Item 1. Business. - -----------------
General
Fred Meyer, Inc. (the "Company") is a leading 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:
The Company's principal business strategy is to operate one-stop-shopping stores that provide convenient shopping for a broad selection of products in one location. Stores are organized into distinct departments that specialize in the sale of particular products. Multidepartment stores that include food, apparel and general merchandise are the Company's primary focus. The Company believes that its food departments increase the shopping frequency of area residents, build customer loyalty and enable its nonfood departments to generate higher levels of sales through increased customer traffic. In more recent years, the Company added food to previously nonfood multidepartment stores and replaced some of its older nonfood stores with new full-service stores which include food departments. The Company promotes cross-shopping by providing convenient access between departments and sections, by making each of these a strong competitor in the market for its products and by facilitating easy customer checkout through a common cash register system that allows customers to
Fred Meyer, Inc. and Subsidiaries 3
purchase merchandise from most departments at any checkstand location. The strength of the individual departments and sections, with their breadth and depth of product selection, national and private-label brands and emphasis on products of everyday use, distinguishes the Company's stores from other retailers and enables the Company to compete with supermarkets, drug stores, discount stores, mass merchandisers, department stores and specialty stores, including category-dominant retailers.
The following table sets forth certain statistical information with respect to the Company's operations for the periods indicated:
4 Fred Meyer, Inc. and Subsidiaries
During the last three years, the Company has made significant capital investments to (1) expand its operations by opening new multidepartment stores in existing markets and remodeling existing stores; (2) improve its Management Information Systems ("MIS") and (3) expand and improve its distribution infrastructure. In 1995, the Company also initiated a remerchandising program to reposition some of its departments to address increasing competition and changing customer preferences and developed smaller store formats for use in certain locations. Capital expenditures (before land sales and excluding real estate financed on leases), which amounted to approximately $236,000,000 in fiscal 1995, declined to approximately $147,000,000 in 1996 and are expected to increase moderately over the next two years. The Company presently intends to use all available cash flow to reinvest in the business of the Company and to reduce debt.
The Company was incorporated in Delaware in 1981 as a successor to the business of a company which opened its first store in downtown Portland, Oregon in 1922 and was incorporated in Oregon in 1923. The Company's principal executive offices are located at 3800 SE 22nd Avenue, Portland, Oregon 97202, and its telephone number is (503) 232-8844. References in this Form 10-K to the Company mean Fred Meyer, Inc., including its subsidiaries, unless the context requires otherwise.
Retail Operations
The Company's principal business strategy is to operate one-stop-shopping stores that provide convenient shopping for a broad selection of products in one location. In most of its stores, the Company sells over 225,000 items, with an emphasis on necessities and items of everyday use. The Company takes advantage of the high and diverse customer traffic in its stores to sell many categories of goods that are purchased on a discretionary basis, such as fine jewelry, home electronics and fashion apparel. Within many categories of apparel, products for the home, jewelry and home electronics, the Company offers customers the breadth of selection normally afforded by department or specialty stores. Its selection of food and groceries is comparable to that of large supermarkets. The Company emphasizes the sale of popular brands and its own private-label brands.
The Company's large stores are organized into departments and sections within departments that specialize in the sale of particular products. The Company endeavors to create individual, recognizable identities for each department and section through specialized design, fixtures and decor. Most of the Company's departments and sections are self-service, except in areas where special sales assistance is required, such as service delicatessens, service meat and/or fish, home electronics, fine jewelry and pharmacy.
The following table sets forth the number of departments and sections in the Company's 109 multidepartment stores at February 1, 1997:
Fred Meyer, Inc. and Subsidiaries 5
The Food Department is typically the same size as free-standing super food stores of competitors and carries a wide variety of national brands, together with the Company's private-label brands of grocery items, which include First Choice, Fred Meyer and FMV (Fred Meyer Value). The average size of the Company's food departments is approximately 38,000 square feet. This square footage does not include space devoted to pharmacies, health and beauty aids, cards and books, nutrition and all other general merchandise. Beginning in 1992, the Company implemented a program to increase sales of its private-label grocery items. As a result, sales of private-label grocery items as a percentage of total grocery sales have increased to approximately 20% from 12% in 1991. Private-label items generally are sold at lower prices to the customer and generate higher margins for the Company than national-brand products. The Company also carries fresh produce, meat, dairy products, bakery products, candy and tobacco, all generally sold on a self-selection basis. In many multidepartment stores, the Company operates in-store bakeries and service departments that offer fresh seafood, delicatessen items and meat products. The Company's newer stores include sit-down eating areas near the service delicatessens and take-out departments.
The Home Department offers a wide selection of home decor, housewares, small appliances, domestics, furniture, sporting goods, floral products, power lawn mowers, garden tools, fertilizers and chemicals, toys, seasonal and holiday merchandise, hardware, tools, paint, building materials, plumbing and electrical fixtures, automotive supplies and related accessories. Some of the national brands featured are Braun, Kitchen-Aid, Coleman, Glidden and Weber. Home improvement, garden and automotive sections feature many items for the do-it-yourself customer. High-quality private-label products under the Fred Meyer, Northwest Home, Everyday Living, Turf King, and Kraft King labels complement the national-brand offerings.
The Apparel Department offers moderately priced national-brand and private-label apparel, sportswear, cosmetics, accessories and family and active shoes. Major national brands carried by the apparel departments include Levi's, Jockey, Maidenform, Vanity Fair, Carter's, Danskin, Nike, Reebok, Adidas, Gotcha, Eastland, Union Bay, Columbia Sportswear, Fila, Lee, Bali and Keds. High-quality private-label products such as Fred Bear, Cascade Kids, Katherine Bishop and Great Northwest complement the national-brand offerings.
The Company's private-label sales in the Home and Apparel Departments represented 16 to 18% of these departments' sales in 1996, with a long-term goal of approximately 20%. The strategy employed in nonfood departments is to use private-label products for both entry-level price points and better offerings at value prices. In 1995 and 1996, the Company introduced additional private-label items in the Home and Apparel Departments to bring additional value to its customers and to improve gross margins in these areas.
The Home Electronics Department offers a large selection of compact discs, for-sale videos and video games and the latest name-brand merchandise, including televisions, VCR's, digital satellite systems, audio components, cellular phones, computer software and telephones. Some of the national brands featured are Sony, JVC, Pioneer and Magnavox. One-hour photo-finishing has been added to numerous locations.
The Pharmacy Department sells a full line of name-brand and generic prescription drugs dispensed by full-time licensed pharmacists and participates with all major third-party Health Maintenance Organization and Preferred Provider Organization plans.
The Health and Beauty Aids section offers a wide selection of national- and private-label brands of health and beauty aid products. It also offers candy and confections and dietary food products. A new line of private-label toiletry and personal-care products called Personal Choice was introduced in 1995.
The Cards and Books section offers a large selection of greeting cards, gift wrap, giftware, paperback books and magazines.
6 Fred Meyer, Inc. and Subsidiaries
The Nutrition section offers name-brand and generic natural foods, dairy products, juices, vitamins, supplements, sugar-free and fat-free products and meat substitutes. Certain items, such as grains, nuts, fruits and natural snacks, are also displayed in bulk to enable customers to buy any amount and package their own purchases.
The Company entered the fine jewelry business in 1973 with its acquisition of a retailer which had existing jewelry operations. Since that time, the Company has expanded its jewelry operations through the establishment of Fine Jewelry Departments within its multidepartment stores and through the leasing of individual locations, averaging approximately 1,300 square feet, in major regional shopping malls. The Company's Fine Jewelry Departments and mall jewelry stores offer an extensive selection of bridal and fashion jewelry, including precious and semi-precious stones. In addition, these departments and mall stores offer name-brand watches and an assortment of 14-carat gold chains and earrings. During the first half of 1996, the Company acquired 71 leased jewelry locations in major shopping malls in 11 states. With these acquisitions, as of February 1, 1997, the Company operated 105 mall jewelry stores under the names "Fred Meyer Jewelers" or "Merksamer Jewelers" and had 98 Fine Jewelry Departments in its multidepartment stores. The recent expansion of the Company's jewelry business is expected to improve the Company's ability to purchase inventory on favorable terms and reduce overhead costs on a per unit basis.
Most of the Company's multidepartment stores open at 7:00 a.m. and close between 10:00 p.m. and 11:00 p.m., seven days a week, including all holidays except Christmas. Most of the multidepartment store locations have complementary third-party tenants (such as banks, optical centers, gourmet coffee bars, restaurants and video rental stores) that attract high customer traffic. The Company's specialty store hours vary depending on location.
Each multidepartment store is managed by a sales director who is responsible for store sales, operations, profitability and departmental cross-merchandising. Departments within multidepartment stores have managers who report to the sales directors. Each sales director and department manager is supported by a regional supervisor and other senior managers who specialize in the market for products sold in the stores. The Company has regional management teams that work closely with the stores in their regions to enhance sales and profit opportunities. As a result of this management structure, the Company believes that each of its stores and the departments within each store serve customers better and are able to respond quickly to market changes.
