-----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, FRLbeEEKZcZoxZR721tQlqAxK0OwUJA88Z+/BTUpMKKBe5LVh/UzEcuos/zZ7rsF XzkvtredHOIffWLZB335Zg== 0000893877-98-000669.txt : 19981106 0000893877-98-000669.hdr.sgml : 19981106 ACCESSION NUMBER: 0000893877-98-000669 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980309 ITEM INFORMATION: FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRED MEYER INC CENTRAL INDEX KEY: 0001043273 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 911826443 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-13339 FILM NUMBER: 98738798 BUSINESS ADDRESS: STREET 1: 3800 SE 22ND AVE CITY: PORTLAND STATE: OR ZIP: 97202 BUSINESS PHONE: 5032328844 MAIL ADDRESS: STREET 1: 3800 SE 22ND AVENUE CITY: PORTLAND STATE: OR ZIP: 97202 FORMER COMPANY: FORMER CONFORMED NAME: MEYER SMITH HOLDCO INC DATE OF NAME CHANGE: 19970730 8-K/A 1 8-K/A, AMENDMENT NO. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A (Amendment No. 2) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) March 9, 1998 ------------- FRED MEYER, INC. (Exact name of registrant as specified in its charter) Delaware 1-13339 91-1826443 - -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) File No.) 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) Item 7. Financial Statements and Exhibits (a) Financial statements of businesses acquired. The audited financial statements of Quality Food Centers, Inc. ("QFC") for the three previous fiscal years, and the accountants' report related thereto, set forth in QFC's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, as amended by Forms 10-K/A, and the unaudited financial statements for the 36 week period ended September 6, 1997 set forth in QFC's Quarterly Report on Form 10-Q for the quarter ended September 6, 1997, as amended by Forms 10-Q/A, are filed as an exhibit to this Report and are incorporated herein by reference. The audited financial statements of Food 4 Less Holdings, Inc. ("Food 4 Less") for the three previous fiscal years, and the accountants' report related thereto, set forth in Food 4 Less' Annual Report on Form 10-K for the year ended February 2, 1997, as amended by Form 10-K/A, and the unaudited financial statements for the period ended October 12, 1997 set forth in Food 4 Less' Quarterly Report on Form 10-Q for the quarter ended October 12, 1997 are filed as an exhibit to this Report and are incorporated herein by reference. Financial statements of Fred Meyer, Inc. (the "Company") reflecting the acquisition of QFC on a pooling-of-interests basis, and the accountants' report related thereto, are attached hereto as Exhibit 99.5 and are incorporated herein by reference. (b) Pro forma financial information. The information set forth under the caption "The FM/QFC Merger and FM/Food 4 Less Merger Unaudited Pro Forma Condensed Combined Financial Statements" in the Joint Proxy and Consent Solicitation Statement/Prospectus contained in the Company's Registration Statement on Form S-4 (Registration No. 333-44871) (the "Joint Proxy Statement"), which is filed as Exhibit 99.1 to this Report, is incorporated herein by reference. (c) Exhibits. 2.1 Agreement and Plan of Merger dated as of November 6, 1997, as amended on January 20, 1998, between the Company and QFC. Incorporated by reference from Appendix A to the Joint Proxy Statement.* 2.2 Agreement and Plan of Merger dated as of November 6, 1997, as amended on January 20, 1998, between the Company and Food 4 Less. Incorporated by reference from Appendix B to the Joint Proxy Statement.* 2 23.1 Consent of Deloitte & Touche LLP (Seattle office).* 23.2 Consent of Arthur Andersen LLP.* 23.3 Consent of Deloitte & Touche LLP (Portland office).* 23.4 Consent of Deloitte & Touche LLP (Portland office). 27 Restated Financial Data Schedule for fiscal years 1997, 1996 and 1995.* 99.1 Joint Proxy Statement. Incorporated by reference from the Company's Registration Statement on Form S-4 (No. 333-44871).* 99.2 Financial Statements of QFC. Incorporated by reference from QFC's Annual Report on Form 10-K, as amended by Forms 10-K/A filed March 31, 1997, May 16, 1997 and July 23, 1997, for the fiscal year ended December 28, 1996, and from QFC's Quarterly Report on Form 10-Q, as amended by Form 10-Q/A filed October 28, 1997, for the quarter ended September 6, 1997.* 99.3 Financial Statements of Food 4 Less. Incorporated by reference from Food 4 Less' Annual Report on Form 10-K, as amended by Form 10- K/A filed December 8, 1997, for the fiscal year ended February 2, 1997, and from Food 4 Less' Quarterly Report on Form 10-Q for the quarter ended October 12, 1997.* 99.4 Supplemental Financial Statements of the Company reflecting the acquisition of QFC on a pooling-of-interests basis.* 99.5 Financial Statements of the Company reflecting the acquisition of QFC on a pooling-of-interests basis. - ------------------- * Previously filed. 3 SIGNATURE 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. Dated: November 5, 1998 FRED MEYER, INC. By: KENNETH THRASHER --------------------------------------- Kenneth Thrasher Executive Vice President 4 EXHIBIT INDEX Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 2.1 Agreement and Plan of Merger dated as of November 6, 1997, as amended on January 20, 1998, between the Company and QFC. Incorporated by reference from Appendix A to the Joint Proxy and Consent Solicitation Statement/Prospectus dated January 27, 1998, which is part of the Company's Registration Statement on Form S-4 (No. 333-44871).* 2.2 Agreement and Plan of Merger dated as of November 6, 1997, as amended on January 20, 1998, between the Company and Food 4 Less. Incorporated by reference from Appendix B to the Joint Proxy and Consent Solicitation Statement/Prospectus dated January 27, 1998, which is part of the Company's Registration Statement on Form S-4 (No. 333-44871).* 23.1 Consent of Deloitte & Touche LLP (Seattle office).* 23.2 Consent of Arthur Andersen LLP.* 23.3 Consent of Deloitte & Touche LLP (Portland office).* 23.4 Consent of Deloitte & Touche LLP (Portland office). 27 Restated Financial Data Schedule for fiscal years 1997, 1996 and 1995.* 99.1 Joint Proxy Statement. Incorporated by reference from the Company's Registration Statement on Form S-4 (No. 333- 44871).* 99.2 Financial Statements of QFC. Incorporated by reference from QFC's Annual Report on Form 10-K, as amended by Forms 10-K/A filed March 31, 1997, May 16, 1997 and July 23, 1997, for the fiscal year ended December 28, 1996, and from QFC's Quarterly Report on Form 10-Q, as amended by Form 10-Q/A filed October 28, 1997, for the quarter ended September 6, 1997.* 99.3 Financial Statements of Food 4 Less. Incorporated by reference from Food 4 Less' Annual Report on Form 10-K, as amended by Form 10-K/A filed December 8, 1997, for the fiscal year ended February 2, 1997, and from Food 4 Less' Quarterly Report on Form 10-Q for the quarter ended October 12, 1997.* EXHIBIT INDEX Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 99.4 Supplemental Financial Statements of the Company reflecting the acquisition of QFC on a pooling-of-interests basis. 99.5 Financial Statements of the Company reflecting the acquisition of QFC on a pooling-of-interests basis. - ------------------- * Previously filed. EX-23.4 2 INDEPENDENT AUDITORS' CONSENT Exhibit 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-35199, 333-36473, and 333-47523 of Fred Meyer, Inc., all on Form S-8, and Registration Statement Nos. 333-44537, 333-46835, and 333-56637 of Fred Meyer, Inc. on Form S-3, of our report dated March 23, 1998 on the consolidated financial statements of Fred Meyer, Inc., included in the Current Report on Form 8-K/A dated March 9, 1998 of Fred Meyer, Inc. DELOITTE & TOUCHE LLP Portland, Oregon November 5, 1998 EX-99.5 3 FINANCIAL STATEMENTS Exhibit 99.5 Fred Meyer, Inc. Consolidated Statements of Income
