and Cash Equivalents for the Year.......................... 6,981 814 2,170 Cash and Cash Equivalents, Beginning of Year.................................... 34,868 34,054 31,884 ---------------------------------------- Cash and Cash Equivalents, End of Year.......................................... $ 41,849 $ 34,868 $ 34,054 ---------------------------------------- Supplemental Disclosure of Cash Flow Information Cash paid (refunded) during the year for: Interest (including interest capitalized of $3,629, $2,520, and $1,689)...... $ 45,228 $ 31,022 $ 17,984 Income taxes................................................................. (3,256) 40,757 53,197 - ------------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
F-9 STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
Common Stock ------------------ Additional Treasury Number of Paid-in Stock Retained (In thousands) Shares Amount Capital and Other Earnings Total - --------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1993.................................. 25,572 $259 $185,080 $(5,018) $269,807 $450,128 Issuance of common stock: Stock options exercised ................................ 843 8 7,185 -- -- 7,193 Tax benefits from stock options......................... -- -- 1,454 -- -- 1,454 Amortization of unearned compensation................... -- -- -- 595 -- 595 Net income................................................. -- -- -- -- 68,316 68,316 ---------------------------------------------------------------- Balance, January 29, 1994.................................. 26,415 267 193,719 (4,423) 338,123 527,686 Issuance of common stock: Stock options exercised ................................ 153 1 2,611 -- -- 2,612 Tax benefits from stock options......................... -- -- 757 -- -- 757 Amortization of unearned compensation................... -- -- -- 397 -- 397 Net income................................................. -- -- -- -- 7,168 7,168 ---------------------------------------------------------------- Balance, January 28, 1995.................................. 26,568 268 197,087 (4,026) 345,291 538,620 Issuance of common stock: Stock options exercised ................................ 137 2 2,016 -- -- 2,018 Tax benefits from stock options......................... -- -- 260 -- -- 260 Amortization of unearned compensation................... -- -- -- 50 -- 50 Net income................................................. -- -- -- -- 30,286 30,286 ---------------------------------------------------------------- Balance, February 3, 1996.................................. 26,705 $270 $199,363 $(3,976) $375,577 $571,234 - --------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Fred Meyer, Inc., a Delaware corporation, and its subsidiaries (the "Company") operate a chain of 136 retail stores offering a wide range of food, products for the home, apparel, fine jewelry, and home improvement items, with emphasis on necessities and items of everyday use. The stores are located in Oregon, Washington, Utah, Alaska, Idaho, northern California, and Montana, and consist of 102 free-standing, multidepartment stores (94 with food departments) and 34 specialty stores (including 29 jewelry stores in malls.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 1995, 1994, and 1993 ended on February 3, 1996, January 28, 1995, and January 29, 1994, respectively. Fiscal years 1994 and 1993 were 52 weeks, while fiscal year 1995 was 53 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 an original maturity of three months or less to be cash equivalents. Receivables--Receivables are reported net of allowances for potential uncollected accounts of $1,294,000 and $1,255,000 at February 3, 1996 and January 28, 1995, respectively. Inventories--Inventories consist principally of items held for sale in its retail operations and substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. If the first-in, first-out method, which approximates replacement cost, had been used in determining inventory values, they would have been $53,940,000 and $54,876,000 higher at February 3, 1996 and January 28, 1995, respectively. Property and Equipment--Property and equipment is stated at cost. Depreciation on 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 property under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years. Goodwill--Goodwill is being amortized on a straight-line basis over 30 years. Management periodically evaluates the recoverability of goodwill based upon current and anticipated net income and undiscounted future cash flows. Accumulated amortization was $4,352,000 and $4,044,000 at February 3, 1996 and January 28, 1995, respectively. Investment Securities--As of January 28, 1995, the Company adopted SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 requires the classification of securities at acquisition into one of three categories: held to maturity, available for sale, or trading. At February 3, 1996, the carrying value of all debt and equity securities approximated their aggregate fair value. Debt securities are classified as held to maturity and are included in Other Assets. Equity securities are classified as trading securities and are included in Cash and Cash Equivalents. Outstanding Checks--Checks that have not yet cleared the bank and that are issued against bank accounts with a zero bank balance are included in current liabilities. 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. 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. 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. Effective January 31, 1993, the Company adopted SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Accordingly, the Company changed its method of accounting for income taxes from the deferred method used in prior years to the method prescribed by SFAS No. 109. Under SFAS No. 109, 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 6). Earnings Per Common Share--Fully diluted earnings per common share are computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Weighted average shares reflect the dilutive effect of outstanding stock options using the treasury stock method. Reclassifications--Certain prior year amounts have been reclassified to conform to current year presentation. The reclassifications have no effect on reported net income. Recent Accounting Changes--The Financial Accounting Standards Board has issued Statement of Financial Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Adoption of these standards will not have a significant effect on the Company's financial position or results of operations. F-11 3. RELATED-PARTY TRANSACTIONS The Company leases or subleases store locations and other properties from entities which have certain common ownership with the Company. At February 3, 1996, 21 store locations were leased under operating leases, including one store which was closed in a prior year. Payments under these leases and those terminated during the year were $18,577,000, $19,734,000, and $21,290,000 in 1995, 1994, and 1993, respectively. The Company also leases 35 store locations and a distribution center from an institutional investor, which is a major beneficial shareholder of the Company's stock. One of these stores was closed in a prior year. Rents paid to this shareholder on these properties was $46,070,000, in each of the years 1995 and 1994, and $39,573,000 in 1993. Total rents included in operating and administrative expenses for locations leased or subleased from related parties were based on the average rental paid during the primary term of the leases. Rents associated with the Company's main distribution center and central bakery are included in cost of goods sold. In 1995, the Company offered interest-free loans of up to $100,000 each to 19 executives for the purpose of acquiring common stock of the Company. Repayment of these loans is required by June 1998 or upon termination of employment or sale of stock. At February 3, 1996, loans under this program amounted to $1,839,000. 4. WRITEDOWN OF CALIFORNIA ASSETS During 1994, the Company incurred a charge of $15,978,000 ($9,906,000 after a deferred tax benefit of $6,072,000) related to the writedown of certain assets and other costs associated with the Company's decision to exit the northern California market except for mall jewelry locations. 5. LONG-TERM DEBT Long-term debt consisted of the following (in thousands):
1995 1994 - ------------------------------------------------------------------------------------------ Commercial paper with maturities through July 1996, classified as long-term, interest rates of 5.44% to 6.11% at February 3, 1996............................... $283,344 $324,921 Uncommitted bank borrowings, due February 5, 1996, through March 1, 1996, classified as long-term, interest rates of 5.40% to 5.55% at February 3, 1996....................................................... 123,500 35,000 Long-term notes secured by trust deeds, due through 2011, fixed interest rates from 9.00% to 9.52%............. 42,536 43,298 Long-term notes, unsecured: Due 1997 through 1998, interest rate is periodically reset, 6.07% at February 3,1996, paid quarterly.......... 70,000 70,000 Due 1996, fixed interest rate of 7.74%, paid quarterly..... 10,000 10,000 Due 2000, fixed interest rate of 6.775%, paid quarterly.... 20,000 -- Senior notes, unsecured, due 1999 through 2007, fixed interest rates from 7.25% to 7.98%......................... 107,500 57,500 Other......................................................... 159 197 ---------------------------- Total......................................................... 657,039 540,916 Less current portion.......................................... (779) (750) ---------------------------- Total......................................................... $656,260 $540,166 - ------------------------------------------------------------------------------------------
The Company has the ability to support commercial paper, uncommitted bank borrowings, and other debt on a long-term basis through its Credit Agreement and therefore, based upon management's intent, has classified these borrowings, which total $416,844,000 at February 3, 1996, as long-term debt. On October 30, 1995, the Company entered into a new expanded Credit Agreement with Bank of America as agent and Bank of Nova Scotia as co-agent, which provides for, among other things: (1) a revolving credit commitment of $500,000,000 with payment of the unpaid balance at June 30, 2000; (2) interest at a spread over LIBOR on such borrowings or various other pricing options; and (3) a facility fee of .15% of the amount of the commitment. The Agreement requires the maintenance of specified ratios and restricts the amounts of cash dividends paid. At February 3, 1996, $12,100,000 of retained earnings was available for payment of dividends or repurchase of Company stock in the following year, based on 40% of net income for the year ended February 3, 1996 or the cumulative amount of $70,000,000 for stock repurchases made during the two-year period from June 15, 1995 through and including June 14, 1997. The Company has established uncommitted lines of credit with foreign banks for $100,000,000 and has uncommitted bid lines of credit with certain banks within its committed bank group for $92,000,000. These lines, which generally have terms of one year, allow the Company to borrow from the banks at mutually agreed upon rates, usually below the rates offered under the 1995 Credit Agreement. The Company has unrated commercial paper programs with maturities ranging up to 270 days in amounts up to a maximum of $455,000,000. The Company also has available letters of credit lines for $32,500,000, of which $12,166,000 had been issued at February 3, 1996. The Company has entered into interest rate swap and cap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At February 3, 1996, the Company had outstanding six interest rate contracts with commercial banks, having a total notional principal amount of $100,000,000. The three swap agreements effectively fix the Company's interest rate on unrated commercial paper, floating rate facilities, and uncommitted lines of credit at rates between 4.625% and 7.595% on a notional principal amount of $50,000,000. These contracts expire through 1998. The cap agreements effectively limit the maximum interest rate the Company will pay at rates between 5.0% and 9.0% on notional principal amounts totaling $50,000,000. These contracts expire through 1999. Gains and losses on these swaps and caps are amortized over the life of the instruments. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap and cap agreements. The Company requires an A or better rating of the counterparties and accordingly does not anticipate nonperformance by the counterparties. Annual estimated long-term debt maturities for the five fiscal years subsequent to February 3, 1996 are: 1996, $779,000; 1997, $11,312,000; 1998, $60,440,000; 1999, $8,528,000; 2000, $438,059,000; and thereafter, $137,921,000. F-12 6. INCOME TAXES The provision for income taxes includes the following (in thousands):
1995 1994 1993 - ------------------------------------------------------------------------- Current................................... $16,937 $7,919 $57,894 Deferred.................................. 1,626 (3,526) (8,296) ----------------------------- Total..................................... $18,563 $4,393 $49,598 - -------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
1995 1994 1993 - -------------------------------------------------------------------------------------- Federal income taxes at the statutory rate........... $17,097 $4,046 $42,176 Settlement of certain IRS audits..................... -- -- 3,588 Deferred income taxes increase in statutory rate..... -- -- 219 State income taxes .................................. 1,466 347 3,615 ------------------------------- Provision for income taxes........................... $18,563 $4,393 $49,598 - --------------------------------------------------------------------------------------
As a result of the adoption of SFAS 109, 1993 consolidated net income was decreased by $2,588,000 (see Note 2). The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at February 3, 1996 and January 28, 1995 were as follows (in thousands):
1995 1994 - -------------------------------------------------------------------- Deferred tax assets: Capitalized inventory costs.................. $ 7,150 $ 6,851 Accrued expenses............................. 20,369 19,328 Restructuring related charges................ 5,124 9,481 Deferred lease transactions.................. 16,063 17,349 AMT credit................................... 1,201 5,110 Other........................................ 8,857 7,864 --------------------- Total deferred tax assets................... 58,764 65,983 --------------------- Deferred tax liabilities: Accumulated depreciation..................... 54,170 50,502 Prepaid expenses............................. 5,918 12,212 LIFO inventory............................... 7,444 10,411 --------------------- Total deferred tax liabilities.............. 67,532 73,125 --------------------- Net deferred income taxes...................... $ 8,768 $ 7,142 Current deferred income taxes--asset ...........$(22,046) $(15,116) Noncurrent deferred income taxes--liability..... 30,814 22,258 -------------------- Net deferred income taxes...................... $ 8,768 $ 7,142 - --------------------------------------------------------------------
7. STOCKHOLDERS' EQUITY Stock Incentive Plans--At February 3, 1996, 4,236,327 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 day prior to the date of grant. Nonqualified stock options may not be granted at less than 50% of the fair value on the day prior to the date of grant. Stock Options--Activity under the plans was as follows (in thousands, except per share data):
Option Price (Market Price at Date of Grant) - ----------------------------------------------------------------------------- Shares Per Share Total - ----------------------------------------------------------------------------- Shares under option: Balance, January 29, 1994........... 2,153 $12.125-36.750 50,651 Options granted .................. 404 29.625-41.250 14,629 Options exercised................. (153) 12.125-32.750 (2,612) Options cancelled................. (46) 14.250-41.250 (1,611) - ----------------------------------------------------------------------------- Balance, January 28, 1995........... 2,358 12.125-41.250 61,057 Options granted .................. 457 21.500-26.000 11,181 Options exercised................. (137) 12.125-24.750 (2,018) Options cancelled................. (121) 12.125-41.250 (3,929) - ----------------------------------------------------------------------------- Balance, February 3, 1996........... 2,557 12.125-41.250 $66,291 - ----------------------------------------------------------------------------- Shares exercisable, February 3, 1996... 1,261 12.125-41.250 Shares available for option: January 28, 1995.................... 15 February 3, 1996.................... 1,679 - ----------------------------------------------------------------------------- The Company issued a replacement grant election program in 1996 that allows stock option holders with options granted at more than $26.00 per share to reset the price at $26.00, on up to 984,000 options that were previously granted at prices ranging from $27.25 to $41.25. For those electing to reset their option price to $26.00, the vesting period will start over. Other Option--The Company's principal stockholder, FMI Associates, holds an option, which expires in 1996, for the purchase of 1,566,441 shares with an aggregate value of $5,080,349. Management Bonus--In 1992, the Company awarded a stock bonus to a corporate officer for 5,000 shares totaling $124,000. Shares vest annually over five years. Nonemployee Directors Stock Compensation Plan--In 1992, the Company purchased 4,016 shares of its common stock at market prices for the benefit of two of its nonemployee directors in lieu of a portion of current and future board of director fee payments. The shares total $125,000 and vest annually over five years. F-13 8. LEASES The Company leases or subleases a substantial portion of the real property used in its operations. In 1986, the leases and subleases for a distribution center, 71 store locations, and certain other properties were amended and restated to provide, among other things, an initial lease term of 20 years for 36 locations (with cash rents of $38,476,000 for the first seven years and $46,070,000 for the remaining 13 years). The average rent over the primary lease term is charged to rent expense. As a result of the above transaction: (1) five previously capitalized leases qualified as operating leases, resulting in a decrease in property held under capital leases and capital lease obligations of $53,678,000 and $72,160,000 respectively, with the resulting $18,482,000 gain deferred and amortized over the 20-year lease period; and (2) the difference between the amount of the cash rent paid and the expense charged to operations on the 36 locations described above is included in deferred lease transactions. In 1992, the Company amended leases for nine store locations, with cash rent escalating over the term of the leases. The difference between cash rent paid and the expense charged to operations is included in deferred lease transactions. The average rent over the primary lease term, which is lower than the prior rents paid, is charged to rent expense. At February 3, 1996, deferred lease transactions consisted of $9,932,000 unamortized gain on capital leases, $31,566,000 of excess of rent expense over cash rents for the aforementioned leases, and unamortized deferred gain on a sale-leaseback transaction of $773,000. In 1995, the Company entered into operating lease agreements covering existing leased stores and the construction of new stores, with costs aggregating $160,000,000. Lease payments are based on a spread over LIBOR on the utilized portion of the facility. As of February 3, 1996, $57,867,000 was utilized under the agreement. After the initial five-year noncancelable lease term, the leases may be extended by agreement of the parties or the Company may purchase the properties. The lease terms of certain operating leases require the payment of executory costs such as property taxes, utilities, insurance, and maintenance. Certain leases provide for percentage rents. Portions of the properties are subleased to others for periods of from one to 20 years. At February 3, 1996, minimum rentals under noncancelable leases for future fiscal years were (in thousands):
Operating Capitalized Less Net Fiscal Year Leases Leases Subleases Rentals - -------------------------------------------------------------------------- 1996........................ $ 80,070 $ 1,563 $ 9,485 $ 72,148 1997........................ 80,212 1,603 8,550 73,265 1998........................ 79,286 1,725 7,532 73,479 1999........................ 78,011 1,725 6,503 73,233 2000........................ 76,093 1,725 5,014 72,804 2001 and thereafter......... 554,669 26,560 18,462 562,767 -------------------------------------------- Total....................... $948,341 $34,901 $55,546 $927,696 -------------------------------------------- Less imputed interest....... (23,943) -------- Present value of minimum rental payments.......... 10,958 Less current portion........ (90) -------- Capitalized lease obligations $10,868 - --------------------------------------------------------------------------
As of February 3, 1996, the leases for seven store locations and certain equipment were accounted for as capital leases. The amounts representing interest expense on these capital lease obligations were included in oper- ating and administrative expenses and were $1,701,000, $1,848,000, and $2,112,000 in 1995, 1994, and 1993, respectively. Accumulated amortization of property under capital leases was $6,556,000 and $6,098,000, at February 3, 1996 and January 28, 1995, respectively. Rent expense under operating leases including executory costs, and payments under capital leases were as follows (in thousands):
1995 1994 1993 - --------------------------------------------------------------------------- Gross rent expense..................... $100,986 $101,163 $104,892 Rent income from subleases............. (13,941) (12,803) (11,582) ---------------------------------- Net rent expense....................... 87,045 88,360 93,310 Payments under capital leases ......... 1,807 1,947 2,178 ---------------------------------- Total.................................. $ 88,852 $ 90,307 $ 95,488 - ---------------------------------------------------------------------------
Included in gross rent expense for 1995, 1994, and 1993 were contingent rents of $1,264,000, $1,421,000, and $1,650,000, respectively. In 1989, the Company incurred a restructuring charge in connection with management's decision to replace or close certain stores and to convert the Company's MIS hardware from Honeywell to IBM. The decision to close certain stores was subsequently reassessed by management, and in 1991 revisions were made to the amounts accrued. At February 3, 1996, included in other long-term liabilities, were future net rentals under noncancelable leases for closed stores as follows (in thousands):
Less Estimated Estimated Subleases/ Net Fiscal Year Leases Discounts Rentals - ---------------------------------------------------------------------------- 1996.................................. $ 1,325 $ 726 $ 599 1997.................................. 1,248 768 480 1998.................................. 1,251 831 420 1999.................................. 1,254 835 419 2000.................................. 1,257 809 448 2001 and thereafter................... 8,664 6,824 1,840 ---------------------------------- Total................................. $14,999 $10,793 $ 4,206 - ----------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS Employees' Profit-sharing Plan--Profit-sharing contributions under this Plan, which covers the Company's nonunion employees, 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. In 1994, the Company added a 1% basic contribution to all eligible employees' accounts each year subject to normal plan vesting. The Company expensed $6,438,000, $5,891,000, and $3,944,000 in 1995, 1994, and 1993, respectively for these contributions. F-14 Multiemployer Pension Plan--The Company contributes to multiemployer pension plan trusts at specified rates in accordance with collective bargaining agreements. Contributions to the trusts were $9,938,000, $8,498,000, and $9,667,000 in 1995, 1994, and 1993, respectively. 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. The plan allows employees to purchase stock in the Company via payroll deductions. The Company pays all brokerage fees associated with the purchase of the stock. The plan is available to all employees over age 18 who have completed six months of continuous employment with the Company. Supplemental Retirement Program--The Company has a supplemental retirement program 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 makes annual contributions of $25,000 per participant. Total contributions were $350,000 in 1995, and $325,000 in each of 1994 and 1993. 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. 10. OTHER POSTRETIREMENT BENEFITS For employees who qualified prior to January 1, 1994, the Company sponsored a retiree health plan for postretirement health care coverage with eligibility requirements and benefits varying by region of the Company. Under this plan, the Company contributes 100% of the premiums of the basic plan for retired salaried employees qualifying under eligibility requirements which specify minimum age and years of continuous service at age 60 with 25 years of service, age 62 with 20 years of service, and age 65 with 15 years of service. For retired salaried and hourly employees between the ages of 62 to 65 years and having completed minimum continuous service of 15 years, the retiree pays premiums at current employee rates. As of January 1, 1994, the Company changed the eligibility requirements and benefits available under the retiree health plan. For all salaried and non-union hourly employees in all regions who retire after January 1, 1994, eligibility requirements changed to a minimum of 60 years of age with 10 years of continuous service. Under the revised plan, the retiree pays premiums at current employee rates. The following table sets forth the plan's funded status, reconciled with the amount shown in the Company's balance sheet:
February 3, 1996 January 28, 1995 - --------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Current retirees............................... $ 1,326,363 $ 1,231,478 Fully eligible plan participants............... 912,301 656,973 Other active plan participants................. 3,312,008 2,331,405 -------------------------------- Accumulated postretirement benefit obligation in excess of plan assets....................... 5,550,672 4,219,856 Unrecognized transition obligation, transition date 1/31/93 and 2/1/92............. (1,336,565) (1,420,100) Unrecognized prior service cost................... (324,484) (366,138) Unrecognized net gain/(loss)...................... (211,209) 657,774 -------------------------------- Accrued postretirement benefit cost............ $ 3,678,414 $ 3,091,392 -------------------------------- Weighted average discount rate ................... 7.5% 8.0% -------------------------------- Net periodic postretirement benefit cost included the following components: Service cost--benefits attributed to service during the period ......................... $ 283,651 $ 353,305 Interest cost on accumulated postretirement benefit obligation......................... 332,045 372,483 Amortization of transition obligation over 20 years.............................. 125,189 125,189 Amortization of unrecognized (gain) loss (19,092) 27,897 -------------------------------- Net periodic postretirement benefit cost $ 721,793 $ 878,874 - ---------------------------------------------------------------------------------------
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were as follows: UNDER MEDICARE RETIREMENT AGE--6% for two years, then grading down to 4.5% by the year 2000, and MEDICARE RETIREMENT AGE AND OVER--5% for two years, then grading down to 4.5% in 1998. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of February 3, 1996 and January 28, 1995 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1995 and 1994 as follows:
1995 1994 - ------------------------------------------------------------------------------------- Increase in accumulated postretirement benefit obligation..... $989,563 $707,931 Increase in service and interest costs........................ 121,270 154,060 - -------------------------------------------------------------------------------------
F-15 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 February 3, 1996, and current estimates of fair value may differ from the amounts presented herein. The Company is not subjected to a concentration of credit risk. The estimated fair values of the Company's financial instruments are as follows (in thousands):
February 3, 1996 ----------------------- Carrying Estimated Amount Fair Value - -------------------------------------------------------------------------- Financial assets: Cash and cash equivalents..................... $ 41,849 $ 41,849 Receivables................................... 24,683 24,683 Prepaid expenses and other.................... 23,680 23,680 Other long-term assets........................ 19,724 19,900 Financial liabilities: Outstanding checks............................ 63,177 63,177 Accounts payable.............................. 193,896 193,896 Long-term debt and interest rate agreements... 656,260 674,804 - --------------------------------------------------------------------------
Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other--The carrying amounts of these items are a reasonable estimate of their fair value. Other Long-term Assets--The fair value of debt and equity investments (primarily municipal securities) is estimated using quoted market prices. Outstanding Checks and Accounts Payable--The carrying amounts of these items are a reasonable estimate of their fair value. Long-term Debt and Interest Rate Agreements--The fair value of notes, mortgages, and real estate 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. For commercial paper and bid lines of credit under the revolving credit agreement (see Note 5), the carrying amounts are a reasonable estimate of their fair value. The fair value of interest rate swap and cap agreements is the estimated amount at which they could be settled. At February 3, 1996, the Company could settle the swap agreements at a loss of $1,037,900, and cap agreements at a gain of $311,700. 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 position or consolidated results of operations. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1995 Fiscal Quarters 1994 Fiscal Quarters ---------------------------------------- --------------------------------------- (In thousands, except per-share data) Fourth Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------------ Net sales......................................... $966,134 $750,042 $775,809 $936,679 $831,997 $626,804 $737,284 $932,347 Gross margin...................................... 282,712/1 208,818 221,890 266,040 220,793/2 152,643 222,018 271,663 Income (loss) from operations..................... 41,676/1 5,393 25,233 16,125 21,037/2 (52,197)/3 36,386 32,192 Net income (loss)................................. 18,839/1 (2,309) 10,673 3,083 8,568/2 (36,579)/3 19,193 15,986 Earnings (loss) per common share.................. $.67/1 $(.08) $.37 $.11 $.30/2 $(1.28)/3 $.67 $.56 Weighted average number of shares outstanding..... 28,199 28,254 28,369 28,465 28,510 28,556 28,676 28,725 - ------------------------------------------------------------------------------------------------------------------------------------ /1 The LIFO adjustment in the fourth quarter of 1995 increased gross margin and income from operations by $6,737; net income by $4,177; and earnings per common share by $.15. /2 The LIFO adjustment in the fourth quarter of 1994 increased gross margin and income from operations by $2,549; net income by $1,580; and earnings per common share by $.06. /3 The writedown of California assets in the third quarter of 1994 decreased income from operations by $15,978; net income by $9,906; and earnings per common share by $.35.
