-----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, OZoSYiO0Yx9fCGCv6e2Y+l0c2KD/jP/7lu936AKqjIbJPxEkKuh7Fx7H8OL719At KYFe4NvUEFGh8sDnQnZ+ew== 0000893877-97-000433.txt : 19970807 0000893877-97-000433.hdr.sgml : 19970807 ACCESSION NUMBER: 0000893877-97-000433 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEYER FRED INC CENTRAL INDEX KEY: 0000701169 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 930798201 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11274 FILM NUMBER: 97651956 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-K/A 1 FORM 10-K, AMENDMENT NO. 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 2 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-11274 FRED MEYER, INC. (Exact name of registrant as specified in its charter) Delaware 93-0798201 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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. [ ] Aggregate market value of Common Stock held by nonaffiliates of the Registrant at March 1, 1997: $1,025,998,079 Number of shares of Common Stock outstanding at March 1, 1997: 26,298,768 Documents Incorporated by Reference Part of Form 10-K into Document which incorporated Portions of Proxy Statement for Part III 1997 Annual Meeting of Shareholders Fred Meyer, Inc. and Subsidiaries Table of Contents - -------------------------------------------------------------------------------- Item of Form 10-K Page Part I Item 1 Business ................................................... 3 Part II Item 6 Selected Financial Data ....................................12 Item 8 Financial Statements and Supplementary Data ................15 Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... Signatures ............................................................32 2 Fred Meyer, Inc. and Subsidiaries Part I - -------------------------------------------------------------------------------- Item 1. Business. - ----------------- General Fred Meyer, Inc. (the "Company") is a regional retailer of a wide range of food, apparel, fine jewelry, and products for the home. As of February 1, 1997, the Company operated 109 multidepartment stores in six states under the name "Fred Meyer" and 110 specialty stores in 17 states. All but five of the specialty stores are mall jewelry stores operating under the names "Fred Meyer Jewelers" or "Merksamer Jewelers." The multidepartment stores are unique in the Pacific Northwest in combining food with a wide range of nonfood merchandise under one roof. These stores average approximately 144,000 square feet of retail space and emphasize one-stop-shopping for necessities and items of everyday use. The multidepartment stores accounted for approximately 97.4% and 96.6% of the Company's total sales and operating income, respectively, for the fiscal year ended February 1, 1997 ("1996"). For 1996, food and nonfood sales were 41.1% and 58.9% of total sales, respectively. The following table sets forth the states in which the Company operates and the number of multidepartment and specialty stores in each state as of February 1, 1997:
Multidepartment Specialty Total State Stores Stores Stores -------------------------------------------------------------------------------- Oregon ............................................. 45 9 54 Washington ......................................... 38 20 58 Utah ............................................... 10 4 14 Alaska ............................................. 7 3 10 Idaho .............................................. 8 2 10 Montana ............................................ 1 1 2 California ......................................... -- 50 50 Michigan ........................................... -- 5 5 Maryland ........................................... -- 4 4 Missouri ........................................... -- 2 2 Ohio ............................................... -- 2 2 Virginia ........................................... -- 2 2 Wisconsin .......................................... -- 2 2 Arizona ............................................ -- 1 1 Illinois ........................................... -- 1 1 Kansas ............................................. -- 1 1 New Mexico ......................................... -- 1 1 ------------------------- Total ........................................... 109 110 219 --------------------------------------------------------------------------------
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. Multidepartment stores that include food, apparel and general merchandise are the Company's primary focus. The Company believes that its food departments increase the shopping frequency of area residents, build customer loyalty and enable its nonfood departments to generate higher levels of sales through increased customer traffic. In more recent years, the Company added food to previously nonfood multidepartment stores and replaced some of its older nonfood stores with new full-service stores which include food departments. The Company promotes cross-shopping by providing convenient access between departments and sections, by making each of these a strong competitor in the market for its products and by facilitating easy customer checkout through a common cash register system that allows customers to Fred Meyer, Inc. and Subsidiaries 3 purchase merchandise from most departments at any checkstand location. The strength of the individual departments and sections, 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 with supermarkets, drug stores, discount stores, mass merchandisers, department stores and specialty stores, including category-dominant retailers. The following table sets forth certain statistical information with respect to the Company's operations for the periods indicated:
Fiscal Year Ended -------------------------------------------------------------------------- February 1, February 3, January 28, January 29, January 30, 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------------------- Percent of net sales: Nonfood sales........................ 58.9% 59.0% 61.7% 62.5% 63.3% Food sales........................... 41.1% 41.0% 38.3% 37.5% 36.7% Sales per square foot of selling space (weighted average)................... $328 $316 $304 $312 $304 Total stores sales growth.............. 10.5%/2 7.7%/2 5.0% 4.4% 5.6% Comparable store sales growth:/1 Total Company........................ 3.8%/3 2.1%/3,4 (2.0%)/3,4 2.4% 3.0% Food................................. 4.7%/3 6.6%/3,4 (3.0%)/3,4 3.4% 2.8% Nonfood.............................. 3.1%/3 (0.9%)/3,4 (1.4%)/3,4 1.9% 3.2% Number of multidepartment stores: At beginning of period............... 102 100 97 94 94 Opened............................... 7 6 5 5 2 Closed............................... -- 4 2 2 2 ----------------------------------------------------------------------- At end of period..................... 109 102 100 97 94 ----------------------------------------------------------------------- Remodeled............................ 4 8 7 7 5 ----------------------------------------------------------------------- Number of stores at end of period: Multidepartment with food............ 101 94 86 77 70 Multidepartment without food......... 8 8 14 20 24 Specialty............................ 110/5 34 31 30 29 ----------------------------------------------------------------------- Total................................ 219 136 131 127 123 ----------------------------------------------------------------------- Total retail square feet (to nearest thousand): At beginning of period...............14,857 14,194 13,423 12,646 12,679 Added by new stores opened........... 1,019/5 948 795 811 295 Added by remodeling of existing stores.................... 59 96 174 80 39 Less closed stores................... -- 381 198 114 367/6 ----------------------------------------------------------------------- At end of period.....................15,935 14,857 14,194 13,423 12,646 ----------------------------------------------------------------------------------------------------------------- /1 Includes only sales of stores operating throughout each of the periods compared. /2 Excludes 53rd week in the fiscal year ended February 3, 1996. /3 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. For 1996, two 52-week periods are compared. /4 If sales at the 27 multidepartment stores in the Portland, Oregon and Vancouver, Washington metropolitan area directly affected by the labor strikes during 1994 were excluded, comparable store sales growth during the periods when the strike occurred would have been: February 3, January 28, 1996 1995 ------------------------------------------------------- Total Company ................... (.6%) 1.5% Food ............................ 3.1% 1.7% Nonfood ......................... (3.0%) 1.3% ------------------------------------------------------- /5 Includes 71 mall jewelry stores, comprising approximately 94,000 square feet, acquired by the Company during the year ended February 1, 1997. /6 Includes approximately 73,000 feet of space for 30 restaurants converted to tenant space.