Fiscal Year Ended ------------------------------------------- January 31, February 1, February 3, (In thousands, except per share data) 1998 1997 1996 ----------- ----------- ----------- Net sales $ 7,359,202 $ 4,530,120 $ 4,152,574 Cost of goods sold: General 5,175,128 3,177,838 2,959,650 Related party lease (Note 4) - 5,566 5,673 ----------- ----------- ----------- Total cost of goods sold 5,175,128 3,183,404 2,965,323 ----------- ----------- ----------- Gross margin 2,184,074 1,346,716 1,187,251 Operating and administrative expenses: General 1,784,128 1,111,520 999,266 Related party leases (Notes 4 and 8) 41,709 50,954 55,601 Amortization of goodwill 16,387 1,385 1,180 ----------- ----------- ----------- Total operating and administrative expenses 1,842,224 1,163,859 1,056,047 ----------- ----------- ----------- Income from operations 341,850 182,857 131,204 Interest expense 102,094 48,855 48,716 Recapitalization fees - - 1,400 ----------- ----------- ----------- Income before income taxes and extraordinary charge 239,756 134,002 81,088 Provision for income taxes (Note 6) 96,445 50,039 30,586 ----------- ----------- ----------- Income before extraordinary charge 143,311 83,963 50,502 Extraordinary charge, net of taxes (91,210) - - ----------- ----------- ----------- Net income $ 52,101 $ 83,963 $ 50,502 =========== =========== =========== Basic earnings per common share: Income before extraordinary charge $ 1.37 $ 1.05 $ 0.61 Extraordinary charge (0.87) - - ----------- ----------- ----------- Net income $ 0.50 $ 1.05 $ 0.61 =========== =========== =========== Basic weighted average number of common shares outstanding 104,520 79,794 83,206 =========== =========== =========== Diluted earnings per common share: Income before extraordinary charge $ 1.31 $ 1.00 $ 0.58 Extraordinary charge (0.83) - - ----------- ----------- ----------- Net income $ 0.48 $ 1.00 $ 0.58 =========== =========== =========== Diluted weighted average number of common and common equivalent shares outstanding 109,591 84,068 86,733 =========== =========== =========== See Notes to Consolidated Financial Statements.
1 Fred Meyer, Inc. Consolidated Balance Sheets
January 31, February 1, (In thousands) 1998 1997 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 117,311 $ 63,340 Receivables 108,496 34,483 Inventories 1,240,866 641,864 Prepaid expenses and other 70,536 49,357 Current portion of deferred taxes (Note 6) 90,804 17,226 ----------- ----------- Total current assets 1,628,013 806,270 Property and equipment: Buildings, fixtures and equipment 2,802,757 1,637,964 Property held under capital leases (Note 8) 67,542 17,523 Land 414,616 154,499 ----------- ----------- Total property and equipment 3,284,915 1,809,986 Less accumulated depreciation and amortization 852,875 685,925 ----------- ----------- Property and equipment-net 2,432,040 1,124,061 Other assets: Goodwill-net 1,279,130 38,290 Other 83,753 27,416 ----------- ----------- Total other assets 1,362,883 65,706 ----------- ----------- Total assets $ 5,422,936 $ 1,996,037 =========== =========== See Notes to Consolidated Financial Statements.
2 Fred Meyer, Inc. Consolidated Balance Sheets
January 31, February 1, (In thousands, except per share data) 1998 1997 ----------- ----------- Liabilities and Stockholders' Equity Current liabilities: Bank overdrafts $ 175,799 $ 116,972 Accounts payable 590,879 318,677 Current portion of long-term debt and lease obligations (Notes 5 and 8) 19,650 1,038 Income taxes payable - 6,060 Accrued expenses: - - Compensation 188,417 72,560 Insurance and other 218,750 54,304 ----------- ----------- Total current liabilities 1,193,495 569,611 Long-term debt (Note 5) 2,184,794 666,512 Capital lease obligations (Note 8) 82,782 13,227 Deferred lease transactions (Note 8) 38,556 46,318 Deferred income taxes (Note 6) 83,183 47,318 Other long-term liabilities (Note 10) 137,766 10,349 Commitments and contingencies (Notes 8 and 12) - - Stockholders' equity (Note 7): Preferred stock, $.01 par value (authorized, 100,000 shares in 1997 and 5,000 shares in 1996; outstanding, none) Common stock, $.01 par value (authorized, 400,000 shares in 1997 and 200,000 shares in 1996; issued 128,809 shares in 1997 and 84,635 shares in 1996; outstanding 128,809 shares in 1997 and 80,235 shares in 1996) 1,288 851 Additional paid-in capital 1,173,760 237,695 Treasury stock (4,400 shares in 1996) - (69,773) Notes receivable from officers (298) (1,394) Unearned compensation (466) (652) Retained earnings 528,076 475,975 ----------- ----------- Total stockholders' equity 1,702,360 642,702 ----------- ----------- Total liabilities and stockholders' equity $ 5,422,936 $ 1,996,037 =========== =========== See Notes to Consolidated Financial Statements.
3 Fred Meyer, Inc. Consolidated Statements of Cash Flows
Fiscal Year Ended ------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Income before extraordinary charge $ 143,311 $ 83,963 $ 50,502 Adjustments to reconcile income before extraordinary charge to net cash provided by operating activities: Depreciation and amortization of property and equipment 195,318 134,946 122,375 Amortization of goodwill 16,387 1,385 1,180 Deferred lease transactions (15,833) (4,944) (3,384) Deferred income taxes 17,090 10,548 3,562 Changes in operating assets and liabilities: - - - Inventories (104,693) (83,841) (10,632) Other current assets 6,592 (20,791) 5,535 Accounts payable (16,636) 108,692 (41,590) Accrued expenses (15,208) 17,219 13,763 Income taxes 33,369 2,459 21,523 Other liabilities 6,713 (2,682) (2,085) Other (12,565) (14,919) 225 ----------- ----------- ----------- Net cash provided by operating activities 253,845 232,035 160,974 Cash flows from investing activities: Cash acquired in acquisitions 71,635 - - Payments made for acquisitions (425,855) - (18,000) Receivable from Santee 5,375 - - Net sales of investment securities - 12,340 1,110 Purchases of property and equipment (329,374) (179,898) (265,098) Proceeds from sale of property and equipment 79,508 126,002 12,123 ----------- ----------- ----------- Net cash used for investing activities (598,711) (41,556) (269,865) Cash flows from financing activities: Issuance of common stock - net 227,386 9,278 29,079 Stock repurchase and related expenses - (70,099) (177,850) Collection of notes receivable 3,062 794 515 Increase in notes receivable (1,447) (857) (2,391) Increase (decrease) in bank overdrafts 9,852 34,590 (12,659) Dividends - Long-term financing: - - - Borrowings 1,857,708 - 299,000 Repayments (1,697,724) (154,749) (43,626) ----------- ----------- ----------- Net cash provided by financing activities 398,837 (181,043) 92,068 ----------- ----------- ----------- Net increase in cash and cash equivalents for the year 53,971 9,436 (16,823) Cash and cash equivalents at beginning of year 63,340 53,904 70,727 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 117,311 $ 63,340 $ 53,904 =========== =========== =========== See Notes to Consolidated Financial Statements.