F-16 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. KENNETH THRASHER Kenneth Thrasher Senior Vice President, Finance and Chief Financial Officer 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 February 3, 1996 and January 28, 1995, and the related statements of consolidated operations, changes in consolidated stockholders' equity, and consolidated cash flows for each of the three fiscal years in the period ended February 3, 1996. 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 February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes in the fiscal year ended January 29, 1994. DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Portland, Oregon March 11, 1996 F-17 EXHIBIT INDEX Sequential Exhibit Page Number Number - ------- ---------- 3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33- 49638. 4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670. 4B Credit Agreement dated as of June 30, 1994, among Fred Meyer, Inc., various banks named therein, and Bank of America as Agent. Incorporated by reference to Exhibit 4B to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4C Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670. 4D Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4E Credit Agreement dated as of March 6, 1995, among Fred Meyer, Inc., various financial institutions named therein, and The Bank of Nova Scotia as Agent. Incorporated by reference to Exhibit 4E to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 4F Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023). 4G Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023). *10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023). *10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023). *10B Fred Meyer, Inc. Bonus Plan Description, as amended. 10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139. *10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. *10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. *10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994. *10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. *10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). 10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Fred Meyer, Inc., Lesseefor the Stadium Parking Lot. Incorporated by reference to Exhibit 10J(6) to the Company's Registration Statement on Form S-1, Registration No. 33- 8574. 10L Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574. 10M Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). 10N Lease Agreement, dated February 1, 1990, relating to additional property adjacent to Oak Grove store location between REC Resolution Co. as successor in interest to Vanoak Corporation, Lessor, and Fred Meyer, Inc., Lessee. Incorporated by reference to Exhibit 10P to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023). 10O Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023). 10P Lease Agreement, dated December 12, 1988, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Fifth Avenue Corporation, as Lessor, for the Burlingame store. Incorporated by reference to Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023). 10Q Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10R Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. 10S Lease Assignment Agreement between Real Estate Properties Limited Partnership (REPL) as assignor, and the Company as assignee, dated as of March 14, 1995, pursuant to which the Company has agreed to purchase the leasehold interest of REPL in the Hawthorne, Hazel Dell and Raleigh Hills stores; and a related Real Estate Purchase and Sale Agreement between REC Resolution Co. as seller and the Company as purchaser, dated as of March 14, 1995, pursuant to which the Company has agreed to purchase the fee interest of REC Resolution Co., (an affiliate of REPL) in the Hawthorne, Hazel Dell and Raleigh Hills stores. Incorporated by reference to Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. 10T Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023). 10U Lease Agreement Tax Retention Operating Lease dated May 5, 1995 between First Security Bank of Utah, N.A. not individually but solely as Owner Trustee under FM Trust 1995-1, as Lessor and Fred Meyer, Inc., as Lessee, Appendix A to Participation Agreement and Lease Supplements nos. 1, 2, and 3 dated as of May 3, 1995 between First Security Bank of Utah, N.A. lessor, and Fred Meyer, Inc., lessee. Incorporated by reference to Exhibit 10U to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023). 10V Lease Agreement Tax Retention Operating Lease dated as of December 1, 1995 between First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FM Trust 1995-2, as Lessor and Fred Meyer, Inc. as Lessee, and Appendix A to Participation Agreement. 10W Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. 11 Computation of Earnings per Common Share. 21 List of Subsidiaries. 23 Consent of Deloitte & Touche LLP. 24 Powers of Attorney. 27 Financial Data Schedule. EX-10.B 2 EXHIBIT 10B EXHIBIT 10B FRED MEYER, INC. BONUS PLAN DESCRIPTION AS AMENDED TO FEBRUARY 3, 1996 INTRODUCTION: The Fred Meyer, Inc. Bonus Plan for 1995 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 and Store bonusable participants, and (2) all other bonusable participants. REGIONAL AND STORE BONUSABLE PARTICIPANTS PROGRAM: Awards for regional and store bonusable participants are based upon predetermined and preapproved objectives for store contribution income, corporate net inventory control (inventory less payables), and corporate pretax income. Each quarter and year the Company sets objectives for sales, contribution income, net inventory, and pretax income based upon the Company's projections, each region/store manager's projections and historical results. These objectives are reviewed and approved by the Company's Compensation Committee. The actual bonus awarded each quarter and for the year 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 bonus (up to 237.5 percent of target bonus), and lower than budgeted results will result in a smaller bonus (as low as 0 percent of target bonus). A portion of each participant's bonus is generally calculated on how well the participant's area of responsibility does, and a smaller portion is based on how well the Company does. The Company portion is capped at 200 percent and the store/region portion is capped at 250 percent. ALL OTHER BONUSABLE PARTICIPANTS PROGRAM: The program applicable to all other management/supervisory and other bonusable participants not included in the regional and store program is based on the following formula: The bonus paid is based on the Company's objectives for sales, pretax income, net inventory, and various departmental budgets as prepared by the department's management, and approved by the Compensation Committee. The bonus amount paid is determined as a percentage of each participant's salary (target bonus), adjusted upward or downward based on performance. Participants can achieve a maximum of 200 percent of their target bonus for exceeding their performance goals or a minimum of 0 percent of target bonus for lower than predefined results. A portion of a participant's bonus is generally based on his/her department's results, with the larger portion based on the Company's pretax income results. Both the department and Company portion is capped at 200 percent. Twenty percent of the target bonus of the Chairman, the President and all Senior Vice Presidents is deferred into the Company's Capital Bonus Plan. The Capital Bonus Plan measures the return on assets invested in new stores and major remodels to determine the actual payment of the deferred portion of the participant's bonus. Payments are made after the second and third full years' results under that Plan. YEAR-END REVIEW AND PAYMENT: Bonuses are generally paid in April following the year in which performance goals are measured. The Compensation Committee approves 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. SUPERIOR PERFORMANCE BONUS PLAN: Vice Presidents, Senior Vice Presidents, the Chief Operating Officer and Chief Executive Officer are eligible to receive stock bonuses based on the Company achieving superior performance levels as approved in advance by the Compensation Committee of the Board of Directors. The number of shares paid as a bonus, which vest one-third per year over a three-year period, is based on the ratio of shareholder value added as a percent of total assets. EX-10.R 3 EXHIBIT 10(R) 1 FRED MEYER - WAREHOUSE LEASE 3205 N. WEBSTER NORTH BASIN - SWAN ISLAND, PORTLAND RIDER TO LEASE DATED: As of November 1, 1994 BETWEEN: REAL ESTATE PROPERTIES LIMITED PARTNERSHIP "Landlord" AND: FRED MEYER, INC. "Tenant" This Rider to Lease ("Rider") hereby amends and supplements and is incorporated into and made part of that certain Lease dated AS OF NOVEMBER 16, 1994 between the parties (the "Lease") with respect to approximately 3,490 square feet of WAREHOUSE space AND CERTAIN ADJOINING LAND AREA SHOWN ON THE SITE PLAN ATTACHED HERETO AS EXHIBIT A (the "Premises") located at 3205 N. WEBSTER, NORTH BASIN - SWAN ISLAND, PORTLAND, OREGON (the "Facility") as more particularly described in the Lease. Capitalized terms not otherwise defined in this Addendum shall have the meanings ascribed in the other provisions of this Lease. In the event of any inconsistency or ambiguity between the terms of this Rider and the other terms of this Lease, the terms of this Rider shall prevail. The Lease is hereby supplemented and amended as follows: RIDER - TERM; DELIVERY OF POSSESSION. The Lease term will ---------------------------- commence DECEMBER 21, 1994 and end on DECEMBER 31, 1995, SUBJECT TO THREE SUCCESSIVE OPTIONS FOR TENANT TO EXTEND SUCH TERM FOR ADDITIONAL 12-MONTH PERIODS BY WRITTEN NOTICE TO LANDLORD NOT LATER THAN 90 DAYS PRIOR TO THE END OF THE THEN CURRENT TERM. THE PREMISES IS CURRENTLY VACANT AND LANDLORD IS PRESENTLY ABLE TO EFFECT DELIVERY OF POSSESSION. RIDER 1 - USE. The permitted use by Tenant UNDER SECTION 1(A) --- will include WAREHOUSE, RELATED OFFICE (IF ANY), PARKING AND any OTHER lawful uses permitted by zoning and other governmental regulations affecting the Premises. RIDER 1(B) TENANT'S LIABILITY FOR INCREASED FIRE INSURANCE ---------------------------------------------- PREMIUMS, OTHER MATTERS. Landlord will promptly notify Tenant - ----------------------- if Landlord's insurance carrier or underwriter or other person claims an increase in premiums attributable to Tenant's use of the Premises or that Tenant's activities on or about the Premises may invalidate such coverage or do not comply with applicable requirements, and will cooperate with Tenant, at Tenant's reasonable expense, to resolve such matter. Landlord represents to Tenant that (to the best of Landlord's knowledge) the uses of the Premises allowed Tenant under this Lease comply 2 with and do not violate any provision of any insurance Landlord may now or hereafter obtain affecting the Premises or Facility. Landlord shall promptly provide Tenant with complete copies of all such policies which Tenant is required to comply (UNDER SECTION 2(B)). LANDLORD HAS DISCLOSED TO TENANT THAT LANDLORD HAS DISCOVERED A FILL PIPE AND A VENT PIPE ON OR NEAR THE PROPERTY (APPROXIMATELY 8 FEET OUT FROM THE BUILDING), AND THAT THERE MAY BE AN UNDERGROUND OIL STORAGE TANK OR OTHER TANK ON OR NEAR THE PROPERTY. LANDLORD WILL HAVE THE RIGHT AND OBLIGATION TO DETERMINE WHETHER SUCH TANK EXISTS AND TO TAKE SUCH STEPS AS ARE REQUIRED BY LAW TO DECOMMISSION AND REMOVE THE TANK AND PIPING AND ANY CONTAMINATED SOIL AROUND THEM AND OTHERWISE COMPLY WITH APPLICABLE LEGAL REQUIREMENTS RELATED THERETO. LANDLORD WILL KEEP TENANT REASONABLY INFORMED ABOUT THE STATUS OF SUCH WORK AND WILL INDEMNIFY TENANT (AND ITS SUBTENANT) AGAINST ANY CLAIM, LOSS OR REASONABLE OUT-OF-POCKET EXPENSE (INCLUDING REASONABLE ATTORNEY FEES) RELATED TO THE PRESENCE AND REMOVAL OF SUCH TANK, PIPES AND ANY CONTAMINATED SOIL. LANDLORD WILL PROVIDE TENANT, ON REQUEST, WITH COPIES OF ANY STUDIES, REPORTS OR NOTICES RECEIVED BY LANDLORD IN CONNECTION THEREWITH AN ANY NOTICES OR FILINGS BY LANDLORD IN CONNECTION WITH SUCH MATTERS. TENANT WILL REASONABLY COOPERATE (AT NO OUT-OF-POCKET COST TO TENANT) IN CONNECTION WITH LANDLORD'S WORK RELATED TO SUCH TANK, PIPES AND ANY CONTAMINATED SOIL AND WILL GIVE (OR REQUIRE ITS SUBTENANT TO GIVE) LANDLORD ACCESS TO PERFORM SUCH WORK. TENANT (AND ITS SUBTENANT) ARE NOT ASSUMING ANY OBLIGATION --- RELATED TO SUCH TANK, PIPES AND ANY CONTAMINATED SOIL. RIDER 1(B) INSTALLATION. Tenant will not be required to ------------ obtain Landlord's prior approval (UNDER SECTION 2(C)) of the use of power tools and other machinery and equipment typically used in the conduct of Tenant's permitted use and that do not pose a risk of any building overload. RIDER 1(D) SURRENDER. The "ADDITIONS" to be surrendered (UNDER --------- SECTION 2(D)) will not include Tenant's furniture, fixtures and equipment ("FF&E") or personal property. RIDER 2 SECURITY DEPOSIT. The requirement of a security ---------------- deposit (UNDER SECTION 2) is waived. RIDER 3(B) MAINTENANCE. NOTWITHSTANDING THE PROVISIONS OF ----------- SECTION 3(B) OF THE LEASE, DURING THE INITIAL 12 MONTHS OF THE LEASE TERM, LANDLORD WILL BE RESPONSIBLE FOR PERFORMING ANY WORK REQUIRED TO THE ITEMS LISTED IN THE THIRD SENTENCE OF SECTION 3(B) OF THE LEASE. RIDER 4 TAXES; OPERATING COSTS. Notwithstanding SECTION 4 OR ---------------------- any OTHER provision of the Lease, Tenant's obligations to pay taxes and assessments ("Taxes") and operating costs are subject to the following: 3 (a) Landlord estimates that the initial payments under this paragraph will be $210 per month. Any adjustments by --- Landlord to the estimated monthly payment and Landlord's annual summary of the actual Taxes and operating costs will include reasonable detail concerning the Taxes and operating costs paid or to be paid. (b) For purposes of SECTION 4 AND OTHER provisions of the Lease computing Tenant's share of costs based on the rentable area ("FLOOR AREA"), Tenant's share of costs will be determined based on the floor area of the Premises divided by the leasable floor area of the Facility (whether or not leased, occupied or open for business). (c) The Taxes which Tenant may be required to pay or share under the Lease shall not include any excise, income, --- franchise, corporate, capital levy, capital stock, gross receipts, excess profits, transfer, revenue, estate, inheritance, gift or devolution or succession tax payable by Landlord, or any other tax, assessment, charge or levy upon, or measured in whole or in part by, the rent payable hereunder by Tenant. (d) As to any Taxes which are payable in installments or any assessment which is capable of being bonded, only the installment payment or bonded installment amount may be included in the amounts required to be paid by Tenant (whether or not Landlord actually elects to pay Taxes in installments or bond the assessment). (e) The periodic computation of actual costs compared to estimated payments and adjustment between the parties will occur not less frequently than annually, when the actual costs are determinable. (f) Operating costs are subject to Tenant's standard exclusions on the Schedule attached hereto. (g) Landlord will maintain and make available to Tenant for its review and audit or examination of Landlord's books and records pertaining to expenses under this Section, and of any other expenses chargeable to Tenant under this Lease. Any adjustment to the required monthly installment or payment or estimate shall be made after thirty (30) days advance notice containing the amount of the adjustment, how it was calculated and allocated, and such information about the costs actually incurred by Landlord as Tenant may reasonably require. No adjustments will be made retroactively for any period or expense incurred more than eighteen (18) months prior to the date of the adjustment. (h) Tenant, at Tenant's sole cost and expense, and after giving Landlord reasonable advance notice, may cause an examination or audit to be made of Landlord's books and records relating to expenses charged to Tenant (but not in any event more frequently than once every year). If it discloses (and the parties agree that) an error in calculation of the billings to Tenant, Tenant shall promptly pay the underpayment or Landlord shall promptly pay to Tenant the overpayment, whichever the case may be, and if there has been an overpayment of more than five percent 4 (5%), Landlord shall reimburse Tenant for the reasonable cost of the examination or audit. RIDER 5 PARKING. THE EXCLUSIVE PARKING AREA IS MARKED ON ------- EXHIBIT A. RIDER 6(B) TENANT'S INSURANCE. Notwithstanding anything to the ------------------ contrary in this Lease, Tenant shall, so long as it has a net worth of at least $50,000,000, have the right to self insure all or any portion of the risks for which Tenant is required to carry insurance under this Lease, in lieu of carrying the policies described in this Lease. By execution of this Lease, Landlord acknowledges that it has approved (for purposes of the Lease) Tenant's insurance coverages, companies and deductibles and self-insurance arrangements, as set forth in information previously provided to Landlord in connection with this Lease. RIDER 7(A) TERMINATION BY LANDLORD ON PARTIAL DESTRUCTION OR ------------------------------------------------- CONDEMNATION. Landlord will not exercise its right to terminate - ------------ Tenant's Lease on a selective basis, unless Landlord is also terminating the leases of similarly affected tenants generally at the Facility. If a casualty or condemnation event occurs that would give Landlord an election whether or not to terminate the Lease, Landlord will notify Tenant within 60 days after the event occurs as to whether Landlord has decided to terminate the Lease or is willing to restore the Facility. If Landlord is willing to restore, Landlord's notice will contain reasonable detail on the plan and schedule for restoration ("Restoration Plan"). Tenant will have 15 days after receipt of any notice of a Restoration Plan to either approve the plan or terminate the Lease (if Tenant is not satisfied with the plan). RIDER 9 TRANSFERS. Notwithstanding any other provisions of the --------- Lease (INCLUDING SECTION 9), the Lease will not restrict or --- require Landlord's consent for any sublease or concession arrangement by Tenant and will not restrict or apply to any sale --- or transfer of stock of Tenant. Notwithstanding any other provision of this Lease, the provisions of SECTION 9 OF the Lease shall not apply to or restrict: (1) a transfer or assignment of this Lease to any corporation that is controlled by, controlling of, or under common control with, Tenant, where "control" means ownership of the interests constituting 50 percent or more of the voting power of a corporation or partnership (an "Affiliate Transfer"); or (2) an assignment or transfer of this Lease in connection with a sale of all or substantially all of the assets of Tenant or in connection with a merger, consolidation, acquisition of a controlling interest in Tenant's stock, or other significant corporate transaction ("Transaction Transfer"). No Affiliate Transfer shall constitute a release of Tenant unless Landlord agrees otherwise in writing. Tenant shall promptly notify Landlord of any Affiliate Transfer or Transaction Transfer. 5 Where Landlord's consent is required for a transfer by Tenant, Landlord will give (or reasonably deny) its consent in writing within 20 days after receipt of a written request, including the name of the Transferee and such other information as Landlord may reasonably require. RIDER 9(A) REASON FOR ANY DISAPPROVAL PROVIDED. Landlord will ----------------------------------- not take action to terminate this Lease because of an unapproved transfer or take other action against Tenant without first giving Tenant a written statement specifying the particular reasons why the proposed transfer and transferee were not reasonable acceptable to Landlord and any steps required to be taken by Tenant (if applicable) to obtain Landlord's consent, and at least twenty (20) days for Tenant to comply with such requirements or take other appropriate action with respect to Landlord's refusal to grant consent. RIDER 10(A) EVENTS OF DEFAULT. Landlord will not have the ----------------- right to terminate this Lease or dispossess Tenant or other action on account of default UNDER SECTION 10 OF THE LEASE without giving Tenant notice and a reasonable opportunity to cure the alleged event of default (minimum of at least five days after receipt of written notice of the event Landlord considers a default with respect to payments and not less than 30 days after receipt of written notice as to other performance obligations, or to commence correction within such 30 days AS PROVIDED IN THE LAST SENTENCE OF SECTION 10(A)). Tenant will not be in default for any bankruptcy or insolvency event of default (FOR MATTERS LISTED IN SECTION 10(B)) unless Tenant is unable to obtain a dismissal or stay of proceeding within 45 days after becoming aware of the event. RIDER 11 REMEDIES FOR DEFAULT. Each party will use reasonable -------------------- efforts to mitigate damages for any default by the other party. THE DISCOUNT RATE UNDER SECTION 11(C) WILL BE NINE PERCENT (9%) PER ANNUM. RIDER 11(A) AND (D) NOTICE. Landlord will not terminate the ------ Lease or make a payment or perform an obligation on Tenant's behalf without Tenant having received five days' written notice of Landlord's intent to do so (which notice may be given in or separately from the notices under SECTION 10 OF THE LEASE). RIDER 17 INTEREST AND LATE CHARGES. The grace period for ------------------------- interest and late charges IN BOTH SENTENCES OF SECTION 17 is modified to be: "five days after receipt of written notice of nonpayment when due." RIDER 18(C) ENTRY. Any entry by Landlord will be made after ----- reasonable advance notice (minimum ten (10) days' notice, except for emergency repairs). Such ten (10) days' written notice shall not be required with respect to emergency repairs required to protect persons, property or other safety of tenants, but in the event of such emergency repairs, Landlord will attempt to contact Tenant as soon as possible and keep Tenant advised as to the action being taken. The reasonable costs of work performed to correct a default shall be promptly 6 reimbursed by Tenant after submission to it of invoice(s) and information on the work performed and costs incurred by Landlord as Tenant may reasonably require. If such reimbursement is not made within twenty (20) days after receipt of such invoice(s) and information, the costs incurred by Landlord will bear interest as provided in the Lease. RIDER 20 GENERAL PROVISIONS. The following General Provisions ------------------ are added to the Lease: 20.1 DECISION MAKING BY PARTIES. Wherever a party's consent, -------------------------- approval, decision or determination is required under this Lease, such consent or approval shall be given or decision or determination shall be made in writing and in a commercially reasonable manner. No change in rent, the rights of the paries or the economic terms of this Lease shall be required as a condition to granting of consent. Any denial of consent will include in reasonable detail the reason for denial or aspect of the request that was not acceptable. 20.2 NOTICES. Notices may be given by utilization of the ------- method(s) referenced in the Lease or by facsimile or other telecommunication device capable of transmitting or creating a written record or personally. Each party shall give notice to the other of its address for notice by written notice to the other. Unless Tenant designates another address for notice by notice given pursuant to this Section, notices to Tenant should be sent to the following address: Fred Meyer, Inc. 3800 S.E. 22nd Avenue P.O. Box 42121 Portland, Oregon 97204-0121 Attn: Senior Vice President, Corporate Facilities Facsimile No.: (503) 797-3539 with a copy to: Fred Meyer, Inc. 3800 S.E. 22nd Avenue P.O. Box 42121 Portland, Oregon 97242-0121 Attn: Corporate Legal Department Facsimile No.: (503) 797-7138 For the purpose of this Lease, the term "receipt" shall mean the earlier of any of the following: (i) the date of delivery of the notice or other document to the address specified pursuant to this Section as shown on the return receipt or by the records of the courier, (ii) the date of actual receipt of the notice or other document by the office of the person or entity specified pursuant to this Section, or (iii) in the case of refusal to accept delivery or inability to deliver the notice or other document, the earlier of (A) the date of the attempted delivery or refusal to accept delivery, (B) the date of the postmark on the return receipt, or (C) the date of receipt of notice of refusal or notice of nondelivery by the sending party. 7 Notices are not to be delivered to the Premises and are not --- effective if delivered there (except that any notice required by law to be posted at or delivered to the Premises will be effective for purposes of satisfying the requirement of the law). 20.3 EXCULPATION; INDEMNITY. No exculpation of Landlord or ---------------------- indemnity by Tenant will be construed to make Tenant responsible for claims arising from the gross negligence or willful misconduct of Landlord, its agents, independent contractors or employees. Landlord shall indemnify Tenant from any loss, liability, claim of liability cost and expense (including reasonable attorneys' fees and litigation expenses), arising out of or related to any violation of law or gross negligence or willful misconduct of Landlord, its agents, independent contractors or employees. 20.4 PRIOR AGREEMENTS. This Lease (including all exhibits, ---------------- schedules and other attachments hereto, incorporated herein by reference) contains all of the agreements of the parties hereto with respect to any such matters which shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. 20.5 AUTHORITY. If Landlord or Tenant is a corporation or other --------- entity, each individual executing this Lease on behalf of such corporation or entity represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of such corporation or entity, in accordance with its bylaws or organizational documents, and that this Lease is binding upon such corporation or entity. IN WITNESS WHEREOF, the parties have executed this Rider to Lease as of the date first above written. LANDLORD: REAL ESTATE PROPERTIES LIMITED PARTNERSHIP By DAVID W. ROM ---------------------------- TENANT: FRED MEYER, INC. By SCOTT L. WIPPEL ---------------------------- 8 SCHEDULE #1 STANDARD EXCLUSIONS Notwithstanding anything contained in this Lease, no expenses incurred for the following shall be included in any common area or operating expenses or other expenses chargeable to Tenant under this Lease: 1. Rent on any ground lease; 2. Leasing commissions, attorneys' fees, costs and disbursements, and other expenses (including advertising) incurred in connection with leasing, renovating, or improving space for tenants or other occupants or prospective tenants or occupants of the Shopping Center; 3. Costs (including permit, license, and inspection fees) incurred in renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants or vacant space; 4. Landlord's costs of any services sold to tenants or other occupants for which Landlord is entitled to be reimbursed by such tenants or other occupants as an additional charge or rental over and above the basic rent and escalations payable under the lease with such tenant or other occupant, and costs associating with valet parking (including wages and other expenses); 5. Costs incurred in connection with the original construction or expansion of the Shopping Center, including any interest or payments on any financing, or the cost of correcting defects in the initial design or construction of the Shopping Center or expansion; 6. Any depreciation and amortization of the Building of which the Premises are a part or other buildings and improvements within the Shopping Center; 7. Expenses in connection with services or other benefits of a type not available to Tenant but which are provided to other tenant or occupant; 8. Damages recovered by any tenant due to violation by Landlord of any of the terms and conditions of any lease or any other agreement relating to the Shopping Center, or any fine or penalty relating to any violation of law or contract by Landlord or any other tenant or occupant of the Shopping Center, or Landlord's expenses incurred in connection with responding to or contesting the same; 9. Interest on debt or amortization payments on any mortgages or deeds of trust or any other debt for borrowed or advanced money, except as expressly permitted herein; 9 10. Any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord; 11. Any cost related to the operation of Landlord as an entity rather than the operating of the Shopping Center, including the cost and formation of the entity, internal accounting, legal matters, preparation of tax returns, etc.; 12. Repairs occasioned by fires, windstorm, or other casualty, to the extent such repairs are covered by insurance or would have been covered by a standard "all risk" form of casualty insurance policy; 13. Repairs and maintenance of any pylon or other sign maintained for tenants which does not include any of Tenant's signage; 14. All costs for which Landlord has received reimbursement or is entitled to receive reimbursement pursuant to any law or agreement other than this Section (including, without limitation insurance and condemnation proceeds), except by way of basic rents or escalation rents; 15. Manager's or agent's fees in excess of FIVE PERCENT (5%) of the other amounts included in the common area costs in which Tenant is required to share (not including any cost of insurance, any taxes or assessment on real or personal property or major capital expenditures); 16. Costs allocable to properties other than the Shopping Center; 17. Legal fees in connection with the sale or lease of all or any portion of the Shopping Center, or any interest therein, or any financing or refinancing related to the Shopping Center, or in connection with any dispute with any other tenant(s) or occupant(s) of the Shopping Center or third parties claiming an interest adverse to Landlord in the Shopping Center or any portion thereof, and legal fees and auditing fees, other than legal and auditing fees reasonably incurred in connection with the maintenance and operation of all or any portion of the Shopping Center or in connection with the preparation of the statements required pursuant to additional rent or lease escalation provisions contained in leases of space in the Shopping Center; 18. Executives' salaries above the grade of building manager; and 19. Common area or operating expenses (such as parking lot repaving) properly chargeable to capital accounts shall be amortized over the useful life of the applicable item(s) in accordance with GAAP. In no event shall Tenant's share of expenses during each succeeding year of the Lease term, increase more than five percent (5%) per year over the amount charged by Landlord during the previous year. As used herein, the term "Shopping Center" is replaced by the term "Facility." EX-10.V 4 EXHIBIT 10V - ------------------------------------------------------------------------------- LEASE AGREEMENT (Tax Retention Operating Lease) Dated as of December 1, 1995 between FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner Trustee under the FM Trust 1995-2, as Lessor, and FRED MEYER, INC., as Lessee - ------------------------------------------------------------------------------- This Lease Agreement is subject to a security interest in favor of NationsBank of Texas, N.A., as Administrative Agent (the "Agent"), under a Credit Agreement dated as of December 1, 1995, among First Security Bank of Utah, N.A., not individually except as expressly stated therein, but solely as Owner Trustee under the FM Trust 1995-2, the Lenders and the Agent, as amended, modified, supplemented, restated and/or replaced from time to time. This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), the counterpart of this Lease Agreement containing the receipt therefor executed by the Agent on the signature page hereof shall be deemed the only original counterpart hereof. i TABLE OF CONTENTS ARTICLE I.................................................................. 1 1.1 Definitions.................................................. 