4 Fred Meyer, Inc. and Subsidiaries During the last three years, the Company has made significant capital investments to (1) expand its operations by opening new multidepartment stores in existing markets and remodeling existing stores; (2) improve its Management Information Systems ("MIS") and (3) expand and improve its distribution infrastructure. In 1995, the Company also initiated a remerchandising program to reposition some of its departments to address increasing competition and changing customer preferences and developed smaller store formats for use in certain locations. Capital expenditures (before land sales and excluding real estate financed on leases), which amounted to approximately $236,000,000 in fiscal 1995, declined to approximately $147,000,000 in 1996 and are expected to increase moderately over the next two years. The Company presently intends to use all available cash flow to reinvest in the business of the Company and to reduce debt. 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, Oregon 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. Retail Operations 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. In most of its stores, the Company sells over 225,000 items, with an emphasis on necessities and items of everyday use. The Company takes advantage of the high and diverse customer traffic in its stores to sell many categories of goods that are purchased on a discretionary basis, such as fine jewelry, home electronics and fashion apparel. Within many categories of apparel, products for the home, jewelry and home electronics, the Company offers customers the breadth of selection 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. 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. Most of the Company's departments and sections are self-service, except in areas where special sales assistance is required, such as service delicatessens, service meat and/or fish, home electronics, fine jewelry and pharmacy. The following table sets forth the number of departments and sections in the Company's 109 multidepartment stores at February 1, 1997:
---------------------------------------------------------------------------------------------- Food ......................................................................................101 Grocery Delicatessen Meat Service Fish/1 Produce Service Delicatessen Bakery Service Meat/1 Nonfood The Home ...............................................................................109 Domestics Closet and Storage Home Decor Housewares Office and School Furniture Automotive Garden Home Improvement Sporting Goods Toys Seasonal Home Electronics .......................................................................109 Apparel ................................................................................105 Apparel for Men, Women, Youth and Children Cosmetics Shoes Accessories Pharmacy ...............................................................................108 Health and Beauty Aids .................................................................109 Cards and Books ........................................................................109 Nutrition ..............................................................................104 Fine Jewelry ........................................................................... 98 ---------------------------------------------------------------------------------------------- /1 Eighty multidepartment stores include Service Fish and 41 include Service Meat.
Fred Meyer, Inc. and Subsidiaries 5 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 include First Choice, Fred Meyer and FMV (Fred Meyer Value). The average size of the Company's food departments is approximately 38,000 square feet. This square footage does not include space devoted to pharmacies, health and beauty aids, cards and books, nutrition and all other general merchandise. 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 approximately 20% from 12% 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 products, bakery products, candy and tobacco, all generally sold on a self-selection basis. 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 Home Department offers a wide selection of home decor, housewares, small appliances, domestics, furniture, sporting goods, 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 the Fred Meyer, Northwest Home, Everyday Living, Turf King, and Kraft King labels complement the national-brand offerings. 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, Carter's, Danskin, Nike, Reebok, Adidas, Gotcha, Eastland, Union Bay, Columbia Sportswear, Fila, Lee, Bali and Keds. High-quality private-label products such as Fred Bear, Cascade Kids, Katherine Bishop and Great Northwest complement the national-brand offerings. The Company's private-label sales in the Home and Apparel Departments represented 16 to 18% of these departments' sales in 1996, with a long-term goal of approximately 20%. The strategy employed in nonfood departments is to use private-label products for both entry-level price points and better offerings at value prices. In 1995 and 1996, the Company introduced additional private-label items in the Home and Apparel Departments to bring additional value to its customers and to improve gross margins in these areas. The Home Electronics Department offers a large selection of compact discs, for-sale videos and video games and the latest name-brand merchandise, including televisions, VCR's, digital satellite systems, audio components, cellular phones, computer software and telephones. Some of the national brands featured are Sony, JVC, Pioneer and Magnavox. One-hour photo-finishing has 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 Organization and Preferred Provider Organization plans. The Health and Beauty Aids section 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 Cards and Books section offers a large selection of greeting cards, gift wrap, giftware, paperback books and magazines. 6 Fred Meyer, Inc. and Subsidiaries The Nutrition section offers 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. The Company entered the fine jewelry business in 1973 with its acquisition of a retailer which had existing jewelry operations. Since that time, the Company has expanded its jewelry operations through the establishment of Fine Jewelry Departments within its multidepartment stores and through the leasing of individual locations, averaging approximately 1,300 square feet, in major regional shopping malls. The Company's Fine Jewelry Departments and mall jewelry stores offer an extensive selection of bridal and fashion jewelry, including precious and semi-precious stones. In addition, these departments and mall stores offer name-brand watches and an assortment of 14-carat gold chains and earrings. During the first half of 1996, the Company acquired 71 leased jewelry locations in major shopping malls in 11 states. With these acquisitions, as of February 1, 1997, the Company operated 105 mall jewelry stores under the names "Fred Meyer Jewelers" or "Merksamer Jewelers" and had 98 Fine Jewelry Departments in its multidepartment stores. The recent expansion of the Company's jewelry business is expected to improve the Company's ability to purchase inventory on favorable terms and reduce overhead costs on a per unit basis. Most of the Company's multidepartment stores open at 7:00 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 multidepartment store locations have complementary third-party tenants (such as banks, optical centers, gourmet coffee bars, restaurants and video rental stores) that attract high customer traffic. The Company's specialty store hours vary depending on location. Each multidepartment store is managed by a sales director who is responsible for store sales, operations, profitability and departmental cross-merchandising. Departments within multidepartment stores have managers who report to the 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. The Company has regional management teams that work closely with the stores in their regions to enhance sales and profit opportunities. As a result of this management structure, the Company believes that each of its stores and the departments within each store serve customers better and are able to respond quickly to market changes. The Company honors most nationally recognized credit cards for sales in all 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 multidepartment stores and selected jewelry stores began accepting debit cards that use personal identification number ("PIN") pads which process electronic benefits online. Distribution and Processing The Company has over 225,000 stock-keeping units supplied by over 10,000 suppliers, none of which represents more than 5% of the Company's total purchases. Due to its many sources of supply, the Company believes that it has many alternative sources of supply for the products it purchases. The Company also believes its purchase terms are generally in line with industry practices. The Company primarily purchases goods using centralized merchandise buyers. It operates a 1,528,000-square-foot distribution center in Clackamas, Oregon, near Portland, a 310,000-square-foot flow-through distribution facility in Chehalis, Washington and a 600,000-square-foot food distribution center in Puyallup near Seattle, Washington. Approximately two-thirds of the merchandise the Company sells is shipped to the stores from these facilities, with the balance shipped directly by vendors to the Company's stores or, in the case of food products for its Utah stores, purchased from a major wholesale supplier. The Company operates a large fleet of trucks and trailers for distribution of goods to its retail stores. The Company has made significant capital investments in its distribution centers which, together with the MIS improvements, are designed to improve operations, permit better inventory management and reduce distribution costs. During 1993 through 1995 the Company has spent approximately $85,000,000 to build and upgrade its distribution centers. Fred Meyer, Inc. and Subsidiaries 7 The Company opened a flow-through retail service center in April 1994 in Chehalis, Washington to serve