KROGER CO, 8-K, 1999-05-28

KROGER CO
8-K, 1999-05-28
GROCERY STORES

Previous: KERR MCGEE CORP, SC 13D/A, 1999-05-28

Next: KROGER CO, S-8 POS, 1999-05-28

<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report: May 28, 1999

THE KROGER CO.
(Exact name of registrant as specified in its charter)

An Ohio Corporation No. 1-303 31-0345740
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Number)

1014 Vine Street
Cincinnati, OH 45201
(Address of principal
executive offices)

Registrant's telephone number: (513) 762-4000

<PAGE> 2

Item 2. Acquisition or Disposition of Assets.
- ------- -------------------------------------

On May 27, 1999, The Kroger Co. completed its
acquisition of all of the outstanding common stock of
Fred Meyer, Inc. pursuant to an Agreement and Plan of
Merger dated as of October 18, 1998. In the merger,
which is to be accounted for as a pooling of
interests, holders of shares of Fred Meyer, Inc.
common stock were issued one common share of The
Kroger Co. for each of their shares. The Agreement
and Plan of Merger can be found as an exhibit to
Kroger's Current Report on Form 8-K dated October 20,
1998.

Item 5. Other Events.
- ------- -------------

Filed herewith as Exhibit 99.1 are the audited
supplemental consolidated financial statements for
The Kroger Co. and Fred Meyer, Inc. for the fiscal
years ended January 2, 1999, December 28, 1997, and
December 28, 1996, along with Management's Discussion
and Analysis. Filed herewith as Exhibit 99.2 is
Kroger's press release dated May 27, 1999, announcing
approval of the merger.

Item 7. Financial Statements, Pro Forma Financial Information
- ------- -----------------------------------------------------
and Exhibits
------------

(a) Financial statements of Fred Meyer, Inc., are
incorporated by reference to Item 8 of Fred Meyer,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended January 30, 1999.

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of Fred
Meyer, Inc.:

We have audited the accompanying consolidated balance
sheets of Fred Meyer, Inc. and subsidiaries as of
January 30, 1999 and January 31, 1998, and the
related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the
three fiscal years in the period ended January 30,
1999 (not presented separately herein). 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 referred to above (not presented
separately herein) present fairly, in all material
respects, the consolidated financial position of Fred
Meyer, Inc. and subsidiaries as of January 30, 1999
and January 31, 1998, and the results of their
operations and their cash flows for each of the three
fiscal years in the period ended January 30, 1999, in
conformity with generally accepted accounting
principles.

(Deloitte & Touche LLP)

Portland, Oregon
March 10, 1999

(b) Unaudited Pro Forma Combined Financial Data for
fiscal years 1996 and 1997 incorporated by reference
to pages 67, 69, 72, and 73 of Amendment No. 3 to the
Registration Statement on Form S-4 filed on March 5,
1999, Registration No. 333-66961. Unaudited Pro Forma
Combined Financial Data for fiscal year 1998 is
attached as Exhibit 99.3 hereto.

2.1 Agreement and Plan of Merger, dated as
of October 18, 1998, by and among The
Kroger Co., Jobsite Holdings, Inc., and
Fred Meyer, Inc. incorporated by
reference to Exhibit 99.1 to Kroger's
Current Report on Form 8-K dated October
20, 1998.

23.1 Consent of PricewaterhouseCoopers LLP.

23.2 Consent of Deloitte and Touche LLP.

99.1 Audited supplemental consolidated
financials and Management's Discussion
and Analysis.

99.2 Press release.

99.3 Unaudited Pro Forma Combined Financial
Data for fiscal year 1998.
<PAGE> 3

SIGNATURE
---------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.

THE KROGER CO.

May 28, 1999 By: (Paul Heldman)
Paul Heldman
Senior Vice President, Secretary
and General Counsel

<PAGE> 4

EXHIBIT INDEX

Exhibit No. Exhibit
- ----------- -------

2.1 Agreement and Plan of Merger, dated as of
October 18, 1998, by and among The Kroger
Co., Jobsite Holdings, Inc., and Fred Meyer,
Inc. incorporated by reference to Exhibit
99.1 to Kroger's Current Report on Form 8-K
dated October 20, 1998.