The Company honors most nationally recognized credit cards for sales in all departments. In addition, the Company has its own credit card program, which is serviced by a national credit card processor. The Company also accepts debit cards that are associated with nationally recognized credit card processors. In 1996, the Company's multidepartment stores and selected jewelry stores began accepting debit cards that use personal identification number ("PIN") pads which process electronic benefits online.
Distribution and Processing
The Company primarily purchases goods using centralized merchandise buyers. It operates a 1,528,000-square-foot distribution center in Clackamas, Oregon, near Portland, a 310,000-square-foot flow-through distribution facility in Chehalis, Washington and a 600,000-square-foot food distribution center in Puyallup near Seattle, Washington. Approximately two-thirds of the merchandise the Company sells is shipped to the stores from these facilities, with the balance shipped directly by vendors to the Company's stores or, in the case of food products for its Utah stores, purchased from a major wholesale supplier. The Company operates a large fleet of trucks and trailers for distribution of goods to its retail stores.
The Company has made significant capital investments in its distribution centers which, together with the MIS improvements, are designed to improve operations, permit better inventory management and reduce distribution costs. During 1993 through 1995 the Company has spent approximately $85,000,000 to build and upgrade its distribution centers.
Fred Meyer, Inc. and Subsidiaries 7
The Company opened a flow-through retail service center in April 1994 in Chehalis, Washington to serve as the centralized distribution facility for certain apparel, music, seasonal and other nonfood items. This facility minimizes the required handling and processing of goods received from vendors and distributed to the Company's stores. It has improved inventory management and reduced distribution costs for the goods shipped through this facility.
In 1995 the Company opened a 600,000-square-foot centralized food distribution facility in Puyallup near Seattle, Washington to serve stores in the Puget Sound Region and Alaska. This facility reduces the cost of transporting goods into the Puget Sound and Alaska markets and affords the Company increased forward-buying opportunities for its food operations.
The Company believes that its existing distribution facilities enable it to meet expected nonfood and food distribution needs until at least the year 2000. As the Company opens additional stores, it expects to utilize the excess capacity currently available at its existing distribution facilities and achieve improved operating efficiencies as distribution facility costs are spread over more sales. Additional acreage is owned or leased at each site to accommodate future expansion.
As a result of its recent investment in information systems and distribution facility improvements, the Company has been able to establish electronic data interchange ("EDI") and automated replenishment programs with many vendors. These quick response capabilities improve inventory management and reduce handling of inventory in the distribution process, which results in lower markdowns and lower distribution costs as a percentage of sales.
The Company believes that its distribution and related information systems provide several additional advantages. First, they permit stores to maintain proper inventory levels for more than 190,000 items supplied through its central distribution facilities. Second, centralized purchasing and distribution reduce the Company's cost of merchandise and related transportation costs. Third, because distribution can be made to stores frequently, the Company is able to reduce the in-store stockroom space and maximize the square footage available for retail selling.
The Company owns and operates a bakery and a dairy. Products processed by the Company are sold primarily through its own retail stores. The Company also sells products from these two manufacturing facilities to third parties.
Management Information Systems
The Company operates a centralized computer system which is linked to store and distribution facility operations through an upgraded network. Stores are supported by the latest technology in store point-of-sale systems. Over the last six years the Company has undertaken a major modernization of its MIS capabilities. In 1994 through 1996 the Company spent approximately $56,000,000 on its centralized computer operations. New merchandising and buying systems have been installed for the Company's food and jewelry operations, with the remaining nonfood categories being converted to a new merchandising system in 1997. Completion of the nonfood merchandising system will allow the Company to combine all computer operations from the two systems it operates today onto one mainframe in 1997, saving approximately $2,000,000 annually in operating costs. When combined with the Company's improved distribution capabilities and new financial systems, the merchandising and buying systems will enhance the Company's quick response inventory capabilities and will improve future inventory management and profitability. The Company believes that these systems will be able to support its growth into the next century.
8 Fred Meyer, Inc. and Subsidiaries
Store Expansion and Development
The Company enlarges, remodels, closes or sells stores in light of their past performance or the Company's assessment of their potential. The Company continually evaluates its position in various market areas to determine whether it should expand or consolidate its operations in those areas. New store sites are determined based on a review of information on demographics and the competitive environment for the market area in which a proposed site is located. The Company's expansion focus is in existing areas of operation, primarily in or near well-populated residential areas. The Company determines store size and designs stores with a view toward making each store a very convenient, one-stop-shopping store in the area it serves. The Company is flexible in its store design where land sites require specialized designs, such as two-level or smaller stores.
During the last three years, the Company increased new store development in its existing markets and the level of remodeling of existing stores. Total retail space, net of closures, increased 663,000 square feet, or approximately 4.7%, during 1995, and increased 1,078,000 square feet, or approximately 7.3%, during 1996. New multidepartment store openings during 1996 representing 917,000 square feet were as follows (in thousands):
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):
The Company currently plans to remodel five stores in each of 1997 and 1998. The major remodeling programs during the last three years included (1) adding food departments to nine existing stores that previously sold only nonfood merchandise; (2) removing walls between departments to facilitate cross-shopping and common checkout for customers; and (3) adding food service departments, such as deli and bakery, to its stores. As a result of these efforts, total square footage for multidepartment stores increased from 12,486,000 square feet at the end of fiscal 1992 to 15,717,000 square feet as of February 1, 1997. As of February 1, 1997, 51% of the multidepartment stores had been built or remodeled within the last five years. The portion of the remodeling program involving the addition of food departments to multidepartment stores will be substantially complete in 1997.
Fred Meyer, Inc. and Subsidiaries 9
Promotion and Advertising
The Company aggressively promotes sales for all departments through weekly advertising, primarily in local and area newspapers, radio and television. Advertising often features many high-demand products at competitive prices. The Company emphasizes everyday low prices in its food departments and generally offers promotional pricing in its nonfood departments. By opening new stores in existing market areas and by remodeling and expanding existing stores, the Company leverages its advertising budget. In 1996, the Company reduced the number of pages of weekly print advertising and increased radio and television advertising in order to reach more customers.
Strategic Changes
The Company reviews its competitive position on a location-by-location basis and analyzes the contribution that each department makes to overall profitability. In 1995, in response to increasing competition from discount retailers and from category-dominant competitors, particularly in the home improvement and home electronics categories, the Company began a remerchandising program in some departments to improve the overall profitability of the Company's operations. These repositioning efforts included: (1) reducing the space allocated to building materials in those stores affected by category-dominant home improvement centers and utilizing this space for other product categories (such as expanded garden centers); (2) reducing computer hardware in a majority of stores and increasing the selection of higher-margin items in home electronics, such as computer software and accessories, compact discs, video games and cellular telephones; (3) refining the apparel selection to emphasize brands, key basic and fashion essentials and casual sportswear; (4) adding additional private-label products to the apparel selection, home products and personal care products; (5) adding new product categories (such as pet centers, bath boutiques, "FM elements" clothing shops for young adults and tool and accessory centers) to certain stores; and (6) increasing the amount of space leased to complementary third-party tenants (such as banks, optical centers, gourmet coffee bars, restaurants and video rental stores) that attract high customer traffic.
Competition
The retail merchandising business is highly competitive. Because of the broad range of merchandise sold by the Company, it competes with many types of retail companies, including national, regional and local supermarkets, discount stores, drug stores, conventional department stores, mall jewelry stores and specialty stores, including category-dominant stores. The Company's competitive position in the retail business varies by type of goods and the communities in which its stores are located. During the last five years, approximately 500 new competitor stores opened in the Company's markets according to a survey conducted by the Company. These competitors included Wal-Mart, Walgreens, Home Depot, HomeBase, Eagle, Sam's Club, Circuit City, Good Guys, Future Shops, Costco, Mervyn's, PayLess, J.C. Penney, Kmart, Target, ShopKo, BiMart, Toys-R-Us, Food 4 Less, Cub Foods, Safeway, Albertson's, Smiths Foods, Carrs and Quality Food Centers. Many of these companies have substantially greater financial and other resources than the Company. The Company's recent competitors include category-dominant stores, particularly in the home improvement and home electronics categories. The Company has responded to the influx of category-dominant stores and other competitors by reducing some product offerings, including computers and building materials, and expanding other offerings to improve overall profitability. No assurance can be given that the Company's strategy will be effective and that the Company will be able to effectively compete against the category-dominant stores or other competitors. In addition, while the Company is the only multidepartment store with significant food departments in most of its markets, some retail companies operate stores under this general format in other regions and could enter the Company's existing markets.
The Company emphasizes customer satisfaction, large selections of high-quality popular products and competitive pricing. In addition, the Company believes that the convenience, attractiveness, and cleanliness of its stores, together with a sales staff knowledgeable in specialty areas, enhances its retail sales efforts and competitive position.