4 Fred Meyer, Inc. Consolidated Statements of Changes in Stockholders' Equity
Common Stock Treasury Stock ----------------- ---------------- Number Additional Number of Paid-in of Retained (In thousands) Shares Amount Capital Shares Amount Other Earnings Total ------ ------ ---------- ------ ------ ----- -------- ---------- Balance at January 28, 1995 45,075 $453 $219,777 $(256) $476,824 $ 696,798 Two-for-one stock split (Note 7) 45,075 453 (453) --- Issuance of common stock: Private placement 1,900 19 24,981 25,000 Stock options exercised 490 5 2,640 2,645 Tax benefits from stock options 927 927 Olson's acquisition 1,431 14 18,056 18,070 Other 159 2 1,431 1,433 Purchase and retirement of treasury stock (13,300) (133) (43,377) (134,340) (177,850) Amortization of unearned compensation 50 50 Notes receivable from officers (1,839) (1,839) Cash dividend paid on QFC shares (974) (974) Net income 50,502 50,502 ------ ------ ---------- ------ ------ ----- -------- ---------- Balance at February 3, 1996 80,830 813 223,982 --- --- (2,045) 392,012 614,762 Issuance/purchase of common stock: Stock options exercised 3,507 35 7,966 8,001 Stock bonus 20 166 (566) (400) Treasury stock (326) 4,400 $(69,773) (70,099) Tax benefits from stock options 877 877 Other 278 3 5,030 5,033 Amortization of unearned compensation 120 120 Payment on notes receivable from officers 445 445 Net income 83,963 83,963 ------ ------ ---------- ------ ------ ----- -------- ---------- Balance at February 1, 1997 84,635 851 237,695 4,400 (69,773) (2,046) 475,975 642,702 Issuance of common stock: Stock options exercised 3,077 31 33,361 1 (29) 33,363 Stock bonus 12 238 (238) --- Tax benefits from stock options 12,690 12,690 Fox acquisition 332 3 9,201 9,204 Smith's acquisition 33,301 333 719,630 719,963 KUI acquisition 1,719 17 35,943 35,960 Hughes acquisition 9,833 98 191,976 192,074 Other 301 3 2,089 2,092 Amortization of discounted stock options 691 691 Amortization of unearned compensation 424 424 Payment on notes receivable from officers 1,096 1,096 Retirement of treasury stock (4,401) (48) (69,754) (4,401) 69,802 --- Net income 52,101 52,101 ------- ------ ---------- ------ ------ ----- -------- ---------- Balance at January 31, 1998 128,809 $1,288 $1,173,760 --- $ --- $(764) $528,076 $1,702,360 ======= ====== ========== ====== ====== ===== ======== ========== See Notes to Consolidated Financial Statements.
5 Notes to Consolidated Financial Statements 1. The Company Fred Meyer, Inc., a Delaware corporation, and its subsidiaries ("Fred Meyer") operated at January 31, 1998 more than 260 retail stores in a variety of food and drug and multidepartment one-stop-shopping formats located primarily in the Western region of the United States. In addition, the Company operates 258 fine jewelry stores across the United States, including 100 stores in the Company's multidepartment stores. On March 9, 1998, Fred Meyer issued 41.2 million shares of Fred Meyer common stock for all the outstanding stock of Quality Food Centers, Inc. ("QFC"), a supermarket chain operating 89 stores in the Seattle/Puget Sound region of Washington state and 56 Hughes Family Market stores in Southern California. As a result, QFC became a wholly owned subsidiary of Fred Meyer. All references to the "Company" hereafter shall mean the consolidated company. The merger of Fred Meyer and QFC was accounted for as a pooling of interests and the accompanying financial statements have been restated to give effect to the consolidated results of Fred Meyer and QFC for all years presented. The accompanying Consolidated Financial Statements reflect the consolidated results as follows:
Fred Meyer QFC Historical Historical Company ----------- ----------- ------------ Fiscal 1997 Net sales $ 5,481,087 $ 1,878,115 $ 7,359,202 Net income 12,094 40,007 52,101 Diluted earnings per common share 0.17 1.95 0.48 Fiscal 1996 Net sales 3,724,839 805,281 4,530,120 Net income 58,545 25,418 83,963 Diluted earnings per common share 1.05 1.71 1.00 Fiscal 1995 Net sales 3,422,718 729,856 4,152,574 Net income 30,286 20,216 50,502 Diluted earnings per common share 0.53 1.28 0.58
2. Summary of Significant Accounting Policies Principles of Consolidation--The accompanying financial statements include the consolidated accounts of the Company and its subsidiaries, including QFC which was acquired in March 1998. 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 1997, 1996, and 1995 ended on January 31, 1998, February 1, 1997, and February 3, 1996, respectively. Operating results for fiscal years 1997, 1996, and 1995 include 52, 52, and 53 weeks, respectively. 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. Inventories--Inventories consist principally of merchandise held for sale and substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. Inventories on a first-in, first-out method, which approximates replacement cost, would have been higher by $51.8 million at January 31, 1998 and $55.5 million at February 1, 1997, respectively. The pretax LIFO income was $3.7 million in 1997, $.9 million in 1996, and $.7 million in 1995. Property and Equipment--Property and equipment is stated at cost. Depreciation on owned buildings and equipment is provided using the straight-line method over the estimated useful lives of the related assets of three to 31 years. Amortization of buildings and equipment under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years. Accumulated amortization of buildings and equipment under 6 capitalized leases was $8.9 million at January 31, 1998 and $7.2 million at February 1, 1997. Goodwill--Goodwill is being amortized on a straight-line basis over 15 to 40 years. Goodwill recorded in connection with the Smith's Food & Drug Centers, Inc. (Smith's) and Fox Jewelry Company (Fox) acquisitions is being amortized over 40 and 15 years, respectively. Other previously recorded goodwill continues to be amortized 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 $23.1 million at January 31, 1998 and $6.8 million at February 1, 1997. Impairment of Long-lived Assets--The Company reviews and evaluates long-lived assets for impairment when events or circumstances indicate costs may not be recoverable. The net book value of long-lived assets is compared to expected undiscounted future cash flows. An impairment loss would be recorded for the excess of net book value over the fair value of the asset impaired. Investment Securities--At January 31, 1998, 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. Bank Overdrafts--Checks that are issued on zero balance accounts and that have not yet cleared the banks 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. Buying and Promotional Allowances--Vendor allowances and credits that relate to the Company's buying and merchandising activities are recognized as earned. Advertising--Advertising costs are expensed as incurred. Advertising costs were $62.9 million in 1997, $40.0 million in 1996, and $42.1 million in 1995. Self-insurance--The Company is primarily self-insured for general liability, property loss, worker's compensation and non-union health and welfare. Liabilities for these costs are based on actual claims and actuarial statements for estimates of claims that have been incurred but not reported. Pre-opening Costs--All noncapital expenditures incurred in connection with the opening of new or acquired stores and other facilities or the remodeling of existing stores are expensed as incurred. Interest Costs--Interest costs are expensed as incurred, except for interest costs which have been capitalized as part of the cost of properties under development. The Company's cash payments for interest (net of capitalized interest of approximately $1.0 million in 1997, $1.4 million in 1996, and $3.8 million in 1995) totaled $97.8 million in 1997, $49.5 million in 1996, and $54.5 million in 1995. Income Taxes--Deferred income taxes are provided for those items included in the determination of income or loss in different periods for financial reporting and income tax purposes. Targeted jobs and other tax credits are recognized in the year realized. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities (see note 6). Cash paid for income taxes was $44.9 million in 1997, $36.9 million in 1996, and $5.6 million in 1995. Stock-based Compensation--The Company adopted SFAS No. 123, Accounting for Stock-based Compensation, effective January 1, 1996. As allowed under SFAS No. 123, the Company will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value based method, but will provide pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123 had been applied in measuring compensation expense (see note 7). Earnings Per Common Share--The Company adopted SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the dual presentation of basic and diluted earnings per share and other additional disclosures. Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share are computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares relate to outstanding stock options and warrants. Prior year earnings per common share have been restated to conform with the standards established by SFAS No. 128. 