23.1 Consent of PricewaterhouseCoopers LLP.

23.2 Consent of Deloitte and Touche LLP.

99.1 Audited supplemental consolidated financials
and Management's Discussion and Analysis.

99.2 Press release.

99.3 Unaudited Pro Forma Combined Financial Data
for fiscal year 1998.

<PAGE> 1
Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the registration
statements of The Kroger Co. on Form S-8 (File No. 33-2056), Form S-8 (File No.
2-98858), Form S-8 (File No. 33-20734), Form S-8 (File No. 33-25698), Form S-8
File No. (33-38121), Form S-8 (File No. 33-38122), Form S-8 (File No. 33-53747),
Form S-8 (File No. 33-55501), Form S-3 (File No. 33-61563), Form S-8 (File No.
333-11859), Form S-8 (File No.333-11909), Form S-8 (File No.333-27211), Form S-4
(File No. 333-66961), Form S-3 (File No. 333-74389) and Form S-8 (File No.
333-78935) of our report (which includes an explanatory paragraph relating to
the Company's change in its application of the LIFO method of accounting for
store inventories as of December 28, 1997) dated May 28, 1999, on our audits of
the supplemental consolidated financial statements of The Kroger Co. as of and
for the three years ended January 2, 1999, which report is included in this
Current Report on Form 8-K.

(PricewaterhouseCoopers LLP)
PricewaterhouseCoopers LLP
Cincinnati, Ohio
May 28, 1999

<PAGE> 1
Exhibit 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement of
The Kroger Co. on Form 8-K and in the Registration Statement Nos. 33-2056,
2-98858, 33- 20734, 33-25698, 33-38121, 33-38122, 33-53747, 33-55501, 33-61563,
333-11859, 333-11909, 333-27211, and 333-78935 of The Kroger Co., all on Form
S-8, Registration Statement No. 333-66961 of The Kroger Co. on Form S-4, and
Registration Statement No. 333-74389 of The Kroger Co. on Form S-3 of our report
dated March 10, 1999 on the consolidated financial statements of Fred Meyer,
Inc., appearing in the Annual Report on Form 10-K of Fred Meyer, Inc. for the
year ended January 30, 1999, and to the use of our report dated March 10, 1999,
appearing in this Registration Statement.

(Deloitte & Touche LLP)

Portland, Oregon
May 28, 1999

<PAGE> 1
Exhibit 99.1

The Kroger Co.
Supplemental Consolidated Statement of Operations
Three years ended January 2, 1999
(In millions, except per share amounts)

1998 1997 1996
-------- -------- --------

<S> <C> <C> <C>
Sales ........................................................... $ 43,082 $ 33,927 $ 29,701
Merchandise costs, including warehousing and transportation ..... 32,058 25,468 22,486
-------- -------- --------
Gross profit .................................................. 11,024 8,459 7,215

Operating, general and administrative ........................... 7,783 6,060 5,292
Rent ............................................................ 619 465 393
Depreciation and amortization ................................... 837 592 480
Merger related costs ............................................ 269 -- --
-------- -------- --------
Operating profit .............................................. 1,516 1,342 1,050

Interest expense ................................................ 645 388 349
-------- -------- --------
Earnings before income tax expense and extraordinary loss ..... 871 954 701

Tax expense ..................................................... 377 365 265
-------- -------- --------
Earnings before extraordinary loss ............................ 494 589 436

Extraordinary loss, net of income tax benefit ................... (257) (124) (3)
-------- -------- --------
Net earnings .................................................. $ 237 $ 465 $ 433
======== ======== ========

Basic earnings per common share:
Earnings before extraordinary loss ............................ $ 1.21 $ 1.64 $ 1.32
Extraordinary loss ............................................ (0.63) (0.34) (0.01)
-------- -------- --------
Net earnings ............................................... $ 0.58 $ 1.30 $ 1.31
======== ======== ========