10 Fred Meyer, Inc. and Subsidiaries
Employees
The Company employs approximately 28,000 full- and part-time employees. Approximately 50% of the Company's employees are represented by 25 different labor unions or locals. These employees are covered by 111 different collective bargaining agreements, none of which covers more than 2,500 employees. The Company believes that it has satisfactory relations with the many unions representing these employees.
The last work stoppages the Company experienced involved the multiemployer bargaining unit for food clerks, checkers, and meatcutters in Portland, Oregon and Vancouver, Washington in 1994, which lasted 88 days. At the same time, Company union employees at its Clackamas distribution facilities, trucking operation, dairy and a small portion of its office employees went on strike. Coos Bay, Oregon nonfood employees went on strike in late 1994 and returned to work on January 14, 1995.
In 1996, the Company reached agreement on contracts covering nonfood employees in Portland, Oregon and settled its Vancouver, Washington food contracts early. Of the 28 contracts that expired in 1996, 26 have satisfactorily completed negotiations; and two that expired toward the latter part of the year are still in negotiations. These two contracts cover less than one percent of total employees. Approximately 21 labor agreements, covering approximately 6% of the labor force, will expire during fiscal 1997, including agreements with the common checkout workers in the Portland, Oregon metropolitan area and employees in other large metropolitan and smaller non-metropolitan areas where the Company operates. The multiemployer grocery and meat worker contracts in the Portland, Oregon metropolitan area, covering approximately 1,500 Fred Meyer employees, that were scheduled to expire in July 1997 were renegotiated in April 1997 to run through July 2000. While the Company is optimistic about reaching agreements with the employees covered by contracts expiring in the immediate future, no assurance can be given that the parties will be able to reach a final conclusion without the occurrence of a work stoppage and the related disruption of the Company's business or that any agreements reached will be on terms that are favorable to the Company.
Forward-looking Statements
Information set forth in this Annual Report on Form 10-K and in the 1996 Annual Report to Shareholders regarding the Company's plans for future operations, including the Company's expectations relating to store expansion and remodeling, capital spending, expense reduction, debt/capital ratios, improvements in sales and inventory turns, reduced markdowns, reduced working capital needs and increases in sales, earnings per share and shareholder value constitutes "forward-looking statements" that involve a number of risks and uncertainties within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. In addition, from time to time the Company may issue other forward-looking statements. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: business and economic conditions generally in the regions in which the Company's stores are located, including the rate of inflation; population and job growth in the Company's markets; competitive factors, such as increased penetration in the Company's markets of large national food and nonfood chains, large category-dominant stores and large national and regional discount retailers and competitive pricing pressures generally; results of the Company's programs to decrease costs as a percent of sales; relations with the union bargaining units representing the Company's employees; factors that might affect the Company's cost and availability of capital; and unusual weather conditions. Any forward-looking statements should be considered in light of these factors. For additional information regarding competition, see "Competition" above and for additional information regarding labor relations see "Employees" above.
Fred Meyer, Inc. and Subsidiaries 11
Item 2.
Item 2. Properties. - -------------------
As of February 1, 1997, the Company owned 22 store locations and four other facilities, including its corporate headquarters. The balance of the Company's locations are leased from Metropolitan Life Insurance Company ("MetLife") or third parties. Of the Company's 109 multidepartment stores, 86% have either been built or received a major remodel in the last ten years. The Company also owns six parcels of land on which it has or is constructing new stores and three parcels of land which are being held for development of future stores. Additionally, it owns one vacant store and two parcels of land in California and two parcels of land in Washington which are being held for sale.
The following table as of February 1, 1997, summarizes the remaining lease years, assuming the exercise of all options, for store locations, distribution and other facilities:
The Company has no obligation to exercise any options beyond the primary lease terms.
Item 3.
Item 3. Legal Proceedings. - --------------------------
The Company and its subsidiaries are parties to various legal claims, actions and complaints which have arisen in the ordinary course of business. Although the Company is unable to predict with certainty whether it will ultimately be successful in these legal proceedings or, if not, what the impact might be, management presently believes that disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or consolidated results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------
Not applicable.
12 Fred Meyer, Inc. and Subsidiaries
Item 4(a). Executive Officers of the Registrant. - ------------------------------------------------
As of April 10, 1997, the executive officers of the Company were as set forth below.
The executive officers of the Company are elected annually for one year and hold office until their successors are elected and qualified. There are no family relationships among the executive officers of the Company.
Mr. Miller became Chairman of the Board and Chief Executive Officer of the Company in August of 1991. Prior to that time he was employed by Albertson's, where his most recent positions were Executive Vice President of Retail Operations from 1989 to 1991 and Senior Vice President and Regional Manager from 1985 to 1989. Mr. Miller has more than 30 years of experience in the retail food industry.
Mr. Thrasher became Executive Vice President and Chief Administrative Officer in January of 1997. Prior to that time, he was Senior Vice President, Finance and Chief Financial Officer from March 1989 until January 1997, Vice President Finance, Chief Financial Officer and Secretary from 1987 until 1989 and Vice President, Corporate Treasurer from 1982 until 1987.
Mr. Abbott became Senior Vice President, Home Group in February 1996. Prior to that time, he served as Vice President, Home Group from September 1994 through February 1996 and Vice President, Food Group from 1989 through August 1994.
Mr. Baltzell became Senior Vice President, Store Sales in 1996. Prior to that time he was Senior Vice President, Store Sales and Operations Division from June 1989 until 1996 and Vice President, Food Operations of the Company from 1982 until June 1989.
Mr. Cooke became Senior Vice President, General Counsel and Secretary in April 1993. Prior to that time he was Vice President, General Counsel and Secretary of the Company from August 1992 until April 1993. From 1982 to 1992, he was an officer of Pan American World Airways, Inc., serving as Senior Vice President and General Counsel from 1990 to 1992. From 1973 to 1980, he was associated with the law firm Simpson Thacher and Bartlett.
Fred Meyer, Inc. and Subsidiaries 13
Mr. Dayoob became Senior Vice President, President, Fred Meyer Jewelers in June 1996. Prior to that time, he served as Senior Vice President, Jewelry Division from 1993 until June 1996 and Senior Vice President, Photo Electronics and Jewelry Group from 1989 to 1993. The Home Electronics Division was merged into the General Group in 1993. From 1979 until 1989, Mr. Dayoob served as Vice President, Jewelry Division.
Mr. Don became Senior Vice President, Chief Executive Officer Fred Meyer Jewelers in June 1996. Prior to that time, he served as Senior Vice President, Strategic Planning and Asset Management from June 1995 to June 1996 and Vice President, Corporate Treasurer from October 1987 to June 1995. Before joining the Company in 1987, he was Controller and Treasurer for two real estate development and management companies.
Mr. Duncan became Senior Vice President, Food Group in February 1996. Prior to that time, he served as Food Group Division Vice President from 1994 to February 1996 and Vice President Grocery Merchandiser from 1992 to 1994. During 1991 and prior to joining the Company in 1992, he was Director of Operations for Albertson's.
Mr. Intile became Senior Vice President, Distribution and Trucking in June 1996. Prior to that time, he served as Vice President of Distribution from 1991 to 1996 and Assistant Vice President of Industrial Engineering from 1988 to 1991. Before joining the Company in 1988, he worked for PayLess Drug Stores in their distribution center operations from 1975 to 1988.
Mr. Jessick became Senior Vice President, Finance and Chief Financial Officer in January of 1997. Prior to that time, he was employed by Thrifty PayLess Holdings Inc., where his most recent positions were Executive Vice President and Chief Financial Officer from 1994 to 1996 and Senior Vice President, Finance and Chief Financial Officer from 1990 until 1994.
Mr. Lovett became Senior Vice President, Human Resources of the Company in February 1992. Prior to that time he was employed by Eagle Food Centers, where he was Senior Vice President of Human Resources and Vice President of Industrial Relations.
Mr. Myhr became Senior Vice President, Sales Promotion and Marketing in 1991. Prior to that time he was Senior Vice President, Strategic Marketing from 1989 until 1991 and Vice President, Sales Promotion from 1982 until 1989.
Ms. Perrin became Senior Vice President, Public Affairs in April 1992. Prior to that time she was Vice President, Public Affairs from 1988 until 1992 and Vice President, Government Affairs from 1985 until 1988.
Ms. Sammons became Senior Vice President, Apparel and Home Electronics Group in 1995. Prior to that time she was Senior Vice President, General Group from June 1989 until 1995, Senior Vice President, Soft Goods Division from January 1986 until June 1989 and Vice President within the Soft Goods Division from 1980 until January 1986.