7 All share and per share amounts have been restated for the two-for-one stock split. The stock split, effected as a 100 percent stock dividend, was effective on September 30, 1997. Reclassifications--Certain prior year amounts have been reclassified to conform to current year presentation. The reclassifications have no effect on reported net income. 3. Acquisitions On September 9, 1997, the Company succeeded to the businesses of Fred Meyer, Inc., now known as Fred Meyer Stores, Inc. ("Fred Meyer Stores"), and Smith's Food & Drug Centers, Inc. ("Smith's") as a result of mergers pursuant to the Agreement and Plan of Reorganization and Merger, dated as of May 11, 1997 (the "Smith's Acquisition"). At the closing on September 9, 1997, Fred Meyer Stores and Smith's, a regional supermarket and drug store chain operating 152 stores in the Intermountain and Southwestern regions of the United States, became wholly owned subsidiaries of the Company. The Company issued 1.05 shares of Common Stock of the Company for each outstanding share of Class A Common Stock and Class B Common Stock of Smith's and one share of Common Stock of the Company for each outstanding share of Common Stock of Fred Meyer Stores. The Smith's Acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of Smith's from the date of acquisition. In total, the Company issued 33.3 million shares of Common Stock to the Smith's stockholders. On August 17, 1997, the Company acquired substantially all of the assets and liabilities of Fox in exchange for common stock with a fair value of $9.2 million. The Fox acquisition was accounted for under the purchase method of accounting. The results of operations of Fox do not have a material effect on the consolidated operating results, and therefore are not included in the pro forma data presented. On March 19, 1997, the Company acquired the principal operations of Hughes Markets, Inc. ("Hughes"), including the assets and liabilities related to 57 stores located in Southern California and a 50% interest in Santee Dairies, Inc., one of the largest dairy plants in California. The merger was effected through the acquisition of 100% of the outstanding voting securities of Hughes for approximately $360.5 million cash and the assumption of approximately $33.2 million of indebtedness of Hughes. The Hughes Acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of Hughes from the date of acquisition. On February 14, 1997, the Company acquired the principal operations of Keith Uddenberg, Inc. ("KUI"), including assets and liabilities related to 25 stores in the western and southern Puget Sound region of Washington. The merger was effected through the acquisition of 100% of the outstanding voting securities of KUI for $34.5 million cash, 1.7 million shares of common stock and the assumption of approximately $23.8 million of indebtedness of KUI. The KUI Acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of KUI from the date of acquisition. On March 2, 1995, the Company acquired the principal operations of Olson's Food Stores, Inc. ("Olson's"), including assets and liabilities related to 12 Olson's stores, interest in certain stores in various stages of development, and rights to several other future sites. The merger was effected through an acquisition of 100% of the outstanding voting securities of Olson's for $18.0 million cash, 1.4 million shares of common stock and the assumption of approximately $24.0 million of indebtedness of Olson's. The Olson's Acquisition was accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of Olson's from the date of acquisition. 8 The following unaudited pro forma information presents the results of the Company's operations assuming the Smith's, KUI, and Hughes Acquisitions and the related financings each occurred at the beginning of each period presented (in thousands, except per share data):
Fiscal Year Ended --------------------------- January 31, February 1, 1998 1997 ----------- ----------- Net sales $ 9,500,727 $ 8,854,186 Income before extraordinary charge 169,720 105,038 Net income 78,510 13,828 Diluted earnings per common share: Income before extraordinary charge 1.28 0.81 Net income 0.59 0.11
The pro forma financial information does not reflect anticipated annualized operating savings. Additionally, each year includes an extraordinary charge of $91.2 million on the extinguishment of debt as a result of refinancing certain debt. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the beginning of each period nor is it necessarily indicative of future operating results. The schedule of business acquisition is as follows (in thousands):
Fiscal Year Ended -------------------------- January 31, February 3, 1998 1996 ----------- ----------- Fair value of assets acquired $ 1,985,604 $ 69,246 Goodwill recorded 1,252,081 Value of stock issued (765,126) (18,070) Liabilities assumed (2,046,704) (33,176) ----------- ---------- Cash paid $ 425,855 $ 18,000 =========== ==========
4. Related-party Transactions The Company leases certain store locations and previously leased a distribution center from MetLife, which was a major beneficial stockholder of the Company's stock during the three years ended January 31, 1998. Rents paid to MetLife and other related parties on leases totaled $34.9 million in 1997, $61.8 million in 1996, and $64.0 million in 1995 (see note 8). Rents paid for store locations leased or subleased from related parties are included in operating and administrative expenses. Rents paid to related parties for the leased distribution center were included in cost of goods sold. During 1997, the Company paid $4.2 million to Equity Group Investments, Inc. ("EGI") and its affiliated companies for management services and insurance premiums. A former director of QFC is chairman of the board of EGI. Another former director of QFC is president and chief executive officer of EGI. During 1997, the Company paid $1.1 million in legal fees to Rosenberg & Liebentritt, PC (R&L"). A former director of QFC was a principal of R&L from 1980 to September 1997. A director of QFC is a member of the board of directors of the Associated Grocers, Inc. ("A.G.") cooperative, which became one of QFC's major suppliers in 1995. Amounts paid to A.G. for products and serviced totaled $191.6 million in 1997, $57.7 million in 1996, and $43.8 million in 1995. As a result of the KUI merger, the Company owns approximately 20% of the non-voting equity of A.G. During 1995, the Company assumed a lease for one of its stores included in the Olson's Acquisition (Note 3) for which the landlord is an entity that is controlled by a member of QFC's Board of Directors. Rental payments for the store, which include reimbursements for common area maintenance and real estate taxes, totaled $200,000 in 1997, $200,000 in 1996 and $100,000 during 1995. The lease terminates in April 2001, with options to renew through April 2035. In addition, the Company purchased approximately $3.2 million in 1997, $1.8 million in 1996, and $1.7 million in 1995 of products from an entity owned by certain family members of the same member of QFC's Board of Directors. 9 In August 1993, two partnerships, which included QFC's chairman, acquired a shopping center where the Company leased a store. The Company negotiated with the partnerships for certain property rights and lease modifications, including a 15-year lease term extension, the right to be the exclusive grocery store in the center, and the right to relocate the store to an adjacent site. The Company paid approximately $5.0 million for these rights, which amount was capitalized in property and equipment and is being amortized over 29 years. In August 1996, the Company relocated to a newly constructed store on an owned site adjacent to the center and terminated the existing lease agreement, paying the partnerships a $300,000 lease termination fee. The Company retained all other property rights. Rentals, common area maintenance and real estate tax reimbursements paid to the partnerships were at the same rates paid to the previous owner of the center and totaled approximately $16,000 in 1997, $500,000 in 1996, and $700,000 in 1995. 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. Outstanding loans under this program amounted to $0.3 million at January 31, 1998 and $1.4 million at February 1, 1997. During 1997, the Company paid to QFC's chairman monthly management fees which, in aggregate, totaled $150,000 for management advisory services plus a bonus payment of $0.5 million. For the period of December 31, 1995 through June 16, 1996, $0.7 million was paid to QFC's chairman pursuant to an agreement to pay a management fee of up to 0.2% of sales as compensation for management advisory services, which agreement expired on June 16, 1996. Upon expiration of the agreement, the Company agreed to pay QFC's chairman a monthly fee aggregating $0.3 million, for June 17, 1996 through December 28, 1996, plus a bonus payment of $0.2 million. For the fourth quarter of 1995, in lieu of the management fee, which would have been approximately $0.5 million, the Company granted stock options for 111,910 shares of its stock under the Company's 1993 Executive Stock Option Plan to its chairman. Management fee expense for 1997, 1996 and 1995 was $0.7 million, $1.2 million and $1.0 million, respectively. The Company has a management agreement for management and financial services with The Yucaipa Companies ("Yucaipa"), whose managing general partner became the Company's chairman of the board effective September 9, 1997. The agreement provides for annual management fees equal to $0.5 million plus reimbursement of all of Yucaipa's reasonable out-of-pocket costs and expenses. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, debt and equity financings, or any other services not otherwise covered by the agreement. 10 5. Long-term Debt Long-term debt consisted of the following (in thousands):