Average number of common shares used in basic calculation ....... 408 359 331

Diluted earnings per common share:
Earnings before extraordinary loss ............................ $ 1.16 $ 1.58 $ 1.27
Extraordinary loss ............................................ (0.60) (0.33) (0.01)
-------- -------- --------
Net earnings ............................................... $ 0.56 $ 1.25 $ 1.26
======== ======== ========

Average number of common shares used in diluted calculation ..... 426 372 343

</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

<PAGE> 2

The Kroger Co.
Supplemental Consolidated Balance Sheet
January 2, 1999 and December 27, 1997
(In millions, except per share amounts)

1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash .................................................. $ 299 $ 183
Receivables ........................................... 587 509
Inventories ........................................... 3,493 3,040
Prepaid and other current assets ...................... 692 530
-------- --------
Total current assets .............................. 5,071 4,262

Property, plant and equipment, net ...................... 7,220 5,724
Goodwill, net ........................................... 3,847 1,323
Other assets ............................................ 503 409
-------- --------
Total Assets ...................................... $ 16,641 $ 11,718
======== ========

LIABILITIES
Current liabilities
Current portion of long-term debt ..................... $ 311 $ 30
Accounts payable ...................................... 2,926 2,548
Salaries and wages .................................... 639 489
Other current liabilities ............................. 1,574 1,069
-------- --------
Total current liabilities ......................... 5,450 4,136

Long-term debt .......................................... 7,848 5,491
Other long-term liabilities ............................. 1,426 1,174
-------- --------
Total Liabilities ................................. 14,724 10,801
-------- --------

SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 million shares
authorized and unissued ............................... -- --
Common stock, $1 par, 1 billion shares
authorized: 438 million shares issued in 1998 and
406 million shares issued in 1997 ..................... 438 406
Additional paid-in capital .............................. 2,351 1,498
Accumulated deficit ..................................... (421) (658)
Common stock in treasury, at cost; 25 million shares in
1998 and 22 million shares in 1997 ................. (451) (329)
-------- --------
Total Shareowners' Equity ........................... 1,917 917
-------- --------
Total Liabilities and Shareowners' Equity ........... $ 16,641 $ 11,718
======== ========

</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

<PAGE> 3

The Kroger Co.
Supplemental Consolidated Statement of Cash Flows
Three years ended January 2, 1999
(In millions)

1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings .................................................. $ 237 $ 465 $ 433
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss ......................................... 257 124 3
Depreciation ............................................... 745 576 479
Goodwill amortization ...................................... 92 16 1
Deferred income taxes ...................................... (49) 81 54
Other ...................................................... 101 (16) 10
Changes in operating assets and liabilities net of effects
from acquisitions of businesses:
Inventories ............................................ 86 (198) (224)
Receivables ............................................ (56) (76) (36)
Accounts payable ....................................... 93 65 24
Other current liabilities .............................. 255 76 93
Other .................................................. 77 -- (106)
------- ------- -------
Net cash provided by operating activities ............ 1,838 1,113 731
------- ------- -------

Cash Flows From Investing Activities:
Capital expenditures .......................................... (1,646) (942) (914)
Proceeds from sale of assets .................................. 96 104 135
Decrease (increase) in other investments ...................... 114 12 (133)
Payments for acquisitions, net of cash acquired ............... (86) (354) --
Other ......................................................... 57 2 13
------- ------- -------
Net cash used by investing activities ................ (1,465) (1,178) (899)
------- ------- -------

Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt ...................... 5,307 2,520 382
Reductions in long-term debt .................................. (5,089) (2,411) (390)
Debt prepayment costs ......................................... (308) (127) (4)
Financing charges incurred .................................... (118) (33) (18)
Increase (decrease) in book overdrafts ........................ (44) (7) 217
Proceeds from issuance of capital stock ....................... 122 269 57
Treasury stock purchases ...................................... (122) (85) (70)
Other ......................................................... (5) (8) (9)
------- ------- -------
Net cash provided (used) by financing activities ..... (257) 118 165
------- ------- -------

Net increase (decrease) in cash and temporary cash investments .. 116 53 (3)
Cash and temporary cash investments:
Beginning of year ........................................... 183 130 133
------- ------- -------
End of year ................................................. $ 299 $ 183 $ 130
======= ======= =======

Supplemental disclosure of cash flow information:
Cash paid during the year for interest ...................... $ 635 $ 402 $ 354
Cash paid during the year for income taxes .................. 172 199 204
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired ............................. 2,209 1,986 --
Goodwill recorded ......................................... 2,389 1,252 --
Value of stock issued ..................................... (652) (765) --
Liabilities assumed ....................................... (3,791) (2,047) --

</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the supplemental consolidated financial statements.