1 1.2 Interpretation............................................... 1 ARTICLE II................................................................. 2 2.1 Property..................................................... 2 2.2 Lease Term................................................... 2 2.3 Title........................................................ 2 2.4 Lease Supplements............................................ 2 ARTICLE III................................................................ 2 3.1 Rent......................................................... 2 3.2 Payment of Basic Rent........................................ 3 3.3 Supplemental Rent............................................ 3 3.4 Performance on a Non-Business Day............................ 3 3.5 Rent Payment Provisions...................................... 4 ARTICLE IV................................................................. 4 4.1 Utility Charges.............................................. 4 ARTICLE V.................................................................. 4 5.1 Quiet Enjoyment.............................................. 4 5.2 Transfers by Lessor; Lessor Liens............................ 4 ARTICLE VI................................................................. 5 6.1 Net Lease.................................................... 5 6.2 No Termination or Abatement.................................. 5 ARTICLE VII................................................................ 6 7.1 Ownership of the Property.................................... 6 ARTICLE VIII............................................................... 7 8.1 Condition of the Property.................................... 7 8.2 Possession and Use of the Property........................... 7 ARTICLE IX................................................................. 8 9.1 Compliance With Legal Requirements and Insurance Requirements................................................. 8 ARTICLE X.................................................................. 9 10.1 Maintenance and Repair; Return............................... 9 10.2 Environmental Inspection.................................... 10 ARTICLE XI................................................................ 11 11.1 Modifications, Substitutions and Replacements............... 11 ARTICLE XII............................................................... 11 12.1 Warranty of Title........................................... 11 ARTICLE XIII.............................................................. 12 13.1 Permitted Contests Other Than in Respect of Indemnities................................................. 12 ii ARTICLE XIV............................................................... 13 14.1 Public Liability and Workers' Compensation Insurance................................................... 13 14.2 Hazard and Other Insurance.................................. 13 14.3 Coverage.................................................... 14 ARTICLE XV................................................................ 15 15.1 Casualty and Condemnation................................... 15 15.2 Environmental Matters....................................... 17 15.3 Notice of Environmental Matters............................. 17 ARTICLE XVI............................................................... 18 16.1 Termination Upon Certain Events............................. 18 16.2 Procedures.................................................. 18 ARTICLE XVII.............................................................. 19 17.1 Lease Events of Default..................................... 19 17.2 Surrender of Possession..................................... 22 17.3 Reletting................................................... 22 17.4 Damages..................................................... 22 17.5 Power of Sale............................................... 23 17.6 Final Liquidated Damages.................................... 23 17.7 Lessee's Purchase Option During Default..................... 24 17.8 Waiver of Certain Rights.................................... 24 17.9 Assignment of Rights Under Contracts........................ 24 17.10 Remedies Cumulative......................................... 25 ARTICLE XVIII............................................................. 25 18.1 Lessor's Right to Cure Lessee's Lease Defaults.............. 25 ARTICLE XIX............................................................... 25 19.1 Provisions Relating to Lessee's Exercise of its Purchase Option............................................. 25 19.2 No Termination With Respect to Less than All of a Property.................................................. 26 ARTICLE XX................................................................ 26 20.1 Purchase Options............................................ 26 20.2 Expiration Date Purchase or Sale Option..................... 27 20.3 Lessor's Transfer Option.................................... 27 ARTICLE XXI............................................................... 28 21.1 Renewal..................................................... 28 ARTICLE XXII.............................................................. 28 22.1 Sale Procedure.............................................. 28 22.2 Application of Proceeds of Sale............................. 30 22.3 (intentionally omitted)..................................... 31 22.4 (intentionally omitted)..................................... 31 22.5 Certain Obligations Continue................................ 31 22.6 Sale of Undeveloped Pads.................................... 31 ARTICLE XXIII............................................................. 31 23.1 Holding Over................................................ 31 iii ARTICLE XXIV.............................................................. 32 24.1 Risk of Loss................................................ 32 ARTICLE XXV............................................................... 32 25.1 Assignment.................................................. 32 25.2 Subleases................................................... 32 ARTICLE XXVI.............................................................. 33 26.1 No Waiver................................................... 33 ARTICLE XXVII............................................................. 33 27.1 Acceptance of Surrender..................................... 33 27.2 No Merger of Title.......................................... 34 ARTICLE XXVIII............................................................ 34 28.1 Incorporation of Covenants.................................. 34 ARTICLE XXIX.............................................................. 34 29.1 Notices..................................................... 34 ARTICLE XXX............................................................... 36 30.1 Miscellaneous............................................... 36 30.2 Amendments and Modifications................................ 36 30.3 Successors and Assigns...................................... 36 30.4 Headings and Table of Contents.............................. 36 30.5 Counterparts................................................ 36 30.6 GOVERNING LAW............................................... 36 30.7 Calculation of Rent......................................... 36 30.8 Memoranda of Lease and Lease Supplements.................... 36 30.9 Allocations between the Lenders and the Holders............. 37 30.10 Limitations on Recourse..................................... 37 30.11 Estoppel Certificates....................................... 37 30.12 Decision Making by Parties.................................. 37 30.13 Limited Power of Attorney................................... 37 30.14 Submission To Jurisdiction; Waivers......................... 38 30.15 WAIVERS OF JURY TRIAL....................................... 39 EXHIBITS EXHIBIT A - Lease Supplement No. ___ EXHIBIT B-1 - Memorandum of Lease and Lease Supplement EXHIBIT B-2 - Memorandum of Lease LEASE AGREEMENT --------------- (Tax Retention Operating Lease Agreement) THIS LEASE AGREEMENT (Tax Retention Operating Lease) (this "Lease"), dated as of December 1, 1995, is between FIRST SECURITY BANK OF UTAH, N.A., a national banking association, having its principal office at 79 South Main Street, Salt Lake City, Utah 84111, not individually, but solely as Owner Trustee under the FM Trust 1995-2, as lessor (the "Lessor"), and FRED MEYER, INC., a Delaware corporation, having its principal place of business at 3800 S.E. 22nd Avenue, Portland, Oregon 97202, as lessee (the "Lessee"). W I T N E S S E T H: - - - - - - - - - - A. WHEREAS, subject to the terms and conditions of the Agency Agreement, Lessor will (i) purchase or ground lease various parcels of real property, some of which will have existing Improvements thereon, from one or more third parties designated by Lessee and (ii) fund the development, refurbishment and construction by the Construction Agent of Improvements on such real property; and B. WHEREAS, the Basic Term shall commence with respect to each Property on the Basic Term Commencement Date described in Section 2.2 hereof; and C. WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor, each Property; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1 Definitions. Capitalized terms used but not otherwise defined in this Lease have the respective meanings specified in Appendix A to the Participation Agreement of even date herewith (as such may be amended, modified, supplemented, restated and/or replaced from time to time, the "Participation Agreement") among the Lessee, the Construction Agent, First Security Bank of Utah, N.A., not individually, except as expressly stated therein, as Owner Trustee under the FM Trust 1995-2, the Holders, the Lenders and the Agent. 1.2 Interpretation. The rules of usage set forth in Appendix A to the Participation Agreement shall apply to this Lease. 2 ARTICLE II 2.1 Property. Subject to the terms and conditions hereinafter set forth and contained in the respective Lease Supplement relating to each Property, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each Property. 2.2 Lease Term. The term of this Lease with respect to each Property (the "Basic Term") shall begin upon the earliest to occur of (i) the Completion Date for such Property, (ii) with respect to Improved Property, the Property Closing Date with respect to such Improved Property or (iii) if such Property is a Construction Period Property as of the date of any Agency Agreement Event of Default, the date of such Agency Agreement Event of Default (in each case the "Basic Term Commencement Date") and shall end on December 8, 2000 (the "Basic Term Expiration Date"), unless the Term is extended or earlier terminated in accordance with the provisions of this Lease. 2.3 Title. Each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in title to any Property. 2.4 Lease Supplements. On or prior to the Completion Date with respect to the Improvements to be constructed on Unimproved Property and on or prior to the Property Closing Date with respect to each acquisition of Improved Property, Lessee covenants and agrees with Lessor that it will execute and deliver to Lessor a Lease Supplement for the Property to be leased effective as of the Basic Term Commencement Date for such Property (such Lease Supplement to be in substantially the form of Exhibit A hereto), and thereafter such Property shall be subject to the terms of this Lease. ARTICLE III 3.1 Rent. (a) Lessee shall pay Basic Rent in arrears, on each Payment Date, and on any date on which this Lease shall terminate with respect to any or all Properties during the Term; provided, however, with respect to each individual Property Lessee shall have no obligation to pay Basic Rent with respect to such Property until the Basic Term has commenced with respect to such Property. (b) Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer (including Automated Clearing House transfer) of immediately available funds on the due date therefor to such 3 account or accounts at such bank or banks as Lessor shall from time to time direct. (c) Lessee's inability or failure to take possession of all or any portion of any Property when delivered by Lessor, whether or not attributable to any act or omission of Lessee or any act or omission of Lessor (other than an act or omission that constitutes gross negligence or wilful misconduct of Lessor), or for any other reason whatsoever, shall not delay or otherwise affect Lessee's obligation to pay Rent for such Property in accordance with the terms of this Lease. 3.2 Payment of Basic Rent. Basic Rent shall be paid absolutely net to Lessor or its designee, so that this Lease shall yield to Lessor the full amount thereof, without setoff, deduction or reduction. 3.3 Supplemental Rent. Lessee shall pay to Lessor or its designee or to the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor, as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements, (a) any and all unpaid fees, charges, payments and other obligations (other than the obligations of Lessor to pay the principal amount of the Loans and the Holder Amounts) due and owing by Lessor under the Credit Agreement, under the Trust Agreement and/or under any other Operative Agreement (including specifically without limitation any amounts owing to the Lenders under Section 2.10 or Section 2.11 of the Credit Agreement and any amounts owing to the Holders under Section 3.8 or Section 3.9 of the Trust Agreement) and (b) interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4 Performance on a Non-Business Day. If any payment is required hereunder on a day that is not a Business Day, then such payment shall be due on the next succeeding Business Day. 4 3.5 Rent Payment Provisions. Lessee shall make payment of all Basic Rent and Supplemental Rent when due regardless of whether any of the Operative Agreements pursuant to which same is calculated and is owing shall have been rejected, avoided or disavowed in any bankruptcy or insolvency proceeding involving any of the parties to any of the Operative Agreements. Such provisions of such Operative Agreements and their related definitions are incorporated herein by reference and shall survive any termination, amendment or rejection of any such Operative Agreements. ARTICLE IV 4.1 Utility Charges. Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on a Property and related real property during the Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee. The amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the reasonable costs and expenses incurred by Lessor in obtaining such credit or refund, if any, shall be promptly paid over to Lessee. All charges for utilities imposed with respect to a Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for such party's pro rata share thereof. ARTICLE V 5.1 Quiet Enjoyment. Subject to the rights of Lessor contained in Sections 17.2, 17.3 and 20.3 and the other terms of this Lease and so long as no Lease Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the applicable Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor (other than Lessee) with respect to any matters arising from and after the applicable Basic Term Commencement Date. 5.2 Transfers by Lessor; Lessor Liens. So long as no Lease Event of Default shall have occurred and be continuing, Lessor shall not assign or convey any of its right, title or interest in and to this Lease or the Properties, except for the Liens specifically contemplated under the Operative Agreements or as otherwise required by Law. In addition to the foregoing, Lessor agrees that it will, in its individual capacity and at its own cost and expense (and without any right of indemnity under the Operative Agreements) promptly take such action as may be necessary to duly discharge and satisfy in full any Lessor Liens in a manner consistent with the requirements of Section 10.2(a) of the Participation Agreement. 5 ARTICLE VI 6.1 Net Lease. This Lease shall constitute a net lease. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of: (i) any damage to or destruction of any Property or any part thereof; (ii) any taking of any Property or any part thereof or interest therein by Condemnation or otherwise; (iii) any prohibition, limitation, restriction or prevention of Lessee's use, occupancy or enjoyment of any Property or any part thereof, or any interference with such use, occupancy or enjoyment by any Person or for any other reason; (iv) any title defect, Lien or any matter affecting title to any Property; (v) any eviction by paramount title or otherwise; (vi) any default by Lessor hereunder; (vii) any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding relating to or affecting Lessor or any Governmental Authority; (viii) the impossibility or illegality of performance by Lessor, Lessee or both; (ix) any action of any Governmental Authority; (x) Lessee's acquisition of ownership of all or part of any Property; (xi) breach of any warranty or representation with respect to any Property or any Operative Agreement; (xii) any defect in the condition, quality or fitness for use of any Property or any part thereof; or (xiii) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. The parties intend that the obligations of Lessee hereunder shall be covenants, agreements and obligations that are separate and independent from any obligations of Lessor hereunder and shall continue unaffected unless such covenants, agreements and obligations shall have been modified or terminated in accordance with an express provision of this Lease. Lessor and Lessee acknowledge and agree that the provisions of this Section 6.1 have been specifically reviewed and subject to negotiation. 6.2 No Termination or Abatement. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting Lessor or any Governmental Authority, or any action with respect to this Lease or any Operative Agreement which may be taken by any trustee, receiver or liquidator of Lessor or any Governmental Authority or by any court with respect to Lessor or any Governmental Authority. Lessee hereby waives all right (i) to terminate or surrender this Lease or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter 6 conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. ARTICLE VII 7.1 Ownership of the Property. (a) Lessor and Lessee intend that (i) for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, (B) Lessor will be treated as the owner and lessor of each Property and (C) Lessee will be treated as the lessee of each Property, but (ii) for federal and all state and local income tax purposes, bankruptcy and commercial law and real estate purposes and all other purposes (A) this Lease will be treated as a financing arrangement, and (B) Lessee will be treated as the owner of the Properties and will be entitled to all tax benefits ordinarily available to owners of property similar to the Properties for such tax purposes. (b) To the extent this Lease is hereafter deemed to constitute a finance lease and not a true lease, then and only in such event, Lessor and Lessee intend and agree that, for the purpose of securing Lessee's obligations hereunder, (i) this Lease shall be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code respecting each of the Properties to the extent such is personal property and an irrevocable grant and conveyance of a lien and mortgage on each of the Properties to the extent such is real property; (ii) the conveyance provided for in Article II shall be deemed to be a grant by Lessee to Lessor of, and Lessee hereby grants to Lessor, a lien on and security interest, mortgage and deed of trust in all of Lessee's right, title and interest in and to the Property and all proceeds (including without limitation insurance proceeds) of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, and an assignment of all rents, profits and income produced by the Property; and (iii) notifications to Persons holding such property, and acknowledgements, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest, mortgage, deed of trust or lien under applicable law. Lessor and Lessee shall, to the extent consistent with this Lease, take such actions as may be necessary (including without limitation the filing of Uniform Commercial Code Financing Statements, Uniform Commercial Code Fixture 7 Filings and memoranda of this Lease and the various Lease Supplements) to ensure that, if this Lease were deemed to create a lien, mortgage, deed of trust or security interest in the Property in accordance with this Section, such lien, mortgage, deed of trust or security interest would be deemed to be perfected and to have a first priority position under applicable law and will be maintained as such throughout the Term. ARTICLE VIII 8.1 Condition of the Property. EXCEPT FOR THE COVENANTS OF LESSOR SET FORTH IN ARTICLE V HEREOF, LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (D) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. THE LESSEE HAS OR WILL HAVE BEEN AFFORDED FULL OPPORTUNITY TO INSPECT THE PROPERTY AND THE IMPROVEMENTS THEREIN, IS OR WILL BE (INSOFAR AS THE LESSOR, THE AGENT, EACH LENDER AND EACH HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING SENTENCE, AS BETWEEN THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE HAND, AND THE LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE. 8.2 Possession and Use of the Property. (a) At all times during the Term with respect to each Property, such Property shall not be used by Lessee for any unlawful purpose. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties as contemplated by this Lease. During the Term, Lessee may cease operations at Properties having a Maximum Property Cost not to exceed fifty percent (50%) of the Maximum Property Cost of all Properties as of the Construction Period Termination Date; provided, during such 8 period of ceased operations Lessee shall comply with its obligations under the Operative Agreements. (b) The address of Lessee set forth in Section 29.1 herein or otherwise disclosed to Lessor by Lessee pursuant to written notice hereunder no less than 30 days prior to the effective date of such changed location is the chief place of business and chief executive office of Lessee (as such terms are used in Section 9-103(3) of the Uniform Commercial Code of any applicable jurisdiction). Regarding a particular Property, each Lease Supplement correctly identifies the initial location of the related Equipment and Improvements and contains an accurate legal description for the related parcel of Land. Lessee has no other places of business where the Equipment or Improvements will be located other than those identified on the applicable Lease Supplement. (c) Lessee will not attach or incorporate any item of Equipment to or in any other item of equipment or personal property or to or in any real property (except the Land identified in the Lease Supplement in which such Equipment is also described) in a manner that could give rise to the assertion of any Lien on such item of Equipment by reason of such attachment or the assertion of a claim that such item of Equipment has become a fixture and is subject to a Lien in favor of a third party that is prior to the Liens thereon created by the Operative Agreements. (d) With respect to each Property, subject to the terms and conditions of this Lease and the Participation Agreement, on each Basic Term Commencement Date Lessor and Lessee shall execute and deliver a Lease Supplement containing, in regard to such Property, an Equipment Schedule that has a complete description of each item of Equipment, an Improvement Schedule that has a complete description of each Improvement and a legal description of the Land, to be leased hereunder as of such date. Simultaneously therewith, such Equipment, Improvements and Land shall be deemed to have been accepted by Lessee for all purposes of this Lease and to be subject to this Lease. ARTICLE IX 9.1 Compliance With Legal Requirements and Insurance Requirements. Subject to the terms of Article XIII relating to permitted contests, Lessee, at its sole cost and expense, shall (i) comply with all material Legal Requirements (including without limitation all Environmental Laws) relating to the Properties, and all Insurance Requirements relating to the Properties, including the use, development, construction, operation, maintenance, repair, refurbishment and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or 9 interfere with the use and enjoyment of the Properties, and (ii) procure, maintain and comply with all material licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of the Properties and for the use, development, construction, operation, maintenance, repair and restoration of the Improvements. ARTICLE X 10.1 Maintenance and Repair; Return. (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition, repair and working order (ordinary wear and tear excepted) and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all Legal Requirements, Insurance Requirements, and manufacturer's specifications and standards and on a basis consistent with the operation and maintenance of other similar properties or equipment of Lessee as of the date hereof subject, however, to the provisions of Article XV with respect to Condemnation and Casualty. (b) Lessee shall not use or locate any component of any Property outside of any Approved State. Lessee shall not move or relocate any component of any Property beyond the boundaries of the Land (comprising part of the Property) described in the applicable Lease Supplement. (c) (Intentionally Omitted). (d) Upon reasonable advance notice, Lessor and its agents shall have the right to inspect each Property and all maintenance records with respect thereto at any reasonable time during normal business hours but shall not, in the absence of a Lease Event of Default, materially disrupt the business of Lessee. (e) If, at any time, the aggregate appraised value of Properties then subject to this Lease and with respect to which operations have not ceased as described in Section 8.2(a) for which the Lessor has received an Appraisal pursuant to the terms of Section 5.6 of the Participation Agreement is less than the lesser of $8,400,000 (provided, in the event of a Commitment Increase for the Lenders and the Holders, such minimum aggregate value of the Properties then subject to the terms of the Operative Agreements shall be increased from $8,400,000 to an amount equal to the sum of (x) $8,400,000 plus (y) the product of (I) the aggregate Amount of Commitment Increase multiplied by (II) fourteen percent (14%)) or the aggregate Property Cost of all Properties then subject to this Lease and with respect to 10 which operations have not ceased as described in Section 8.2(a) (such lesser amount being hereafter referred to as the "Base Amount"), then the Lessee will cause an additional Appraisal or Appraisals to be immediately delivered to the Lessor in an amount sufficient to cause such aggregate appraised value to equal or exceed the Base Amount. In addition, Lessee shall cause to be delivered to Lessor (at Lessee's sole expense) any additional Appraisals (or reappraisals) as Lessor may request if any one of Lessor, the Agent, any Lender or any Holder is required pursuant to any applicable Legal Requirement to obtain such an Appraisal (or reappraisal). Any such request by Lessor will identify the Person and the applicable Legal Requirement that necessitates the additional Appraisal (or reappraisal). Lessee may cause the additional Appraisal (or reappraisal) to be performed in a manner that satisfies the minimum requirements of such Legal Requirement, including, without limitation, if permitted by the Legal Requirement, providing a supplement or date-down to a previously provided Appraisal. The parties will cooperate on efforts to minimize the frequency and costs of such additional Appraisals (or reappraisals). (f) Lessor shall under no circumstances be required to build any improvements on any Property, make any repairs, replacements, alterations or renewals of any nature or description to any Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. (g) Lessee shall, upon the expiration or earlier termination of this Lease with respect to a Property, if Lessee shall not have exercised its Purchase Option or Expiration Date Purchase Option with respect to such Property, surrender such Property to Lessor, or the third party purchaser, as the case may be, subject to Lessee's obligations under this Lease (including without limitation Sections 9.1, 10.1(a)-(f), 10.2, 11.1, 12.1, 22.1 and 23.1). 10.2 Environmental Inspection. If Lessee has not given notice of exercise of its Expiration Date Purchase Option pursuant to Section 20.2, then not more than 120 days nor less than 60 days prior to the Expiration Date, Lessee shall, at its sole cost and expense, provide to Lessor a report by a reputable environmental consultant selected by Lessee, which report shall be in form and substance satisfactory to Lessor. 11 ARTICLE XI 11.1 Modifications, Substitutions and Replacements. (a) Lessee may, either at its sole cost and expense or with the proceeds of Modification Advances made pursuant to the terms of the Participation Agreement during the Construction Period, at any time and from time to time without the consent of Lessor make alterations, renovations, improvements and additions to the Property or any part thereof and substitutions and replacements therefor (collectively, "Modifications"); provided, that: (i) except for any Modification required to be made pursuant to a Legal Requirement, no Modification shall materially impair the value, utility or useful life of the Property from that which existed immediately prior to such Modification; (ii) the Modification shall be done expeditiously and in a good and workmanlike manner; (iii) Lessee shall comply with all Legal Requirements (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of the Property shall not be adversely affected; (iv) to the extent required by Section 14.2(a), Lessee shall maintain builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article XIII relating to permitted contests, Lessee shall pay all costs and expenses and discharge any liens arising with respect to the Modification; and (vi) such Modification shall comply with the requirements of this Lease (including without limitation Sections 8.2 and 10.1). All Modifications financed by Lessor shall become the property of, and title thereto shall immediately and without further action vest in, the Lessor, when installed (and the Ground Lease shall expressly provide). All other Modifications shall become the property of, and title thereto shall immediately and without further action vest in, Lessor, on surrender of the Property, the earlier termination of this Lease or the occurrence of a Lease Default or Lease Event of Default under Section 17.1(j) of this Lease. (b) The construction process provided for in the Agency Agreement is acknowledged by Lessor and the Agent to be consistent with and in compliance with the terms and provisions of this Article XI. ARTICLE XII 12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise provided herein and subject to the terms of Article XIII relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at 12 its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon any Property or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Credit Agreement, other than Permitted Liens and Lessor Liens. Lessee shall promptly notify Lessor in the event it receives actual knowledge that a Lien other than a Permitted Lien or Lessor Lien has occurred with respect to a Property, and Lessee represents and warrants to, and covenants with, Lessor that the Liens in favor of the Lessor created by the Operative Agreements are first priority perfected liens subject only to Permitted Liens. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Property or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY PROPERTY. ARTICLE XIII 13.1 Permitted Contests Other Than in Respect of Indemnities. Except to the extent otherwise provided for in Section 13 of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) Lessee provides to Lessor such security or other assurances reasonably acceptable to Lessor that Lessee can and will satisfy the Lien and comply with the Legal Requirements in sufficient time to prevent any sale, forfeiture or loss by reason of such non-payment or noncompliance, (b) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability (in the case of a civil liability, unless Lessee provides to Lessor such security or other assurances reasonably acceptable to Lessor that Lessee can and will satisfy such liability) on Lessor, any Holder, the Agent or any Lender for failure to comply therewith; and (c) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then Lessee shall deliver to Lessor an Officer's 13 Certificate certifying as to the matters set forth in clauses (a) and (b) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. ARTICLE XIV 14.1 Public Liability and Workers' Compensation Insurance. During the Term of each Property, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage to property while on the Properties or the premises where the Equipment is located and such other public liability coverages as are ordinarily procured by Persons who own or operate similar properties or equipment in similar businesses. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by Lessee with respect to similar properties and equipment that it owns and that are in accordance with normal industry practice. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders as additional insureds. The policies shall also specifically provide that such policies shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, the Holders, the Agent or the Lenders may have in force. Lessee shall, in the operation of the Properties, comply with the applicable workers' compensation laws and protect Lessor, the Holders, the Agent and the Lenders against any liability under such laws. 14.2 Hazard and Other Insurance. (a) During the Term for each Property, Lessee shall keep, or cause to be kept, such Property insured against loss or damage by fire and other risks and shall maintain builders' risk insurance during construction of any Improvements or Modifications on terms and in amounts that are no less favorable than insurance covering other similar properties owned by Lessee and that are in accordance with normal industry practice. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders, to the extent of their respective interests, as additional loss payees; provided, so long as no Lease Event of Default exists, any loss payable under the insurance policies required by this Section will be paid to Lessee and Lessee will have the sole authority to settle any such insurance claim without the need for prior approval by any such additional loss payee. (b) During the Term with respect to a Property the area in which such Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act of 1973, or any amendments or supplements thereto, then 14 Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement, concerning flood insurance to the extent that it apply to any such Property. 14.3 Coverage. (a) As of the date of this Lease and annually thereafter, Lessee shall furnish Lessor and the Agent with certificates showing the insurance required under Sections 14.1 and 14.2 to be in effect, naming Lessor, the Holders, the Agent and the Lenders as additional insureds and loss payees and evidencing the other requirements of this Article XIV. All such insurance shall be at the cost and expense of Lessee. Such certificates shall include a provision for thirty (30) days' advance written notice by the insurer to Lessor and the Agent in the event of cancellation or material alteration of such insurance. If a Lease Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by Sections 14.1 and 14.2. (b) Lessee agrees that the insurance policy or policies required by Sections 14.1, 14.2(a) and 14.2(b) shall include an appropriate clause pursuant to which any such policy shall provide that it will not be invalidated by any act or omission of Lessee or to the extent Lessee waives, at any time, any or all rights of recovery against any party for losses covered by such policy. Lessee hereby waives any and all such rights against the Lessor, the Holders, the Agent and the Lenders to the extent of payments made to any such Person under any such policy. (c) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV, except that Lessor may carry separate liability insurance at Lessor's sole cost so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. (d) Lessee shall pay as they become due all premiums for the insurance required by Section 14.1 and Section 14.2, shall renew or replace each policy prior to the expiration date thereof or otherwise maintain the coverage required by such Sections without any lapse in coverage. 15 (e) Any insurance required to be carried hereunder may contain such deductibles and/or self insurance consistent with industry standards and the then current practice of Lessee with respect to its other properties similar to the Properties. Any liability insurance required under Section 14.1 may be met through "blanket" policies of insurance. ARTICLE XV 15.1 Casualty and Condemnation. (a) Subject to the provisions of this Article XV and Article XVI (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of a Lease Default or Lease Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any award, compensation or insurance proceeds under Sections 14.2(a) or (b) hereof to which Lessee or Lessor may become entitled by reason of their respective interests in a Property (i) if all or a portion of such Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to such Property or any part thereof is the subject of a Condemnation; provided, however, if a Lease Default or Lease Event of Default shall have occurred and be continuing such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor and held in accordance with the terms of this paragraph (a). All amounts held by Lessor hereunder on account of any award, compensation or insurance proceeds either paid directly to Lessor or turned over to Lessor shall be held as security for the performance of Lessee's obligations hereunder for the duration of any applicable cure period. (b) Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessee shall receive notice of a Casualty or a possible Condemnation of a Property or any interest therein where damage to the affected Property is estimated to equal or exceed ten percent (10%) of the Property Cost of such 16 Property, Lessee shall give notice thereof to the Lessor and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or a Condemnation (regardless of whether notice thereof must be given pursuant to paragraph (c)), this Lease shall terminate with respect to the applicable Property in accordance with Section 16.1 if Lessee, within sixty (60) days after such occurrence, delivers to Lessor and the Agent a notice to such effect. (e) If pursuant to this Section 15.1 this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected Property, Lessee shall, at its sole cost and expense and using, if available, the proceeds of any award, compensation or insurance with respect to such Casualty or Condemnation (including, without limitation, any such award, compensation or insurance which has been received by the Agent and which should be turned over to Lessee pursuant to the terms of the Operative Agreements), promptly and diligently repair any damage to the applicable Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1, so as to restore the applicable Property to substantially the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to the applicable Property shall remain with Lessor. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term with respect to a Property a Casualty occurs with respect to such Property or Lessee receives notice of a Condemnation with respect to such Property, and following such Casualty or Condemnation, Lessee is unable to use the remaining applicable Property in substantially the same manner as the Property was used prior to such Casualty or Condemnation and the applicable Property cannot reasonably be restored, repaired or replaced in a manner consistent with the requirements of this Lease by the earlier to occur of the Expiration Date or the date nine (9) months after the occurrence of such Casualty or Condemnation (if such Casualty or Condemnation occurs during the Term), to permit such use, then Lessee shall be required to exercise its Purchase Option with respect to the applicable Property on the next Payment Date (notwithstanding the limits on such exercise contained in Section 20.1), and pay Lessor the Purchase Option Price and any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2); provided, if any Lease Default or Lease Event 17 of Default has occurred and is continuing, Lessee shall also promptly (and in any event within three (3) Business Days) pay Lessor any award, compensation or insurance proceeds received on account of any Casualty or Condemnation with respect to any Property. Provided that no Lease Default or Lease Event of Default has occurred and is continuing, any Excess Proceeds shall be paid to Lessee. If a Lease Default has occurred and is continuing and any Loans, Holder Advances or other amounts are owing with respect thereto, then any Excess Proceeds (to the extent of any such Loans, Holder Advances or other amounts owing with respect thereto) shall be paid to the Lessor. 15.2 Environmental Matters. Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of any Property or Properties in concentrations and conditions that constitute an Environmental Violation and which, in the reasonable opinion of Lessee, the cost to undertake any legally required response, clean up, remedial or other action will or might result in a cost to Lessee of more than $100,000, Lessee shall notify Lessor in writing of such condition. In the event of any Environmental Violation (regardless of whether notice thereof must be given), Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor a Termination Notice with respect to the applicable Property or Properties pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently commence any response, clean up, remedial or other action (including the pursuit by Lessee of appropriate action against any off-site or third party source for contamination, as appropriate) necessary to remove, cleanup or remediate the Environmental Violation in accordance with all Environmental Laws. If Lessee does not deliver a Termination Notice with respect to such Property pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by a reputable environmental consultant acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full compliance with applicable Environmental Law. Not less than sixty (60) days prior to any time that Lessee elects to cease operations with respect to any Property in excess of that permitted by Section 8.2(a) hereof or to remarket any Property pursuant to Section 20.2 hereof or any other provision of any Operative Agreement, Lessee shall deliver a Phase I environmental survey respecting such Property satisfactory in form and substance to the Lessor. 15.3 Notice of Environmental Matters. Promptly, but in any event within five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any material pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with any Property or Properties. All such notices shall describe in reasonable detail the nature of the claim, 18 action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within ten (10) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with any Property. Lessee shall also promptly provide such detailed reports of any such material environmental claims as may reasonably be requested by Lessor. ARTICLE XVI 16.1 Termination Upon Certain Events. If any of the following occur: (i) Lessee has delivered a notice pursuant to Section 15.1(d) that following the applicable Casualty or Condemnation this Lease shall terminate with respect to the affected Property, or (ii) Lessee has delivered notice pursuant to the second sentence of Section 15.2 that, due to the occurrence of an Environmental Violation, this Lease shall terminate with respect to the affected Property, then Lessee shall be obligated to deliver, within thirty (30) days of its receipt of notice of the applicable Condemnation or the occurrence of the applicable Casualty or Environmental Violation, a written notice to the Lessor in the form described in Section 16.2(a) (a "Termination Notice") of the termination of this Lease with respect to the applicable Property. 16.2 Procedures. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a Payment Date not more than sixty (60) days after Lessor's receipt of such Termination Notice (the "Termination Date"); and (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2) and purchase such Property on such Termination Date. (b) On each Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2) theretofore accruing, and Lessor shall convey such Property or the remaining portion thereof, if any, to Lessee (or Lessee's designee), all in accordance with Section 19.1, as well as any Net Proceeds with respect to the Casualty or Condemnation giving rise to the termination of this Lease with respect to such Property theretofore received by Lessor; provided, that if a Lease Event of Default shall have occurred and be continuing and any Loans or Holder Advances are owing with respect thereto or under this Lease, then any Excess Proceeds shall be paid to Lessor. 19 ARTICLE XVII 17.1 Lease Events of Default. If any one or more of the following events (each a "Lease Event of Default") shall occur: (a) Lessee shall fail to make payment of (i) any Basic Rent (except as set forth in clause (ii)) within five (5) days after the same has become due and payable or (ii) any Purchase Option Price or Termination Value, on the date any such payment is due, or any payment of Basic Rent or Supplemental Rent due on the due date of any such payment of Purchase Option Price or Termination Value, or any amount due on the Expiration Date; (b) Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in Section 17.1(a)(ii)) due and payable within ten (10) Business Days after receipt of notice thereof; (c) Lessee shall fail to maintain insurance as required by Article XIV of this Lease and such failure shall remain uncured for a period of thirty (30) days after receipt of written notice thereof; (d) Lessee shall fail to observe or perform any term, covenant or condition of Lessee under this Lease or any other Operative Agreement to which Lessee is a party other than those set forth in Sections 17.1(a), (b), (c) or (g) hereof, or any representation or warranty made by Lessee set forth in this Lease or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way, and if such failure or misrepresentation or breach of warranty is capable of being cured, it shall remain uncured for a period of thirty (30) days after receipt of written notice from Lessor thereof; provided, if such failure or misrepresentation or breach of warranty is capable of being cured but cannot be cured within such thirty-day period, so long as Lessee is diligently pursuing such cure, Lessee shall have an additional period, not exceeding 60 days, within which to effect such cure; (e) an Agency Agreement Event of Default shall have occurred and be continuing; (f) a failure by Lessee to pay any Imposition, in whole or in part, or to observe any Legal Requirement, regarding any Property imposed by any governmental entity or agency thereunder, subject to Lessee's rights relating to permitted contests under Section 13.1 and if such failure is capable of being cured, it remains uncured for a period of thirty (30) days after receipt of written notice from Lessor thereof; provided, if such a failure is capable of being 20 cured but cannot be cured within such thirty-day period, so long as Lessee is diligently pursuing such cure, Lessee shall have an additional period, not exceeding 60 days, within which to effect such cure; (g) Lessee shall fail to observe or perform any term, covenant or condition incorporated by reference herein pursuant to Article XXVIII hereof and such failure shall remain uncured for a period of thirty (30) days (or such shorter or longer cure period subsequently available under the 1995 Credit Agreement with respect to an event of default thereunder regarding the Incorporated Covenants) after receipt of written notice from Lessor thereof; (h) Any default shall occur under the terms applicable to any Debt of Lessee or any Subsidiary of Lessee in an aggregate amount (for all Debt so affected) exceeding $5,000,000 and such default shall (a) consist of the failure to pay such Debt when due (subject to any applicable grace period), whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable prior to its expressed maturity; (i) Any default shall occur in the payment when due of any obligation of $5,000,000 or more of Lessee or any Subsidiary of Lessee with respect to any material purchase or lease of goods or services (except only to the extent that the existence of any such default is being contested by Lessee or such Subsidiary in good faith and by appropriate proceedings and appropriate reserves have been made in respect of such default), and continuance of such default for 30 days after notice thereof from the Lessor; (j) Lessee or any Material Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or Lessee or any Material Subsidiary applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for Lessee or such Material Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for Lessee or any Material Subsidiary or for a substantial part of any property of Lessee or any Material Subsidiary and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of Lessee or any Material Subsidiary, and if such case or proceeding is not commenced by Lessee or such Material Subsidiary, it is consented to or acquiesced in by Lessee or such Material Subsidiary, or remains for 60 days undismissed; or Lessee or 21 any Material Subsidiary takes any corporate action to authorize, or in furtherance of, any of the foregoing; (k) ____ (i) Institution of any steps by Lessee or any other Person to terminate a Pension Plan if as a result of such termination Lessee could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $5,000,000, or (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (l) Lessee or any ERISA Affiliate shall make a complete or partial withdrawal from a Multiemployer Plan and the plan sponsor or such Multiemployer Plan shall notify such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $5,000,000, unless and only for as long as such liability shall be contested in good faith and such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (m) Any money judgment, writ or warrant or attachment or similar process involving in any case a final judgment in an amount in excess of $5,000,000 shall be entered or filed against Lessee or any Material Subsidiary or any of their respective assets and shall remain unsatisfied, undischarged, unvacated, unbonded or unstayed for a period of 60 days or in any event later than five days prior to the date of any proposed sale thereunder; (n) Any Change in Control shall occur; or (o) Any Operative Agreement to which Lessee or the Construction Agent is a party shall cease to be enforceable (other than in accordance with its terms) against such party or such party shall claim in writing that such is the case. then, in any such event, (i) all Construction Period Properties shall automatically become Properties that are subject to the terms of this Lease as more specifically provided in Section 2.2 and thereafter all references hereunder to "Property" or "Properties" and all obligations of the Lessee with respect to the Properties (including specifically without limitation the obligations of the Lessee contained in this Article XVII) shall be deemed to include such Construction Period Properties, and (ii) Lessor may, in addition to the other rights and remedies provided for in this Article XVII and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination (provided that such Event of Default is continuing at the end of such five-day period), and this Lease shall terminate, and all rights of Lessee under this Lease shall cease. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including without limitation reasonable fees and 22 expenses of counsel, as a result of any Lease Event of Default hereunder. As used in this Lease, a "notice" of a Lease Default or a Lease Event of Default shall mean a written notice to Lessee pursuant to Section 29.1, which specifies (i) the Lease Default or the Lease Event of Default and (ii) that it is intended as a notice of a Lease Default or a Lease Event of Default. 17.2 Surrender of Possession. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Properties. Lessor may enter upon and repossess the Properties by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Properties. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. Upon the written demand of Lessor, Lessee shall return the Properties promptly to Lessor, in the manner and condition required by, and otherwise in accordance with the provisions of, Section 22.1(c) hereof. 17.3 Reletting. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet any or all of the Properties, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet any Property or for any failure to collect any rent due upon such reletting. 17.4 Damages. Neither (a) the termination of this Lease as to all or any of the Properties pursuant to Section 17.1; (b) the repossession of all or any of the Properties; nor (c) the failure of Lessor to relet all or any of the Properties, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Rent and other sums due and payable hereunder to and including the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term hereof or what would have been the Term in the absence of such termination, Lessee shall pay 23 Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of any Property or any portion thereof; provided, that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.6. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, any Holder's, the Agent's and any Lender's reasonable expenses in connection therewith, including repossession costs, brokerage or sales commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. 17.5 Power of Sale. Without limiting any other remedies set forth in this Lease, in the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessee has granted, pursuant to Section 7.1(b) hereof and each Lease Supplement, a Lien against the Properties WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, the Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Properties. 17.6 Final Liquidated Damages. If a Lease Event of Default shall have occurred and be continuing, whether or not this Lease shall have been terminated pursuant to Section 17.1 and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.4, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 13 of the Participation Agreement, and in lieu of all current liquidated damages beyond the date of such demand (it being agreed that it would be impossible accurately to determine actual damages) the sum of (a) the Termination Value for all Properties remaining under this Lease, plus (b) all other amounts owing in respect of Rent and Supplemental Rent theretofore accruing under this Lease. Upon payment of the amount specified pursuant to the first sentence of this Section 17.6, Lessee shall be entitled to receive from Lessor, either at Lessee's request or upon Lessor's election, in either case at Lessee's cost, a transfer and assignment of Lessor's entire right, title and interest in and to the Properties, the Improvements, Fixtures, Modifications and 24 Equipment. To effect such transfer and assignment, Lessor shall execute, acknowledge (where required) and deliver to Lessee each of the following: (i) a special or limited warranty Deed conveying the Property (to the extent it is real property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (ii) a Bill of Sale conveying the Property (to the extent it is personal property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (iii) any real estate tax affidavit or other document required by law to be executed and filed in order to record the Deed; and (iv) a FIRPTA affidavit. Subject to the foregoing, the Properties shall be conveyed to Lessee (or Lessee's designee) "AS IS" and in their then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided, however, Lessee shall not be entitled to receive an assignment of Lessor's interest in the Properties, the Improvements, Fixtures, Modifications or Equipment or documents unless Lessee shall have paid in full the Termination Value and all other amounts due and owing hereunder and under the other Operative Agreements. 17.7 Lessee's Purchase Option During Default. If Lessee exercises its Purchase Option in accordance with Section 20.1 with respect to a Property while a Lease Default or Lease Event of Default is continuing, the exercise of such Purchase Option shall be deemed to have cured such Lease Default or Lease Event of Default to the extent such Lease Default or Lease Event of Default is no longer continuing with respect to any other Property remaining subject to this Lease after the exercise of the Purchase Option. 17.8 Waiver of Certain Rights. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or possession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article XVII. 17.9 Assignment of Rights Under Contracts. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the purchase, construction, development, use or operation of the Properties (including, without limitation, all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the purchase, construction, use and operation of the Properties. 25 17.10 Remedies Cumulative. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including, without limitation, any mortgage foreclosure remedies. ARTICLE XVIII 18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property, or real property owned or leased by Lessee and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of any lessee. All reasonable out-of-pocket costs and expenses so incurred (including without limitation reasonable fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand. ARTICLE XIX 19.1 Provisions Relating to Lessee's Exercise of its Purchase Option. Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option or Expiration Date Purchase Option, upon the date on which this Lease is to terminate with respect to the applicable Property or upon the Expiration Date with respect to the applicable Property, and upon tender by Lessee of the amounts set forth in Sections 16.2(b), 20.1 or 20.2, as applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment and transfer of Lessor's entire interest in the applicable Property (which shall include an assignment of all of Lessor's right, title and interest in and to any Net Proceeds not previously received by Lessor). To effect such transfer and assignment, Lessor shall execute, acknowledge (where required) and deliver to Lessee each of the following: (i) a special or limited warranty Deed conveying the Property (to the extent it is real property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (ii) a Bill of Sale conveying the Property (to the extent it is personal property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (iii) any real estate tax affidavit or other document required by law to be executed and filed in order to record the Deed; and (iv) a FIRPTA affidavit. Subject to the foregoing, the 26 applicable Property shall be conveyed to Lessee "AS IS" "WHERE IS" and in then present physical condition. 19.2 No Termination With Respect to Less than All of a Property. Lessee shall not be entitled to exercise its Purchase Option separately with respect to portions of a Property consisting of Land, Equipment and Improvements but shall be required to exercise its Purchase Option with respect to such entire Property. ARTICLE XX 20.1 Purchase Options. Provided that no Lease Default of the types specified in Sections 17.1(a), (b) or (j) or Lease Event of Default shall have occurred and be continuing (unless such Lease Event of Default involves a single Property and can be cured by the exercise of the option to purchase by Lessee of such Property and such Property is referenced in the Purchase Notice (referenced below)), and subject to Section 19.2, Lessee shall have the option (the "Purchase Option"), exercisable by giving Lessor no less than sixty (60) days irrevocable written notice (the "Purchase Notice") of Lessee's election to exercise such option as to any Property, on any anniversary of the Basic Term Commencement Date for such Property (or if all Properties are to be acquired on any such anniversary), to purchase all or one or more Properties on such date specified in such Purchase Notice at a price equal to the Termination Value for such Property or Properties (which the parties do not intend to be a "bargain" purchase price), and Lessee at such time shall also pay any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts, if any, described in clause FIRST of Section 22.2) (such Termination Value, Rent and other amounts being hereafter referred to as the "Purchase Option Price"); provided, however, that unless the Lessor otherwise consents or the Purchase Option is exercised after the Construction Period Termination Date with respect to all of the Properties, the Purchase Option may not be exercised by the Lessee if, after giving effect to such exercise, the Maximum Property Cost of the purchased Properties (together with all other Properties purchased by Lessee pursuant to this Section 20.1) would be greater than 35% of the greatest Maximum Property Cost applicable at any time during the Term. If Lessee exercises its Purchase Option pursuant to this Section 20.1, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to such Property as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price, amounts, if any, referred to in clause FIRST of Section 22.2 and all Rent and other amounts then due and payable under this Lease and any other Operative Agreement. To effect any transfer and assignment by Lessor to Lessee under this Section 20.1, Lessor shall execute, acknowledge (where required) and deliver to Lessee each of the following: (i) a special or limited warranty Deed conveying the Property (to the extent it is real property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents 27 and any Lessor Liens; (ii) a Bill of Sale conveying the Property (to the extent it is personal property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (iii) any real estate tax affidavit or other document required by law to be executed and filed in order to record the Deed; and (iv) a FIRPTA affidavit. For purposes of this Lease and the other Operative Agreements, any and all amounts paid by Lessee pursuant to the provisions of Section 10.3(f) of the Participation Agreement shall be deemed to be amounts paid and received pursuant to this Section 20.1. Lessee may assign its rights under this Section 20.1 to another Person; provided, Lessee shall remain liable for all obligations of Lessee hereunder respecting Property remaining subject to the terms of this Lease subsequent to such assignment as if such assignment had not occurred. 