as the centralized distribution facility for certain apparel, music, seasonal and other nonfood items. This facility minimizes the required handling and processing of goods received from vendors and distributed to the Company's stores. It has improved inventory management and reduced distribution costs for the goods shipped through this facility. In 1995 the Company opened a 600,000-square-foot centralized food distribution facility in Puyallup near Seattle, Washington 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 believes that its existing distribution facilities enable it to meet expected nonfood and food distribution needs until at least the year 2000. As the Company opens additional stores, it expects to utilize the excess capacity currently available at its existing distribution facilities and achieve improved operating efficiencies as distribution facility costs are spread over more sales. Additional acreage is owned or leased at each site to accommodate future expansion. As a result of its recent investment in information systems and distribution facility improvements, the Company has been able to establish electronic data interchange ("EDI") and automated replenishment programs with many vendors. These quick response capabilities improve inventory management and reduce handling of inventory in the distribution process, which results in lower markdowns and lower distribution costs as a percentage of sales. The Company believes that its distribution and related information systems provide several additional advantages. First, they permit stores to maintain proper inventory levels for more than 190,000 items supplied through its central distribution facilities. Second, centralized purchasing and distribution reduce the Company's cost of merchandise and related transportation costs. Third, because distribution can be made to stores frequently, the Company is able to reduce the in-store stockroom space and maximize the square footage available for retail selling. The Company owns and operates a bakery and a dairy. Products processed by the Company are sold primarily through its own retail stores. The Company also sells products from these two manufacturing facilities to third parties. Management Information Systems The Company operates a centralized computer system which is linked to store and distribution facility operations through an upgraded network. Stores are supported by the latest technology in store point-of-sale systems. Over the last six years the Company has undertaken a major modernization of its MIS capabilities. In 1994 through 1996 the Company spent approximately $56,000,000 on its centralized computer operations. New merchandising and buying systems have been installed for the Company's food and jewelry operations, with the remaining nonfood categories being converted to a new merchandising system in 1997. Completion of the nonfood merchandising system will allow the Company to combine all computer operations from the two systems it operates today onto one mainframe in 1997, saving approximately $2,000,000 annually in operating costs. When combined with the Company's improved distribution capabilities and new financial systems, the merchandising and buying systems will enhance the Company's quick response inventory capabilities and will improve future inventory management and profitability. The Company believes that these systems will be able to support its growth into the next century. 8 Fred Meyer, Inc. and Subsidiaries Store Expansion and Development The Company enlarges, remodels, closes or sells stores in light of their past performance or the Company's assessment of their potential. The Company continually evaluates its position in various market areas to determine whether it should expand or consolidate its operations in those areas. New store sites are determined based on a review of information on demographics and the competitive environment for the market area in which a proposed site is located. The Company's expansion focus is in existing areas of operation, primarily in or near well-populated residential areas. The Company determines store size and designs stores with a view toward making each store a very convenient, one-stop-shopping store in the area it serves. The Company is flexible in its store design where land sites require specialized designs, such as two-level or smaller stores. During the last three years, the Company increased new store development in its existing markets and the level of remodeling of existing stores. Total retail space, net of closures, increased 663,000 square feet, or approximately 4.7%, during 1995, and increased 1,078,000 square feet, or approximately 7.3%, during 1996. New multidepartment store openings during 1996 representing 917,000 square feet were as follows (in thousands):
Total Retail Location Square Footage Opened ------------------------------------------------------------------------------------- Tillamook, Oregon ..................................... 127 First Quarter Hillsboro, Oregon ..................................... 163 Second Quarter Meridian, Idaho ....................................... 168 Second Quarter Twin Falls, Idaho ..................................... 168 Second Quarter Silverdale, Washington/1 .............................. 70 Second Quarter Seattle, Washington/1 ................................. 62 Second Quarter Scappoose, Oregon ..................................... 159 Third Quarter ------------------------------------------------------------------------------------- /1 Marketplace stores emphasizing food.
Five new multidepartment stores are planned or scheduled to be opened during each of 1997 and 1998. The planned openings for 1997 are as follows (in thousands):
Total Retail Scheduled Location Square Footage to Open ------------------------------------------------------------------------------------- Idaho Falls, Idaho/1 .................................. 157 First Quarter Covington, Washington ................................. 163 First Quarter South Hill (Puyallup), Washington ..................... 168 First Quarter Orem, Utah ............................................ 157 First Quarter Coeur d'Alene, Idaho .................................. 157 First Quarter ------------------------------------------------------------------------------------- /1 Replacement store
The Company currently plans to remodel five stores in each of 1997 and 1998. The major remodeling programs during the last three years included (1) adding food departments to nine existing stores that previously sold only nonfood merchandise; (2) removing walls between departments to facilitate cross-shopping and common checkout for customers; and (3) adding food service departments, such as deli and bakery, to its stores. As a result of these efforts, total square footage for multidepartment stores increased from 12,486,000 square feet at the end of fiscal 1992 to 15,717,000 square feet as of February 1, 1997. As of February 1, 1997, 51% of the multidepartment stores had been built or remodeled within the last five years. The portion of the remodeling program involving the addition of food departments to multidepartment stores will be substantially complete in 1997. Fred Meyer, Inc. and Subsidiaries 9 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. The Company emphasizes everyday low prices in its food departments and generally offers promotional pricing in its nonfood departments. By opening new stores in existing market areas and by remodeling and expanding existing stores, the Company leverages its advertising budget. In 1996, the Company reduced the number of pages of weekly print advertising and increased radio and television advertising in order to reach more customers. Strategic Changes The Company reviews its competitive position on a location-by-location basis and analyzes the contribution that each department makes to overall profitability. In 1995, in response to increasing competition from discount retailers and from category-dominant competitors, particularly in the home improvement and home electronics categories, the Company began a remerchandising program in some departments to improve the overall profitability of the Company's operations. These repositioning efforts included: (1) reducing the space allocated to building materials in those stores affected by category-dominant home improvement centers and utilizing this space for other product categories (such as expanded garden centers); (2) reducing computer hardware in a majority of stores and increasing the selection of higher-margin items in home electronics, such as computer software and accessories, compact discs, video games and cellular telephones; (3) refining the apparel selection to emphasize brands, key basic and fashion essentials and casual sportswear; (4) adding additional private-label products to the apparel selection, home products and personal care products; (5) adding new product categories (such as pet centers, bath boutiques, "FM elements" clothing shops for young adults and tool and accessory centers) to certain stores; and (6) increasing the amount of space leased to complementary third-party tenants (such as banks, optical centers, gourmet coffee bars, restaurants and video rental stores) that attract high customer traffic. 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 supermarkets, discount stores, drug stores, conventional department stores, mall jewelry stores and specialty stores, including category-dominant stores. The Company's competitive position in the retail business varies by type of goods and the communities in which its stores are located. During the last five years, approximately 500 new competitor stores opened in the Company's markets according to a survey conducted by the Company. These competitors included Wal-Mart, Walgreens, Home Depot, HomeBase, Eagle, Sam's Club, Circuit City, Good Guys, Future Shops, Costco, Mervyn's, PayLess, J.C. Penney, Kmart, Target, ShopKo, BiMart, Toys-R-Us, Food 4 Less, Cub Foods, Safeway, Albertson's, Smiths Foods, Carrs and Quality Food Centers. Many of these companies have substantially greater financial and other resources than the Company. The Company's recent competitors include category-dominant stores, particularly in the home improvement and home electronics categories. The Company has responded to the influx of category-dominant stores and other competitors by reducing some product offerings, including computers and building materials, and expanding other offerings to improve overall profitability. No assurance can be given that the Company's strategy will be effective and that the Company will be able to effectively compete against the category-dominant stores or other competitors. In addition, while the Company is the only multidepartment store with significant food departments in most of its markets, some retail companies operate stores under this general format in other regions and could enter the Company's existing markets. 