<PAGE> 4

The Kroger Co.
Supplemental Consolidated Statement of Changes in Shareowners' Equity (Deficit)
Three years ended January 2, 1999
(In millions)

Common Stock Treasury Stock
------------------ ------------------
Additional
Paid-In Accumulated
Shares Amount Capital Shares Amount Deficit Total
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 349 $ 349 $ 462 19 $ (244) $(1,556) $ (989)
Issuance of common stock:
Stock options exercised 6 6 49 -- -- -- 55
Other 3 3 5 -- -- -- 8
Treasury stock purchases -- -- -- 5 (70) -- (70)
Tax benefits from exercise of stock options -- -- 23 -- -- -- 23
Net income -- -- -- -- -- 433 433
------- ------- ------- ------- ------- ------- -------

Balances at December 28, 1996 358 358 539 24 (314) (1,123) (540)
Issuance of common stock:
Stock options exercised 7 7 70 -- -- -- 77
KUI acquisition 2 2 34 -- -- -- 36
Hughes acquisition 10 10 182 -- -- -- 192
Smith's acquisition 33 33 687 -- -- -- 720
Other 1 1 12 -- -- -- 13
Treasury stock purchases -- -- -- 3 (85) -- (85)
Tax benefits from exercise of stock options -- -- 40 -- -- -- 40
Retirement of treasury stock (5) (5) (66) (5) 70 -- (1)
Net income -- -- -- -- -- 465 465
------- ------- ------- ------- ------- ------- -------

Balances at December 27, 1997 406 406 1,498 22 (329) (658) 917
Issuance of common stock:
Stock options exercised 10 10 111 -- -- -- 121
Ralphs acquisition 22 22 631 -- -- -- 653
Other -- -- 10 -- -- -- 10
Treasury stock purchases -- -- -- 3 (122) -- (122)
Tax benefits from exercise of stock options -- -- 101 -- -- -- 101
Net income -- -- -- -- -- 237 237
------- ------- ------- ------- ------- ------- -------

Balances at January 2, 1999 438 $ 438 $ 2,351 25 $ (451) $ (421) $ 1,917
======= ======= ======= ======= ======= ======= =======

</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

<PAGE> 5

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------

All dollar amounts are in millions except per share amounts.

1. ACCOUNTING POLICIES

The following is a summary of the significant accounting policies
followed in preparing these financial statements:

Basis of Presentation and Principles of Consolidation
-----------------------------------------------------

The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"), and Fred Meyer, Inc.
and its subsidiaries ("Fred Meyer") which were merged with Kroger on
May 27, 1999 (See note 2). Amounts included in the supplemental
consolidated financial statements for Fred Meyer as of January 2, 1999
and December 27, 1997 and for the years ended January 2, 1999, December
27, 1997 and December 28, 1996 relate to Fred Meyer's fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively. Significant intercompany transactions and balances have
been eliminated. References to the "Company" mean the consolidated
company.

The supplemental consolidated financial statements of Kroger have been
prepared to give retroactive effect to the merger with Fred Meyer.
Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date
of consummation. These financial statements do not extend through the
date of consummation; however, they will become the historical
consolidated financial statements of Kroger and its subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.

Pervasiveness 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. Disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported amounts
of consolidated revenues and expenses during the reporting period also
is required. Actual results could differ from those estimates.

Inventories
-----------

Inventories are stated at the lower of cost (principally LIFO) or
market. Approximately 97% of inventories for 1998 and 94% of
inventories for 1997 were valued using the LIFO method. Cost for the
balance of the inventories is determined using the FIFO method.
Replacement cost is higher than the carrying amount by $530 at January
2, 1999 and $520 at December 27, 1997.