20.2 Expiration Date Purchase or Sale Option. Not less than 90 days and no more than 180 days prior to the Expiration Date, Lessee may give Lessor and Agent written notice (the "Expiration Date Election Notice") that Lessee is electing to exercise the Expiration Date Purchase Option or the option of Lessee to remarket and sell the Properties pursuant to Section 22.1. If Lessee does not give an Expiration Date Election Notice at least 90 days and not more than 180 days prior to the then current Expiration Date, then Lessee shall be obligated to repurchase the Properties pursuant to Section 20.1. If any Property is the subject of remediation efforts respecting Hazardous Substances at the Expiration Date which could materially and adversely impact the Fair Market Sales Value of such Property, then Lessee shall be obligated to repurchase each such Property pursuant to Section 20.1. Prior to the Expiration Date, Lessee may rescind its election to remarket the Properties pursuant to Section 22.1 and elect instead the Expiration Date Purchase Option. If Lessee shall either (i) elect, or be deemed to have elected, to exercise the Expiration Date Purchase Option or (ii) elect to remarket the Properties pursuant to Section 22.1 and fail to cause all of the Properties to be sold on the Expiration Date in accordance with the terms of Sections 20.1 or 22.1, respectively, then in either case, on the Expiration Date Lessee shall pay to Lessor an amount equal to the Termination Value for all the Properties (which the parties do not intend to be a "bargain" purchase) and, upon receipt of such amount plus all Rent and other amounts then due and payable under this Lease and under any other Operative Agreement (including without limitation the amounts described in clause FIRST of Section 22.2), Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to the Properties in accordance with Section 19.1. 20.3 Lessor's Transfer Option. If, on the Construction Period Termination Date, there are fewer than three (3) Properties then subject to the terms of this Lease, then Lessor shall have the option to give Lessee irrevocable written notice that Lessor, on a Payment Date that is not less than thirty (30) days after the date of such written notice, shall transfer and convey all of its right, title and interest in and to any or all 28 of the Properties to Lessee. On any transfer and conveyance date specified by Lessor pursuant to this Section 20.3, (i) Lessor shall transfer and convey all of its right, title and interest in and to any or all of the Properties previously specified to Lessee, (ii) Lessee shall accept such transfer and conveyance of right, title and interest in and to the respective Property or Properties and (iii) Lessee shall pay the Termination Value for such respective Property or Properties and all Rent and other amounts then due and payable under this Lease and under any other Operative Agreement (including without limitation all costs and expenses referred to in clause FIRST of Section 22.2), in accordance with Section 19.1. ARTICLE XXI 21.1 Renewal. Provided that no Lease Event of Default shall have occurred and be continuing and provided that the Lenders agree at such time to extend the Maturity Date to a date that is identical to the final day of the Extended Term, at the Basic Term Expiration Date, Lessee may renew this Lease (the "Renewal Option") for the Extended Term upon not more than 180 days and not less than 90 days prior written notice to Lessor, with respect to all Property, other than Property which Lessee shall have elected to purchase pursuant to Section 20.1. Unless otherwise agreed, any such renewal of this Lease for the Extended Term shall be on the same terms and conditions as set forth in this Lease for the original Term (which the parties do not intend to be a "bargain" renewal), subject in any case to renegotiation of the rental rate applicable during the Extended Term. ARTICLE XXII 22.1 Sale Procedure. (a) During the Marketing Period, Lessee, on behalf of any assignee of Lessee pursuant to Section 25.1 or the Lessor, shall obtain bids for the cash purchase of all of the Properties in connection with a sale to one or more purchasers to be consummated on the Expiration Date for the highest price available (subject to the proviso in the next sentence), shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for any Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may not reject the bids for the Properties submitted by the Lessee if such bids, in the aggregate, are greater than or equal to the sum of the Limited Recourse Amount for all of the Properties, 29 plus all amounts, if any, referred to in clause FIRST of Section 22.2 and represent bona fide offers from one or more third party purchasers. If the price which a prospective purchaser or purchasers shall have offered to pay for the Properties is less than the sum of the Limited Recourse Amount plus all costs and expenses referred to in clause FIRST of Section 22.2, Lessor may elect to retain all the Properties by giving Lessee prior written notice of Lessor's election to retain the Properties, and upon receipt of such notice, Lessee shall surrender, or cause to be surrendered, the Properties to Lessor pursuant to Section 10.1. Unless Lessor shall have elected to retain the Properties pursuant to the preceding sentence, Lessee shall arrange for Lessor to sell the Properties, for cash on the Expiration Date to the purchaser or purchasers identified by Lessee or Lessor, as the case may be. To effect such transfer and assignment, Lessor shall execute, acknowledge (where required) and deliver to Lessee each of the following: (i) a special or limited warranty Deed conveying the Property (to the extent it is real property) to the purchaser or purchasers free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (ii) a Bill of Sale conveying the Property (to the extent it is personal property) to the purchaser or purchasers free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (iii) any real estate tax affidavit or other document required by law to be executed and filed in order to record the Deed; and (iv) a FIRPTA affidavit. Lessee shall surrender, or cause to be surrendered, the Property so sold or subject to such documents to each purchaser in the condition specified in Section 10.1. Neither party shall take any action or fail to take any action (where action is required under the Operative Agreements) which would have the effect of discouraging bona fide third party bids for any Property. If all of the Properties are not either (i) sold on the Expiration Date in accordance with the terms of this Section 22.1, or (ii) retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of this Section 22.1(a), then the Lessee shall be obligated to pay the Lessor on the Expiration Date an amount equal to the Termination Value for all of the Properties (plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreements) in accordance with the terms of Section 20.2. (b) If the Properties are sold on the Expiration Date to one or more third party purchasers in accordance with the terms of Section 22.1(a) and the aggregate purchase price paid for the Properties minus the sum of all amounts, if any, referred to in clause FIRST of Section 22.2 is less than the sum of the aggregate Termination Values for all of the Properties plus all Rent and other amounts then due and payable under this Lease and under any other Operative Agreements (hereinafter such difference shall be referred to 30 as the "Deficiency Balance"), then the Lessee hereby unconditionally promises to pay to the Lessor on the Expiration Date the lesser of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for all of the Properties. If the Properties are retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of Section 22.1(a), then the Lessee hereby unconditionally promises to pay to the Lessor on the Expiration Date an amount equal to the aggregate Maximum Residual Guaranty Amounts for all of the Properties. (c) In the event the Properties are either sold to a third party purchaser on the Expiration Date or retained by the Lessor in connection with an affirmative election by the Lessor pursuant to the third sentence of Section 22.1(a), then in either case on the Expiration Date the Lessee shall provide, or cause to be provided, Lessor or such third party purchaser, with (i) all permits, certificates of occupancy, governmental licenses and authorizations (to the extent such licenses or authorizations are transferable) necessary to use and operate such Property for its intended purposes, (ii) such easements, licenses, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, repair, access to or maintenance of such Property for its intended purpose or otherwise as the Lessor shall reasonably request, and (iii) a services agreement covering such services as Lessor or such third party purchaser may request in order to use and operate the Property for its intended purposes at such rates (not in excess of arm's-length fair market rates) as shall be acceptable to Lessee and Lessor or such third party purchaser. All assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this paragraph (c) shall be in form satisfactory to the Lessor or such third party purchaser, as applicable, and shall be fully assignable (including both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. 22.2 Application of Proceeds of Sale. The Lessor shall apply the proceeds of sale of any Property in the following order of priority: (i) FIRST, to pay or to reimburse Lessor for the payment of all reasonable costs and expenses, if any, incurred by Lessor in connection with the sale; (ii) SECOND, so long as the Credit Agreement is in effect and the Holder Advances or any amount is owing to any Holder under any Operative Agreement, to the Agent to be applied pursuant to inter-creditor provisions between the Lenders and the Holders contained in Section 8 of the Credit Agreement and any other applicable provisions of the Operative Agreements; and 31 (iii) THIRD, to the Lessee. 22.3 (intentionally omitted). 22.4 (intentionally omitted). 22.5 Certain Obligations Continue. During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Properties (including the installment of Basic Rent due on the Expiration Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, if any, the Maximum Residual Guarantee Amount and all other amounts due to Lessor with respect to all Properties. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. 22.6 Sale of Undeveloped Pads. Provided that no Lease Default or Lease Event of Default shall have occurred and be continuing, Lessee shall have the option, exercisable by giving Lessor no less than fifteen (15) days written notice of Lessee's election to transfer and convey any undeveloped Land (excluding any de minimus site improvements) regarding any Property on the following terms and conditions: (a) the Person to whom the transfer and conveyance is made shall not be an Affiliate of Lessee; (b) the purchase price for such Land shall be equal to or greater than the Fair Market Sales Value thereof and the net proceeds from the sale of such Land shall be retained by Lessee; (c) the applicable Property, excluding such Land transferred and conveyed therefrom, shall (on and after the date of such transfer and conveyance) satisfy all of the terms and conditions of the Operative Agreements and (d) all Rent and other amounts due and payable by Lessee under any Operative Agreement shall be paid on or prior to the date of such transfer and conveyance. ARTICLE XXIII 23.1 Holding Over. If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease as to such Property (unless such Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to the Property and Lessee shall continue to pay Basic Rent at 110% of the Basic Rent that would otherwise be due and payable at such time. Such Basic Rent shall be payable from time to time upon demand by Lessor and such additional 10% amount shall be applied by the Lessor to the payment of the Loans pursuant to the Credit Agreement and the Holder Advances pursuant to the Trust Agreement pro rata between the Loans and the Holder Advances. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe 32 all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue their occupancy and use of such Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property (unless such Property is conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of such Property or exercising any other remedy available to Lessor at law or in equity. ARTICLE XXIV 24.1 Risk of Loss. During the Term, unless Lessee shall not be in actual possession of the Property in question solely by reason of Lessor's exercise of its remedies of dispossession under Article XVII, the risk of loss or decrease in the enjoyment and beneficial use of such Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. ARTICLE XXV 25.1 Assignment. (a) Without the consent of the Lessor, Lessee may assign, subject to Section 25.1(b), this Lease and its rights hereunder in whole or in part to any Person provided the aggregate Property Cost of all such Properties under assignment, at the time such assignment becomes effective, does not exceed 25% of the aggregate Property Cost of all Properties then subject to this Lease. Lessee may not assign this Lease or its rights hereunder in whole or in part in addition to that referenced in the preceding sentence without first obtaining the prior written consent of the Lessor. Each assignment hereunder shall be made in the normal course of Lessee's business, on commercially reasonable terms and at market rates. (b) No such assignment or other relinquishment of possession to any Property shall in any way discharge or diminish any of the obligations of Lessee to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to any assignment regarding this Lease. 25.2 Subleases. (a) Without the consent of the Lessor, Lessee may sublet, subject to Section 25.2(c), any Property or portion thereof to (i) any wholly-owned Subsidiary of Lessee or (ii) 33 any Person (which is not a wholly-owned Subsidiary of Lessee) provided the aggregate Property Cost of all such Properties under sublease to Persons (which are not wholly-owned Subsidiaries of Lessee), at the time such sublease becomes effective, does not exceed 25% of the aggregate Property Cost of all Properties then subject to this Lease. Lessee may not sublet any Property or portion thereof in addition to that referenced in the preceding sentence without first obtaining the prior written consent of the Lessor. Each sublease hereunder shall be made in the normal course of Lessee's business, on commercially reasonable terms and at market rates. Each sublease may be for a term less than, equal to or greater than the Term, as extended from time to time. (b) Promptly following the execution and delivery of any sublease permitted by this Article XXV, Lessee shall notify Lessor and the Agent of the execution of such sublease. As of the date of each Lease Supplement, Lessee shall lease the respective Properties described in such Lease Supplement from Lessor, and any existing tenant respecting such Property shall automatically be deemed to be a subtenant of Lessee and not a tenant of Lessor. (c) No such sublease or other relinquishment of possession to any Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the Property, or portion thereof, so sublet. ARTICLE XXVI 26.1 No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVII 27.1 Acceptance of Surrender. No surrender to Lessor of this Lease or of all or any portion of any Property or of any part of any thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and, prior to the payment or performance of all obligations under the Credit Documents, the Agent, and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a 34 written acceptance, shall constitute an acceptance of any such surrender. 27.2 No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) any right, title or interest in any Property, (c) any Notes, or (d) a beneficial interest in Lessor. ARTICLE XXVIII 28.1 Incorporation of Covenants. Reference is made to that certain Credit Agreement dated as of October 30, 1995 (the "1995 Credit Agreement") among the Lessee, Bank of America National Trust and Savings Association, as Agent, and the other financial institutions party thereto. Further reference is made to the covenants contained in Section 10 of the 1995 Credit Agreement (hereinafter referred to as the "Incorporated Covenants"). The Lessee agrees with the Lessor that the Incorporated Covenants (and all other relevant provisions of the Credit Agreement related thereto) are hereby incorporated by reference into this Lease to the same extent and with the same effect as if set forth fully herein, without giving effect to any waiver, amendment, modification or replacement of the 1995 Credit Agreement or any term or provision of the Incorporated Covenants occurring subsequent to the date of this Lease, except to the extent otherwise specifically provided in the following provisions of this paragraph. In the event a waiver is granted under the 1995 Credit Agreement or an amendment or modification is executed with respect to the 1995 Credit Agreement, and such waiver, amendment and/or modification affects the Incorporated Covenants, then such waiver, amendment or modification shall be effective with respect to the Incorporated Covenants as incorporated by reference into this Lease only if consented to in writing by the Lessor and the Majority Lenders. In the event of any replacement of the 1995 Credit Agreement with a similar credit facility (the "New Facility") the covenants contained in the New Facility which correspond to the covenants contained in Section 10 of the 1995 Credit Agreement shall become the Incorporated Covenants hereunder only if consented to in writing by the Lessor and the Majority Lenders and, if such consent is not granted or if the 1995 Credit Agreement is terminated and not replaced, then the covenants contained in Section 10 of the 1995 Credit Agreement (together with any modifications or amendments approved in accordance with this paragraph) shall continue to be the Incorporated Covenants hereunder. ARTICLE XXIX 29.1 Notices. All notices required or permitted to be given under this Lease shall be in writing. Notices may be served by 35 certified or registered mail, postage paid with return receipt requested; by private courier, prepaid; by telex, facsimile, or other telecommunication device capable of transmitting or creating a written record; or personally. Mailed notices shall be deemed delivered five days after mailing, properly addressed. Couriered notices shall be deemed delivered when delivered as addressed, or if the addressee refuses delivery, when presented for delivery notwithstanding such refusal. Telex or telecommunicated notices shall be deemed delivered when receipt is either confirmed by confirming transmission equipment or acknowledged by the addressee or its office. Personal delivery shall be effective when accomplished. Unless a party changes its address by giving notice to the other party as provided herein, notices shall be delivered to the parties at the following addresses: If to Lessee: Fred Meyer, Inc. 3800 S.E. 22nd Avenue P.O. Box 42121 Portland, Oregon 97242 Attention: James C. Aalberg, Vice President and Corporate Treasurer Telephone: (503) 797-5300 Telecopier: (503) 797-5299 If to Lessor: First Security Bank of Utah, N.A. 79 South Main Street Salt Lake City, Utah 84111 Attention: Mr. Val T. Orton Corporate Trust Counsel Telephone: (801) 246-5300 Telecopy: (801) 246-5053 with a copy to the Agent: NationsBank of Texas, N.A. 901 Main Street, 13th Floor P.O. Box 831000 Dallas, Texas 75283-1000 Attention: Ms. Molly Oxford Assistant Vice President Telephone: (214) 508-3255 Telecopy: (214) 508-2515 or such additional parties and/or other address as such party may hereafter designate, and shall be effective upon receipt or refusal thereof. 36 ARTICLE XXX 30.1 Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any provision of this Lease shall be held to be unenforceable in any jurisdiction, such unenforceability shall not affect the enforceability of any other provision of this Lease and such jurisdiction or of such provision or of any other provision hereof in any other jurisdiction. 30.2 Amendments and Modifications. Neither this Lease, any Lease Supplement nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by Lessor and Lessee. 30.3 Successors and Assigns. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4 Headings and Table of Contents. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 30.5 Counterparts. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 30.6 GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON. 30.7 Calculation of Rent. All calculation of Basic Rent payable hereunder (to the extent computed with reference to the Eurodollar Rate) shall be computed based on the actual number of days elapsed over a year of 360 days. 30.8 Memoranda of Lease and Lease Supplements. This Lease shall not be recorded; provided, Lessor and Lessee shall promptly record (a) a memorandum of this Lease and the applicable Lease Supplement (in substantially the form of Exhibit B-1 attached hereto) regarding (i) each Improved Property promptly after the acquisition thereof in the local filing office with respect thereto and (ii) each Property which is not an Improved Property promptly after the commencement of the Basic Term therefor in the local filing office with respect thereto, and (b) a memorandum of this Lease (in substantially the form of Exhibit B-2 attached hereto) regarding each Property which is not an Improved Property promptly after the acquisition thereof in the local filing office with respect thereto, in all cases at Lessee's cost and expense, and as required under applicable law to sufficiently evidence this Lease or any such Lease Supplement in the applicable real estate filing records. 37 30.9 Allocations between the Lenders and the Holders. Notwithstanding any other term or provision of this Lease to the contrary, the allocations of the proceeds of the Properties and any and all other Rent and other amounts received hereunder shall be subject to the inter-creditor provisions between the Lenders and the Holders contained in the Operative Agreement (or as otherwise agreed among the Lenders and the Holders from time to time). 30.10 Limitations on Recourse. Notwithstanding anything contained in this Lease to the contrary, Lessee agrees to look solely to Lessor's estate and interest in the Properties (and in no circumstance to the Agent, the Lenders, the Holders or otherwise to Lessor) for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Lessee under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Properties or any other liability of Lessor to Lessee. Nothing in this Section shall be interpreted so as to limit the terms of Sections 6.1 or 6.2. 30.11 Estoppel Certificates. Upon twenty (20) days' prior notice of the request, either party will execute, acknowledge and deliver to the other party a certificate stating (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified, and setting forth such modifications), (b) the dates to which Rent and other sums payable hereunder have been paid, and (c) either that to the knowledge of the party no default exists under this Lease or specifying each such default of which the party has knowledge. A party shall not be obligated, except as provided herein, to update any certificate once delivered. 30.12 Decision Making by Parties. Wherever a party's consent, approval, decision or determination is required under this Lease, such consent or approval shall be given or decision or determination shall be made in writing and in a commercially reasonable manner. No change in Rent, the rights of the parties or the economic terms of this Lease shall be required as a condition to granting of consent. Any denial of consent will include in reasonable detail the reason for denial or aspect of the request that was not acceptable. 30.13 Limited Power of Attorney. To the extent required by Lessee, Lessor hereby agrees to provide Lessee with a Limited Power of Attorney permitting Lessee to act on behalf of Lessor in connection with (i) consenting to all Subleases referenced in Section 25.2 of this Lease (respecting up to, but not to exceed, 25% of the aggregate Property Costs of all Properties then 38 subject to the Lease), (ii) executing all easements, use, restrictive covenant, assessment or bonding agreements referenced in the first paragraph of Section 10.5 of the Participation Agreement and (iii) selling undeveloped Land as is more specifically described in Section 22.6 of this Lease (provided, all such sales shall be conducted in compliance with the terms of such Section 22.6, without modification of such provisions pursuant to the utilization of the Limited Power of Attorney by Lessee); provided, the Limited Power of Attorney may be utilized only to the extent (x) no Default or Event of Default shall have occurred or be continuing at the time of the contemplated exercise of the Limited Power of Attorney and (y) such Sublease, easement, use, restrictive covenant, assessment or bonding agreement or document of sale shall be made in the normal course of the Lessee's business, at market rates, on commercially reasonable terms and accomplished in a manner so as not to diminish the value of any Property in any material respect. To the extent any Event of Default has occurred and is continuing or the Lessee has received written notice of the occurrence of any Default, the Limited Power of Attorney shall immediately terminate and be void and of no further force or effect unless reinstated in writing by the Lessor and acknowledged and agreed to by the Holders and the Agent. Each action taken by the Lessee under the Limited Power of Attorney shall automatically, without further action, be deemed to be a representation and warranty as of such date that the conditions set forth in the first sentence of this Section 30.13 are satisfied in full as of such date. 30.14 Submission To Jurisdiction; Waivers. Each of the parties hereto hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Lease and the other Operative Agreements to which it is a party, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of Oregon, the courts of the United States of America for the District of Oregon, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail) postage prepaid, to such party at its address set forth in Section 29.1 or at such other address of which the parties hereto shall have been notified pursuant thereto; 39 (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 30.14 any special, exemplary or punitive damages. 30.15 WAIVERS OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE LESSOR AND THE LESSEE HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LEASE OR ANY OTHER OPERATIVE AGREEMENT TO WHICH SUCH ENTITY IS A PARTY AND FOR ANY COUNTERCLAIM THEREIN. [Signature pages follow] IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FRED MEYER, INC. By: JAMES C. AALBERG --------------------------------------- Name: James C. Aalberg Title: Vice President and Corporate Treasurer FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner Trustee under the FM Trust 1995-2 By: VAL T. ORTON --------------------------------------- Name: Val T. Orton ------------------------------------- Title: Vice President ------------------------------------ Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof NationsBank of Texas, N.A., as Agent By: ----------------------------------- Name: William Guffey Title: Vice President EXHIBIT A TO THE LEASE LEASE SUPPLEMENT NO. ___ THIS LEASE SUPPLEMENT NO. ___ (this "Lease Supplement") dated as of ________________ between FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995-2, as lessor (the "Lessor"), and FRED MEYER, INC., as lessee (the "Lessee"). WHEREAS, the Lessor is the owner or will be owner of the Property described on Schedule I hereto (the "Leased Property") and wishes to lease the same to Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; RULES OF USAGE. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix A to the Participation Agreement, dated as of December 1, 1995, among the Lessee, the Lessor, not individually, except as expressly stated therein, but solely as Owner Trustee under the FM Trust 1995-2, NationsBank of Texas, N.A., Greenwich Funding Corporation and Credit Suisse, as the Holders, the various banks and banking institutions which are parties thereto from time to time and NationsBank of Texas, N.A., as Agent for the Lenders. SECTION 2. THE PROPERTIES. Attached hereto as Schedule I is the description of the Leased Property, with an Equipment Schedule attached hereto as Schedule I-A, an Improvement Schedule attached hereto as Schedule I-B and a legal description of the Land for such Project attached hereto as Schedule I-C. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Leased Property shall be subject to the terms and provisions of the Lease. SECTION 3. RATIFICATION; INCORPORATION BY REFERENCE. Except as specifically modified hereby, the terms and provisions of the Lease and the Operative Agreements are hereby ratified and confirmed and remain in full force and effect. The Lease is hereby incorporated herein by reference as though restated herein in its entirety. SECTION 4. ORIGINAL LEASE SUPPLEMENT. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the original executed counterpart of this Lease Supplement (the "Original Executed Counterpart"). To the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 5. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF OREGON. SECTION 6. MORTGAGE; POWER OF SALE. Without limiting any other remedies set forth in the Lease, in the event that a court of competent jurisdiction rules that the Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessee hereby grants a Lien against the Leased Property WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, the Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Leased Property. SECTION 7. COUNTERPART EXECUTION. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] [IF NECESSARY, MODIFY TO PUT IN RECORDABLE FORM.] [CONFORM TO STATE LAW REQUIREMENTS] STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of ______, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995-2, of and on behalf of such national banking association and acknowledged to me that such national banking association executed the same. [NOTARIAL SEAL] _____________________________________ Notary Public for the State of ______ Residing at:_________________________ My commission expires:_______________ STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of Oregon, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FRED MEYER, INC., a Delaware corporation, of and on behalf of such corporation and acknowledged to me that such corporation executed the same. [NOTARIAL SEAL] __________________________________ Notary Public for the State of Oregon Residing at:______________________ My commission expires:____________ STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of ______, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of NATIONSBANK OF TEXAS, N.A., a national banking association, as Agent, of and on behalf of such national banking association and acknowledged to me that such national banking association executed the same. [NOTARIAL SEAL] _____________________________________ Notary Public for the State of ______ Residing at:_________________________ My commission expires:_______________ SCHEDULE I TO LEASE SUPPLEMENT NO. ____ SCHEDULE I-A TO LEASE SUPPLEMENT NO. ____ (Equipment) SCHEDULE I-B TO LEASE SUPPLEMENT NO. ____ (Improvements) SCHEDULE I-C TO LEASE SUPPLEMENT NO. ____ (Land) EXHIBIT B-1 TO THE LEASE Recordation requested by: Moore & Van Allen, PLLC After recordation return to: Moore & Van Allen, PLLC (WMA) NationsBank Corporate Center 100 North Tryon Street, Floor 47 Charlotte, NC 28202-4003 Space above this line for Recorder's use - ------------------------------------------------------------------------------- MEMORANDUM OF LEASE AGREEMENT (TAX RETENTION OPERATING LEASE) AND LEASE SUPPLEMENT NO. _____________ THIS MEMORANDUM OF LEASE AGREEMENT (TAX RETENTION OPERATING LEASE) AND LEASE SUPPLEMENT NO. ____________ ("Memorandum"), dated as of _____________, 199___, is by and between FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995-2, with an office at 79 South Main Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Landlord") and FRED MEYER, INC., a Delaware corporation, with an office at 3800 SE 22nd Avenue, PO Box 42121, Portland, Oregon 97242-0121 (hereinafter referred to as "Tenant"). WITNESSETH: That for value received, Landlord and Tenant do hereby covenant, promise and agree as follows: 1. DEMISED PREMISES. Landlord has leased to Tenant, and Tenant has leased from Landlord, for the Term (as hereinafter defined), certain real property and other property located in ________________, which is described in the attached Exhibit A (the "Property"), pursuant to the terms of a Lease Agreement (Tax Retention Operating Lease Agreement), between Landlord and Tenant dated December 1, 1995 (the "Lease") and a Lease Supplement No. _____ between Landlord and Tenant dated ______________ (the "Lease Supplement"). 