Mr. Wippel became Senior Vice President, Corporate Facilities in April 1993. Prior to that time he was Vice President, Corporate Facilities from June 1992 until April 1993. Before joining the Company, he was employed by Albertson's where his most recent positions were Vice President of Real Estate from 1990 to 1992 and Director of Real Estate from 1988 to 1990.
14 Fred Meyer, Inc. and Subsidiaries
Part II - --------------------------------------------------------------------------------
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. - ------------------------------------------------------------------------
Common Stock Information
The Company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "FMY." At February 1, 1997, the Company had approximately 1,300 shareholders of record.
The Company has not paid dividends since its incorporation in 1981, and it is the current policy of the Board of Directors that all available cash flow be used for reinvestment in the business of the Company and for the reduction of debt.
Fred Meyer, Inc. and Subsidiaries 15
16a Fred Meyer, Inc. and Subsidiaries
16b Fred Meyer, Inc. and Subsidiaries
Fred Meyer, Inc. and Subsidiaries 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ----------------------------------------------
The following discussion summarizes Fred Meyer, Inc.'s operating results for the fiscal year ended February 1, 1997 ("1996") compared with the fiscal year ended February 3, 1996 ("1995") and for 1995 compared with the fiscal year ended January 28, 1995 ("1994"). Also included are discussions of the Company's liquidity, capital resources, effect of LIFO, effect of inflation and recent accounting changes. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements.
Results of Operations--1996 Compared with 1995
Net sales for 1996 (52 weeks) increased $302,121,000, or 8.8%, over 1995 (53 weeks). This increase reflects openings of five full-size multidepartment stores, two marketplace stores, and five jewelry stores in malls and the acquisition of 71 mall jewelry stores. Comparable store sales, measured on a 52-week corresponding period for both years, increased 3.8% for 1996. Comparable food sales increased 4.7%, and comparable nonfood sales increased 3.1%. Food sales as a percent of net sales were 41.1% and 41.0%, respectively for 1996 and 1995.
Gross margin as a percent of net sales was 29.7% in 1996 compared with 28.4% in 1995. Gross margins increased primarily due to significant reductions in markdowns in 1996 versus 1995, the effects of increased sales of higher-margin jewelry, primarily from the 71 acquired fine jewelry stores, and lower distribution costs as a percent of sales.
Operating and administrative expenses increased 9.8% to $971,667,000 in 1996 from $885,087,000 in 1995, and as a percent of net sales were 26.1% in 1996 and 25.9% in 1995. Operating and administrative expenses increased as a percent of sales due to the higher expense structure at the fine jewelry stores and increased wages for additional staffing in some nonfood sections of the multidepartment stores. These increases were partially offset by reduced advertising expense as a percent of sales.
Net interest expense decreased to $39,432,000 in 1996 from $39,578,000 in 1995. The decrease primarily reflects lower borrowings due to the impact of the Company's third quarter $108,000,000 sale-leaseback of 10 stores and to improved cash flow from operations, offset in part by the third quarter repurchase of $70,000,000 of common stock.
The effective tax rate was 38.0% for both 1996 and 1995.
Net income was $58,545,000 for 1996 and $30,286,000 for 1995. This increase is primarily the result of the above-mentioned factors.
Results of Operations--1995 Compared with 1994
Net sales for 1995 (53 weeks) increased $300,083,000, or 9.6%, over 1994 (52 weeks). This increase reflects openings of six full-size multidepartment stores, three jewelry stores in malls and the addition of food to three previously nonfood stores, offset in part by the closure of four multidepartment stores. Comparable store sales increased 2.1% for 1995. Comparable food sales increased 6.6% and comparable nonfood sales decreased .9%. These sales comparisons were aided by the negative impact of labor strikes on 1994 sales. Excluding store sales during the three-month period in 1994 affected by the strikes, total comparable store sales decreased .6% in 1995, with comparable food sales increasing 3.1% and comparable nonfood sales decreasing 3.0%. Comparable sales are measured on a 53-week corresponding period for both years. Food sales as a percent of net sales were 41.0% and 38.3%, respectively, for 1995 and 1994. The increase in food sales as a percent of net sales was primarily due to an increase in the number of the Company's stores that sell food.
18 Fred Meyer, Inc. and Subsidiaries
Gross margin as a percent of net sales was 28.4% in 1995 compared with 27.6% in 1994. 1995's fourth quarter gross margins increased as a percent of sales primarily due to the comparison to reduced 1994 fourth quarter margins, which were affected by factors associated with labor strikes and increased promotional activities. Gross margins for 1995, however, were negatively affected by slow nonfood sales, a high level of nonfood promotions and a greater portion of sales being in food where margins are typically lower, partially offset by a lower LIFO charge and the impact of increased utilization of new flow-through distribution facilities.
Operating and administrative expenses increased 9.6% to $885,087,000 in 1995 from $807,924,000 in 1994, and as a percent of net sales were 25.9% for both years. This comparison was prior to reflecting 1994's writedown of California assets of $15,978,000, covering one store and three land parcels.
Net interest expense was $39,578,000 for 1995 and $25,857,000 for 1994, an increase of 53.1%. This increase primarily reflects interest on debt associated with increased capital spending, and to a lesser extent, interest on debt incurred as a result of 1994's labor disputes.
The effective tax rate was 38.0% for both 1995 and 1994.
Net income was $30,286,000 for 1995 and $7,168,000 for 1994. This increase is primarily the result of the above-mentioned factors. Excluding the writedown of California assets, 1994 net income was $17,074,000.
Liquidity and Capital Resources
The Company funded its working capital and capital expenditure needs in 1996 through internally generated cash flow and sale-leaseback proceeds, supplemented by borrowings under committed and uncommitted bank lines of credit and unrated commercial paper. Cash provided by operating activities was approximately $33,192,000 higher in 1996 than 1995. This was mainly due to a decrease in working capital (primarily through increased accounts payable) and the increase in net income. Changes in cash flows from investing and financing activities are primarily the result of the timing of borrowing and capital expenditures. Additionally, in 1996 the Company repurchased 2,200,000 shares of its common stock for $70,099,000, including expenses.
On September 5, 1996 with respect to 10 of its stores, the Company closed a sale-leaseback which generated $108,000,000 in net proceeds used to pay down 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.
The Company renewed its credit facility in 1996 with several domestic and foreign banks for a committed line of credit which provides for borrowings of up to $500,000,000. This agreement continues through June 30, 2000, at which time the agreement terminates and any outstanding amounts must be paid in full. In addition to this committed credit facility, at February 1, 1997 the Company had $105,000,000 of uncommitted money market lines with several foreign banks and $120,000,000 of uncommitted money market lines with banks which are also in the committed credit facility. The bank lines and unrated commercial paper are used primarily for seasonal inventory requirements, new store construction and financing, existing store remodeling, acquisition of land, and major projects such as the development of MIS. At February 1, 1997 the Company had unrated commercial paper outstanding in the amount of $283,040,000 and a total of approximately $216,960,000 available for borrowings that would be supported by its committed credit facility.
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.
Fred Meyer, Inc. and Subsidiaries 19
In 1992, the Company's Board of Directors adopted a derivative policy recognizing derivative financial instruments as an integral part of its risk management program. Management periodically reviews the use of derivative transactions and market positions, including assessments of compliance with the policy.
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. 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. 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 principal amounts of $40,000,000. The remaining four agreements effectively limit the maximum rental rate the Company will pay at 7.25% on notional principal amounts totaling $40,000,000. All seven of these contracts expire in 2000. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate and rent rate swap and cap agreements. The Company requires an A or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties.
During 1996, capital expenditures totaled $146,917,000, net of real estate financed on leases. The Company opened five full-size multidepartment stores, two marketplace stores and five jewelry stores in malls, acquired 71 jewelry stores in malls and remodeled four multidepartment stores. In addition, the Company is continuing its program of replacing and upgrading its MIS. During 1996, the Company also began construction of four multidepartment stores and one replacement store scheduled to open in 1997. At least five major remodels are planned for completion in 1997. The Company believes that a combination of cash flow from operations, proceeds from sale-leasebacks, lease facilities and borrowings under its credit facilities will permit it to finance its capital expenditure requirements for 1997, estimated at $165,000,000, net of estimated real estate financed on leases.
Effect of LIFO
During each year, the Company estimates the LIFO adjustment for the year based on estimates of three factors: inflation rates (calculated by reference to the Department Stores Inventory Price Index published by the Bureau of Labor Statistics for soft goods and jewelry and to internally generated indices based on Company purchases during the year for all other departments), expected inventory levels, and expected markup levels (after reflecting permanent markdowns and cash discounts). At year-end, the Company makes the final adjustment reflecting the difference between the Company's prior quarterly estimates and actual LIFO amount for the year.
Effect of Inflation
While management believes that some portion of the increase in sales is due to inflation, it is difficult to segregate and to measure the effects of inflation because of changes in the types of merchandise sold year-to-year and other pricing and competitive influences. By attempting to control costs and efficiently utilize resources, the Company strives to minimize the effects of inflation on its operations.