Property, Plant and Equipment
-----------------------------

Property, plant and equipment are stated at cost. Depreciation expense,
which includes the amortization of assets recorded under capital
leases, is computed principally using the straight-line method over the
estimated useful lives of individual assets, or remaining terms of
leases. Buildings and land improvements are depreciated based on lives
varying from ten to 40 years. Equipment depreciation is based on lives
varying from three to 15 years. Leasehold improvements are amortized
over their useful lives, which vary from four to 25 years. Depreciation
expense was $745 in 1998, $576 in 1997, and $479 in 1996.

Interest costs on significant projects constructed for the Company's
own use are capitalized as part of the costs of the newly constructed
facilities. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the balance sheet and any
gain or loss is reflected in earnings.

<PAGE> 6

Goodwill
--------

Goodwill is generally being amortized on a straight-line basis over 40
years. Accumulated amortization was approximately $115 at January 2,
1999 and $23 at December 27, 1997.

Impairment of Long-Lived Assets
-------------------------------

The Company reviews and evaluates long-lived assets for impairment when
events or circumstances indicate costs may not be recoverable. The net
book value of long-lived assets is compared to expected undiscounted
future cash flows. An impairment loss would be recorded for the excess
of net book value over the fair value of the asset impaired.

Interest Rate Protection Agreements
-----------------------------------

The Company uses interest rate swaps and caps to hedge a portion of its
borrowings against changes in interest rates. The interest differential
to be paid or received is accrued as interest expense. Gains and losses
from the disposition of hedge agreements are deferred and amortized
over the term of the related agreements.

Advertising Costs
-----------------

The Company's advertising costs are expensed as incurred and included
in merchandise costs in the Supplemental Consolidated Statement of
Operations. Advertising expenses amounted to $489 in 1998, $375 in 1997
and $342 in 1996.

Deferred Income Taxes
---------------------

Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax bases of assets and liabilities and their
financial reporting bases. See note 6 for the types of differences that
give rise to significant portions of deferred income tax assets and
liabilities. Deferred income taxes are classified as a net current or
noncurrent asset or liability based on the classification of the
related asset or liability for financial reporting purposes. A deferred
tax asset or liability that is not related to an asset or liability for
financial reporting is classified according to the expected reversal
date.

Comprehensive Income
--------------------

The Company has no items of other comprehensive income in any period
presented. Therefore, net earnings as presented in the Supplemental
Consolidated Statement of Operations equals comprehensive income.

Supplemental Consolidated Statement of Cash Flows
-------------------------------------------------

For purposes of the Supplemental Consolidated Statement of Cash Flows,
the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be temporary cash
investments. Book overdrafts, which are included in accounts payable,
represent disbursements that are funded as the item is presented for
payment.

Segments
--------

The Company operates retail food and drug stores, multi-department
stores and convenience stores in the Midwest, South and West. The
Company's retail operations, which represents approximately 98% of
consolidated sales, is its only reportable segment. All of the
Company's operations are domestic.

<PAGE> 7

2. BUSINESS COMBINATIONS

On May 27, 1999, Kroger issued 156 million shares of Kroger common
stock in connection with a merger, for all of the outstanding common
stock of Fred Meyer Inc., which operates stores primarily in the
Western region of the United States. On March 9, 1998, Fred Meyer
issued 41 million of shares of Fred Meyer common stock in connection
with a merger, for all of the outstanding stock of Quality Food
Centers, Inc. ("QFC"), a supermarket chain operating in the
Seattle/Puget Sound region of Washington state, and in Southern
California. The mergers were accounted for as poolings of interests,
and the accompanying financial statements have been restated to give
effect to the consolidated results of Kroger, Fred Meyer, and QFC for
all years presented.