January 31, February 1, 1998 1997 ------------ ----------- 1997 Senior Credit Facility $ 1,300,000 QFC Credit Facility 214,293 $ 145,000 Commercial paper with maturities through July 1, 1998, classified as long-term, 367,156 283,040 interest rates of 5.63% to 6.30% at January 31, 1998 QFC 8.7% Senior Subordinated Notes, principal due 2007 with interest payable 150,000 semi-annually Long-term notes secured by trust deeds, due through 2012, fixed interest 67,875 41,819 rates from 9.00% to 9.52% Uncommitted bank borrowings classified as long-term 79,000 Long-term notes, unsecured: Due 1997 through 1998, interest rate is periodically reset, 6.10% at 70,000 February 1, 1997, paid quarterly Due 2000, fixed interest rate of 6.775%, paid quarterly 20,000 Senior notes, unsecured, due 1999 through 2007, fixed interest rates 107,500 from 7.25% to 7.98% Other 22,648 ------------ ----------- Total 2,200,972 667,359 Less current portion 16,178 847 ------------ ----------- Total $ 2,184,794 $ 666,512 ============ ===========
In conjunction with the Smith's Acquisition, the Company entered into a new bank credit facility (the "1997 Senior Credit Facility") that refinanced a substantial portion of the Company's indebtedness and indebtedness assumed in the Smith's Acquisition. The 1997 Senior Credit Facility provides a five year $1.03 billion revolving credit facility, a $500.0 million 364-day revolving credit facility and a five year $500.0 million bridge facility. All indebtedness under the 1997 Senior Credit Facility is guaranteed by certain of the Company's subsidiaries. The revolving portion of the 1997 Senior Credit Facility is available for general corporate purposes, including the support of the commercial paper program of the Company. The revolving credit facility and the bridge facility mature on September 9, 2002. Commitment fees are charged at .175% on the unused portion of the five year revolving credit facility and .08% on the unused portion of the 364-day facility. The 364-day facility matures on September 9, 1998 with a one year extension available upon the request of the Company. Interest on the 1997 Senior Credit Facility is at the prime rate plus a margin of .5% or the Adjusted LIBOR plus a margin of .30%. At January 31, 1998, the interest rate was 5.89% on the five year revolving credit facility and 6.21% on the five year bridge facility. No amounts were outstanding under the 364-day revolving credit facility. The 1997 Senior Credit Facility requires the Company to comply with certain ratios related to fixed charges and indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA"). In addition, the 1997 Senior Credit Facility limits dividends on and redemption of capital stock. In conjunction with the Hughes merger, the Company entered into a new credit facility ("QFC Credit Facility") which replaced the credit facility it entered into in connection with the 1995 QFC recapitalization. As of January 31, 1998, the QFC Credit Facility consisted of (i) a $214 million term loan facility, (ii) a $125 million revolving credit facility, and (iii) a $75 million reducing revolving credit facility. The Company has established uncommitted money market lines with four banks of $125.0 million. 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 1997 Senior Credit Facility. The Company also has $500.0 million of unrated commercial paper facilities with three commercial banks. The Company has the ability to support commercial paper and other debt on a long-term basis through its bank credit facilities and therefore, based upon management's intent, has classified these borrowings, which totaled $446.2 million at January 31, 1998, as long-term debt. 11 The Company has entered into interest rate swap, cap and collar agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At January 31, 1998, the Company had outstanding four interest rate contracts for a total notional principal amount of $180.0 million with commercial banks. One swap agreement effectively fixes the Company's interest rate on unrated commercial paper, floating rate facilities and uncommitted lines of credit at 5.20% on a notional principal amount of $15.0 million. This contract expires in 1998. Two 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 $35.0 million. These contracts expire through 1999. One collar agreement effectively limits the maximum interest rate the Company will pay at 7.5% and limits the minimum interest rate the Company will pay at 5.3% on a notional principal amount of $130.0 million. This contract expires in 1998. The Company has entered into swap and cap agreements to reduce the impact of changes in rent expense on its two lease lines of credit. At January 31, 1998, the Company had outstanding seven rent rate contracts, for a total notional principal amount of $80.0 million, with commercial banks. Three of these agreements effectively fix the Company's rental rate on the lease lines at rates between 6.28% and 6.54% on notional amounts of $40.0 million. The remaining four agreements effectively limit the maximum rental rate the Company will pay at 7.25% on notional amounts totaling $40.0 million. All seven of these contracts expire in 2000. Gains and losses on 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 long-term debt maturities for the five fiscal years subsequent to January 31, 1998 are $1.5 million in 1998, $5.1 million in 1999, $369.7 million in 2000, $2.8 million in 2001, and $1,381.6 million in 2002. The Company recorded an extraordinary charge of $148.3 million less a $57.1 million income tax benefit which consisted of premiums paid in the prepayment of certain notes and bank facilities of Fred Meyer Stores and Smith's and the write-off of their related deferred financing costs. 6. Income Taxes The provision for income taxes includes the following (in thousands):
Fiscal Year Ended ------------------------------------- January 31 February 1, February 3, 1998 1997 1996 ---------- ----------- ----------- Current $ 80,479 $ 39,491 $ 27,024 Deferred 15,966 10,548 3,562 ---------- ----------- ----------- Total $ 96,445 $ 50,039 $ 30,586 ========== =========== ===========
A reconciliation between the statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
Fiscal Year Ended --------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Federal income taxes at the statutory rate $ 83,914 $ 46,901 $ 28,381 State income taxes 7,297 2,833 1,466 Effect of goodwill amortization 5,649 356 290 Other (415) (51) 449 ----------- ----------- ----------- Provision for income taxes $ 96,445 $ 50,039 $ 30,586 =========== =========== ===========
12 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 31, 1998 and February 1, 1997 were as follows (in thousands):
January 31, February 1, 1998 1997 ----------- ----------- Deferred tax assets: Capitalized inventory costs $ 9,945 $ 9,660 Accrued expenses 55,664 25,436 Restructuring related charges 65,194 4,215 Deferred lease transactions 18,932 13,644 Net operating loss carryforwards 68,330 3,963 AMT credits 7,800 - Other 23,712 8,552 ----------- ----------- Total deferred tax assets 249,577 65,470 Valuation allowance (11,708) ----------- ----------- Net deferred tax assets 237,869 65,470 Deferred tax liabilities: Accumulated depreciation 185,421 71,544 Prepaid expenses 3,492 13,481 LIFO inventory 41,335 8,790 Other - 1,747 ----------- ----------- Total deferred tax liabilities 230,248 95,562 ----------- ----------- Net deferred income taxes $ (7,621) $ 30,092 =========== =========== Current deferred income taxes-asset $ (90,804) $ (17,226) Noncurrent deferred income taxes--liability 83,183 47,318 ----------- ----------- Net deferred income taxes $ (7,621) $ 30,092 =========== ===========