Recent Accounting Changes
There are no issued and pending accounting changes which will have a material effect on the Company's financial reporting.
20 Fred Meyer, Inc. and Subsidiaries
Item 8. Financial Statements and Supplementary Data. - ----------------------------------------------------
Fred Meyer, Inc. and Subsidiaries 21
22 Fred Meyer, Inc. and Subsidiaries
Fred Meyer, Inc. and Subsidiaries 23
24 Fred Meyer, Inc. and Subsidiaries
Fred Meyer, Inc. and Subsidiaries 25
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 buildings and equipment is provided using the straight-line method over the estimated useful lives of the related assets of three to 31 years. Amortization of property under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years.
Goodwill--Goodwill is being amortized on a straight-line basis over 30 years. Management periodically evaluates the recoverability of goodwill based upon current and anticipated net income and undiscounted future cash flows. Accumulated amortization was $4,659,000 and $4,352,000 at February 1, 1997 and February 3, 1996, respectively.
Investment Securities--As of January 28, 1995, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 requires the classification of securities at acquisition into one of three categories: held to maturity, available for sale, or trading. At February 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.
26 Fred Meyer, Inc. and Subsidiaries
Buying and Promotional Allowances--Vendor allowances and credits that relate to the Company's buying and merchandising activities are recognized as earned.
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 27
5. Long-term Debt
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
28 Fred Meyer, Inc. and Subsidiaries
and caps are amortized over the life of the instruments. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap and cap agreements. The Company requires an "A" or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties.
Annual estimated long-term debt maturities for the five fiscal years subsequent to February 1, 1997 are: 1997, $847,000; 1998, $60,428,000; 1999, $8,516,000; 2000, $314,743,000; 2001, $16,228,000; and thereafter, $121,597,000.
6. Income Taxes
The provision for income taxes includes the following (in thousands):
A reconciliation between the statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
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):
Fred Meyer, Inc. and Subsidiaries 29
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):
The following table summarizes information concerning currently outstanding and exercisable options at February 1, 1997:
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.
30 Fred Meyer, Inc. and Subsidiaries
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for stock options granted at the fair value on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the estimated fair value of the options at the date of grant, the Company's net income and income per share would have been reduced to the pro forma amounts below:
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:
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 31
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):
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.
32 Fred Meyer, Inc. and Subsidiaries
Rent expense under operating leases, including executory costs, and payments under capitalized leases were as follows (in thousands):
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 33
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):
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):
34 Fred Meyer, Inc. and Subsidiaries
11. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies as shown below. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could actually realize.
Management is not aware of any factors that would significantly change the estimated fair value amounts shown below. A comprehensive revaluation for purposes of these financial statements has not been performed since February 1, 1997, and current estimates of fair value may differ from the amounts presented herein. The Company is not subjected to a concentration of credit risk.
Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other Current Assets, Other Long-term Assets, Outstanding Checks and Accounts Payable--The carrying amounts of these items are a reasonable estimate of their fair value.
Long-term Debt and Interest Rate Agreements--The carrying amount and estimated fair value of long-term debt at February 1, 1997 are $522,359 and $535,891, respectively. The fair value of notes, mortgages and real estate assessments payable is estimated by discounting expected future cash flows. The discount rate used is the rate currently available to the Company for issuance of debt with similar terms and remaining maturities. For commercial paper and bid lines of credit under the revolving credit agreement (see Note 5), the carrying amounts are a reasonable estimate of their fair value.
The fair value of interest rate swap and cap agreements is the estimated amount at which they could be settled. At February 1, 1997, the Company could settle the swap agreements at a loss of $550,000 and cap agreements at a gain of $573,000.
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)
Fred Meyer, Inc. and Subsidiaries 35
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
36 Fred Meyer, Inc. and Subsidiaries
Independent Auditors' Report - ----------------------------
To the Shareholders and Board of Directors of Fred Meyer, Inc.:
We have audited the accompanying consolidated balance sheets of Fred Meyer, Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the related statements of consolidated operations, changes in consolidated stockholders' equity, and consolidated cash flows for each of the three fiscal years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fred Meyer, Inc. and subsidiaries at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Portland, Oregon
March 12, 1997
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - -----------------------------------------------------
Not applicable.
Fred Meyer, Inc. and Subsidiaries 37
Part III - --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------
Information with respect to directors of the Company is included under "Election of Directors" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report.
Item 11. Executive Compensation. - --------------------------------
Information with respect to executive compensation is included under "Executive Compensation" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference, except for items appearing under the subheadings "Compensation Committee Report on Executive Compensation" and "Comparison of Five Year Cumulative Total Return" which are not incorporated herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners and management is included under "Voting Securities and Principal Shareholders" and "Election of Directors" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------
Information required by this item is included under "Certain Transactions" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
38 Fred Meyer, Inc. and Subsidiaries
Part IV - --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------
(a)(1) Financial Statements. The information required by this item is listed in Item 8, Part II of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules. All schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes thereto.
(a)(3) Exhibits. ----------------------------------------------------------------------------- 3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33-49638.
4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4B Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4C Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
4D Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
4E Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023).
*10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10B Fred Meyer, Inc. Bonus Plan Description, as amended.
Fred Meyer, Inc. and Subsidiaries 39
10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139.
*10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994.
*10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
*10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023).
10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated
40 Fred Meyer, Inc. and Subsidiaries
as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Lease Amendment No. 2 (AN-Northern Lights, Boulevard Store) between Fred Meyer and Real Estate Properties Limited Partnership, and Memorandum of Modification to Lease/Short-Form Lease (AN-Northern Lights, Anchorage, Alaska) between Fred Meyer and Real Estate Properties Limited Partnership, dated December 20, 1996; Lease Amendment No. 4 (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup Co., a Washington corporation ("Roundup"), and Memorandum of Modification to Lease/Short-Form Lease (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup, dated December 20, 1996;Lease Amendment No. 3 (Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Short-Form Lease (CK-Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer dated December 20, 1996;Lease Amendment No. 3 (Cornelius, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Modification to Lease/Short-Form Lease (CN-Cornelius, Oregon) by and between Real Estate Properties Limited Partnership, Fred Meyer Real Estate Properties and Fred Meyer dated December 20, 1996; Lease Amendment No. 3 (Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer of Alaska, Inc., an Alaskan corporation ("Fred Meyer-Alaska"), and Memorandum of Modification to Lease/Short-Form Lease (FB Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer-Alaska, dated December 20, 1996 and Lease Assignment Agreement (Stark Street, Portland) between Fred Meyer, Inc., a Delaware corporation and Real Estate Properties Limited Partnership, an Oregon limited partnership and made as of December 16, 1996 and Agreement and Supplement to Leasehold Assignment and Modification Agreement (Stark Street, Portland, Oregon).
10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10L Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023).
10M Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023).
10N Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
Fred Meyer, Inc. and Subsidiaries 41
10O Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
10P Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
10Q Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. Incorporated by reference to Exhibit 10W to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
11 Computation of Earnings per Common Share.
21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
- -------------------------------------------------------------------------------- * This exhibit constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the year ended February 1, 1997.
Fred Meyer, Inc. and Subsidiaries 42
Signatures - ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 25, 1997 FRED MEYER, INC.
By DAVID R. JESSICK ------------------------------------- David R. Jessick Chief Financial Officer and Senior Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 25, 1997.
Signature Title
(1) Principal Executive Officer
ROBERT G. MILLER Chairman of the Board and Chief ----------------------------- Executive Officer Robert G. Miller
(2) Principal Financial Officer
DAVID R. JESSICK Chief Financial Officer and Senior ----------------------------- Vice President, Finance David R. Jessick
(3) Principal Accounting Officer
THOMAS R. HUGHES Vice President and Controller ----------------------------- Thomas R. Hughes
(4) Directors
*ROGER S. MEIER Director ----------------------------- Roger S. Meier
*A.M. GLEASON Director ----------------------------- A.M. Gleason
*JAMES J. CURRAN Director ----------------------------- James J. Curran
*DAVID L. JOHNSON Director ----------------------------- David L. Johnson
*VIVIAN A. BULL Director ----------------------------- Vivian A. Bull
*STEVEN R. ROGEL Director ----------------------------- Steven R. Rogel
*By ROGER A. COOKE ----------------------------- Roger A. Cooke As Attorney in Fact
Fred Meyer, Inc. and Subsidiaries 43
EXHIBIT INDEX
Exhibit No. Description --- -----------
3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33-49638.
4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4B Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4C Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
4D Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
4E Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023).
*10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10B Fred Meyer, Inc. Bonus Plan Description, as amended.
Fred Meyer, Inc. and Subsidiaries
10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139.
*10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994.
*10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
*10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023).