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 and competitive position. 10 Fred Meyer, Inc. and Subsidiaries Employees The Company employs approximately 28,000 full- and part-time employees. Approximately 50% of the Company's employees are represented by 25 different labor unions or locals. These employees are covered by 111 different collective bargaining agreements, none of which covers more than 2,500 employees. The Company believes that it has satisfactory relations with the many unions representing these employees. 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. In 1996, the Company reached agreement on contracts covering nonfood employees in Portland, Oregon and settled its Vancouver, Washington food contracts early. Of the 28 contracts that expired in 1996, 26 have satisfactorily completed negotiations; and two that expired toward the latter part of the year are still in negotiations. These two contracts cover less than one percent of total employees. Approximately 21 labor agreements, covering approximately 6% of the labor force, will expire during fiscal 1997, including agreements with the common checkout workers in the Portland, Oregon metropolitan area and employees in other large metropolitan and smaller non-metropolitan areas where the Company operates. The multiemployer grocery and meat worker contracts in the Portland, Oregon metropolitan area, covering approximately 1,500 Fred Meyer employees, that were scheduled to expire in July 1997 were renegotiated in April 1997 to run through July 2000. While the Company is optimistic about reaching agreements with the employees covered by contracts expiring in the immediate future, no assurance can be given that the parties will be able to reach a final conclusion without the occurrence of a work stoppage and the related disruption of the Company's business or that any agreements reached will be on terms that are favorable to the Company. Forward-looking Statements Information set forth in this Annual Report on Form 10-K and in the 1996 Annual Report to Shareholders regarding the Company's plans for future operations, including the Company's expectations relating to store expansion and remodeling, capital spending, expense reduction, debt/capital ratios, improvements in sales and inventory turns, reduced markdowns, reduced working capital needs and increases in sales, earnings per share and shareholder value constitutes "forward-looking statements" that involve a number of risks and uncertainties within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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, large category-dominant stores and large national and regional discount 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. For additional information regarding competition, see "Competition" above and for additional information regarding labor relations see "Employees" above. Fred Meyer, Inc. and Subsidiaries 11
Item 6. Selected Financial Data. - -------------------------------- (Page 1 of 3) Fiscal Year Ended ------------------------------------------------------------- (In thousands, except per-share data, February 1, February 3, January 28, January 29, percentages and number of stores) 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Income Statement Data Net sales ......................................... $3,724,839 $3,422,718 $3,122,635 $2,973,825 Gross margin ...................................... 1,105,527 973,514 861,320 885,257/6 Operating and administrative expenses ............. 971,667 885,087 807,924 747,151 Writedown of California assets/restructuring charge (reversal) ............................... -- -- 15,978/5 -- Income from operations ............................ 133,860 88,427 37,418/5 138,106/6 Interest expense, net of interest income/1 ........ 39,432 39,578 25,857 17,604 Income (loss) before income taxes ................. 94,428 48,849 11,561/5 120,502 Provision for (benefit from) income taxes ......... 35,883 18,563 4,393/5 49,598/7 Net income (loss) before accounting change/extraordinary item ....................... 58,545 30,286 7,168/5 70,904/6,7 Accounting change/extraordinary item .............. -- -- -- (2,588)/8 ---------- ---------- ---------- ---------- Net income (loss) ................................. $ 58,545 $ 30,286 $ 7,168/5 $ 68,316/6,7,8 ========== ========== ========== ========== Earnings (loss) per common share: Net income (loss) before accounting change/extraordinary item ..................... $2.09 $1.07 $.25/5 $2.50/6,7 Accounting change/extraordinary item ............ -- -- -- (.09)/8 ---------- ---------- ---------- ---------- Net income (loss) ............................... $2.09 $1.07 $.25/5 $2.41/6,7,8 ========== ========== ========== ========== Balance Sheet Data Total assets ...................................... $1,693,414 $1,671,592 $1,562,672 $1,326,076 ========== ========== ========== ========== Capitalization: Long-term debt .................................. $ 521,512 $ 656,260 $ 540,166 $ 321,398 Capital lease obligations ....................... 59,882 58,318 63,229 65,955 ---------- ---------- ---------- ---------- Total long-term debt and capital lease obligations ................................. 581,394 714,578 603,395 387,353 Stockholders' equity ............................ 567,298 571,234 538,620 527,686 ---------- ---------- ---------- ---------- Total capitalization .......................... $1,148,692 $1,285,812 $1,142,015 $ 915,039 ========== ========== ========== ========== Statistical Information Percent of net sales: Nonfood sales ................................... 58.9% 59.0% 61.7% 62.5% Food sales ...................................... 41.1% 41.0% 38.3% 37.5% Net income (loss) ............................... 1.6% .9% .2%/5 2.3%/6,7,8 Total stores sales growth ......................... 8.8% 9.6% 5.0% 4.4% Comparable stores sales percentage increase (decrease)/2 .................................... 3.8%/3 2.1%/4 (2.0)% 2.4% Long-term debt and capital leases as a percent of total capitalization ................. 50.6% 55.6% 52.8% 42.3% Number of multidepartment and specialty stores operated at year end ..................... 219 136 131 127 Total retail square feet at end of year ........... 15,935 14,857 14,194 13,423 Selling square feet at end of year ................ 11,704 10,817 10,490 9,999 Sales per selling square foot (weighted average)... $328 $316 $304 $312 Common shares outstanding (weighted average)....... 27,962 28,333 28,625 28,375 - -----------------------------------------------------------------------------------------------------------------
12 Fred Meyer, Inc. and Subsidiaries
Item 6. Selected Financial Data. - -------------------------------- (Page 2 of 3) Fiscal Year Ended ------------------------------------------------------------- (In thousands, except per-share data, January 30, February 1, February 2, February 3, percentages and number of stores) 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------- Income Statement Data Net sales ......................................... $2,849,521 $2,700,550 $2,474,327 $2,283,187 Gross margin ...................................... 852,821 807,729 739,992 669,696 Operating and administrative expenses ............. 738,581 724,446 672,484 619,605 Writedown of California assets/restructuring charge (reversal) ............................... -- (8,289)/9 -- 49,277/9 Income from operations ............................ 114,240 91,572 67,508 814 Interest expense, net of interest income/1 ........ 18,070 20,577 15,974 13,947 Income (loss) before income taxes ................. 96,170 70,995/9 51,534 (13,133) Provision for (benefit from) income taxes ......... 35,583 25,768 17,951 (6,285) Net income (loss) before accounting change/extraordinary item ....................... 60,587 45,227/9 33,583 (6,848) Accounting change/extraordinary item .............. -- -- -- -- ---------- ---------- ---------- ---------- Net income (loss) ................................. $ 60,587 $ 45,227/9 $ 33,583 $ (6,848) ========== ========== ========== ========== Earnings (loss) per common share: Net income (loss) before accounting change/extraordinary item ..................... $2.21 $1.80/9 $1.37 $(.28) Accounting change/extraordinary item ............ -- -- -- -- ---------- ---------- ---------- ---------- Net income (loss) ............................... $2.21 $1.80/9 $1.37 $(.28) ========== ========== ========== ========== Balance Sheet Data Total assets ...................................... $1,081,627 $974,780 $905,756 $796,894 ========== ========== ========== ========== Capitalization: Long-term debt .................................. $195,837 $240,968 $232,881 $188,441 Capital lease obligations ....................... 70,313 67,387 67,664 66,393 ---------- ---------- ---------- ---------- Total long-term debt and capital lease obligations ................................. 266,150 308,355 300,545 254,834 Stockholders' equity ............................ 450,128 335,154 285,299 251,546 ---------- ---------- ---------- ---------- Total capitalization .......................... $ 716,278 $ 643,509 $ 585,844 $ 506,380 ========== ========== ========== ========== Statistical Information Percent of net sales: Nonfood sales ................................... 63.3% 63.7% 64.3% 66.8% Food sales ...................................... 36.7% 36.3% 35.7% 33.2% Net income (loss) ............................... 2.1% 1.7% 1.4% (.3)% Total stores sales growth ......................... 5.6% 9.2% 11.6%/10 8.4%/10 Comparable stores sales percentage increase (decrease)/2 .................................... 3.0% 4.0% 3.6%/10 4.5%/10 Long-term debt and capital leases as a percent of total capitalization ................. 37.2% 47.9% 51.3% 50.3% Number of multidepartment and specialty stores operated at year end ..................... 123 122 122 125 Total retail square feet at end of year ........... 12,646 12,679 12,213 11,743 Selling square feet at end of year ................ 9,471 9,657 9,361 9,056 Sales per selling square foot (weighted average)... $304 $283 $269 $261/10 Common shares outstanding (weighted average)....... 27,446 25,182 24,500 24,801 - -----------------------------------------------------------------------------------------------------------------