At January 31, 1998, the Company has net operating loss carryforwards for federal income tax purposes of $197.0 million which expire from 2010 through 2013. In addition, the Company has net operating loss carryforwards for state income tax purposes of $356.4 million which expire from 1998 through 2013. The Company has federal Alternative Minimum Tax ("AMT") credit carryforwards of $7.8 million which are available to reduce future regular taxes in excess of AMT. These credits have no expiration date. 7. Stockholders' Equity At January 31, 1998, 21.0 million shares of common stock were reserved for issuance to employees, including officers and directors, and nonemployee agents, consultants and advisors, under stock incentive plans. These plans provide for the granting of incentive stock options, nonqualified stock options, stock bonuses, stock appreciation rights, cash bonus rights and performance units. Under the terms of the plans, the option price is determined by the Board of Directors at the time the option is granted. The option price for incentive stock options cannot be less than the fair value of the Company's stock on the date of grant. Nonqualified stock options may not be granted at less than 50% of the fair value on the date of grant. 13 Stock Options--Activity under the plans was as follows (in thousands, except per share data):
Fiscal Year Ended ------------------------------------------------------------------ January 31, 1998 February 1, 1997 February 3, 1996 --------------------- ------------------- --------------------- Weighted Weighted Weighted Average Average Average Option Price Option Price Option Price Shares Per Share Shares Per Share Shares Per Share ------ --------- ------ --------- ------ --------- Outstanding at beginning of year 10,272 $ 12.84 7,709 $ 12.41 6,588 $ 12.30 Granted 5,188 25.09 4,749 14.58 1,892 11.52 Options added from acquired company 1,595 7.33 Exercised (3,075) 10.96 (375) 7.81 (490) 5.41 Cancelled (319) 13.17 (1,811) 16.65 (281) 15.96 ------ ------ ------ Outstanding at end of year 13,661 17.26 10,272 12.84 7,709 12.41 ====== ========= ====== ========= ====== ========= Exercisable at end of year 7,452 $ 12.71 3,665 $ 10.90 3,628 $ 10.52 ====== ========= ====== ========= ====== ========= Weighted-average fair value of options granted during the year $13.30 $ 6.08 $ 5.90 ====== ====== ======
Stock options granted in 1995, 1996, and 1997 expire in 10 years. The options vest over five years, 20 percent each year, beginning at the end of the first year. In conjunction with the Smith's Acquisition, option holders could elect to accelerate to the closing date of September 9, 1997 the vesting of previously unvested options. Accordingly, nearly all options outstanding became fully vested at the closing date. Options outstanding at Smith's became fully vested at the closing date and were converted at the exchange ratio into options exercisable in the Company's Common Stock expiring on the original terms. In conjunction with the QFC Acquisition, all options outstanding at QFC were converted at the exchange ratio into options exercisable in the Company's Common Stock expiring on the original terms. In additions, 629,803 options at QFC became fully vested at March 9, 1998. All stock options granted in 1995 and 1996 were granted at an amount equal to or greater than the fair market value on the date prior to the grant date. Accordingly, no compensation was recorded in 1995 and 1996. Compensation expense for options granted in 1997 at an amount below the fair market value was recorded for the amortization of the difference between the market value on the date of grant and the grant price. The amortization was determined on a straight-line basis over the vesting period. The amount charged to operations in 1997 was immaterial. The following table summarizes information concerning currently outstanding and exercisable options at January 31, 1998:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------ Range of Number Weighted Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price -------- ------------- ---------------- -------------- ------------- -------------- $3 to $9 1,545 3.2 $ 7.04 1,531 $ 7.10 10 to 14 5,183 7.2 12.40 3,583 12.34 15 to 19 2,863 8.3 17.05 2,309 16.92 20 to 29 3,111 9.6 24.86 29 20.63 30 to 36 959 10.0 35.94 ------- ------- 3 to 36 13,661 7.7 17.26 7,452 12.71 ======= =======
Shares available for option were 8.5 million as of January 31, 1998 and 1.9 million as of February 1, 1997. Of the shares available at January 31, 1998, 1.4 million shares have been approved for grant to employees of the companies that were acquired subsequent to the year end. 14 The Company issued a replacement grant election program in 1996 that allowed stock option holders with options granted at more than $13.00 per share to reset the price at $13.00, on up to 1,968,000 options that were previously granted at prices ranging from $13.62 to $20.63. For those who elected to reset their option price to $13.00, the vesting period started over. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for stock options granted at the market value on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the estimated fair value of the options at the date of grant, the Company's net income and income per share would have been reduced to the pro forma amounts below:
Fiscal Year Ended --------------------------------------------------------------------- January 31, 1998 February 1, 1997 February 3, 1996 -------------------- -------------------- --------------------- Actual Pro forma Actual Pro forma Actual Pro forma ------- --------- ------- --------- ------- --------- Net income (in thousands) $52,101 $25,849 $83,963 $79,231 $50,502 $48,498 Diluted net income per common share 0.48 0.24 1.00 0.95 0.58 0.56
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model based on historical assumptions from Fred Meyer and QFC. The following assumptions were used for grants awarded in each year to option holders of each company:
Fiscal Year Ended -------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Fred Meyer Weighted average expected volatility (based on historical volatility) 33.67% 34.97% 40.19% Weighted average risk-free interest rate 6.10% 5.77% 6.01% Expected term 5 years 5 years 5 years QFC Weighted average expected volatility (based on historical volatility) 43.50% 44.70% 44.70% Weighted average risk-free interest rate 5.50% 5.12% 5.10% Expected term 5 years 5 years 5 years
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to stock options granted prior to 1995. It is anticipated that additional stock options will be granted in future years. Other Option--FMI Associates, which was the Company's principal shareholder in 1996, exercised an option in 1996 for the purchase of 3.1 million shares with an aggregate value of $5.1 million. Warrant--As part of the Smith's Acquisition, the Company converted a warrant for Smith's stock into a warrant for Fred Meyer stock. The warrant issued to Yucaipa is for the purchase of up to 3.9 million shares of Common Stock at an exercise price of $23.81 per share. Half of the warrant expires in 2005 and half expires in 2006. Additionally, at the option of Yucaipa, the warrant is exercisable without the payment of cash consideration. Under this condition, the Company will withhold upon exercise the number of shares having a market value equal to the aggregate exercise price from the shares issuable. Management Bonus--In 1996, the Company awarded a stock bonus to a corporate officer for 20,000 shares totaling $291,250. Shares vest annually over five years. In 1997, the Company awarded stock bonuses to corporate officers for 3,000 shares totaling $60,562 that vest annually over five years and 8,606 shares totaling $177,498 that vest annually over three years. Nonemployee Directors Stock Compensation Plan--In 1996, the Company purchased 25,116 shares of its common stock at market prices for the benefit of six of its nonemployee directors in lieu of a portion of current and future Board of Director fee payments. The cost of the shares totaled $400,103 and became fully vested in conjunction with the Smith's Acquisition. QFC Recapitalization--On March 29, 1995, QFC completed a recapitalization plan, including a self-tender offer under which QFC purchased 13.3 million shares of common stock at a price of $13.16 per share payable in cash, and entered into a $220.0 million credit facility to finance the tender offer, the Olson's Acquisition and provide additional 15 capital. Additionally, QFC sold 1.9 million newly issued shares of common stock to Zell/Chilmark Fund L.P. at $13.16 per share on March 29, 1995. To reflect the net reduction in stockholders' equity resulting from the recapitalization, QFC's retained earnings were reduced to zero at the beginning of the second quarter of 1995 and allocated the remaining amount as a reduction to common stock. Fees paid in connection with the recapitalization aggregated approximately $4.3 million. During 1995, $1.4 million of these fees were recorded as a one-time expense and $2.9 million were recorded as a direct reduction to stockholders' equity. Stock Split--On September 5, 1997, the Executive Committee of the Board of Directors declared a two-for-one stock split, to be effected in the form of a 100% stock dividend. As a result, 63.8 million shares were issued on September 30, 1997 to shareholders of record on September 19, 1997. Par value remained at $.01 per share as a result of transferring $638,000 to common stock from additional paid-in capital. All references to the number of shares and to per share information in the consolidated financial statements and notes thereto have been adjusted to reflect the stock split on a retroactive basis. 8. Leases The Company leases or subleases property and equipment used in its operations. The terms of certain leases include renewal options, escalation clauses, percentage rents based on sales, or payment of executory costs such as property taxes, utilities, insurance and maintenance. Portions of certain properties are subleased to others for periods of from one to 20 years. At January 31, 1998, minimum rentals under noncancelable leases for future fiscal years were as follows (in thousands):