The accompanying supplemental Consolidated Financial Statements reflect
the consolidated results as follows:

Kroger Fred Meyer Consolidated
Historical Company QFC Company
---------- ---------- ------ ------------
<S> <C> <C> <C> <C>
1998
Sales $28,203 $14,879 $ - $43,082
Extraordinary loss, net of
income tax benefit (39) (218) - (257)
Net earnings 411 (174) - 237
Diluted earnings per common share 1.55 (1.09) - 0.56

1997
Sales $26,567 $ 5,481 $1,879 $33,927
Extraordinary loss, net of
income tax benefit (32) (92) - (124)
Net earnings 412 13 40 465
Diluted earnings per common share 1.57 0.19 1.95 1.25

1996
Sales $25,171 $ 3,725 $ 805 $29,701
Extraordinary loss, net of
income tax benefit (3) - - (3)
Net earnings 350 59 24 433
Diluted earnings per common share 1.35 1.05 1.71 1.26

</TABLE>

Prior period financial statements of Fred Meyer have been restated to
conform with accounting practices of Kroger with respect to certain
inventory related costs and the capitalization policy for property,
plant and equipment. As a result of the restatement Fred Meyer retained
earnings at December 31, 1995 was reduced by $3. In addition, the
restatement reduced Fred Meyer net earnings by $11 in 1998 and $1 in
1997. The effect of the conforming adjustments on 1996 net earnings was
not material.

On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc.
("Ralphs/Food 4 Less"), a supermarket chain operating primarily in
Southern California by issuing 22 million shares of common stock to the
Ralphs/Food 4 Less stockholders. The acquisition was accounted for
under the purchase method of accounting. The financial statements
include the operating results of Ralphs/Food 4 Less from the date of
acquisition.

On September 9, 1997, Fred Meyer acquired Smith's, a regional
supermarket and drug store chain operating in the Intermountain and
Southwestern regions of the United States, by issuing 33 million shares
of common stock to the Smith's stockholders. The acquisition was
accounted for under the purchase method of accounting. The financial
statements include the operating results of Smith's from the date of
acquisition.

<PAGE> 8

$33 of indebtedness of Hughes. The acquisition was accounted for under
the purchase method of accounting. The financial statements include the
operating results of Hughes from the date of acquisition.

On February 14, 1997, QFC acquired the principal operations of Keith
Uddenberg, Inc. ("KUI"), a supermarket chain operating in the western
and southern Puget Sound region of Washington. The merger was effected
through the acquisition of the outstanding voting securities of KUI for
$35 cash, 2 million shares of common stock and the assumption of
approximately $24 of indebtedness of KUI. The acquisition was accounted
for under the purchase method of accounting. The financial statements
include the operating results of KUI from the date of acquisition.

Fred Meyer also completed other acquisitions and divestitures during
1998. These acquisitions do not have a material effect on the
consolidated operating results and, therefore, are not included in the
pro forma data presented below.

The following unaudited pro forma information presents the results of
operations assuming the Ralphs/Food 4 Less, Smith's, Hughes, and KUI
acquisitions occurred at the beginning of each period presented. In
addition, the following unaudited pro forma information gives effect to
refinancing certain debt as if such refinancing occurred at the
beginning of each period presented:

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Sales $43,628 $41,517
Earnings before extraordinary loss 444 560
Net earnings 187 309
Diluted earnings per common share:
Earnings before extraordinary loss 1.06 1.35
Net earnings .45 .75
</TABLE>

The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisitions
been consummated as of the beginning of each period nor is it
necessarily indicative of future operating results.

In conjunction with purchase acquisitions, the Company accrued certain
costs associated with closing and divesting of certain acquired
facilities and severance payments to terminate employees of the
acquired companies. The following table presents the activity in the
Company's accrued purchase liabilities:

Facility
Closure Employee
Costs Severance Total
-------- --------- ------
<S> <C> <C> <C>
Balance at December 28, 1996 $ - $ - $ -
Additions 23 9 32
Payments (4) (1) (5)
----- ----- ------
Balance at December 27, 1997 19 8 27
Additions 122 22 144
Payments (13) (2) (15)
Adjustment to severance accrual - (3) (3)
----- ----- ------

Balance at January 2, 1999 $ 128 $ 25 $ 153
===== ===== ======

</TABLE>

Facility Closure Costs
----------------------

The Company acquired certain idle facilities in its purchase
acquisitions including 63 closed stores, four closed warehouses and one
vacant parcel all of which are leased. The Company also acquired 16
stores that the California Attorney General required be divested and
17 stores that were duplicate facilities. Divestitures of thirteen
stores have been completed and 7 of the duplicate facilities have been
closed. The remaining 10 duplicate stores are expected to close by the
end of 1999. Facility

<PAGE> 9

closure costs accrued include obligations for future contractual lease
payments, net of sublease income, and closure costs.