Fred Meyer, Inc. and Subsidiaries
10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Lease Amendment No. 2 (AN-Northern Lights, Boulevard Store) between Fred Meyer and Real Estate Properties Limited Partnership, and Memorandum of Modification to Lease/Short-Form Lease (AN-Northern Lights, Anchorage, Alaska) between Fred Meyer and Real Estate Properties Limited Partnership, dated December 20, 1996; Lease Amendment No. 4 (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup Co., a Washington corporation ("Roundup"), and Memorandum of Modification to Lease/Short-Form Lease (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup, dated December 20, 1996;Lease Amendment No. 3 (Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Short-Form Lease (CK-Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer dated December 20, 1996;Lease Amendment No. 3 (Cornelius, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Modification to Lease/Short-Form Lease (CN-Cornelius, Oregon) by and between Real Estate Properties Limited Partnership, Fred Meyer Real Estate Properties and Fred Meyer dated December 20, 1996; Lease Amendment No. 3 (Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer of Alaska, Inc., an Alaskan corporation ("Fred Meyer-Alaska"), and Memorandum of Modification to Lease/Short-Form Lease (FB Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer-Alaska, dated December 20, 1996 and Lease Assignment Agreement (Stark Street, Portland) between Fred Meyer, Inc., a Delaware corporation and Real Estate Properties Limited Partnership, an Oregon limited partnership and made as of December 16, 1996 and Agreement and Supplement to Leasehold Assignment and Modification Agreement (Stark Street, Portland, Oregon).
10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
Fred Meyer, Inc. and Subsidiaries
10L Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023).
10M Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023).
10N Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
10O Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
10P Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
10Q Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. Incorporated by reference to Exhibit 10W to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
11 Computation of Earnings per Common Share.
21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
Fred Meyer, Inc. and Subsidiaries
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ----------------------------------------------
The following discussion summarizes Fred Meyer, Inc.'s operating results for the fiscal year ended February 1, 1997 ("1996") compared with the fiscal year ended February 3, 1996 ("1995") and for 1995 compared with the fiscal year ended January 28, 1995 ("1994"). Also included are discussions of the Company's liquidity, capital resources, effect of LIFO, effect of inflation and recent accounting changes. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements.
Results of Operations--1996 Compared with 1995
Net sales for 1996 (52 weeks) increased $302,121,000, or 8.8%, over 1995 (53 weeks). This increase reflects openings of five full-size multidepartment stores, two marketplace stores, and five jewelry stores in malls and the acquisition of 71 mall jewelry stores. Comparable store sales, measured on a 52-week corresponding period for both years, increased 3.8% for 1996. Comparable food sales increased 4.7%, and comparable nonfood sales increased 3.1%. Food sales as a percent of net sales were 41.1% and 41.0%, respectively for 1996 and 1995.
Gross margin as a percent of net sales was 29.7% in 1996 compared with 28.4% in 1995. Gross margins increased primarily due to significant reductions in markdowns in 1996 versus 1995, the effects of increased sales of higher-margin jewelry, primarily from the 71 acquired fine jewelry stores, and lower distribution costs as a percent of sales.
Operating and administrative expenses increased 9.8% to $971,667,000 in 1996 from $885,087,000 in 1995, and as a percent of net sales were 26.1% in 1996 and 25.9% in 1995. Operating and administrative expenses increased as a percent of sales due to the higher expense structure at the fine jewelry stores and increased wages for additional staffing in some nonfood sections of the multidepartment stores. These increases were partially offset by reduced advertising expense as a percent of sales.
Net interest expense decreased to $39,432,000 in 1996 from $39,578,000 in 1995. The decrease primarily reflects lower borrowings due to the impact of the Company's third quarter $108,000,000 sale-leaseback of 10 stores and to improved cash flow from operations, offset in part by the third quarter repurchase of $70,000,000 of common stock.
The effective tax rate was 38.0% for both 1996 and 1995.
Net income was $58,545,000 for 1996 and $30,286,000 for 1995. This increase is primarily the result of the above-mentioned factors.
Results of Operations--1995 Compared with 1994
Net sales for 1995 (53 weeks) increased $300,083,000, or 9.6%, over 1994 (52 weeks). This increase reflects openings of six full-size multidepartment stores, three jewelry stores in malls and the addition of food to three previously nonfood stores, offset in part by the closure of four multidepartment stores. Comparable store sales increased 2.1% for 1995. Comparable food sales increased 6.6% and comparable nonfood sales decreased .9%. These sales comparisons were aided by the negative impact of labor strikes on 1994 sales. Excluding store sales during the three-month period in 1994 affected by the strikes, total comparable store sales decreased .6% in 1995, with comparable food sales increasing 3.1% and comparable nonfood sales decreasing 3.0%. Comparable sales are measured on a 53-week corresponding period for both years. Food sales as a percent of net sales were 41.0% and 38.3%, respectively, for 1995 and 1994. The increase in food sales as a percent of net sales was primarily due to an increase in the number of the Company's stores that sell food.
18 Fred Meyer, Inc. and Subsidiaries
Gross margin as a percent of net sales was 28.4% in 1995 compared with 27.6% in 1994. 1995's fourth quarter gross margins increased as a percent of sales primarily due to the comparison to reduced 1994 fourth quarter margins, which were affected by factors associated with labor strikes and increased promotional activities. Gross margins for 1995, however, were negatively affected by slow nonfood sales, a high level of nonfood promotions and a greater portion of sales being in food where margins are typically lower, partially offset by a lower LIFO charge and the impact of increased utilization of new flow-through distribution facilities.
Operating and administrative expenses increased 9.6% to $885,087,000 in 1995 from $807,924,000 in 1994, and as a percent of net sales were 25.9% for both years. This comparison was prior to reflecting 1994's writedown of California assets of $15,978,000, covering one store and three land parcels.
Net interest expense was $39,578,000 for 1995 and $25,857,000 for 1994, an increase of 53.1%. This increase primarily reflects interest on debt associated with increased capital spending, and to a lesser extent, interest on debt incurred as a result of 1994's labor disputes.
The effective tax rate was 38.0% for both 1995 and 1994.
Net income was $30,286,000 for 1995 and $7,168,000 for 1994. This increase is primarily the result of the above-mentioned factors. Excluding the writedown of California assets, 1994 net income was $17,074,000.
Liquidity and Capital Resources
The Company funded its working capital and capital expenditure needs in 1996 through internally generated cash flow and sale-leaseback proceeds, supplemented by borrowings under committed and uncommitted bank lines of credit and unrated commercial paper. Cash provided by operating activities was approximately $33,192,000 higher in 1996 than 1995. This was mainly due to a decrease in working capital (primarily through increased accounts payable) and the increase in net income. Changes in cash flows from investing and financing activities are primarily the result of the timing of borrowing and capital expenditures. Additionally, in 1996 the Company repurchased 2,200,000 shares of its common stock for $70,099,000, including expenses.
On September 5, 1996 with respect to 10 of its stores, the Company closed a sale-leaseback which generated $108,000,000 in net proceeds used to pay down 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.
The Company renewed its credit facility in 1996 with several domestic and foreign banks for a committed line of credit which provides for borrowings of up to $500,000,000. This agreement continues through June 30, 2000, at which time the agreement terminates and any outstanding amounts must be paid in full. In addition to this committed credit facility, at February 1, 1997 the Company had $105,000,000 of uncommitted money market lines with several foreign banks and $120,000,000 of uncommitted money market lines with banks which are also in the committed credit facility. The bank lines and unrated commercial paper are used primarily for seasonal inventory requirements, new store construction and financing, existing store remodeling, acquisition of land, and major projects such as the development of MIS. At February 1, 1997 the Company had unrated commercial paper outstanding in the amount of $283,040,000 and a total of approximately $216,960,000 available for borrowings that would be supported by its committed credit facility.
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.
Fred Meyer, Inc. and Subsidiaries 19
In 1992, the Company's Board of Directors adopted a derivative policy recognizing derivative financial instruments as an integral part of its risk management program. Management periodically reviews the use of derivative transactions and market positions, including assessments of compliance with the policy.
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. 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. 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 principal amounts of $40,000,000. The remaining four agreements effectively limit the maximum rental rate the Company will pay at 7.25% on notional principal amounts totaling $40,000,000. All seven of these contracts expire in 2000. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate and rent rate swap and cap agreements. The Company requires an A or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties.
During 1996, capital expenditures totaled $146,917,000, net of real estate financed on leases. The Company opened five full-size multidepartment stores, two marketplace stores and five jewelry stores in malls, acquired 71 jewelry stores in malls and remodeled four multidepartment stores. In addition, the Company is continuing its program of replacing and upgrading its MIS. During 1996, the Company also began construction of four multidepartment stores and one replacement store scheduled to open in 1997. At least five major remodels are planned for completion in 1997. The Company believes that a combination of cash flow from operations, proceeds from sale-leasebacks, lease facilities and borrowings under its credit facilities will permit it to finance its capital expenditure requirements for 1997, estimated at $165,000,000, net of estimated real estate financed on leases.