Operating Capitalized Less Net Fiscal Year Leases Leases Subleases Rentals - -------------------------------------------------- ----------- ----------- --------- ----------- 1998 $ 183,397 $ 13,062 $ 35,896 $ 160,563 1999 178,690 13,138 33,551 158,277 2000 172,562 12,733 31,134 154,161 2001 170,621 11,783 29,031 153,373 2002 162,052 10,771 27,024 145,799 Thereafter 1,745,865 146,575 293,526 1,598,914 ----------- ----------- --------- ----------- Total $ 2,613,187 208,062 $ 450,162 $ 2,371,087 =========== ========= =========== Less imputed interest 121,927 ----------- Present value of minimum rental payments 86,135 Less current portion 3,353 ----------- Capitalized lease obligations $ 82,782 ===========
Rent expense under operating leases, including executory costs, were as follows (in thousands):
Fiscal Year Ended ------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Minimum rent expense $ 152,393 $ 104,595 $ 97,052 Contingent rent expense 4,589 2,962 3,084 Rent income from subleases (23,179) (16,259) (14,717) ----------- ----------- ----------- Net rent expense $ 133,803 $ 91,298 $ 85,419 =========== =========== ===========
At January 31, 1998, deferred lease transactions consisted of unamortized gains on lease financing transactions and cumulative net excess of rent expense over cash rents. The gains on lease financing transactions included the differences between property held under capital leases and capital lease obligations at the time of amendments to the capital leases which resulted in the leases qualifying as operating leases and gains resulting from sale-leaseback transactions. The gains are being amortized over the remaining life of the respective leases. The excess rent expense over cash rents results from charging to operations the average rent over the primary lease term on leases with escalating rent payments. 16 On February 4, 1997, in a series of transactions with MetLife, the Company purchased, for approximately $49.0 million, six stores previously leased from MetLife and an option to purchase parcels at 18 of the 29 stores which the Company will continue to lease from MetLife. Additionally, the Company entered into new 25-year leases on these remaining 29 stores that will result in reduced rents. A distribution center that was leased to the Company by MetLife was sold to a third party who leased the center to the Company at reduced rates. In 1996 and 1997, the Company completed sale-leaseback transactions on 13 stores. The proceeds from the transactions were used to repay outstanding indebtedness on credit lines and for general working capital purposes. The initial lease terms are for 21 to 23 years and are subject to renewal at the option of the Company. The annual rent obligation, including amortization of fees and deferred gain, is approximately $12.1 million. On September 9, 1997, the Company entered into a $270.0 million five-year operating lease facility which was used to replace the leases on 17 existing leased stores and to finance the construction of three new stores. Lease payments are based on LIBOR applied to the utilized portion of the facility. As of January 31, 1998, the Company had utilized $251.0 million on the facility. On January 28, 1998, the Company entered into a $53.0 million 90-day operating lease facility. Lease payments are based on LIBOR applied to the utilized portion of the facility. As of January 31, 1998, the Company had utilized $52.0 million on the facility. 9. Employee Benefit Plans Employees' Profit-sharing Plan--Profit-sharing contributions under this Plan, which covers nonunion employees of Fred Meyer Stores, are made to a trust fund held by a third-party trustee. Contributions are based on the Company's pretax income, as defined, at rates determined by the Board of Directors and are not to exceed amounts deductible under applicable provisions of the Internal Revenue Code. In 1994, the Company added an annual 1% basic contribution to all eligible employees' accounts subject to normal plan vesting. The Company expensed $9.1 million in 1997, $7.7 million in 1996, and $6.4 million in 1995 for these contributions. The Company also maintains a defined contribution profit-sharing plan which covers nonunion employees of QFC who meet certain service requirements. Contributions to the plan are based on a percentage of gross wages and are made at the discretion of the Company. The Company expensed $0.9 million in 1997, $0.6 million in 1996, and $0.5 million in 1995. Multiemployer Pension Plans--The Company contributes to multiemployer pension plan trusts at specified rates in accordance with collective bargaining agreements. Contributions to the trusts were $35.1 million in 1997, $13.6 million in 1996, and $13.0 million in 1995. The Company's relative positions in these plans with respect to the actuarial present value of the accumulated benefit obligation and the projected benefit obligation, net assets available for benefits and the assumed rates of return used by the plans are not determinable. Employee Stock Purchase Plan--The Company has a noncontributory employee stock purchase plan that allows employees to purchase stock in the Company at market prices via payroll deductions. The Company pays all brokerage fees associated with the purchase of the stock and administrative fees. The Company also pays a ten percent cash bonus at year end based on the number of shares purchased and held during the previous calendar year and the market price at year end. The plan is available to all employees over age 18 who have completed six months of continuous employment with the Company. Supplemental Retirement 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 made annual contributions per participant of $35,000 in 1997 and $25,000 in 1996 and 1995. Total contributions were $865,000 in 1997, $400,000 in 1996, and $350,000 in 1995. 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. 17 Pension Plan--The Company maintains a defined benefit pension plan for all permanent, nonunion employees of Smith's which provides for normal retirement at age 65. Employees are eligible to join when they complete at least one year of service and have reached age 21. The benefits are based on years of service and stated amounts associated with those years of service. The Company's current funding policy is to contribute annually up to the maximum amount deductible for federal income tax purposes. Net pension cost charged to operations from the date of acquisition to year end includes the following components (in thousands):
Fiscal Year Ended January 31, 1998 ----------------- Service cost - present value of benefits earned during the period $ 1,066 Interest cost on projected benefit obligation 1,184 Actual return on plan assets (1,658) Net amortization and deferral (318) ------- Net pension cost $ 274 =======
The following table presents the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
January 31, 1998 ----------- Actuarial present value of accumulated benefits based on service rendered to date: Vested $ 44,014 Non-vested 2,044 ----------- 46,058 Fair value of plan assets (primarily in equity and fixed income funds) 58,266 ----------- Fair value of plan assets in excess of projected benefit obligation 12,208 Unrecognized net loss 4,897 ----------- Net prepaid pension cost $ 17,105 ===========
The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7%. The expected long-term rate of return on plan assets was 9%. 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. 18 The following table sets forth the plan's funded status, reconciled with the amount shown in the Company's balance sheets (in thousands):
January 31, February 1, 1998 1997 ----------- ----------- Accumulated postretirement benefit obligation: Current retirees $ 1,362 $ 1,289 Fully eligible plan participants 891 877 Other active plan participants 5,153 3,598 ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets 7,406 5,764 Unrecognized transition obligation (1,169) (1,253) Unrecognized prior service cost (241) (283) Unrecognized net gain (loss) (610) 257 ----------- ----------- Accrued postretirement benefit cost $ 5,386 $ 4,485 =========== =========== Weighted average discount rate 6.8% 8.0% =========== =========== Net periodic postretirement benefit cost included the following components (in thousands): Fiscal Year Ended ------------------------ January 31, February 1, 1998 1997 ----------- ----------- Service cost-benefits attributed to service during the period $ 454 $ 411 Interest cost on accumulated postretirement benefit obligation 455 410 Amortization of transition obligation over 20 years 125 125 ----------- ----------- Net periodic postretirement benefit cost $ 1,034 $ 946 =========== ===========