Fred Meyer, Inc. and Subsidiaries 13
Item 6. Selected Financial Data. - -------------------------------- (Page 3 of 3) Fiscal Year Ended ------------------------------------------- (In thousands, except per-share data, January 28, January 30, January 31, percentages and number of stores) 1989 1988 1987 - ----------------------------------------------------------------------------------------------- Income Statement Data Net sales ......................................... $2,072,507 $1,847,104 $1,687,674 Gross margin ...................................... 609,378 546,418 487,295 Operating and administrative expenses ............. 543,188 485,083 429,935 Writedown of California assets/restructuring charge (reversal) ............................... -- -- -- Income from operations ............................ 66,190 61,335 57,360 Interest expense, net of interest income/1 ........ 9,291 7,449 11,945 Income (loss) before income taxes ................. 56,899 53,886 45,415 Provision for (benefit from) income taxes ......... 20,238 21,850 21,350 Net income (loss) before accounting change/extraordinary item ....................... 36,661 32,036 24,065 Accounting change/extraordinary item .............. -- -- (1,530)/11 ---------- ---------- ---------- Net income (loss) ................................. $ 36,661 $ 32,036 $ 22,535 ========== ========== ========== Earnings (loss) per common share: Net income (loss) before accounting change/extraordinary item ..................... $1.50 $1.31 $1.15 Accounting change/extraordinary item ............ -- -- (.07)/11 ---------- ---------- ---------- Net income (loss) ............................... $1.50 $1.31 $1.08 ========== ========== ========== Balance Sheet Data Total assets ...................................... $ 686,806 $ 626,522 $ 533,986 ========== ========== ========== Capitalization: Long-term debt .................................. $ 92,180 $ 87,730 $ 76,874 Capital lease obligations ....................... 50,774 46,904 36,093 ---------- ---------- ---------- Total long-term debt and capital lease obligations ................................. 142,954 134,634 112,967 Stockholders' equity ............................ 258,188 221,056 186,692 ---------- ---------- ---------- Total capitalization .......................... $ 401,142 $ 355,690 $ 299,659 ========== ========== ========== Statistical Information Percent of net sales: Nonfood sales ................................... 68.2% 67.6% 66.1% Food sales ...................................... 31.8% 32.4% 33.9% Net income (loss) ............................... 1.8% 1.7% 1.3% Total stores sales growth ......................... 12.2% 9.5% 6.6% Comparable stores sales percentage increase (decrease)/2 .................................... 7.9% 6.6% 4.3% Long-term debt and capital leases as a percent of total capitalization ................. 35.6% 37.9% 37.7% Number of multidepartment and specialty stores operated at year end ..................... 112 99 93 Total retail square feet at end of year ........... 10,925 10,494 9,738 Selling square feet at end of year ................ 8,388 8,064 7,497 Sales per selling square foot (weighted average)... $253 $239 $228 Common shares outstanding (weighted average)....... 24,470 24,403 20,870 - ----------------------------------------------------------------------------------------------- /1 Interest income was $858, $1,060, $885, $707, $544, $517, $467, $482, $336, $350 and $1,679, respectively. /2 Includes only sales of stores operating throughout each of the periods compared. /3 The calculation for comparable store sales for the year ended February 1, 1997 is computed on a 52-week basis for both years. /4 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. /5 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. /6 Includes a nonrecurring LIFO credit of $6,178. /7 Includes $3,588 from the resolution of an IRS audit ($2,286) related to the LIFO credit and a 38% tax rate. /8 Effect of adopting Statement of Financial Accounting Standards No. 109 relating to income taxes. /9 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. /10 Excludes 53rd week in the fiscal year ended February 3, 1990. /11 Prepayment costs of $1,530 ($.07 per share) from early extinguishment of 17% Senior and Subordinated Notes, net of taxes.
14 Fred Meyer, Inc. and Subsidiaries Item 8. Financial Statements and Supplementary Data. - ----------------------------------------------------
Statements of Consolidated Operations Fiscal Year Ended ---------------------------------------------- February 1, February 3, January 28, (In thousands, except per-share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Net Sales .................................................... $3,724,839 $3,422,718 $3,122,635 --------------------------------------------- Cost of Goods Sold: General .................................................. 2,613,746 2,443,531 2,255,749 Related party lease (Note 3) ............................. 5,566 5,673 5,566 --------------------------------------------- Total cost of goods sold ..................................... 2,619,312 2,449,204 2,261,315 --------------------------------------------- Gross Margin ................................................. 1,105,527 973,514 861,320 Operating and Administrative Expenses: General .................................................. 920,713 829,486 750,888 Related party leases (Notes 3 and 8) ..................... 50,954 55,601 57,036 Writedown of California Assets (Note 4) .................. -- -- 15,978 --------------------------------------------- Total operating and administrative expenses .............. 971,667 885,087 823,902 --------------------------------------------- Income from Operations ....................................... 133,860 88,427 37,418 Interest Expense, net of interest income of $858, $1,060 and $885 .......................................... 39,432 39,578 25,857 --------------------------------------------- Income before Income Taxes ................................... 94,428 48,849 11,561 Provision for Income Taxes (Note 6) .......................... 35,883 18,563 4,393 --------------------------------------------- Net Income ................................................... $ 58,545 $ 30,286 $ 7,168 ============================================= Net Income per Common Share .................................. $2.09 $1.07 $.25 ============================================= Weighted Average Number of Common Shares Outstanding ......... 27,962 28,333 28,625 - ------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
Fred Meyer, Inc. and Subsidiaries 15
Consolidated Balance Sheets Assets February 1, February 3, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents .................................................. $ 48,769 $ 41,849 Receivables ................................................................ 23,729 24,683 Inventories ................................................................ 604,910 520,555 Prepaid expenses and other ................................................. 43,149 23,680 Current portion of deferred taxes (Note 6) ................................. 17,226 22,046 ---------------------------- Total current assets ....................................................... 737,783 632,813 ---------------------------- Property and Equipment: Buildings, fixtures and equipment .......................................... 1,397,872 1,366,511 Property held under capital leases (Note 8) ................................ 17,523 17,523 Land ....................................................................... 139,474 160,657 ---------------------------- Total property and equipment ............................................... 1,554,869 1,544,691 Less accumulated depreciation and amortization ............................. 625,104 530,543 ---------------------------- Property and equipment--net ................................................. 929,765 1,014,148 ---------------------------- Other Assets: Goodwill--net ............................................................... 4,599 4,907 Other ...................................................................... 19,873 17,885 ---------------------------- Total other assets ......................................................... 24,472 22,792 ---------------------------- Total assets ............................................................... $1,692,020 $1,669,753 - ------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
16 Fred Meyer, Inc. and Subsidiaries