2. TERM. The term of the Lease ("Term") commenced on _______ and shall end December 8, 2000, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. 3. MORTGAGE; POWER OF SALE. Without limiting any other remedies set forth in the Lease, in the event that a court of competent jurisdiction rules that the Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessee has granted, pursuant to the terms of the Lease and the Lease Supplement, a Lien against the Property WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, the Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Property. 4. EFFECT OF MEMORANDUM. The purpose of this instrument is to give notice of the Lease and the Lease Supplement and their respective terms, covenants and conditions to the same extent as if the Lease and the Lease Supplement were fully set forth herein. This Memorandum shall not modify in any manner the terms, conditions or intent of the Lease or the Lease Supplement and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or the Lease Supplement or determine the intent of the parties under the Lease or the Lease Supplement. [The remainder of this page has been intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LANDLORD: TENANT: FIRST SECURITY BANK FRED MEYER, INC., a Delaware OF UTAH, N.A. not individually, corporation but solely as Owner Trustee under the FM Trust 1995-2 By:___________________________ By:__________________________ Its:__________________________ Its:_________________________ [CONFORM TO STATE LAW REQUIREMENTS] ACKNOWLEDGEMENTS STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of ______, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995-2, of and on behalf of such national banking association and acknowledged to me that such national banking association executed the same. [NOTARIAL SEAL] _____________________________________ Notary Public for the State of ______ Residing at:_________________________ My commission expires:_______________ STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of Oregon, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FRED MEYER, INC., a Delaware corporation, of and on behalf of such corporation and acknowledged to me that such corporation executed the same. [NOTARIAL SEAL] __________________________________ Notary Public for the State of Oregon Residing at:______________________ My commission expires:____________ EXHIBIT B-2 TO THE LEASE Recordation requested by: Moore & Van Allen, PLLC After recordation return to: Moore & Van Allen, PLLC (WMA) NationsBank Corporate Center 100 North Tryon Street, Floor 47 Charlotte, NC 28202-4003 Space above this line for Recorder's use - ------------------------------------------------------------------------------- MEMORANDUM OF LEASE AGREEMENT (TAX RETENTION OPERATING AGREEMENT) THIS MEMORANDUM OF LEASE AGREEMENT (TAX RETENTION OPERATING LEASE) ("Memorandum"), dated as of __________________, 199__, is by and between FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995-2, with an office at 79 South Main Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Landlord") and FRED MEYER, INC., a Delaware corporation, with an office at 3800 SE 22nd Avenue, PO Box 42121, Portland, Oregon 97242-0121 (hereinafter referred to as "Tenant"). WITNESSETH: That for value received, Landlord and Tenant do hereby covenant, promise and agree as follows: 1. DEMISED PREMISES. Landlord hereby agrees to lease to Tenant, and Tenant hereby agrees to lease from Landlord, for the Term (as hereinafter defined), certain real property and other property located in ___________________ which is described in the attached Exhibit A (the "Property"), pursuant to the terms of a Lease Agreement (Tax Retention Operating Lease Agreement), between Landlord and Tenant dated December 1, 1995 (the "Lease"). 2. TERM. The term of the Lease ("Term") shall commence upon the earlier to occur of (i) the Completion Date (as such term is defined in the Lease) for the Property or (ii) as of the date of any Agency Agreement Event of Default (as such term is defined in the Lease) and shall end on December 8, 2000, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. 3. MORTGAGE; POWER OF SALE. Without limiting any other remedies set forth in the Lease, in the event that a court of competent jurisdiction rules that the Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessee has granted, pursuant to the terms of the Lease, a Lien against the Property WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default during the Term, the Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Property. 4. EFFECT OF MEMORANDUM. The purpose of this instrument is to give notice of the Lease and its terms, covenants and conditions to the same extent as if the Lease were fully set forth herein. This Memorandum shall not modify in any manner the terms, conditions or intent of the Lease and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or determine the intent of the parties under the Lease. [The remainder of this page has been intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LANDLORD: TENANT: FIRST SECURITY BANK FRED MEYER, INC., a Delaware OF UTAH, N.A. not individually, corporation but solely as Owner Trustee under the FM Trust 1995-2 By:___________________________ By:__________________________ Its:__________________________ Its:_________________________ [CONFORM TO STATE LAW REQUIREMENTS] ACKNOWLEDGEMENTS STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of ______, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually, but solely as Owner Trustee under the FM Trust 1995- 2, of and on behalf of such national banking association and acknowledged to me that such national banking association executed the same. [NOTARIAL SEAL] _____________________________________ Notary Public for the State of ______ Residing at:_________________________ My commission expires:_______________ STATE OF _______________ ) ) ss. COUNTY OF ______________ ) On this ____ day of ______________, 19___, before me, _____________________ [NOTARY'S NAME], a Notary Public of the State of Oregon, duly commissioned and sworn, personally appeared _________________ to me personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the written instrument as the _________________ of FRED MEYER, INC., a Delaware corporation, of and on behalf of such corporation and acknowledged to me that such corporation executed the same. [NOTARIAL SEAL] __________________________________ Notary Public for the State of Oregon Residing at:______________________ My commission expires:____________ - -------------------------------------------------------------------------------- Appendix A Rules of Usage and Definitions - -------------------------------------------------------------------------------- I. Rules of Usage The following rules of usage shall apply to this Appendix A and the Operative Agreements (and each appendix, schedule, exhibit and annex to the foregoing) unless otherwise required by the context or unless otherwise defined therein: (a) Except as otherwise expressly provided, any definitions set forth herein or in any other document shall be equally applicable to the singular and plural forms of the terms defined. (b) Except as otherwise expressly provided, references in any document to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits are references to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in or to such document. (c) The headings, subheadings and table of contents used in any document are solely for convenience of reference and shall not constitute a part of any such document nor shall they affect the meaning, construction or effect of any provision thereof. (d) References to any Person shall include such Person, its successors and permitted assigns and transferees. (e) Except as otherwise expressly provided, reference to any agreement means such agreement as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. (f) Except as otherwise expressly provided, references to any law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor. (g) When used in any document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. A-1 (h) References to "including" means including without limiting the generality of any description preceding such term and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. (i) References herein to "attorney's fees", "legal fees", "costs of counsel" or other such references shall be deemed to include the allocated cost of in-house counsel. (j) Each of the parties to the Operative Agreements and their counsel have reviewed and revised, or requested revisions to, the Operative Agreements, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construing and interpretation of the Operative Agreements and any amendments or exhibits thereto. II. Definitions "ABR" shall have the meaning specified in Section 1.1 of the Credit Agreement. "acquire" or "purchase" shall mean, with respect to any Property, the acquisition, lease or purchase of such Property by the Owner Trustee from any Person. "Acquisition Advance" shall mean an advance of funds to pay Property Acquisition Costs and other amounts related thereto pursuant to Section 5.3 of the Participation Agreement. "Additional Up-Front Fee" shall have the meaning specified in Section 9.4 of the Participation Agreement. "Advance" shall mean a Construction Advance or Modification Advance or an Acquisition Advance. "Affiliate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "After Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient calculated at the then maximum marginal rates generally applicable to Persons of the same type as the recipients (less any tax savings realized as a result of the payment of the indemnified amount) with respect to the receipt by the recipient of such amounts, such increased payment (as so reduced) is equal to the payment otherwise required to be made. "Agency Agreement" shall mean the Agency Agreement, dated as of the Initial Closing Date, between the Construction Agent and the Owner Trustee. A-2 "Agency Agreement Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Agency Agreement Event of Default. "Agency Agreement Event of Default" shall mean an "Event of Default" as defined in Section 5.1 of the Agency Agreement. "Agent" or "Administrative Agent" shall mean NationsBank of Texas, N.A., as Administrative Agent for the Lenders pursuant to the Credit Agreement, or any successor agent appointed in accordance with the terms of the Credit Agreement. "Allocated Interest" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Amount of Commitment Increase" shall mean, (a) in the aggregate for the Lenders and the Holders, the sum of the amount of the Commitment Increase of the Lenders plus the amount of the Commitment Increase of the Holders and (b) as to the Lenders as a group or the Holders as a group, as the case may be, the amount of the Commitment Increase of the Lenders or the Commitment Increase of the Holders, as the case may be. "Applicable Margin" shall have the meaning given such term in Section 1.1 of the Credit Agreement. "Appraisal" shall mean, with respect to any Property, an appraisal to be delivered in connection with a Property Closing Date or in accordance with the terms of Section 10.1(e) of the Lease, in each case prepared by a reputable appraiser reasonably acceptable to the Agent, which in the judgment of counsel to the Agent, complies with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements, with such appraisal to be performed by an appraiser selected by the Agent after consultation with Lessee. "Approved States" shall mean Washington, Oregon, Utah and Idaho, and any other state approved in writing by the Lessor and the Agent. "Appurtenant Rights" shall mean (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land underlying any Improvements, or the Improvements, including, without limitation, the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to such Land. "Available Commitment" shall have the meaning specified in Section 1.1 of the Credit Agreement. A-3 "Base Amount" shall have the meaning specified in Section 10.1 of the Lease. "Basic Rent" shall mean, the sum of (i) the Loan Basic Rent and (ii) the Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is due. "Basic Term" shall have the meaning specified in Section 2.2 of the Lease. "Basic Term Commencement Date" shall have the meaning specified in Section 2.2 of the Lease. "Basic Term Expiration Date" shall have the meaning specified in Section 2.2 of the Lease. "Bill of Sale" shall mean a Bill of Sale regarding Equipment in form and substance satisfactory to the Holders and the Agent. "Borrowing Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina, Dallas, Texas, Los Angeles, California, San Francisco, California, New York, New York or Portland, Oregon, are authorized or required by law to close; provided, however, that when used in connection with a Loan bearing interest based on the Eurodollar Rate, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease" means any lease of property (whether real, personal or mixed) which would, in accordance with GAAP, be required to be classified and accounted for on the books of the lessee as a capital lease. "Casualty" shall mean any damage or destruction of all or any portion of a Property as a result of a fire or other casualty. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss.ss. 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificate" shall mean a Certificate in favor of each Holder regarding the Holder Commitment of such Holder issued pursuant to the terms and conditions of the Trust Agreement in favor of such Holder. "Change in Control" means the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934, as amended) of outstanding shares of voting A-4 stock of Lessee representing in excess of 50% of voting control of Company, which Person or Persons have beneficial ownership of less than 5% of the outstanding shares of voting stock of Lessee as of the date of the Participation Agreement. "Claims" shall mean any and all obligations, liabilities, losses, actions, suits, penalties, claims, demands, costs and expenses (including, without limitation, reasonable attorney's fees and expenses) of any nature whatsoever. "Closing Date" shall mean the Initial Closing Date and each Property Closing Date. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute hereto. "Collateral" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Commitment" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Commitment Fee Payment Date" shall mean each Specified Interest Payment Date and the last day of the Commitment Period, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement. "Commitment Fee Rate" shall mean, with respect to the Commitments, a rate equal to 15 basis points (0.15%) per annum for the Commitment Period. "Commitment Increase" shall mean an increase in the Commitments of the Lenders pursuant to Section 9.8(d) of the Credit Agreement and a concurrent increase in the Holder Commitments of the Holders pursuant to Section 3.1(d) of the Trust Agreement. "Commitment Period" shall mean the period from the Initial Closing Date to and including the Construction Period Termination Date, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement. "Company" shall have the meaning specified in Section 7.3 of the Participation Agreement. "Completion" shall mean, with respect to a Property, such time as final completion of the Improvements on such Property has been achieved in accordance with the Plans and Specifications, the Agency Agreement and/or the Lease, and in compliance with all material Legal Requirements and Insurance Requirements and (unless not required in connection with the construction, renovation and/or modification of Improvements on Improved Property) a certificate of occupancy has been issued with respect to such Property by the appropriate governmental entity. A-5 "Completion Date" shall mean, with respect to a Property, the earlier of (i) the date on which Completion for such Property has occurred and (ii) the Construction Period Termination Date. "Condemnation" shall mean any taking or sale of the use, access, occupancy, easement rights or title to any Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Person having the power of eminent domain, including an action by a Governmental Authority to change the grade of, or widen the streets adjacent to, any Property or alter the pedestrian or vehicular traffic flow to any Property so as to result in a change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. "Construction Advance" shall mean an advance of funds to pay Property Costs and other amounts related thereto with respect to Unimproved Property pursuant to Section 5.4 or 5.5 of the Participation Agreement. "Construction Agent" shall mean Fred Meyer, Inc., a Delaware corporation, as construction agent under the Agency Agreement. "Construction Budget" shall mean, as to any Property, the aggregate of Land acquisition costs and the estimated cost of constructing and developing any Improvements, on a Property by Property basis, as determined by the Construction Agent or the Lessee, as the case may be, in its reasonable, good faith judgment, specifying the acquisition cost for Land and the projected hard costs relating to Improvements and soft costs relating to Improvements. "Construction Commencement Date" shall mean, with respect to Improvements, the date on which construction of such Improvements commences pursuant to the Agency Agreement. "Construction Period" shall mean, with respect to a Property, the period commencing on the Construction Commencement Date for such Property and ending on the Completion Date for such Property. "Construction Period Property" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Construction Period Termination Date" shall mean the second annual anniversary of the Initial Closing Date, as such date may be extended for up to six (6) additional months to the extent that a delay in construction is caused by a Force Majeure Event. "Control" shall mean (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, the possession directly or indirectly, of the power to direct or cause the direction of the A-6 management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Co-Owner Trustee" shall have the meaning specified in Section 9.2 of the Trust Agreement. "Credit Agreement" shall mean the Credit Agreement, dated as of the Initial Closing Date, among the Lessor, the Agent and the Lenders, as specified therein. "Credit Agreement Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Credit Agreement Event of Default. "Credit Agreement Event of Default" shall mean any event or condition defined as an "Event of Default" in Section 6 of the Credit Agreement. "Credit Documents" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Credit Suisse" shall mean Credit Suisse, a Swiss banking corporation. "Debt" of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all obligations of such Person as lessee under Capital Leases which have been recorded as liabilities on a balance sheet of such Person, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than current accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person (it being understood that if such Person has not assumed or otherwise become personally liable for any such indebtedness, the amount of the Debt of such Person in connection therewith shall be limited to the lesser of the face amount of such indebtedness or the fair market value of all property of such Person securing such indebtedness), (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances issued for the account of such Person, (f) all obligations of such Person in respect of Hedging Arrangements, (g) all Suretyship Liabilities of such Person and (h) all Debt (as defined above) of any partnership in which such Person is a general partner. The amount of the Debt of any Person in respect of Hedging Arrangements shall be deemed to be the unrealized net loss position of such Person thereunder (determined for each counterparty individually, but netted for all Hedging Arrangements maintained with such counterparty). "Deed" shall mean a special or limited warranty deed regarding Land and/or Improvements in form and substance satisfactory to the Owner Trustee and the Agent. A-7 "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Employee Benefit Plan" or "Plan" shall mean an employee benefit plan (within the meaning of Section 3(3) of ERISA, including any Multiemployer Plan), or any "plan" as defined in Section 4975(e)(1) of the Code and as interpreted by the Internal Revenue Service and the Department of Labor in rules, regulations, releases or bulletins in effect on any Closing Date. "Environmental Claims" shall mean any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding, or claim (whether administrative, judicial, or private in nature) arising (a) pursuant to, or in connection with, an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Substance, (c) from any abatement, removal, remedial, corrective, or other response action in connection with a Hazardous Material, Environmental Law, or other order of a Tribunal or (d) from any actual or alleged damage, injury, threat, or harm to health, safety, natural resources, or the environment. "Environmental Laws" shall mean any Law, permit, consent, approval, license, award, or other authorization or requirement of any Tribunal relating to emissions, discharges, releases, threatened releases of any Hazardous Substance into ambient air, surface water, ground water, publicly owned treatment works, septic system, or land, or otherwise relating to the handling, storage, treatment, generation, use, or disposal of Hazardous Substances, pollution or to the protection of health or the environment, including without limitation CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, et seq., and state statutes analogous thereto. "Environmental Violation" shall mean any activity, occurrence or condition that violates or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to violate or results in or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to result in noncompliance with any Environmental Law. "Equipment" shall mean equipment, apparatus, furnishings, fittings and personal property of every kind and nature whatsoever purchased, leased or otherwise acquired using the proceeds of the Loans or the Holder Advances by the Construction Agent, the Lessee or the Lessor as specified or described in either a Requisition or a Lease Supplement, whether or not now or subsequently attached to, contained in or used or usable in any way in connection with any operation of any Improvements or other improvements to Land. A-8 "Equipment Schedule" shall mean (a) each Equipment Schedule attached to the applicable Requisition and (b) each Equipment Schedule attached to the applicable Lease Supplement as Schedule I-A. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean each entity required to be aggregated with any Lessee pursuant to the requirements of Section 414(b) or (c) of the Code. "Eurocurrency Reserve Requirements" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Eurodollar Holder Advance" shall mean the Holder Advance bearing a Holder Yield based on the Eurodollar Rate. "Eurodollar Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Eurodollar Reserve Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Event of Default" shall mean a Lease Event of Default, an Agency Agreement Event of Default or a Credit Agreement Event of Default. "Excepted Payments" shall mean: (a) all indemnity payments (including indemnity payments made pursuant to Section 13 of the Participation Agreement), whether made by adjustment to Basic Rent or otherwise, to which the Owner Trustee, any Holder or any of their respective Affiliates, agents, officers, directors or employees is entitled; (b) any amounts (other than Basic Rent, Termination Value, or Purchase Option Price) payable under any Operative Agreement to reimburse the Owner Trustee, the Trust Company, any Holder or any of their respective Affiliates (including the reasonable expenses of the Owner Trustee, the Trust Company and the Holders incurred in connection with any such payment) for performing or complying with any of the obligations of the Lessee under and as permitted by any Operative Agreement; (c) any amount payable to any Holder by any transferee of such interest of such Holder as the purchase price of such Holder's interest in the Trust Estate (or a portion thereof); (d) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies other than such proceeds or payments payable to the Agent; (e) any insurance proceeds under policies maintained by the Owner Trustee or any Holder; A-9 (f) Transaction Expenses or other amounts or expenses paid or payable to or for the benefit of the Owner Trustee or any Holder; (g) all right, title and interest of any Holder or the Owner Trustee to any Property or any portion thereof or any other property to the extent any of the foregoing has been released from the Liens of the Security Documents and the Lease pursuant to the terms thereof; (h) upon termination of the Credit Agreement pursuant to the terms thereof, all remaining property covered by the Lease or Security Documents; (i) all payments in respect of the Holder Yield; (j) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (i) above; and (k) any rights of either the Owner Trustee or Trust Company to demand, collect, sue for or otherwise receive and enforce payment of any of the foregoing amounts. "Excepted Rights" shall mean the rights retained by the Owner Trustee pursuant to Section 8.2(a) of the Credit Agreement and all right, title and interest of Owner Trustee in the Shared Rights. "Excess Proceeds" shall mean the excess, if any, of the aggregate of all awards, compensation or insurance proceeds payable in connection with a Casualty or Condemnation over the Termination Value paid by the Lessee pursuant to the Lease with respect to such Casualty or Condemnation. "Excluded Taxes" shall have the meaning specified in Section 13.2(e) of the Participation Agreement. "Exemption Agreement" shall have the meaning specified in Section 13.2(f) of the Participation Agreement. "Exemption Representation" shall have the meaning specified in Section 13.2(g) of the Participation Agreement. "Expiration Date" shall mean the Basic Term Expiration Date or the last day of the Extended Term, if applicable. "Expiration Date Election Notice" shall have the meaning specified in Section 20.2 of the Lease. "Expiration Date Purchase Option" shall mean the Lessee's option to purchase all (but not less than all) of the Properties on the Expiration Date. A-10 "Extended Term" shall mean the five year period which immediately follows the end of the Basic Term and expires on December 8, 2005 with respect to which Lessee has exercised its Renewal Option pursuant to Section 21.1 of the Lease. "Facility" shall mean a facility used for the treatment, storage or disposal of Hazardous Substances. "Fair Market Sales Value" shall mean, with respect to any Property, the amount, which in any event, shall not be less than zero, that would be paid in cash in an arms-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, such Property. Fair Market Sales Value of any Property shall be determined based on the assumption that, except for purposes of Section 17 of the Lease, such Property is in the condition and state of repair required under Section 10.1 of the Lease and the Lessee is in compliance with the other requirements of the Operative Agreements. "Federal Funds Effective Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Fixtures" shall mean all fixtures relating to the Improvements, including all components thereof, located in or on the Improvements, together with all replacements, modifications, alterations and additions thereto. "FM Trust 1995-2" shall mean the grantor trust created pursuant to the terms and conditions of the Trust Agreement. "Force Majeure Event" shall mean any event beyond the control of the Construction Agent, including, but not limited to, strikes, lockouts, adverse soil conditions, acts of God, adverse weather conditions, inability to obtain labor or materials, governmental activities, civil commotion and enemy action; but excluding any event, cause or condition that results from the Construction Agent's financial condition. "GAAP" shall mean the principles of accounting set forth in pronouncements of the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, as such principles are from time to time supplemented and amended. "Governmental Action" shall mean all permits, authoriza tions, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Legal Requirement, and shall include, without limitation, all environmental and operating permits and licenses that are required for the contemplated use, occupancy, zoning and operations of any Property. A-11 "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Greenwich Funding Corporation" shall mean Greenwich Funding Corporation, a Delaware corporation. "Ground Lease" shall mean a ground lease respecting any Property owned by Lessee or a wholly-owned Subsidiary of Lessee in form and substance satisfactory to Lessor (i) having a 99 year term and payments set at $1.00 per year or (ii) subject to such other terms and conditions as are reasonably satisfactory to Lessor, Lessee and the Agent. "Hedging Arrangement" means any interest rate swap, cap or collar agreement, currency swap agreement, commodity swap agreement or other arrangement designed to hedge interest rate and/or currency risk or changes in commodity prices. "Hazardous Substance" shall mean any of the following: (i) any petroleum or petroleum product, explosives, radioactive materials, asbestos, formaldehyde, polychlorinated biphenyls, lead and radon gas; (ii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste, or pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous to the environment or human health or safety as determined in accordance with any Environmental Law; or (iii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant that would support the assertion of any claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law. The term "Hazardous Substances" shall not include (a) cleaning products, landscape fertilizers and other products in the ordinary quantities that are customarily used in the ordinary course of business of operating and maintaining commercial properties or (b) products held in sealed containers for sale to customers. "Holder" shall mean the several banks and other financial institutions which are from time to time holders of Certificates in connection with the FM Trust 1995-2. "Holder Advance" shall have the meaning specified in Section 2 of