Effect of LIFO
During each year, the Company estimates the LIFO adjustment for the year based on estimates of three factors: inflation rates (calculated by reference to the Department Stores Inventory Price Index published by the Bureau of Labor Statistics for soft goods and jewelry and to internally generated indices based on Company purchases during the year for all other departments), expected inventory levels, and expected markup levels (after reflecting permanent markdowns and cash discounts). At year-end, the Company makes the final adjustment reflecting the difference between the Company's prior quarterly estimates and actual LIFO amount for the year.
Effect of Inflation
While management believes that some portion of the increase in sales is due to inflation, it is difficult to segregate and to measure the effects of inflation because of changes in the types of merchandise sold year-to-year and other pricing and competitive influences. By attempting to control costs and efficiently utilize resources, the Company strives to minimize the effects of inflation on its operations.
Recent Accounting Changes
There are no issued and pending accounting changes which will have a material effect on the Company's financial reporting.
20 Fred Meyer, Inc. and Subsidiaries
Item 8.
Item 8. Financial Statements and Supplementary Data. - ----------------------------------------------------
Fred Meyer, Inc. and Subsidiaries 21
22 Fred Meyer, Inc. and Subsidiaries
Fred Meyer, Inc. and Subsidiaries 23
24 Fred Meyer, Inc. and Subsidiaries
Fred Meyer, Inc. and Subsidiaries 25
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 buildings and equipment is provided using the straight-line method over the estimated useful lives of the related assets of three to 31 years. Amortization of property under capital leases is provided using the straight-line method over the remaining related lease terms of 16 to 40 years.
Goodwill--Goodwill is being amortized on a straight-line basis over 30 years. Management periodically evaluates the recoverability of goodwill based upon current and anticipated net income and undiscounted future cash flows. Accumulated amortization was $4,659,000 and $4,352,000 at February 1, 1997 and February 3, 1996, respectively.
Investment Securities--As of January 28, 1995, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 requires the classification of securities at acquisition into one of three categories: held to maturity, available for sale, or trading. At February 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.
26 Fred Meyer, Inc. and Subsidiaries
Buying and Promotional Allowances--Vendor allowances and credits that relate to the Company's buying and merchandising activities are recognized as earned.
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 27
5. Long-term Debt
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
28 Fred Meyer, Inc. and Subsidiaries
and caps are amortized over the life of the instruments. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap and cap agreements. The Company requires an "A" or better rating of the counterparties and, accordingly, does not anticipate nonperformance by the counterparties.
Annual estimated long-term debt maturities for the five fiscal years subsequent to February 1, 1997 are: 1997, $847,000; 1998, $60,428,000; 1999, $8,516,000; 2000, $314,743,000; 2001, $16,228,000; and thereafter, $121,597,000.
6. Income Taxes
The provision for income taxes includes the following (in thousands):
A reconciliation between the statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
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):
Fred Meyer, Inc. and Subsidiaries 29
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):
The following table summarizes information concerning currently outstanding and exercisable options at February 1, 1997:
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.
30 Fred Meyer, Inc. and Subsidiaries
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for stock options granted at the fair value on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the estimated fair value of the options at the date of grant, the Company's net income and income per share would have been reduced to the pro forma amounts below:
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:
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 31
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):
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.
32 Fred Meyer, Inc. and Subsidiaries
Rent expense under operating leases, including executory costs, and payments under capitalized leases were as follows (in thousands):
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 33
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):
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):
34 Fred Meyer, Inc. and Subsidiaries
11. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies as shown below. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could actually realize.
Management is not aware of any factors that would significantly change the estimated fair value amounts shown below. A comprehensive revaluation for purposes of these financial statements has not been performed since February 1, 1997, and current estimates of fair value may differ from the amounts presented herein. The Company is not subjected to a concentration of credit risk.
Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other Current Assets, Other Long-term Assets, Outstanding Checks and Accounts Payable--The carrying amounts of these items are a reasonable estimate of their fair value.
Long-term Debt and Interest Rate Agreements--The carrying amount and estimated fair value of long-term debt at February 1, 1997 are $522,359 and $535,891, respectively. The fair value of notes, mortgages and real estate assessments payable is estimated by discounting expected future cash flows. The discount rate used is the rate currently available to the Company for issuance of debt with similar terms and remaining maturities. For commercial paper and bid lines of credit under the revolving credit agreement (see Note 5), the carrying amounts are a reasonable estimate of their fair value.
The fair value of interest rate swap and cap agreements is the estimated amount at which they could be settled. At February 1, 1997, the Company could settle the swap agreements at a loss of $550,000 and cap agreements at a gain of $573,000.
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)
Fred Meyer, Inc. and Subsidiaries 35
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
36 Fred Meyer, Inc. and Subsidiaries
Independent Auditors' Report - ----------------------------
To the Shareholders and Board of Directors of Fred Meyer, Inc.:
We have audited the accompanying consolidated balance sheets of Fred Meyer, Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the related statements of consolidated operations, changes in consolidated stockholders' equity, and consolidated cash flows for each of the three fiscal years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fred Meyer, Inc. and subsidiaries at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Portland, Oregon
March 12, 1997
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - -----------------------------------------------------
Not applicable.
Fred Meyer, Inc. and Subsidiaries 37
Part III - --------------------------------------------------------------------------------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------
Information with respect to directors of the Company is included under "Election of Directors" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report.
Item 11.
Item 11. Executive Compensation. - --------------------------------
Information with respect to executive compensation is included under "Executive Compensation" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference, except for items appearing under the subheadings "Compensation Committee Report on Executive Compensation" and "Comparison of Five Year Cumulative Total Return" which are not incorporated herein.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners and management is included under "Voting Securities and Principal Shareholders" and "Election of Directors" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------
Information required by this item is included under "Certain Transactions" in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
38 Fred Meyer, Inc. and Subsidiaries
Part IV - --------------------------------------------------------------------------------
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------
(a)(1) Financial Statements. The information required by this item is listed in Item 8, Part II of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules. All schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes thereto.
(a)(3) Exhibits. ----------------------------------------------------------------------------- 3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33-49638.
4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4B Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4C Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
4D Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
4E Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023).
*10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10B Fred Meyer, Inc. Bonus Plan Description, as amended.
Fred Meyer, Inc. and Subsidiaries 39
10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139.
*10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994.
*10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
*10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023).
10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated
40 Fred Meyer, Inc. and Subsidiaries
as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Lease Amendment No. 2 (AN-Northern Lights, Boulevard Store) between Fred Meyer and Real Estate Properties Limited Partnership, and Memorandum of Modification to Lease/Short-Form Lease (AN-Northern Lights, Anchorage, Alaska) between Fred Meyer and Real Estate Properties Limited Partnership, dated December 20, 1996; Lease Amendment No. 4 (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup Co., a Washington corporation ("Roundup"), and Memorandum of Modification to Lease/Short-Form Lease (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup, dated December 20, 1996;Lease Amendment No. 3 (Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Short-Form Lease (CK-Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer dated December 20, 1996;Lease Amendment No. 3 (Cornelius, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Modification to Lease/Short-Form Lease (CN-Cornelius, Oregon) by and between Real Estate Properties Limited Partnership, Fred Meyer Real Estate Properties and Fred Meyer dated December 20, 1996; Lease Amendment No. 3 (Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer of Alaska, Inc., an Alaskan corporation ("Fred Meyer-Alaska"), and Memorandum of Modification to Lease/Short-Form Lease (FB Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer-Alaska, dated December 20, 1996 and Lease Assignment Agreement (Stark Street, Portland) between Fred Meyer, Inc., a Delaware corporation and Real Estate Properties Limited Partnership, an Oregon limited partnership and made as of December 16, 1996 and Agreement and Supplement to Leasehold Assignment and Modification Agreement (Stark Street, Portland, Oregon).
10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10L Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023).
10M Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023).
10N Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
Fred Meyer, Inc. and Subsidiaries 41
10O Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
10P Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
10Q Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. Incorporated by reference to Exhibit 10W to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
11 Computation of Earnings per Common Share.
21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
- -------------------------------------------------------------------------------- * This exhibit constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the year ended February 1, 1997.
Fred Meyer, Inc. and Subsidiaries 42
Signatures - ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 25, 1997 FRED MEYER, INC.
By DAVID R. JESSICK ------------------------------------- David R. Jessick Chief Financial Officer and Senior Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 25, 1997.