Consolidated Balance Sheets Liabilities and Stockholder's Equity February 1, February 3, (In thousands, except per share data) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Current Liabilities: Outstanding checks ......................................................... $ 112,991 $ 63,177 Accounts payable ........................................................... 285,439 193,896 Current portion of long-term debt and lease obligations (Notes 5 and 8) 1,038 1,468 Income taxes payable ....................................................... 5,115 4,857 Accrued expenses: Compensation ........................................................... 58,347 48,743 Insurance and other .................................................... 41,651 37,590 ---------------------------- Total current liabilities .................................................. 504,581 349,731 ---------------------------- Long-term Debt (Note 5) ........................................................ 521,512 656,260 ---------------------------- Capital Lease Obligations (Note 8) ............................................. 13,227 13,298 ---------------------------- Deferred Lease Transactions (Note 8) ........................................... 46,318 42,271 ---------------------------- Deferred Income Taxes (Note 6) ................................................. 35,176 30,814 ---------------------------- Other Long-term Liabilities (Notes 8 and 10) ................................... 5,302 7,984 ---------------------------- 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--28,404 shares and 26,705 shares; outstanding--26,204 shares and 26,705 shares) .......................... 287 270 Additional paid-in capital ..................................................... 203,314 195,593 Treasury stock 1996--2,200 shares............................................... (69,773) (206) Notes receivable from officers.................................................. (1,394) (1,839) Unearned compensation........................................................... (652) -- Retained earnings .............................................................. 434,122 375,577 ---------------------------- Total stockholders' equity ..................................................... 565,904 569,395 ---------------------------- Total liabilities and stockholders' equity ..................................... $1,692,020 $1,669,753 - ------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
Fred Meyer, Inc. and Subsidiaries 17
Statements of Consolidated Cash Flows Fiscal Year Ended ---------------------------------------------- February 1, February 3, January 28, (In thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income ................................................................. $ 58,545 $ 30,286 $ 7,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment ................ 116,546 107,077 89,474 Amortization of goodwill ............................................... 308 308 308 Writedown of California assets ......................................... -- -- 15,978 Deferred lease transactions ............................................ (4,944) (3,384) (2,599) Deferred income taxes .................................................. 9,182 1,626 (3,526) Other liabilities ...................................................... (2,682) (2,085) (347) Inventories ............................................................ (84,355) (6,082) (37,358) Other current assets ................................................... (17,714) 13,705 1,552 Accounts payable and accrued expenses .................................. 105,210 (28,890) 11,613 Income taxes ........................................................... 258 19,878 (33,681) Other .................................................................. (14,110) 613 1,458 ------------------------------------------- Net cash provided by operating activities .................................. 166,244 133,052 50,040 ------------------------------------------- Cash Flows from Financing Activities: Issuance of common stock - net ............................................. 7,498 2,278 3,369 Stock repurchase and related expenses ...................................... (70,099) -- -- Collection of notes receivable ............................................. 794 515 364 Increase in notes receivable ............................................... (857) (2,391) (213) Increase/(decrease) in outstanding checks .................................. 49,814 (18,162) 8,968 Long-term financing: Borrowings ............................................................. -- 158,500 258,871 Repayments ............................................................. (135,249) (42,652) (40,093) ------------------------------------------- Net cash (used for) provided by financing activities ....................... (148,099) 98,088 231,266 ------------------------------------------- Cash Flows from Investing Activities: Net sales (purchases) of investment securities ............................. 12,340 1,110 (935) Purchases of property and equipment ........................................ (146,917) (236,052) (284,193) Proceeds from sale of property and equipment ............................... 123,352 10,783 4,636 ------------------------------------------- Net cash used for investing activities ..................................... (11,225) (224,159) (280,492) ------------------------------------------- Net Increase in Cash and Cash Equivalents for the Year ......................... 6,920 6,981 814 Cash and Cash Equivalents, Beginning of Year ................................... 41,849 34,868 34,054 ------------------------------------------- Cash and Cash Equivalents, End of Year ......................................... $ 48,769 $ 41,849 $ 34,868 ------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash paid (refunded) during the year for: Interest (including interest capitalized of $121, $3,629, and $2,520) $ 40,458 $ 45,228 $ 31,022 Income taxes ........................................................... 25,744 (3,256) 40,757 - --------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
18 Fred Meyer, Inc. and Subsidiaries
Statements of Changes in Consolidated 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, January 29, 1994 ................ 26,415 $267 $189,949 -- $ -- $(653) $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 ................ 26,568 268 193,317 -- -- (256) 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 Notes receivable - officers............... -- -- -- -- -- (1,839) -- (1,839) Net income ............................... -- -- -- -- -- -- 30,286 30,286 -------------------------------------------------------------------------------------- Balance, February 3, 1996 ................ 26,705 270 195,593 -- -- (2,045) 375,577 569,395 Issuance of common stock: Stock options exercised .................. 1,689 17 7,244 -- -- -- -- 7,261 Stock bonus .............................. 10 -- 166 -- -- (566) -- (400) Treasury stock ........................... -- -- (326) 2,200 (69,773) -- -- (70,099) Tax benefits from stock options .......... -- -- 637 -- -- -- -- 637 Amortization of unearned compensation .... -- -- -- -- -- 120 -- 120 Payment on notes receivable - officers.... -- -- -- -- -- 445 -- 445 Net income ............................... -- -- -- -- -- -- 58,545 58,545 -------------------------------------------------------------------------------------- Balance, February 1, 1997 ................ 28,404 $287 $203,314 2,200 $(69,773) $(2,046) $434,122 $565,904 - ---------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
Fred Meyer, Inc. and Subsidiaries 19 Notes to Consolidated Financial Statements 1. The Company Fred Meyer, Inc., a Delaware corporation, and its subsidiaries operate a chain of 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. At February 1, 1997 the Company operated 219 stores, of which 109 are large multidepartment stores (101 with food departments), located in Oregon, Washington, Utah, Alaska, Idaho and Montana; and the balance are smaller specialty stores (including 105 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 1996, 1995 and 1994 ended on February 1, 1997, February 3, 1996 and January 28, 1995, respectively. Fiscal years 1996, 1995 and 1994 were 52, 53 and 52 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. Receivables--Receivables are reported net of allowances for potential uncollected accounts of $1,348,000 and $1,294,000 at February 1, 1997 and February 3, 1996, 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 $52,774,000 and $53,940,000 higher at February 1, 1997 and February 3, 1996, respectively. 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 under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years. The Company has no equipment under capital leases. 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 $4,659,000 and $4,352,000 at February 1, 1997 and February 3, 1996, respectively. Impairment of Long-lived Assets--In accordance with SFAS 121, the Company annually reviews and evaluates long-lived assets for potential impairment of value. A review and evaluation also occurs whenever events or changes in circumstances indicate that a long-lived asset's value may not be recoverable. 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 1, 1997, 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. Outstanding Checks--Checks that are issued 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. 20 Fred Meyer, Inc. and Subsidiaries 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 $34,867,000, 37,156,000 and $34,932,000 for 1996, 1995 and 1994. 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. 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). Stock-based Compensation--The Company adopted SFAS No. 123, Accounting for Stock-based Compensation, effective January 1, 1996. The Company will continue to measure compensation expense for its stock-based employee compensation plans using the method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, 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. 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. 3. Related-party Transactions The Company leases 56 store locations (one of which is closed) and a distribution center from MetLife, which is a major beneficial shareholder of the Company's stock, and other related parties. Rents paid to related parties on these properties were $61,762,000; $64,010,000 and $65,804,000; respectively for 1996, 1995 and 1994. (See note 8.) 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 1, 1997 and February 3, 1996, outstanding loans under this program amounted to $1,394,000 and $1,839,000, respectively. 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. Fred Meyer, Inc. and Subsidiaries 21 5. Long-term Debt