the Participation Agreement. "Holder Amount" shall mean as of any date, the aggregate amount of the Holder Advances made by each Holder to the Trust Estate pursuant to Section 2 of the Participation Agreement and Section 3.1 of the Trust Agreement less any payments of any Holder Advances received by the Holders pursuant to Section 3.4 of the Trust Agreement. A-12 "Holder Applicable Margin" shall mean the Applicable Margin plus, in each case, .50%. "Holder Commitment" shall mean $1,800,000 in the aggregate, with respect to which the commitment of NationsBank is $900,000 and the commitment of Credit Suisse is $900,000, as such commitments may be reduced or increased from time to time in accordance with the provisions of the Trust Agreement. "Holder Overdue Rate" shall mean the lesser of (i) the Overdue Interest, as defined in the Credit Agreement, plus 1.00% and (ii) the highest rate permitted by applicable law. "Holder Property Cost" shall mean with respect to each Property, at any date of determination, an amount equal to the product of (a) a fraction, the numerator of which is the Property Cost for such individual Property and the denominator of which is the aggregate Property Cost for all Properties which are then subject to the terms and conditions of the Operative Agreements multiplied by (b) the outstanding Holder Advances. "Holder Up-Front Fee" shall have the meaning specified in Section 9.4 of the Participation Agreement. "Holder Yield" shall mean the Eurodollar Reserve Rate plus the Holder Applicable Margin; provided, however, (i) upon delivery of the notice described in Section 3.7(c) of the Trust Agreement, the outstanding Holder Advances of each Holder shall bear a yield at the ABR applicable from time to time from and after the dates and during the periods specified in Section 3.7(c) of the Trust Agreement, and (ii) upon the delivery by any Holder of the notice described in Section 3.8(c) of the Trust Agreement, the Holder Advances of such Holder shall bear a yield at the ABR applicable from time to time after the dates and during the periods specified in Section 3.8(c) of the Trust Agreement. "Impositions" shall mean, except to the extent described in the following sentence, any and all liabilities, losses, expenses, costs, charges and Liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes"), including (i) real and personal property taxes, including personal property taxes on any property covered by the Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; (vi) assessments on any Property, including all assessments for public improvements or benefits, whether or not such improvements are commenced or completed within the Term; and (vii) any tax, Lien, assessment or charge A-13 asserted, imposed or assessed by the PBGC or any governmental authority succeeding to or performing functions similar to, the PBGC; and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Governmental Authority upon or with respect to (a) any Property or any part thereof or interest therein; (b) the leasing, financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, transfer of title, return or other disposition of such Property or any part thereof or interest therein; (c) the Notes or other indebtedness with respect to any Property or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from any Property or any part thereof or interest therein; (e) the Operative Agreements, the performance thereof, or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to any Property or any part thereof or interest therein upon the sale or disposition thereof; (g) any contract (including the Agency Agreement) relating to the construction, acquisition or delivery of the Improvements or any part thereof or interest therein; (h) the issuance of the Notes; or (i) otherwise in connection with the transactions contemplated by the Operative Agreements. The term "Imposition" shall not mean or include: (i) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on a Indemnified Person (other than Lessor) by the United States federal government that are based on or measured by the net income (including taxes based on capital gains, and minimum taxes or any tax imposed by Code ss. 59A) of such Indemnified Person; provided, that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on any Indemnified Person (other than Lessor) by any state or local jurisdiction or taxing authority within any state or local jurisdiction and that are in the nature of franchise taxes or are based upon or measured by the overall gross or net income or overall gross or net receipts of such Indemnified Person except that this clause (ii) shall not apply to (and thus shall not exclude) any such Taxes imposed on an Indemnified Person by a state (or any local taxing authority thereof or therein) to the extent that (A) such Taxes would not have been imposed but for the location, possession or A-14 use of any Property in such jurisdiction, and (B) in the case of Taxes based upon overall gross or net income or overall gross or net receipts, such Taxes would not have been imposed had the transactions described in the Operative Agreements been structured as a standard financing arrangement (i.e, with the Indemnity Provider (x) being the borrower of funds advanced by the Lenders and the Holders, (y) holding title to each Property, and (z) being treated as the owner of each Property for both financial accounting and federal income tax purposes) rather than as a tax retention operating lease (it being understood that any such indemnity would be payable only to the extent of the net harm incurred by such Indemnified Person from such Taxes, taking into account any incremental tax benefit in another tax jurisdiction resulting from payment of such Taxes); provided, that this clause (ii) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (iii) any Tax or imposition to the extent, but only to such extent, it relates to any act, event or omission that occurs after the termination of the Lease and redelivery or sale of the property in accordance with the terms of the Lease (but not any Tax or imposition that relates to such termination, redelivery or sale and/or to any period prior to such termination, redelivery or sale); or (iv) any Taxes which are imposed on an Indemnified Person as a result of the gross negligence or wilful misconduct of such Indemnified Person itself (as opposed to gross negligence or wilful misconduct imputed to such Indemnified Person), but not Taxes imposed as a result of ordinary negligence of such Indemnified Person; Any Tax or imposition excluded from the defined term "Imposition" in any one of the foregoing clauses (i) through (iv) shall not be construed as constituting an Imposition by any provision of any other of the aforementioned clauses. "Improved Property" shall mean a Property acquired by the Lessor which contains Improvements that are suitable as of the Property Closing Date for occupancy by the Lessee and the operation by the Lessee of a Store therein. "Improvements" shall mean, with respect to the construction, renovation and/or Modification of a Store, all buildings, structures, Fixtures, and other improvements of every kind existing at any time and from time to time on or under the Land purchased, leased or otherwise acquired using the proceeds of the Loans or the Holder Advances, together with any and all appurtenances to such buildings, structures or improvements, including sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including all Modifications and other additions to or changes in the Improvements at any time, A-15 including without limitation (a) any Improvements existing as of the Property Closing Date as such Improvements may be referenced on the applicable Requisition and (b) any Improvements made subsequent to such Property Closing Date. "Incorporated Covenants" shall have the meaning specified in Section 28.1 of the Lease Agreement. "Indebtedness" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Indemnified Person" shall mean the Lessor, the Owner Trustee, in its individual and its trust capacity, the Agent, the Holders, the Lenders and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Indemnity Provider" shall mean, respecting each Property, the Construction Agent from the date of the Participation Agreement to and including the Basic Term Commencement Date for such Property and the Lessee for the duration of the Term for such Property. "Initial Closing Date" shall mean December 8, 1995. "Initial Construction Advance" shall mean any initial Advance (which may be either a Construction Advance or a Modification Advance) to pay for: (i) Property Costs for construction of any Improvements; (ii) the Property Costs of restoring or repairing any Property which is required to be restored or repaired in accordance with Section 15.1(e) of the Lease; and (iii) the costs of any Modifications in accordance with Section 11.1 of the Lease. "Insurance Requirements" shall mean all terms and conditions of any insurance policy either required by the Lease to be main tained by the Lessee or required by the Agency Agreement to be maintained by the Construction Agent, and all requirements of the issuer of any such policy and, regarding self insurance, any other requirements of Lessee. "Interest Period" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Land" shall mean a parcel of real property described on (a) the Requisition issued by the Construction Agent on the Property Closing Date relating to such parcel and (b) Schedule I- C to each applicable Lease Supplement executed and delivered in accordance with the requirements of Section 2.4 of the Lease. A-16 "Law" shall mean any statute, law, ordinance, regulation, rule, order, writ, injunction or decree of any Tribunal. "Lease" or "Lease Agreement" shall mean the Lease Agreement (Tax Retention Operating Lease) dated as of the Initial Closing Date, between the Lessor and the Lessee, together with any Lease Supplements thereto, as such Lease Agreement may from time to time be supplemented, amended or modified in accordance with the terms thereof. "Lease Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" shall have the meaning specified in Section 17.1 of the Lease. "Lease Supplement" shall mean each Lease Supplement substan tially in the form of Exhibit A to the Lease, together with all attachments and schedules thereto, as such Lease Supplement may be supplemented, amended or modified from time to time. "Lease Term Debt Percentage" shall mean, as of the date of determination, a percentage equal to 1.000 minus the Lease Term Holder Percentage. "Lease Term Holder Percentage" shall mean, as of the date of determination, a percentage equal to $1,800,000 (as such amount may be reduced or increased from time to time pursuant to the terms of the Trust Agreement) divided by the aggregate Property Costs for all Properties after the Completion thereof and with respect to any Improved Property, after the acquisition thereof. "Legal Requirements" shall mean as to any Person all foreign, Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting such Person and all foreign, Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and impositions affecting any Property or the taxation, demolition, construction, use or alteration of such Property, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to any Property or in any way limit the use and enjoyment thereof (including all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. ss. 12101 et. seq., and any other similar Federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to the Lessee affecting any Property, the Appurtenant Rights and A-17 any easements, licenses or other agreements entered into pursuant to Section 10.5 of the Participation Agreement. "Lender Commitment Fee" shall have the meaning specified in Section 9.5(a) of the Participation Agreement. "Lender Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdiction in order to procure a security interest in favor of the Agent in any Equipment or in any Improvements. "Lender Up-Front Fee" shall have the meaning specified in Section 9.4 of the Participation Agreement. "Lenders" shall mean the several banks and other financial institutions from time to time party to the Credit Agreement. "Lessee" shall have the meaning set forth in the Lease. "Lessor" shall mean the Owner Trustee, not in its individual capacity, but as Lessor under the Lease. "Lessor Basic Rent" shall mean the scheduled Holder Yield due on the Holder Advances on any Specified Interest Payment Date pursuant to the Trust Agreement (but not including interest on overdue amounts under the Trust Agreement or otherwise). "Lessor Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdictions in order to protect the Lessor's interest under the Lease to the extent the Lease is a security agreement or a mortgage. "Lessor Lien" shall mean any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor or Trust Company, in its individual capacity, not resulting from the transactions contemplated by the Operative Agreements, (b) any act or omission of the Lessor or Trust Company, in its individual capacity, which is not required by the Operative Agreements or is in violation of any of the terms of the Operative Agreements, (c) any claim against the Lessor or Trust Company, in its individual capacity, with respect to Taxes or Transaction Expenses against which the Lessee is not required to indemnify Lessor or Trust Company, in its individual capacity, pursuant to Section 13 of the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Properties, the Trust Estate or the Operative Agreements other than the transfer of title to or possession of any Properties by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement or the Participation Agreement or pursuant to the exercise of the remedies set forth in Article XVII of the Lease. A-18 "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien, option or charge of any kind. "Limited Power of Attorney" shall mean the Limited Power of Attorney dated as of the Initial Closing Date given by the Owner Trustee in favor of the Company and in form and substance satisfactory to the Agent, the Holders, the Owner Trustee and the Company. "Limited Recourse Amount" shall mean with respect to the Properties on an aggregate basis, an amount equal to the sum of the Termination Values with respect to all of the Properties on each Payment Date, less the Maximum Residual Guarantee Amount as of such date with respect to the Properties. "Loans" shall have the meaning specified in Section 2.1 of the Credit Agreement. "Loan Basic Rent" shall mean the interest due on the Loans on any Specified Interest Payment Date pursuant to the Credit Agreement (but not including interest on (i) any such Loan prior to the Basic Term Commencement Date with respect to the Property to which such Loan relates or (ii) any overdue amounts under Section 2.7(b) of the Credit Agreement or otherwise). "Loan Property Cost" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Majority Lenders" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Marketing Period" shall mean, if the Lessee have not given the Expiration Date Election Notice in accordance with Section 20.2 of the Lease, the period commencing on the date 90 days prior to the applicable Expiration Date and ending on such Expiration Date. "Material Adverse Effect" shall mean a material adverse effect on (a) the ability of the Lessee or any Subsidiary to perform its respective obligations under any Operative Agreement to which it is a party, (b) the validity or enforceability of any Operative Agreement or the rights and remedies of the Agent, the Lenders, the Holders, or the Lessor thereunder, (c) the validity, priority or enforceability of any Lien on any Property created by any of the Operative Agreements, or (d) the value, utility or useful life of any Property or the use, or ability of the Lessee to use, any Property for the purpose for which it was intended. "Material Subsidiary" means any Subsidiary of Lessee which either (a) has assets which constitute 5% or more of the consolidated assets of Lessee and its Subsidiaries or (b) has revenues during its most recently-ended fiscal year which constitute more than 5% of the consolidated revenues of Lessee and its Subsidiaries during the most recently-ended fiscal year of Lessee. A-19 "Maturity Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Maximum Property Cost" shall mean the aggregate amount of the Property Costs for all Properties subject to the Lease as of the applicable determination date. "Maximum Residual Guarantee Amount" shall mean an amount equal to the product of the aggregate Property Cost for all of the Properties times 89 1/2%. "Modification Advance" shall mean an advance of funds to pay Property Costs and other amounts related thereto with respect to Improved Property pursuant to Section 5.4 or 5.5 of the Participation Agreement. "Modifications" shall have the meaning specified in Section 11.1(a) of the Lease. "Mortgage Instrument" shall mean any mortgage, deed of trust or any other instrument executed by the Owner Trustee in favor of the Agent and evidencing a Lien on a Property, in form and substance substantially in the form attached as Exhibit J to the Participation Agreement. "Multiemployer Plan" shall mean any plan described in Section 4001(a)(3) of ERISA to which contributions are or have been made or required by the Lessee or any of its Subsidiaries or ERISA Affiliates. "Multiple Employer Plan" shall mean a plan to which the Lessee or any ERISA Affiliate and at least one other employer other than an ERISA Affiliate is making or accruing an obligation to make, or has made or accrued an obligation to make, contributions. "NationsBank" shall mean NationsBank of Texas, N.A., a national banking association. "Net Proceeds" shall mean all amounts paid in connection with any Casualty or Condemnation, and all interest earned thereon, less the expense of claiming and collecting such amounts, including all costs and expenses in connection therewith for which the Agent or Lessor are entitled to be reimbursed pursuant to the Lease. "1995 Credit Agreement" shall have the meaning specified in Section 28.1 of the Lease. "Notes" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Occupational Safety and Health Law" shall mean the Occupational Safety and Health Act of 1970 and any other federal, state or local statute, law, ordinance, code, rule, regulation, A-20 order or decree regulating or relating to, or imposing liability or standards of conduct concerning, employee health and/or safety, as now or at any time hereafter in effect. "Officer's Certificate" shall mean a certificate signed by any individual holding the office of vice president or higher, which certificate shall certify as true and correct the subject matter being certified to in such certificate. "Operative Agreements" shall mean the following: the Participation Agreement, the Agency Agreement, the Original Trust Agreement, the Trust Agreement, the Certificates, the Credit Agreement, the Notes, the Lease (and a memorandum thereof in a form reasonably acceptable to the Agent), each Lease Supplement (and a memorandum thereof in a form reasonably acceptable to the Agent), the Security Agreement and each Mortgage Instrument. "Orem Deed" shall mean the Warranty Deed dated September 26, 1995 executed by Philips Semiconductors Inc. for the benefit of the Owner Trustee and recorded September 27, 1995, as Entry No. 64619, in Book 3777, Page 619 in the Official Records of Utah County, Utah. "Original Trust Agreement" shall have the meaning specified in the recitals of the Trust Agreement. "Overdue Rate" shall mean (i) with respect to Basic Rent, and any other amount owed under or with respect to the Credit Agreement or the Security Documents, the rate specified in Section 2.7(b) of the Credit Agreement, (ii) with respect to Lessor Basic Rent, the Holder Yield and any other amount owed under or with respect to the Trust Agreement, the applicable rate specified in the Trust Agreement, and (iii) with respect to any other amount, the amount specified in Section 2.7(b) of the Credit Agreement. "Owner Trustee" shall mean First Security Bank of Utah, N.A., not individually, except as expressly stated in the various Operative Agreements, but solely as Owner Trustee under the FM Trust 1995-2, and any successor or replacement Owner Trustee expressly permitted under the Operative Agreements. "Participation Agreement" shall mean the Participation Agreement dated as of December 1, 1995, among the Lessee, the Owner Trustee, not in its individual capacity except as expressly stated therein, the Holders, the Lenders and the Agent, as such Participation Agreement may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Payment Date" shall mean any Specified Interest Payment Date and any date on which interest or Holder Yield in connection with a prepayment of principal on the Loans or of the Holder Advances is due under the Credit Agreement or the Trust Agreement. A-21 "PBGC" shall mean the Pension Benefit Guaranty Corporation created by Section 4002(a) of ERISA or any successor thereto. "Permitted Exceptions" shall mean: (i) Liens of the types described in clauses (i), (ii) and (v) of the definition of Permitted Liens; (ii) Liens for Taxes not yet due; and (iii) all encumbrances, exceptions, restrictions, easements, rights of way, servitudes, encroachments and irregularities in title, other than Liens which, in the reasonable assessment of the Agent, do not materially impair the use of the Property for its intended purpose. "Permitted Liens" shall mean: (i) the respective rights and interests of the parties to the Operative Agreements as provided in the Operative Agreements; (ii) the rights of any sublessee, assignee or other transferee expressly permitted by the terms of the Lease; (iii) Liens for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 13.1 of the Lease; (iv) Liens arising by operation of law, material men's, mechanics', workmen's, repairmen's, employees', carriers', warehousemen's and other like Liens relating to the construction of the Improvements or in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than 30 days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (v) Liens of any of the types referred to in clause (iv) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor and the Agent have been made), which bonding (or arrangements) shall comply with applicable Legal Requirements, and shall have effectively stayed any execution or enforcement of such Liens; (vi) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such A-22 proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings set forth in Section 13.1 of the Lease; (vii) Liens in favor of municipalities to the extent agreed to by the Lessor; and (viii) Permitted Exceptions. "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer Plan), and to which the Company or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Person" shall mean any individual, corporation, partner ship, joint venture, association, joint-stock company, trust, unincorporated organization, governmental authority or any other entity. "Plans and Specifications" shall mean, with respect to Improvements, the plans and specifications for such Improvements to be constructed or already existing, as such Plans and Specifications may be amended, modified or supplemented from time to time. "Prime Lending Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Property" shall mean, with respect to each Store that is acquired, constructed and/or renovated pursuant to the terms of the Operative Agreements, the Land and each item of Equipment and the various Improvements, in each case located on such Land. "Property Acquisition Cost" shall mean the cost to Lessor to purchase a Property on a Property Closing Date. "Property Closing Date" shall mean each date on which (a) the Lessor purchases or leases (pursuant to Ground Lease) a Property or (b) with respect to the Property owned by Lessor pursuant to the Orem Deed, the date as of which such Property is refinanced in accordance with the terms of the Operative Agreements. "Property Cost" shall mean with respect to a Property the aggregate amount of Advances for such Property (as such amounts shall be increased equally among all Properties respecting the Loans in regard to Section 9.1 of the Participation Agreement extended from time to time to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in Sections 9.1(a) and (b) of the Participation Agreement). A-23 "Purchase Notice" shall have the meaning given to such term in Section 20.1 of the Lease. "Purchase Option" shall have the meaning given to such term in Section 20.1 of the Lease. "Purchase Option Price" shall have the meaning given to such term in Section 20.1 of the Lease. "Qualified Loan Assignment" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Recipient Taxes" shall have the meaning specified in Section 13.2(e) of the Participation Agreement. "Release" shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Substance. "Renewal Option" shall have the meaning specified in Section 21.1 of the Lease. "Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Reportable Event" shall have the meaning specified in ERISA. "Requested Funds" shall mean any funds requested by the Lessee or the Construction Agent, as applicable, in accordance with Section 5 of the Participation Agreement. "Requirement of Law" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Requisition" shall have the meaning specified in Section 4.2 of the Participation Agreement. "Responsible Officer" shall mean the Chairman or Vice Chairman of the Board of Directors, the Chairman or Vice Chairman of the Executive Committee of the Board of Directors, the President, any Senior Vice President or Executive Vice President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer, except that when used with respect to the Trust Company or the Owner Trustee, "Responsible Officer" shall also include the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, the Controller and any Assistant Controller or any other officer of the Trust Company or the Owner Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. A-24 "Scheduled Interest Payment Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Security Agreement" shall mean the Security Agreement, dated as of the Initial Closing Date between the Owner Trustee and the Agent. "Security Documents" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Shared Rights" shall mean the rights retained by the Lessor, but not to the exclusion of the Agent, pursuant to Section 8.2(b) of the Credit Agreement. "Specialized Equipment" shall mean Equipment which is not, and is not intended to be, affixed to or a component of any of the various Improvements or Land subject to the Operative Agreements. "Specified Interest Payment Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Store" means a combination supermarket and general merchandise multidepartment store that is substantially similar to stores owned and/or leased by the Lessee as of the Initial Closing Date. "Subsidiary" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which the Lessee assumes or agrees to pay to Lessor, the Holders, the Administrative Agent or any other Person under the Lease or under any of the other Operative Agreements including, without limitation, payments of Purchase Option Price, Termination Value and the Maximum Residual Guarantee Amount and all indemnification amounts, liabilities and obligations. "Suretyship Liability" means any agreement, undertaking or other contractual arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to invest in a debtor, or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability (including accounts payable) of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Suretyship Liability shall (subject to any limitation set A-25 forth therein) be deemed to be the principal amount of the indebtedness, obligation or other liability guaranteed thereby. "Taxes" shall have the meaning specified in the definition of Impositions; provided, solely for purposes of Section 13.2(e) of the Participation Agreement "Taxes" shall have the meaning specified in such Section 13.2(e). "Term" shall mean the Basic Term and each Extended Term, if any. "Termination Date" shall have the meaning specified in Section 16.2(a) of the Lease. "Termination Event" shall mean (a) with respect to any Plan, the occurrence of a Reportable Event or an event described in Section 4062(e) of ERISA, (b) the withdrawal of the Lessee or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the distribution of a notice of intent to terminate a Plan or Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the institution of proceedings to terminate a Plan or Multiemployer Plan by the PBGC under Section 4042 of ERISA, (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (f) the complete or partial withdrawal of the Lessee or any ERISA Affiliate from a Multiemployer Plan. "Termination Notice" shall have the meaning specified in Section 16.1 of the Lease. "Termination Value" shall mean, as of any Payment Date, (a) with respect to all Properties, an amount equal to the sum of (i) the aggregate outstanding principal of the Notes, plus (ii) the aggregate Holder Property Cost, in each case as of the applicable Payment Date and (b) with respect to a particular Property, an amount equal to the product of the Termination Value of all the Properties as of such Payment Date times a fraction, the numerator of which is the Property Cost as of such Payment Date allocable to the particular Property in question and the denominator of which is the aggregate Property Cost for all the Properties as of such Payment Date. "Total Condemnation" shall mean a Condemnation that involves a taking of Lessor's entire title to a Property. "Transaction Expenses" shall mean all reasonable costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Agreements and the transactions contemplated by the Operative Agreements including without limitation: A-26 (a) the reasonable fees, out-of-pocket expenses and disbursements of counsel in negotiating the terms of the Operative Agreements and the other transaction documents, preparing for the closings under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Agreements; (b) any and all other reasonable fees, charges or other amounts payable to the Lenders, Agent, the Holders, the Owner Trustee or any broker which arises under any of the Operative Agreements; (c) any other reasonable fee, out-of-pocket expenses, disbursement or cost of any party to the Operative Agree ments or any of the other transaction documents; and (d) any and all Taxes and fees incurred in recording or filing any Operative Agreement or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Agreement. "Tribunal" shall mean any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision agency, department, commission, board, bureau or instrumentality of a governmental body. "Trust Agreement" shall mean the Amended and Restated Trust Agreement dated as of the Initial Closing Date among the Holders and the Owner Trustee. "Trust Company" shall mean First Security Bank of Utah, N.A., in its individual capacity, and any successor owner trustee under the Trust Agreement in its individual capacity. "Trust Estate" shall have the meaning specified in Section 2.2 of the Trust Agreement. "UCC Financing Statements" shall mean collectively the Lender Financing Statements and the Lessor Financing Statements. "Unfunded Amount" shall have the meaning specified in Section 3.2 of the Agency Agreement. "Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code as in effect in any applicable jurisdiction. "Unimproved Property" shall mean a Property acquired by the Lessor which either consists entirely of Land or consists of Land and Improvements but the existing Improvements are not suitable as of the Property Closing Date for occupancy by the Lessee and the operation by the Lessee of a Store therein. A-27 "Up-Front Fee" shall mean the fee payable by Lessee to Lessor on or prior to the Initial Closing Date pursuant to the terms and conditions of Section 9.4 of the Participation Agreement. "Voting Power" shall mean, with respect to securities issued by any Person, the combined voting power of all securities of such person which are issued and outstanding at the time of determination and which are entitled to vote in the election of directors or such Person, other than securities having such power only by reason of the happening of a contingency. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "Work" shall mean the furnishing of labor, materials, components, furniture, furnishings, fixtures, appliances, machinery, equipment, tools, power, water, fuel, lubricants, supplies, goods and/or services with respect to any Property. A-28 EX-10.W 5 EXHIBIT 10(W) Page 1 of 7 SETTLEMENT AGREEMENT AND MUTUAL RELEASE THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (this "Agreement") is made as of this 10th day of August, 1995, between REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership ("REPLP") and REC Resolution Company, an Oregon corporation ("REC"); and FRED MEYER, INC., a Delaware corporation ("FMI"), ROUNDUP CO., a Washington corporation ("Roundup"), FRED MEYER OF ALASKA, INC., an Alaska corporation ("FM Alaska"), and B & B STORES, INC., a Montana corporation ("B & B"). R E C I T A L S A. Roundup, FM Alaska and B & B are wholly owned subsidiaries of FMI. B. On or about December 11, 1981, REPLP, as landlord, and FMI (or its subsidiaries), as tenant, entered into various real property leases (or subleases) for (i) all or substantially all of the retail buildings in which FMI operated Fred Meyer retail developments, plus (ii) the warehouse and manufacturing properties operated by FMI (the "1981 Leases"). In October of 1986 REPLP sold a majority of its properties to Metropolitan Life Insurance Company, who entered into new leases with FMI (or its subsidiaries) for these properties. On October 22, 1986, REPLP entered into new leases with FMI (or its subsidiaries) for the remaining properties covered by the 1981 Leases (the "1986 Leases"). The properties covered by the 1986 Leases are listed on Exhibit A attached hereto and incorporated by reference. C. REC is the successor by merger to Duane Company, Union Central Company, Fourth Avenue Corporation, Fifth Avenue Corporation and Van Oak Corporation and has acquired substantially all of the assets of EFEM Company. REC's predecessors leased to REPLP the Fred Meyer retail developments listed on Exhibit B, attached hereto and incorporated by reference (the "REC Leases"), and REPLP in turn subleased these properties to FMI (or its subsidiaries) under the applicable 1981 Leases and 1986 Leases. The 1986 Lease for the Gateway Fred Meyer retail development has expired and REC is currently leasing this property directly to FMI. D. Many of the Fred Meyer retail developments and warehouse and manufacturing properties leased under the 1981 Leases and the 1986 Leases contain small tenant spaces and/or adjacent pad sites or pad buildings (collectively "Retail Tenant Space") which were, at the time or thereafter, leased to third party tenants. Some of the Retail Tenant Space was leased to third party tenants by FMI (or its subsidiaries) and some of the Retail Tenant Space was leased by REPLP or REC. The Retail Tenant Space leased by REPLP, since 1981, include, without limitation, the properties listed on Exhibit C, attached hereto and incorporated by reference (the "REPLP Pad Properties") and the Retail Tenant Space leased by REC (or its predecessors) since 1981 include, without limitation, the properties listed on Exhibit D attached hereto and incorporated by reference (the "REC Pad Properties"). E. FMI claims that the REPLP Pad Properties at the Gresham, Clackamas and Tigard Fred Meyer retail developments (the "Contested Pads") were, or should have been, included in the applicable 1986 Leases and 1981 Leases and that it is entitled to have the 1981 Leases and/or the 1986 Leases reformed, if necessary, to include the Contested Pads, and that FMI is entitled to the lease revenue received from the Contested 2 of 7 Pads. FMI has made demand that REPLP convey to FMI a leasehold estate to the Contested Pads (and assign all existing leases encumbering the Contested Pads) for the balance of the terms of the related 1986 Leases and pay FMI for all lease revenue received from the Contested Pads since December 11, 1981, including interest thereon. F. REPLP disputes FMI's claim for control of the Contested Pads and rental income received therefrom. G. The parties now desire to settle all claims between themselves arising out of or based on rental income received from the Retail Tenant Space including, without limitation, the REPLP Pad Properties and the REC Pad Properties. NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1. Pad Properties. FMI, Roundup, FM Alaska and B & B acknowledge and agree that (i) REPLP is the lessor under the leases for the REPLP Pad Properties and is entitled to all rental income received under leases for such properties and (ii) REC is the lessor under the leases for the REC Pad Properties and is entitled to all rental income received under such leases. Furthermore, FMI, Roundup, FM Alaska and B & B acknowledge and agree that the REPLP Pad Properties and the REC Pad Properties are not included in the applicable 1986 Leases and were not included in the applicable 1981 Leases. 2. Gateway. FMI acknowledges and agrees that the current lease for the Gateway Fred Meyer retail development only includes the Fred Meyer retail building and does not include any adjacent pad sites. 3. Settlement Payment. Upon execution and delivery of this Agreement by the parties, REPLP will, by wire transfer, pay to FMI the sum of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00). 4. Modification of 1986 Leases. FMI and REPLP will execute and deliver amendments to the 1986 Leases for the Gresham Fred Meyer retail development and the Clackamas Fred Meyer retail development to delete the legal descriptions of the Newport Bay Gresham Pad, the US Bank/Burger King Gresham Pad and the Elmers Clackamas Pad from said leases. Furthermore, the parties agree to execute such other instruments and agreements necessary to effect the intent of this Agreement. 5. FMI, Roundup, FM Alaska and B & B Release. For good and valuable consideration, including the mutual promises and actions made and taken herein, FMI, Roundup, FM Alaska and B & B, for themselves and their respective successors, assigns, agents, servants and employees, hereby mutually release, acquit and forever discharge REPLP and REC, their representatives, agents, servants, employees, successors and assigns of and from any and all actions, causes of action, claims, demands, damages, costs, expenses, liabilities, attorneys' fees, and debts whatsoever, in law or in equity, on account of any matter or thing which will or has happened, developed or occurred in the past, present or future, whether known or unknown, suspected or unsuspected, which are in any way connected with, based upon, related to, or arising out of rental income received by REPLP from the leasing or subleasing of Retail Tenant Space at any time during the terms of the 1981 Leases and the 1986 Leases. 6. REPLP and REC Release. For good and valuable consideration, including the mutual promises and actions made and taken herein, REC and REPLP, for themselves and their 3 of 7 respective successors, assigns, agents, servants and employees, hereby mutually release, acquit and forever discharge FMI, Roundup, FM Alaska and B & B, their representatives, agents, servants, employees, successors and assigns of and from any and all actions, causes of action, claims, demands, damages, costs, expenses, liabilities, attorneys' fees, and debts whatsoever, in law or in equity, on account of any matter or thing which will or has happened, developed or occurred in the past, present or future, whether known or unknown, suspected or unsuspected, which are in any way connected with, based upon, related to, or arising out of rental income received by FMI, Roundup, FM Alaska and B & B from the leasing or subleasing of Retail Tenant Space at any time during the terms of the 1981 Leases and the 1986 Leases. 7. Entire Agreement. The parties agree that no representation or promise not expressly contained in this Agreement has been made and further acknowledge that they are not entering into this Agreement on the basis of any promise or representation, express or implied, not otherwise contained herein. This Agreement contains the entire agreement between the parties hereto and the terms hereof are contractual and not a mere recital. This Agreement supersedes any prior agreement and contains the entire agreement of the parties on the matters covered. Each party hereto has fully and personally investigated the subject matter of this Agreement, consulted such independent counselors as required, and does not rely on any statement of facts or opinions of any other party to this Agreement. 8. Attorneys' Fees. If either party hereto brings an action at law or in equity to enforce, interpret or seek redress for the breach of this Agreement, then the prevailing party in such action shall be entitled to recover all court costs and witness fees and reasonable attorneys' fees (at trial or on appeal) in addition to all other appropriate relief. 9. Counterparts. This Agreement may be executed in one or more counterparts by the parties hereto. All counterparts shall be construed together and shall constitute one agreement. 10. Binding Effect. This Agreement shall be binding on and inure to the benefit of the parties and their respective heirs, successors and assigns. 11. Effective Date. The effective date of this Agreement and each and every provision hereof is and shall be August 10, 1995. 4 of 7 IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the date first above written. REPLP: REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership By FMGP Associates, an Oregon limited partnership, Its General Partner By FMGP Incorporated, a Delaware corporation, Its General Partner By DAVID W. RAMUS ------------------------------------------- David W. Ramus ------------------------------------------- (typed or printed name) Its Vice President --------------------------------------- REC: REC RESOLUTION COMPANY, an Oregon corporation By DAVID W. RAMUS ------------------------------------------- David W. Ramus ------------------------------------------- (typed or printed name) Its Vice President --------------------------------------- FMI: FRED MEYER, INC., a Delaware corporation By KENNETH THRASHER ------------------------------------------- Kenneth Thrasher ------------------------------------------- (typed or printed name) Its Senior V.P. - Finance --------------------------------------- (Signatures continued on following page) 5 of 7 ROUNDUP: ROUNDUP CO., a Washington corporation By KENNETH THRASHER ------------------------------------------- Kenneth Thrasher ------------------------------------------- (typed or printed name) Its Senior V.P. - Finance --------------------------------------- FM ALASKA: FRED MEYER OF ALASKA, INC., an Alaska corporation By KENNETH THRASHER ------------------------------------------- Kenneth Thrasher ------------------------------------------- (typed or printed name) Its Senior V.P. - Finance --------------------------------------- B & B: B & B STORES, INC., a Montana corporation By KENNETH THRASHER ------------------------------------------- Kenneth Thrasher ------------------------------------------- (typed or printed name) Its Senior V.P. - Finance --------------------------------------- (Acknowledgments on following page) 6 of 7 (Acknowledgment for REPLP) STATE OF OREGON ) ) ss. County of Washington ) This instrument was acknowledged before me on this 25th day of August, 1995 by David W. Ramus, as Vice President of FMGP INCORPORATED, a Delaware corporation. Jennifer Seifert ------------------------------------------- Notary Public for Oregon My Commission Expires: March 28, 1997 (Acknowledgment for REC) STATE OF OREGON ) ) ss. County of Washington ) This instrument was acknowledged before me on this 25th day of August, 1995 by David W. Ramus, as Vice President of REC Resolution Company, an Oregon corporation. Jennifer Seifert ------------------------------------------- Notary Public for Oregon My Commission Expires: March 28, 1997 (Acknowledgment for FMI) STATE OF OREGON ) ) ss. County of Multnomah ) This instrument was acknowledged before me on this 28th day of August, 1995 by Kenneth Thrasher, as Sr. V.P. - Finance of FRED MEYER, INC., a Delaware corporation. Carla J. Bangert ------------------------------------------- Notary Public for Oregon My Commission Expires: Nov. 13, 1997 (Acknowledgment for Roundup) STATE OF OREGON ) ) ss. County of Multnomah ) This instrument was acknowledged before me on this 28th day of August, 1995 by Kenneth Thraser, as V.P. of ROUNDUP CO., a Washington corporation. Carla J. Bangert ------------------------------------------- Notary Public for Oregon My Commission Expires: Nov. 13, 1997 7 of 7 (Acknowledgment for FM Alaska) STATE OF OREGON ) ) ss. County of Multnomah ) This instrument was acknowledged before me on this 28th day of August, 1995 by Kenneth Thrasher, as V.P. of FRED MEYER OF ALASKA, INC., an Alaska corporation. Carla J. Banger ------------------------------------------- Notary Public for Oregon My Commission Expires: Nov. 13, 1997 (Acknowledgment for B & B) STATE OF OREGON ) ) ss. County of Multnomah ) This instrument was acknowledged before me on this 28th day of August, 1995 by Kenneth Thrasher, as V.P. of B & B STORES, INC., a Montana corporation. Carla J. Bangert ------------------------------------------- Notary Public for Oregon My Commission Expires: Nov. 13, 1997 EXHIBIT A FRED MEYER RETAIL DEVELOPMENTS LEASED BY REPLP TO FMI UNDER THE 1986 LEASES Anchorage Newport 1000 E Northern Lights Blvd. Newport, OR Anchorage, AK Oak Grove Bellevue 14700 SE McLoughlin Blvd. 2041 148th NE Milwaukie, OR Bellevue, WA Peninsula Burien 6850 N Lombard 14300 First Avenue South Portland, OR Seattle, WA Polson Burlingame Polson, MT 7555 SW Barbur Blvd. Portland, OR Raleigh Hills 7700 SW Beavrtn-Hillsdale Hwy. Clackamas Portland, OR 16301 SE 82nd Drive Clackamas, OR Rockwood 18535 SE Stark St. Cornelius Portland, OR 2200 Baseline Street Cornelius, OR Rose City Portland, OR Eugene Eugene, OR Sixth & Alder Portland, OR Fairbanks 19 College Road Southeast Fairbanks, AK 5253 SE 82nd Ave. Portland, OR Gateway 1111 NE 102nd Avenue Spokane Francis Portland, OR E 525 Francis Ave. Spokane, WA Glisan 6615 NE Glisan St. Spokane Sprague Portland, OR E 5204 Sprague Ave. Spokane, WA Greenwood 100 NW 85th St. Stadium Seattle, WA 100 NW 20th Place Portland, OR Gresham 2497 NE Burnside Rd. Stark Gresham, OR 700 SE 122nd Portland, OR Hawthorne 3805 SE Hawthorne Blvd. Swan Island Portland, OR 5000 N. Basin Portland, OR Hazel Dell 7700 NE Highway 99 Tigard Vancouver, WA 11565 SW Pacific Hwy. Tigard, OR Hollywood Portland, OR Totem Lake 12221 120th Avenue NE Interstate Kirkland, WA 7404 N Interstate Ave. Portland, OR White Center 2601 Roxbury King Road Seattle, WA 10510 SE 82nd Ave. Portland, OR Yakima Yakima, WA Lake City 12778 Lake City Way, NE Seattle, WA EXHIBIT B REC LEASES Burlingame 7555 SW Barbur Blvd. Portland, OR Gateway 1111 NE 102nd Avenue Portland, OR Glisan 6615 NE Glisan St. Portland, OR Gresham 2497 NE Burnside Rd. Gresham, OR Hawthorne 3805 SE Hawthorne Blvd. Portland, OR Hazel Dell 7700 NE Highway 99 Vancouver, WA Interstate 7404 N Interstate Ave. Portland, OR Oak Grove 14700 SE McLoughlin Blvd. Milwaukie, OR Peninsula 6850 N Lombard Portland, OR Raleigh Hills 7700 SW Beavrtn-Hillsdale Hwy. Portland, OR Rose City Portland, OR Southeast 5253 SE 82nd Ave. Portland, OR Stadium 100 NW 20th Place Portland, OR Swan Island 5000 N. Basin Portland, OR Tigard 11565 SW Pacific Hwy. Tigard, OR EXHIBIT C REPLP PAD PROPERTIES 1. Gresham Fred Meyer Retail Development: US Bank Pad Burger King Pad Newport Bay Pad 2. Clackamas Fred Meyer Retail Development: US Bank Pad Elmer's Pad 3. Tigard Fred Meyer Retail Development: US Bank Pad 4. Everett Fred Meyer Retail Development: Billy's Big-O-Tires Pad 5. King Road Fred Meyer Retail Development: First Interstate Bank Pad Southgate Locksmith Pad Property taxes related to these pad properties are the responsibility of REPLP EXHIBIT D REC PAD PROPERTIES 1. Burlingame Fred Meyer Retail Development: Burger King Pad 2. Raleigh Hills Fred Meyer Retail Development: Quickstart pad (former Flying A Service Station) Union 76 Station Pad 3. Beaverton Fred Meyer Retail Development: Chevron Station Pad Property taxes related to these pad properties are the responsibility of REC. 1 of 2 SECOND LEASE MODIFICATION AGREEMENT THIS SECOND LEASE MODIFICATION AGREEMENT (this "Agreement") is made and entered into this 12th day of October, 1995, by and between REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership ("Landlord"), and FRED MEYER, INC., a Delaware corporation ("Tenant"). R E C I T A L S A. As of October 22, 1986, Landlord (formerly Fred Meyer Real Estate Properties, Ltd.) and Tenant entered into a lease for the real property located at 2497 N.E. Burnside Road, Gresham, Oregon, and more particularly described in the lease. The lease was amended by Lease Modification Agreement dated February 7, 1992 (as amended, the "Lease"). B. Landlord and Tenant desire to further amend and modify the Lease as set forth below. NOW, THEREFORE, in consideration of the foregoing facts and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant hereby amend and modify the Lease as follows: 1. Exhibit A. Exhibit A to the Lease is hereby deleted and Exhibit A-I, attached hereto and incorporated by reference, is substituted in lieu thereof. 2. Effective Date. This Agreement shall be effective as of the date first above written. 3. Ratification. Except as herein modified the Lease shall remain in full force and effect and is hereby ratified and affirmed. 4. Successors and Assigns. This agreement shall bind and inure to the benefit of each of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the date first above written. LANDLORD: REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership By FMGP Associates, an Oregon limited partnership, Its General Partner By FMGP Incorporated, a Delaware corporation, Its General Partner By DAVID W. RAMUS ------------------------------------------- David W. Ramus ------------------------------------------- (typed or printed name) Its Vice President --------------------------------------- (Signatures continued on following page) 2 of 2 TENANT: FRED MEYER, INC., a Delaware corporation By SCOTT L. WIPPEL ------------------------------------------- Scott L. Wippel ------------------------------------------- (typed or printed name) Its Senior Vice President --------------------------------------- LEGAL DESCRIPTION A tract of land in Section 11, Township 1 South, Range 3 East of the Willamette Meridian, in the City of Gresham, County of Multnomah and State of Oregon described as follows: Beginning at a point on the westerly line of that tract of land described in Book 2191, page 341, Multnomah County Record of Deeds, 5.00 feet southerly from the southerly right-of-way line of Bull Run Road, said point bears South 2 degrees 44' 22" West 14.47 feet and South 87 degrees 15' 38" East 252.33 feet South 89 degrees 38' 02" East 434.96 feet from the Northeast corner of the J.H. Lambert Donation Land Claim, Township 1 South, Range 3 East, Willamette Meridian, Multnomah County, Oregon: Thence South 0 degrees 30' 55" East 185.19 feet to the southwesterly corner of that tract of land described in Book 2191, page 341, Multnomah County Record of Deeds; Thence South 89 degrees 38' 35" East 404.95 feet to a point situated North 89 degrees 38' 35" West 20.00 feet from the East line of that tract of land described in PS Miscellaneous Book 188, page 511, Multnomah County Record of Deeds; thence South 0 degrees 27' 56" East 190.00 feet to a point; thence South 21 degrees 30' 03" East 334.70 feet to a point; thence South 32 degrees 04' 14" East 220.83 feet to a 1-inch iron pipe on the westerly boundary of that tract of land described in PS Deed Book 990, page 130; thence South 0 degrees 28' 16" East 661.58 feet along said boundary line to the Northeast corner of that tract of land described in Volume 1106 page 283, Multnomah County Book of Deed Records; thence North 71 degrees 51' 12" West, conincident with the northerly line of the aforementioned described tract, 122.03 feet to a point; thence North 0 degrees 28' 31" West 427.13 feet to a point; thence South 89 degrees 29' 30" West 252.94 feet to a point; thence South 60 degrees 57' 27" West 235.66 feet to the easterly right-of-way line of S.E. Burnside Road; thence northwesterly along said right-of-way as follows: North 39 degrees 07' 34" West 299.29 feet along the Northeast boundary of that parcel of land described in Book 1701, page 3, Deed Records, and North 28 degrees 49' 10" West 116.95 feet and northwesterly along the arc of a 5,809.58-foot radius curve left, of which the long chord bears North 29 degrees 50' 21" West 226.35 feet and North 58 degrees 59' 11" East 10.00 feet and northwesterly along the arc of a 5,819.58-foot radius curve left, of which the long chord bears North 32 degrees 47' 02" West 371.74 feet to the intersection of the easterly right-of-way line of East Burnside Road and the southerly right-of-way line of Third Street; thence northeasterly along the southerly right-of- way line of Third Street as follows: Northeasterly along the arc of a 1,732.77-foot radius curve left, the long chord bears North 48 degrees 06' East 246.87 feet; North 44 degrees 00' 53" East 163.77 feet, northeasterly along the arc of a 211.00-foot radius curve right of which the long chord bears North 60 degrees 56' 29" East 122.86 feet, South 89 degrees 38' 02" East 70.65 feet to the point of beginning. Exhibit A-I 1 of 2 SECOND LEASE MODIFICATION AGREEMENT THIS SECOND LEASE MODIFICATION AGREEMENT (this "Agreement") is made and entered into this 12th day of October, 1995, by and between REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership ("Landlord"), and FRED MEYER, INC., a Delaware corporation ("Tenant"). R E C I T A L S A. As of October 22, 1986, Landlord (formerly Fred Meyer Real Estate Properties, Ltd.) and Tenant entered into a lease for the real property located at 16301 S.E. 82nd Drive, Clackamas, Oregon, and more particularly described in the lease. The lease was amended by Lease Modification Agreement dated February 7, 1992 (as amended, the "Lease"). B. Landlord and Tenant desire to further amend and modify the Lease as set forth below. NOW, THEREFORE, in consideration of the foregoing facts and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant hereby amend and modify the Lease as follows: 1. Exhibit A. Exhibit A to the Lease is hereby deleted and Exhibit A-I, attached hereto and incorporated by reference, is substituted in lieu thereof. 2. Effective Date. This Agreement shall be effective as of the date first above written. 3. Ratification. Except as herein modified the Lease shall remain in full force and effect and is hereby ratified and affirmed. 4. Successors and Assigns. This agreement shall bind and inure to the benefit of each of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the date first above written. LANDLORD: REAL ESTATE PROPERTIES LIMITED PARTNERSHIP, an Oregon limited partnership By FMGP Associates, an Oregon limited partnership, Its General Partner By FMGP Incorporated, a Delaware corporation, Its General Partner By DAVID W. RAMUS ------------------------------------ DAVID W. RAMUS ------------------------------------ (typed or printed name) Its VICE PRESIDENT -------------------------------- (Signatures continued on following page) 2 of 2 TENANT: FRED MEYER, INC., a Delaware corporation By SCOTT L. WIPPEL ------------------------------------ SCOTT L. WIPPEL ------------------------------------ (typed or printed name) Its SENIOR VICE PRESIDENT -------------------------------- Property No./Code: 004-01/CK-1 Clackamas, OR LEGAL DESCRIPTION 2. IN THE COUNTY OF CLACKAMAS AND STATE OF OREGON A tract of land located in the southwest one-quarter of Section 9, T. 2 S., R. 2 E., of the W. M., and the northwest one-quarter, Section 16, T. 2 S., R. 2 E., of the W. M., described as follows: Beginning at a point on the westerly right-of-way of 82nd Drive (Cascade Highway) and the southerly boundary line of that tract of land described in Fee No. 70 20685, said point bears North 87 degrees 46' 28" West 30.02 feet and South 04 degrees 18' 02" West 80.15 feet from the one-quarter corner between Sections 9 and 16, T. 2 S., R. 2 E., of the W. M.; thence North 88 degrees 40' 53" West 603.69 feet along said southerly boundary and parallel with the south line of Roots Addition to Marshfield, Clackamas County, Oregon, to a point on the easterly right-of-way line of Interstate Highway 205 (I-205); thence along said Easterly right-of-way line the following bearings and distances: along the arc of a spiral curve offset in an easterly direction, 135.00 feet distance from the reference spiral defined as being 500 feet in length, having a central angle of 3 degrees 45' and on "a" value of 0.3 (the offset spiral chord bears North 13 degrees 43' 46" East 210.12 feet) to the point of change from spiral to circular curve along the arc of a 3,954.72 foot curve left (the long chord bears North 10 degrees 58' 32" East 197.47 feet) through a central angle of 2 degrees 51' 41" 197.50 feet to a point situated 135.00 feet easterly on a radial line from OSHD reference line of I-205 Engineers' Station 542+50, North 15 degrees 11' 42" East 262.50 feet to a point situated 170.00 feet easterly on a radial line from said reference line at I-205 Engineers' Station 540+00, North 12 degrees 13' 43" East 517.40 feet to the point of intersection of said easterly right-of-way with the north right-of-way of Roots Webster Road (vacated), vacation of said street recorded in Book 661, page 828, Deed Records; thence along said North right-of-way and North right-of-way extended South 88 degrees 40' 53" East 251.01 feet to a point which lies North 88 degrees 40' 53" West, a distance of 97.02 feet from said Southeast 82nd Drive Westerly right of way line; thence South 0 degrees 13' 31" West parallel with said westerly right of way line, a distance of 281.00 feet; thence South 88 degrees 40' 53" East parallel with said north right of way line, a distance of 85.02 feet to a point which lies Westerly, a distance of 12.00 feet from said westerly right of way line; thence North 0 degrees 13' 31" East parallel with said westerly right of way line, a distance of 155.94 feet; thence along the arc of a 208.33 foot radius curve to the right (the long chord of which bears North 7 degrees 07' 03" East, a distance of 50.00 feet) through a central angle of 13 degrees 47' 03" an arc distance of 50.12 feet; thence along the arc of a 208.33 radius curve to the left (the long chord of which bears North 7 degrees 07' 03" East, a distance of 50.00 feet) through a central angle of 13 degrees 47' 03" an arc distance of 50.12 feet to a point on said westerly right of way line which lies South 0 degrees 13' 31" West, a distance of 25.55 feet from the north right of way line of said Roots-Webster Road; thence South 0 degrees 13' 31" West along said westerly right of way line, a distance of 1057.37 feet to an angle point; thence continuing along said westerly right of way line South 4 degrees 18' 02" West, a distance of 80.15 feet to the point of beginning. Exhibit A-I EX-11 6 EXHIBIT 11 EXHIBIT 11 FRED MEYER, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (in thousands, except per share amounts)
53 Weeks 52 Weeks Ended Ended ------------------------- Feb. 3, Jan. 28, Jan. 29, 1996 1995 1994 ------- ------- -------- Weighted average number of shares outstanding.................. 26,682 26,514 25,878 Weighted average number of shares under option................. 2,683 3,452 4,032 Shares assumed to have been purchased under the treasury stock method.................. (1,032) (1,341) (1,535) ------- ------- ------- Weighted average number of common and common equivalent shares outstanding.......... 28,333 28,625 28,375 ======= ======= ======= Net income before the effect of an accounting change................ $30,286 $ 7,168 $70,904 Effect of an accounting change........... --- --- (2,588) ------- ------- ------- Net income............................... $30,286 $ 7,168 $68,316 ======= ======= ======= Earnings per common share on: Net income before the effect of an accounting change.............. $ 1.07 $ 0.25 $ 2.50 Effect of an accounting change......... --- --- (0.09) ------- ------- ------- Net income............................... $ 1.07 $ 0.25 $ 2.41 ======= ======= =======
EX-21 7 EXHIBIT 21 EXHIBIT 21 LIST OF ACTIVE SUBSIDIARIES OF FRED MEYER, INC. Jurisdiction of Incorporation Name of Subsidiary or Organization - ------------------ --------------- Roundup Co. (doing business in the State of Oregon as Roundup Distribution Co.) Washington B & B Stores, Inc. Montana B & B Pharmacy, Inc. Montana Fred Meyer of Alaska, Inc. Alaska Fred Meyer of California, Inc. California Distribution Trucking Company Oregon CB&S Advertising Agency, Inc. Oregon FM Holding Corporation Delaware Grand Central, Inc. Utah FM Retail Services, Inc. Washington Fred Meyer Jewelers, Inc. Delaware FM Inc. Utah EX-23 8 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-13912, 33-22572, 33-31798, 33-36163, and 33-49638 all on Form S-8 and Registration Statement No. 33-51177 on Form S-3, of our report dated March 11, 1996 (which expresses an unqualified opinion and includes an explanatory paragraph relating to a change in the method of accounting for income taxes in the fiscal year ended January 29, 1994), included in the Annual Report on Form 10-K of Fred Meyer, Inc. for the year ended February 3, 1996. DELOITTE & TOUCHE LLP Portland, Oregon March 20, 1996 EX-24 9 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 12th day of March, 1996. KENNETH THRASHER ---------------------------------------- Kenneth Thrasher Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. THOMAS R. HUGHES ---------------------------------------- Thomas R. Hughes Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. SAUL A. FOX ---------------------------------------- Saul A. Fox Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. A.M. GLEASON ---------------------------------------- A.M. Gleason Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. JEROME KOHLBERG, JR. ---------------------------------------- Jerome Kohlberg, Jr. Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. ROGER S. MEIER ---------------------------------------- Roger S. Meier Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. MICHAEL W. MICHELSON ---------------------------------------- Michael W. Michelson Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. ROBERT G. MILLER ---------------------------------------- Robert G. Miller Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, an officer and/or director of Fred Meyer, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint Robert G. Miller, Kenneth Thrasher and Roger A. Cooke, and each of them, his true and lawful attorney and agent, to do any and all acts and things and execute in his name as an officer or director of the Company the Annual Report on Form 10-K for the year ended February 3, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 1st day of March, 1996. PAUL E. RAETHER ---------------------------------------- Paul E. Raether EX-27 10 EXHIBIT 27
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 FEB-03-1996 FEB-03-1996 41,849 0 24,683 0 520,555 632,813 1,544,691 530,543 1,671,592 349,731 656,260 0 0 270 570,964 1,671,592 3,428,664 3,428,664 2,449,204 891,033 0 0 39,578 48,849 18,563 30,286 0 0 0 30,286 1.07 1.07
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