Signature Title
(1) Principal Executive Officer
ROBERT G. MILLER Chairman of the Board and Chief ----------------------------- Executive Officer Robert G. Miller
(2) Principal Financial Officer
DAVID R. JESSICK Chief Financial Officer and Senior ----------------------------- Vice President, Finance David R. Jessick
(3) Principal Accounting Officer
THOMAS R. HUGHES Vice President and Controller ----------------------------- Thomas R. Hughes
(4) Directors
*ROGER S. MEIER Director ----------------------------- Roger S. Meier
*A.M. GLEASON Director ----------------------------- A.M. Gleason
*JAMES J. CURRAN Director ----------------------------- James J. Curran
*DAVID L. JOHNSON Director ----------------------------- David L. Johnson
*VIVIAN A. BULL Director ----------------------------- Vivian A. Bull
*STEVEN R. ROGEL Director ----------------------------- Steven R. Rogel
*By ROGER A. COOKE ----------------------------- Roger A. Cooke As Attorney in Fact
Fred Meyer, Inc. and Subsidiaries 43
EXHIBIT INDEX
Exhibit No. Description --- -----------
3A Restated Certificate of Incorporation of Fred Meyer, Inc. Incorporated by reference to Exhibit 3A to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
3B Amended and Restated Bylaws of Fred Meyer, Inc. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8, Registration No. 33-49638.
4A Specimen Stock Certificate. Incorporated by reference to Exhibit 4C to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4B Term Promissory Notes in an original aggregate principal amount of $70,000,000, including the Intercreditor Agreement dated June 29, 1993 among the Company, and various banks and financial institutions named therein. Incorporated by reference to Exhibit 4E to the Company's Registration Statement on Form S-3, Registration No. 33-67670.
4C Note agreement dated as of June 1, 1994, in an original aggregate principal amount of $57,500,000, among Fred Meyer, Inc., and various life insurance companies. Incorporated by reference to Exhibit 4D to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
4D Amended and Restated Credit Agreement dated as of October 30, 1995 among Fred Meyer, Inc., Various Financial Institutions, Bank of America National Trust & Savings Association, as Agent, and the Bank of Nova Scotia as co-Agent; arranged by BA Securities, Inc. Incorporated by reference to Exhibit 4F to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
4E Note Agreement, dated April 25, 1995, in an original aggregate principal amount of $50,000,000, among Fred Meyer, Inc., and The Prudential Insurance Company of America and Pruco Life Insurance Company. Incorporated by reference to Exhibit 4G to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10A-1 Fred Meyer, Inc. 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10D to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (File No. 0-15023).
*10A-2 Amended Fred Meyer, Inc. 1990 Stock Incentive Plan. Incorporated by reference to Exhibit 22 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 12, 1995 (File No. 0-15023).
*10B Fred Meyer, Inc. Bonus Plan Description, as amended.
Fred Meyer, Inc. and Subsidiaries
10C Assumption Agreement and Unconditional Guaranty of Certain Obligations, dated December 11, 1981, among Fred Meyer, Inc., The Predecessor Company, DTC Acquisition Corporation, and Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.). Incorporated by reference to Exhibit 10FF to the Company's Registration Statement on Form S-1, Registration No. 2-87139.
*10D Non-Employee Directors Stock Compensation Plan, adopted November 17, 1992. Incorporated by reference to Exhibit 10F to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10E Form of contract for Senior Executive Long-Term Disability Program. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 30, 1993.
*10F Fred Meyer Supplemental Income Plan dated January 1, 1994. Incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended January 29, 1994.
*10G Employment Agreement between Fred Meyer, Inc. and Robert G. Miller, as amended by Amendment No. 1. Incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
*10H Indemnity Agreement. Incorporated by reference to Exhibit 10I to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
10I Form of Lease Agreement for substantially identical leases covering 36 stores and other locations leased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) including form of Assignment of Master Lease wherein Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership) assigned its interest to Metropolitan Life Insurance Company and a First Amendment to Lease Agreement, dated November 25, 1986, with appendices containing certain nonstandard provisions of the Lease Agreement and the First Amendment; Collateral Matters Agreement and Indemnification Agreement, each dated November 25, 1986, between Fred Meyer, Inc. and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Memorandum of First Amendment to Lease Agreement, dated March 6, 1987, between Metropolitan Life Insurance Company ("Metropolitan"), Landlord and Fred Meyer, Inc., Tenant; and Assignment of Master Lease, dated March 6, 1987, between Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) (Assignor) and Metropolitan (Assignee) for Nampa, Idaho. Incorporated by reference to Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023).
Fred Meyer, Inc. and Subsidiaries
10J Form of Lease Agreement for substantially identical leases covering 27 stores and other locations subleased by Fred Meyer, Inc. (or a wholly owned subsidiary) from Real Estate Properties Limited Partnership (formerly Fred Meyer Real Estate Properties, Ltd.) with appendices containing certain nonstandard provisions contained in the Lease Agreement. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023). Appendices containing certain additional nonstandard provisions. Incorporated by reference to Exhibit 10J to the Company's Annual Reports on Form 10-K for the years ended January 28, 1989, February 3, 1990, and February 2, 1991 (File No. 0-15023). Certain lease modifications for Burien, Washington facility. Incorporated by reference to Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended January 30, 1993. Second Lease Modification Agreement for Cornelius store, dated as of August 16, 1994; and Second Lease Modification Agreement for Fairbanks store, dated as of March 18, 1994. Incorporated by reference to Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Lease Amendment No. 2 (AN-Northern Lights, Boulevard Store) between Fred Meyer and Real Estate Properties Limited Partnership, and Memorandum of Modification to Lease/Short-Form Lease (AN-Northern Lights, Anchorage, Alaska) between Fred Meyer and Real Estate Properties Limited Partnership, dated December 20, 1996; Lease Amendment No. 4 (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup Co., a Washington corporation ("Roundup"), and Memorandum of Modification to Lease/Short-Form Lease (Burien, Washington) by and between Real Estate Properties Limited Partnership and Roundup, dated December 20, 1996;Lease Amendment No. 3 (Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Short-Form Lease (CK-Clackamas, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer dated December 20, 1996;Lease Amendment No. 3 (Cornelius, Oregon) by and between Real Estate Properties Limited Partnership and Fred Meyer, and Memorandum of Modification to Lease/Modification to Lease/Short-Form Lease (CN-Cornelius, Oregon) by and between Real Estate Properties Limited Partnership, Fred Meyer Real Estate Properties and Fred Meyer dated December 20, 1996; Lease Amendment No. 3 (Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer of Alaska, Inc., an Alaskan corporation ("Fred Meyer-Alaska"), and Memorandum of Modification to Lease/Short-Form Lease (FB Fairbanks, Alaska) by and between Real Estate Properties Limited Partnership and Fred Meyer-Alaska, dated December 20, 1996 and Lease Assignment Agreement (Stark Street, Portland) between Fred Meyer, Inc., a Delaware corporation and Real Estate Properties Limited Partnership, an Oregon limited partnership and made as of December 16, 1996 and Agreement and Supplement to Leasehold Assignment and Modification Agreement (Stark Street, Portland, Oregon).
10K Form of Sublease, dated May 1, 1984, Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), Lessor to Roundup Co., Lessee for Photo Plant Parking Lot. Incorporated by reference to Exhibit 10J(7) to the Company's Registration Statement on Form S-1, Registration No. 33-8574.
Fred Meyer, Inc. and Subsidiaries
10L Lease Agreement, dated October 22, 1986, including Amendment, dated April 30, 1987, between Fred Meyer Real Estate Properties, Ltd. (now Real Estate Properties Limited Partnership), and Roundup Co. for Midway store. Incorporated by reference to Exhibit 10N to the Company's Annual Report on Form 10-K for the year ended January 31, 1987 (File No. 0-15023).
10M Lease Agreement, dated February 19, 1987, including Addendum, dated September 16, 1987, between Fred Meyer, Inc., as Lessee, and REC Resolution Co. as successor in interest to Duane Company, as Lessor, for the Gateway store. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 0-15023). Addendum No. 2 to Lease Agreement. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 0-15023).
10N Lease Cancellation Agreement between the Company and Real Estate Properties Limited Partnership, regarding termination of the lease of the photo plant facility, dated as of January 17, 1995. Incorporated by reference to Exhibit 10Q to the Company's Annual Report on Form 10-K for the year ended January 28, 1995.
10O Lease for Swan Island Parking Lot between the Company as lessee and Real Estate Properties Limited Partnership as lessor, dated November 16, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended January 28, 1995. Rider to Lease dated as of November 1, 1994. Incorporated by reference to Exhibit 10R to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
10P Fred Meyer Excess Deferral and Benefit Equalization Plan. 1994 Restatement dated as of January 1, 1994. Incorporated by reference to Exhibit 10T to the Company's Quarterly Report on Form 10-Q for the quarter ended November 4, 1995 (File No. 0-15023).
10Q Settlement Agreement and Mutual Release dated as of August 10, 1995 between REPL, REC Resolution Co., and the Company and certain of its subsidiaries and restated Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL, with respect to the Gresham, Oregon store, and Second Lease Modification Agreement dated October 12, 1995 between the Company and REPL with respect to the Clackamas, Oregon store. Incorporated by reference to Exhibit 10W to the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 0-15023).
11 Computation of Earnings per Common Share.
21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
Fred Meyer, Inc. and Subsidiaries