Long-term debt consisted of the following (in thousands): 1996 1995 ----------------------------------------------------------------------------------------------- Commercial paper with maturities through July 1997, classified as long-term, interest rates of 5.44% to 6.11% at February 1, 1997 ................................... $283,040 $283,344 Uncommitted bank borrowings classified as long-term ............ -- 123,500 Long-term notes secured by trust deeds, due through 2012, fixed interest rates from 9.00% to 9.52% .................... 41,819 42,536 Long-term notes, unsecured: Due 1997 through 1998, interest rate is periodically reset, 6.10% at February 1,1997, paid quarterly ........... 70,000 70,000 Due 1996, fixed interest rate of 7.74%, paid quarterly ...... -- 10,000 Due 2000, fixed interest rate of 6.775%, paid quarterly ..... 20,000 20,000 Senior notes, unsecured, due 1999 through 2007, fixed interest rates from 7.25% to 7.98% .................... 107,500 107,500 Other .......................................................... -- 159 -------------------------- Total .......................................................... 522,359 657,039 Less current portion............................................ (847) (779) -------------------------- Total .......................................................... $521,512 $656,260 -----------------------------------------------------------------------------------------------
The Company has the ability to support commercial paper, uncommitted bank borrowings, and other debt on a long-term basis through its Bank Credit Agreement and therefore, based upon management's intent, has classified these borrowings, which total $283,040,000 at February 1, 1997, as long-term debt. The Company has a Bank Credit Agreement 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. This agreement requires the maintenance of specified ratios and restricts the amounts of cash dividends paid. The Company bought back $69,773,000 of its stock in 1996 under provisions of this agreement. At February 1, 1997 and through June 14, 1997, the Company is restricted from payment of dividends or repurchase of Company stock under this provision. As of June 15, 1997 the Company may pay cash dividends or repurchase Company stock based on 40% of net income for the year ending January 31, 1998. The Company has established uncommitted lines of credit for $105,000,000 with foreign banks and has uncommitted bid lines of credit for $120,000,000 with certain banks within its committed bank group. 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 Bank Credit Agreement. The Company has unrated commercial paper programs with maturities ranging up to 270 days in amounts up to a maximum of $500,000,000. The Company also has available letters of credit lines for $66,000,000, of which $24,330,000 had been issued at February 1, 1997. 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 1, 1997, the Company had outstanding four interest rate contracts, for a total notional principal amount of $75,000,000, with commercial banks. The two swap agreements effectively fix the Company's interest rate on unrated commercial paper, floating rate facilities and uncommitted lines of credit at rates between 5.20% and 7.595% on a notional principal amount of $40,000,000. These contracts expire through 1998. The 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 $35,000,000. These contracts expire through 1999. 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 February 1, 1997, the Company had outstanding seven rent rate contracts, for a total notional principal amount of $80,000,000, with commercial banks. Three of these agreements effectively fix the Company's rental rate on the lease lines at rates between 6.2775% and 6.537% on notional amounts of $40,000,000. The remaining four agreements effectively limit the maximum rental rate the Company will pay at 7.25% on notional amounts totaling $40,000,000. All seven of these contracts expire in 2000. Gains and losses on swaps 22 Fred Meyer, Inc. and Subsidiaries 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 1, 1997 are: 1997, $847,000; 1998, $60,428,000; 1999, $8,516,000; 2000, $314,743,000; 2001, $16,228,000; and thereafter, $121,597,000. 6. Income Taxes The provision for income taxes includes the following (in thousands):
1996 1995 1994 ------------------------------------------------------------------------------------------ Current ....................................... $26,701 $16,937 $7,919 Deferred ...................................... 9,182 1,626 (3,526) ------------------------------------------ Total ......................................... $35,883 $18,563 $4,393 ------------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
1996 1995 1994 ------------------------------------------------------------------------------------------ Federal income taxes at the statutory rate .... $33,050 $17,097 $4,046 State income taxes ............................ 2,833 1,466 347 ------------------------------------------ Provision for income taxes .................... $35,883 $18,563 $4,393 ------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at February 1, 1997 and February 3, 1996 were as follows (in thousands):
1996 1995 -------------------------------------------------------------------------- Deferred tax assets: Capitalized inventory costs ................. $ 8,627 $ 7,150 Accrued expenses ............................ 23,954 20,369 Restructuring related charges ............... 4,215 5,124 Deferred lease transactions ................. 13,644 16,063 Other ....................................... 8,552 10,058 -------------------------- Total deferred tax assets ................. 58,992 58,764 -------------------------- Deferred tax liabilities: Accumulated depreciation .................... 55,782 54,170 Prepaid expenses ............................ 12,748 5,918 LIFO inventory .............................. 8,412 7,444 -------------------------- Total deferred tax liabilities ............ 76,942 67,532 -------------------------- Net deferred income taxes ..................... $ 17,950 $ 8,768 -------------------------- Current deferred income taxes--asset .......... $(17,226) $(22,046) Noncurrent deferred income taxes--liability ... 35,176 30,814 -------------------------- Net deferred income taxes ..................... $ 17,950 $ 8,768 --------------------------------------------------------------------------
Fred Meyer, Inc. and Subsidiaries 23 7. Stockholders' Equity Stock Incentive Plans--At February 1, 1997, 4,113,000 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):
Weighted Average Option Price Shares Per Share Total -------------------------------------------------------------------------------------------- Shares under option: Balance, January 29, 1994...................... 2,154 $23.52 $50,651 Options granted............................. 406 36.16 14,696 Options exercised........................... (152) 17.14 (2,612) Options cancelled........................... (50) 33.58 (1,678) Balance, January 28, 1995 ..................... 2,358 25.90 61,057 Options granted ............................ 457 24.47 11,181 Options exercised .......................... (137) 14.76 (2,018) Options cancelled ......................... (121) 32.51 (3,929) ------- ------- ------- Balance, February 3, 1996 ..................... 2,557 25.93 66,291 Options granted ............................ 1,628 27.83 45,309 Options exercised .......................... (123) 17.74 (2,181) Options cancelled .......................... (891) 33.41 (29,778) ------- ------- ------- Balance, February 1, 1997 ..................... 3,171 25.12 $79,641 --------------------------------------------------------------------------------------------
Stock options granted in 1994, 1995 and 1996 expire in 10 years. The options vest over five years, 20 percent each year, beginning at the end of the first year. All stock options granted in 1994, 1995 and 1996 were granted at an amount equal to or greater than the fair market value on the grant date. Accordingly no compensation was recorded. The following table summarizes information concerning currently outstanding and exercisable options at February 1, 1997:
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 --------------------------------------------------------------------------------------------------------------------- $12 to $20 343 2.7 $14.61 337 $14.58 21 to 30 2,339 7.7 24.94 774 23.28 31 to 42 489 9.4 33.36 40 34.52 ----- ----- 12 to 42 3,171 7.4 25.12 1,151 21.13 ---------------------------------------------------------------------------------------------------------------------
Shares available for option as of February 1, 1997 and February 3, 1996 were 943,000 and 1,679,000, respectively. The Company issued a replacement grant election program in 1996 that allowed 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 who elected to reset their option price to $26.00, the vesting period started over. 24 Fred Meyer, Inc. and Subsidiaries 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 fair 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:
1996 1995 -------------------- --------------------- Actual Pro forma Actual Pro forma ------------------------------------------------------------------------------------------------------ Net income (in thousands) ........................... $58,545 $56,946 $30,286 $30,078 Net income per common share ......................... $2.09 $2.04 $1.07 $1.06 ------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants awarded in 1996 and 1995:
