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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Multidepartment Specialty Total
State Stores Stores Stores
--------------------------------------------------------------------------------
<S> <C> <C> <C>
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
--------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
-----------------------------------------------------------------------------------------------------------------
<FN>
/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.
</FN>
</TABLE>
4 Fred Meyer, Inc. and Subsidiaries
<PAGE>
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:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Total Retail
Location Square Footage Opened
-------------------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
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):
<TABLE>
<CAPTION>
Total Retail Scheduled
Location Square Footage to Open
-------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
12 Fred Meyer, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Fred Meyer, Inc. and Subsidiaries 13
<PAGE>
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
<FN>
/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.
</FN>
</TABLE>
14 Fred Meyer, Inc. and Subsidiaries
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
<TABLE>
<CAPTION>
Statements of Consolidated Operations
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
(In thousands, except per-share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Assets
February 1, February 3,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
16 Fred Meyer, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Liabilities and Stockholder's Equity
February 1, February 3,
(In thousands, except per share data) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 17
<PAGE>
<TABLE>
<CAPTION>
Statements of Consolidated Cash Flows
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
18 Fred Meyer, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 19
<PAGE>
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
<PAGE>
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
<PAGE>
5. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands):
1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
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
-----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ....................................... $26,701 $16,937 $7,919
Deferred ...................................... 9,182 1,626 (3,526)
------------------------------------------
Total ......................................... $35,883 $18,563 $4,393
------------------------------------------------------------------------------------------
</TABLE>
A reconciliation between the statutory federal income tax rate to the
provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
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
--------------------------------------------------------------------------
</TABLE>
Fred Meyer, Inc. and Subsidiaries 23
<PAGE>
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):
<TABLE>
<CAPTION>
Weighted
Average
Option Price
Shares Per Share Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
--------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
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
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
Actual Pro forma Actual Pro forma
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
<S> <C>
Weighted average expected volatility (based on historical volatility) ...............32.35%
Weighted average risk-free interest rate .............................................5.98%
Expected term ......................................................................5 years
-------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Operating Capitalized Less Net
Fiscal Year Leases Leases Subleases Rentals
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
Rent expense under operating leases, including executory costs, and
payments under capitalized leases were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
----------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
February 1, 1997 February 3, 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C>
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
---------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Increase in accumulated postretirement benefit obligation......... $1,053 $990
Increase in service and interest costs............................ 169 121
----------------------------------------------------------------------------------------
</TABLE>
28 Fred Meyer, Inc. and Subsidiaries
<PAGE>
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)
<TABLE>
<CAPTION>
1996 Fiscal Quarters 1995 Fiscal Quarters
(In thousands, except --------------------------------------------- -------------------------------------------
per-share data) Fourth Third Second First Fourth/3 Third Second First
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 29
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