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were as follows: Under Medicare Retirement Age--6% for one year, then grading down to 4.5% by the year 2001, and Medicare Retirement Age and Over--5% for one year, then grading down to 4.5% in 1999. 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 by $1.1 million at January 31, 1998 and February 1, 1997 and increase the aggregate of the service and interest cost components of the net periodic postretirement benefit cost by $191,000 in 1997 and $169,000 in 1996. 11. Estimated Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies as shown below. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could actually realize. Management is not aware of any factors that would significantly change the estimated fair value amounts shown below. A comprehensive revaluation for purposes of these financial statements has not been performed since January 31, 1998, and current estimates of fair value may differ from the amounts presented herein. The Company is not subjected to a concentration of credit risk. Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other Current Assets, Other Long-term Assets, Outstanding Bank Overdrafts and Accounts Payable--The carrying amounts of these items are a reasonable estimate of their fair value. 19 Long-term Debt and Interest Rate Agreements--The amount of long-term debt included in the balance sheet approximates its fair value at January 31, 1998. 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. The amounts for commercial paper and bid lines of credit under the revolving credit agreement (see Note 5) approximates fair value at January 31, 1998. The fair value of interest rate or rent rate swap and cap agreements is the estimated settlement amount. At January 31, 1998, the Company could settle the various swap agreements at a loss of $699,000 and various cap agreements at a loss of $525,000. The value is determined based on the notional amount of each cap and swap, its term and the difference in rates between the date of measurement and when the cap or swaps were initiated. 12. Commitments and Contingencies The Company and its subsidiaries are parties to various legal claims, actions and complaints, certain of which involve material amounts. Although the Company is unable to predict with certainty whether or not it will ultimately be successful in these legal proceedings or, if not, what the impact might be, management presently believes that disposition of these matters will not have a material adverse effect on the Company's consolidated financial statements. 13. Subsequent Events On November 6, 1997, the Company entered into separate merger agreements with Quality Food Centers, Inc. ("QFC"), a supermarket chain operating 89 stores in the Seattle/Puget Sound region of Washington state and 56 Hughes Family Market stores in Southern California, and Food 4 Less Holdings, Inc. ("Ralphs/Food 4 Less"), a supermarket chain operating 409 stores primarily in Southern California and Northern California (see Note 1 for the QFC Acquisition). Ralphs/Food 4 Less Acquisition. At the closing on March 10, 1998, Ralphs/Food 4 Less became a wholly-owned subsidiary of the Company. The Company issued 21.7 million shares of common stock of the Company for all of the equity interests of Ralphs/Food 4 Less. The acquisition will be accounted for under the purchase method of accounting. The accompanying financial statements do not reflect any adjustments as a result of the Ralphs/Food 4 Less Acquisition. Debt Refinancing. In conjunction with the acquisitions, the Company entered into new financing arrangements that refinanced a substantial portion of the Company's principal debt facilities and indebtedness assumed in the acquisitions of QFC and Ralphs/Food 4 Less. The new credit facilities include a public issue of $1.75 billion senior unsecured notes and bank credit facilities which include a $1.875 billion five-year revolving credit agreement and a $1.625 billion five-year term note. The unsecured notes were issued with $250 million of five-year notes at 7.15%, $750 million of seven-year notes at 7.38%, and $750 million of ten-year notes at 7.45%. At closing on March 11, 1998, the Company utilized $2.765 billion of the bank credit facilities. An additional $403 million was used to support the Company's commercial paper program. The remaining $332 million was available at March 11, 1998 for general corporate purposes. A commitment fee of .30% will be charged on the unused portion of the five-year revolving credit agreement. Interest on the revolving credit agreement and term notes will be at the Adjusted LIBOR plus a margin of 1.0%. In addition to the new credit facilities, the Company entered into a $500 million five-year operating lease facility which refinanced $303 million in existing lease financing facilities. The balance of this lease facility will be used for land and construction costs for new stores. Merger with The Kroger Co. (unaudited). On October 19, 1998, the Company announced its intended merger with The Kroger Co. ("Kroger"). Under the terms of the merger agreement, Fred Meyer stockholders will receive one newly issued share of Kroger common stock for each share of Fred Meyer common stock. The transaction will be accounted for as a pooling of interests. It is expected to close in early 1999 subject to approval of Kroger and Fred Meyer stockholders, antitrust clearance and customary closing conditions. Additional information regarding the merger can be found in the Company's Form 8-K dated October 18, 1998. 20 14. Selected Quarterly Financial Data (Unaudited) (in thousands, except per share data)
First Second Third Fourth(1) Total ---------- ---------- ---------- ---------- ---------- Fiscal 1997 Net sales $1,593,437 $1,457,602 $1,945,543 $2,362,620 $7,359,202 Gross margin 472,084 433,782 575,104 703,104 2,184,074 Income from operations 55,297 65,247 79,930 141,376 341,850 Income before extraordinary charge 22,513 29,452 28,665 62,681 143,311 Extraordinary charge (91,210) (91,210) Net income (loss) 22,513 29,452 (62,545) 62,681 52,101 Basic earnings per common share: Income before extraordinary charge 2 $ 0.27 $ 0.32 $ 0.24 $ 0.49 $ 1.37 Extraordinary charge (0.77) (0.87) ---------- ---------- ---------- ---------- ---------- Net income (loss) 2 $ 0.27 $ 0.32 $ (0.53) $ 0.49 $ 0.50 ========== ========== ========== ========== ========== Weighted average number of shares outstanding 84,758 93,175 118,331 128,319 104,520 ========== ========== ========== ========== ========== Diluted earnings per common share: Income before extraordinary charge 2 $ 0.25 $ 0.30 $ 0.23 $ 0.46 $ 1.31 Extraordinary charge (0.74) (0.83) ---------- ---------- ---------- ---------- ---------- Net income (loss) 2 $ 0.25 $ 0.30 $ (0.51) $ 0.46 $ 0.48 ========== ========== ========== ========== ========== Weighted average number of shares outstanding 88,335 97,207 123,546 136,007 109,591 ========== ========== ========== ========== ========== First Second Third Fourth (3) Total ---------- ---------- ---------- ---------- ---------- Fiscal 1996 Net sales $1,277,059 $1,040,847 $1,019,023 $1,193,191 $4,530,120 Gross margin 373,343 311,509 300,077 361,787 1,346,716 Income from operations 42,162 45,070 29,748 65,877 182,857 Net income 16,245 21,212 12,198 34,308 83,963 Basic earnings per common share: Net income 4 $ 0.20 $ 0.26 $ 0.16 $ 0.44 $ 1.05 ========== ========== ========== ========== ========== Weighted average number of shares outstanding 80,840 81,075 78,463 78,342 79,794 ========== ========== ========== =---====== ========== Diluted earnings per common share: Net income 4 $ 0.19 $ 0.25 $ 0.15 $ 0.42 $ 1.00 ========== ========== ========== ========== ========== Weighted average number of shares outstanding 84,571 85,380 83,520 82,103 84,068 ========== ========== ========== ========== ========== 1 The LIFO adjustment in the fourth quarter of 1997 increased gross margin and income from operations by $9,417, income before extraordinary charge and net income by $5,814 and diluted earnings per common share by $.06. 2 In 1997, the sum of the four quarters earnings per common share does not equal the annual amount due to the acquisition of Smith's and the two-for-one stock split in the third quarter. 3 The LIFO adjustment in the fourth quarter of 1996 increased gross margin and income from operations by $5,386, net income by $3,339 and diluted earnings per common share by $.06. 4 In 1996, the sum of the four quarters earnings per common share does not equal the annual amount due to the purchase by the Company in October 1996 of 4,400 shares of its common stock.
21 Independent Auditors' Report To the Shareholders and Board of Directors of Fred Meyer, Inc.: We have audited the accompanying consolidated balance sheets of Fred Meyer, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fred Meyer, Inc. and subsidiaries at January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Portland, Oregon March 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----