------------------------------------------------------------------------------------------- Weighted average expected volatility (based on historical volatility) ...............32.35% Weighted average risk-free interest rate .............................................5.98% Expected term ......................................................................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 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. In 1996, the Company awarded a stock bonus to a corporate officer for 10,000 shares totaling $291,250. 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. In 1996, the Company purchased 12,558 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 shares total $400,103 and vest annually over five years. 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. Fred Meyer, Inc. and Subsidiaries 25 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 1, 1997, deferred lease transactions consisted of $9,008,000 unamortized gain on capital leases, $27,784,000 of excess of rent expense over cash rents for the aforementioned leases and unamortized deferred gain on a sale-leaseback transaction of $9,526,000. 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 1, 1997, $136,307,000 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. On September 5, 1996, the Company closed a sale-leaseback with respect to 10 of its stores which generated $108,000,000 in net proceeds used to pay down its credit lines. The leases are for an initial term of 21 years, subject to renewal at the option of the Company; and the average rent, including amortization of fees and a deferred gain, is approximately $8,200,000 annually. Subsequent to year end in a series of transactions with MetLife, the Company purchased, for approximately $49,000,000, six stores leased from MetLife, including one store that was previously closed, plus an option to purchase 25 parcels at 18 of the 29 stores it will continue to lease from MetLife. An agreement has been entered into for new 25-year leases on these 29 stores that will result in reduced rents for accounting purposes. The Company's Clackamas Distribution Center has been sold by MetLife for approximately $63,000,000 to a third party and leased to Fred Meyer at reduced rates. An agreement with another lessor covered acquisition of fixed assets and utilized funds totaling $8,585,000. The 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. Minimum rentals under noncancelable leases for future fiscal years were (in thousands):
Operating Capitalized Less Net Fiscal Year Leases Leases Subleases Rentals ------------------------------------------------------------------------------------------ 1997 .............................. $ 94,687 $1,759 $10,300 $ $86,146 1998 .............................. 93,324 1,880 9,314 85,890 1999 .............................. 90,553 1,880 8,012 84,421 2000 .............................. 83,311 1,880 6,452 78,739 2001 .............................. 78,338 1,880 3,410 76,808 2002 and thereafter ............... 859,220 26,334 19,635 865,919 ----------------------------------------------------- Total ............................. $1,299,433 35,613 $57,123 $1,277,923 ---------- ---------------------- Less imputed interest ............. (22,315) Present value of minimum -------- rental payments ................. 13,298 Less current portion .............. (71) -------- Capitalized lease obligations ..... $13,227 ------------------------------------------------------------------------------------------
As of February 1, 1997, the leases for eight store locations and certain equipment were accounted for as capitalized leases. The amounts representing interest expense on these capitalized lease obligations were included in operating and administrative expenses and were $1,628,000, $1,701,000, and $1,848,000 in 1996, 1995, and 1994, respectively. Accumulated amortization of property under capitalized leases was $7,186,000 and $6,556,000, at February 1, 1997 and February 3, 1996, respectively. 26 Fred Meyer, Inc. and Subsidiaries Rent expense under operating leases, including executory costs, and payments under capitalized leases were as follows (in thousands):
1996 1995 1994 ---------------------------------------------------------------------------------------- Gross rent expense .................................. $109,393 $100,986 $101,163 Rent income from subleases .......................... (15,261) (13,941) (12,803) -------------------------------- Net rent expense .................................... 94,132 87,045 88,360 Payments under capitalized leases ................... 1,718 1,807 1,947 -------------------------------- Total ............................................... $ 95,850 $ 88,852 $ 90,307 ----------------------------------------------------------------------------------------
Included in gross rent expense for 1996, 1995, and 1994 were contingent rents of $1,467,000, $1,264,000, and $1,421,000, respectively. 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 $7,723,000, $6,438,000, and $5,891,000 in 1996, 1995, and 1994, respectively, for these contributions. 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 $10,358,000, $9,938,000, and $8,498,000 in 1996, 1995, and 1994, 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 $400,000 in 1996, $350,000 in 1995 and $325,000 in 1994. 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. Fred Meyer, Inc. and Subsidiaries 27 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 (in thousands):
February 1, 1997 February 3, 1996 --------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Current retirees ................................................... $1,289 $1,326 Fully eligible plan participants ................................... 877 912 Other active plan participants ..................................... 3,598 3,312 -------------------------- Accumulated postretirement benefit obligation in excess of plan assets ......................................... 5,764 5,550 Unrecognized transition obligation ................................... (1,253) (1,337) Unrecognized prior service cost ...................................... (283) (324) Unrecognized net gain/(loss) ......................................... 257 (211) -------------------------- Accrued postretirement benefit cost ................................ $4,485 $3,678 -------------------------- Weighted average discount rate ....................................... 8.0% 7.5% Net periodic postretirement benefit cost included the following components: Service cost--benefits attributed to service during the period ..... $411 $284 Interest cost on accumulated postretirement benefit obligation ..... 410 332 Amortization of transition obligation over 20 years ................ 125 125 Amortization of unrecognized gain .................................. -- (19) -------------------------- Net periodic postretirement benefit cost ............................. $ 946 $ 722 ---------------------------------------------------------------------------------------------------
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 2000, and Medicare Retirement Age and Over--5% for one year, 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 1, 1997 and February 3, 1996 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1996 and 1995 as follows (in thousands):
1996 1995 ---------------------------------------------------------------------------------------- Increase in accumulated postretirement benefit obligation......... $1,053 $990 Increase in service and interest costs............................ 169 121 ----------------------------------------------------------------------------------------
28 Fred Meyer, Inc. and Subsidiaries 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 1, 1997, 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 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 carrying amount and estimated fair value of long-term debt at February 1, 1997 are $522,359 and $535,891, respectively. 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 1, 1997, the Company could settle the swap agreements at a loss of $550,000 and cap agreements at a gain of $573,000. 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 position or consolidated results of operations. 13. Selected Quarterly Financial Data (Unaudited)
1996 Fiscal Quarters 1995 Fiscal Quarters (In thousands, except --------------------------------------------- ------------------------------------------- per-share data) Fourth Third Second First Fourth/3 Third Second First ------------------------------------------------------------------------------------------------------------------------ Net sales ............... $995,755 $835,142 $853,914 $1,040,028 $963,650 $749,015 $774,702 $935,351 Gross margin ............ 303,642/1 244,427 255,386 302,072 280,228/4 207,791 220,783 264,712 Income from operations... 53,401/1 18,472 33,651 28,336 41,676/4 5,393 25,233 16,125 Net income (loss)........ 27,636/1 6,292 15,173 9,444 18,839/4 (2,309) 10,673 3,083 Net income (loss) per common share....... $1.03/1,2 $.23/2 $.53/2 $.33/2 $.67/4 $(.08) $.37 $.11 Weighted average number of shares outstanding.. 26,722 27,693 28,703 28,539 28,199 28,254 28,369 28,465 ------------------------------------------------------------------------------------------------------------------------- /1 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 earnings per common share by $.12. /2 In 1996, the sum of the four quarters net income per common share does not equal the annual amount due to the purchase by the Company in October 1996 of 2,200,000 shares of its common stock. /3 The fourth quarter of 1995 is a 13-week period. /4 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.
Fred Meyer, Inc. and Subsidiaries 29 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. DAVID R. JESSICK David R. Jessick Senior Vice President, Finance and Chief Financial Officer 30 Fred Meyer, Inc. and Subsidiaries 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 1, 1997 and February 3, 1996, 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 1, 1997. 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 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Portland, Oregon March 12, 1997 Fred Meyer, Inc. and Subsidiaries 31 Part IV - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------------------------------------------------------------------------------- (a)(3) Exhibits. 23 Consent of Deloitte & Touche LLP. 32 Fred Meyer, Inc. and Subsidiaries Signatures - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 5, 1997 FRED MEYER, INC. By DAVID R. JESSICK ------------------------------------- David R. Jessick Chief Financial Officer and Senior Vice President, Finance Fred Meyer, Inc. and Subsidiaries 33 EX-23 2 CONSENT OF DELOITTE & TOUCHE LLP 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 12, 1997, included in the Annual Report on Form 10-K of Fred Meyer, Inc. for the year ended February 1, 1997, as amended by Form 10-K/A dated May 20, 1997 and Form 10-K/A dated August 5, 1997. DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP August 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----