Employee Severance
------------------

Employee severance relates to 24 employees that have been terminated
and 73 employees that will be terminated in the future. Under severance
agreements, the severance will be paid over a period not to exceed
three years following the date of termination.

3. MERGER RELATED COSTS

Fred Meyer is in the process of implementing its plan to integrate Fred
Meyer Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes, resulting in
merger related costs of $269 in 1998. The integration plan includes the
consolidation of distribution, information systems, and administrative
functions, conversion of 78 store banners, closure of seven stores, and
transaction costs incurred to complete the mergers. The costs were
reported in the periods in which cash was expended except for $26 that
was accrued for liabilities incurred to discontinue activities and
retain key employees and an $83 charge to write-down assets. The
following table presents components of the merger related costs:

1998
-----
<S> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation $ 16
Systems integration 50
Store conversions 48
Transaction costs 34
Administration integration 12
-----
160

NONCASH ASSET WRITE-DOWN
Distribution consolidation 29
Systems integration 26
Store closures 25
Administration integration 3
-----
83

ACCRUED CHARGES
Systems integration 1
Transaction costs 6
Store closures 7
Administration integration 12
-----
26
-----
Total merger related costs $ 269
=====

TOTAL CHARGES
Distribution consolidation $ 45
Systems integration 77
Store conversions 48
Transaction costs 40
Store closures 32
Administration integration 27
-----
Total merger related costs $ 269
=====

</TABLE>

Distribution Consolidation
--------------------------

Represents costs to consolidate manufacturing and distribution
operations and eliminate duplicate facilities. The costs include a $29
write-down to estimated net realizable value for the Hughes
distribution center in Southern California. Net realizable value was
determined by a market analysis. The facilities are held for sale and
depreciation expense for the closed Hughes distribution facility has
been suspended. Depreciation expense in the second and third quarters
would have totaled $2 if it

<PAGE> 10

had not been suspended. Efforts to dispose of the facilities are
ongoing and a sale is expected in 1999. Also included is $13 incurred
for incremental labor during the closing of the distribution center and
other incremental costs incurred as a part of the realignment of the
Company's distribution system.

Systems Integration
-------------------

Represents the costs of integrating systems from QFC, Hughes and
Smith's computer platforms into Fred Meyer and Ralphs' platforms and
the related conversion of all corporate office and store systems. The
asset write-down of $26 includes $18 for computer equipment and related
software that have been abandoned and $8 associated with computer
equipment at QFC which is being written off over 18 months at which
time it will be abandoned. Costs totaling $50 were expensed as incurred
and include $27 of incremental operating costs, principally labor,
during the conversion process, $14 paid to third parties, and $9 of
training costs. Also included are severance costs for system employees
who will be terminated as the integration is completed.

Store Conversions
-----------------

Includes the cost to convert 55 Hughes stores to the Ralph's banner, 15
Smitty's stores to the Fred Meyer banner, five QFC stores to the Fred
Meyer banner, and three Fred Meyer stores to the Smith's banner. The
conversion of the Hughes and QFC stores are substantially complete.
Costs totaling $48 represented incremental cash expenditures for
advertising and promotions to establish the banner, changing store
signage, labor required to remerchandise the store inventory and other
services which were expensed as incurred.

Transaction Costs
-----------------

Represents $34 for fees paid to outside parties and employee bonuses
that were contingent upon the completion of the mergers and $6 for an
employee stay bonus program. The stay bonus program was accrued ratably
over the stay period and paid in the fourth quarter of 1998.

Store Closures
--------------

Includes the costs to close four stores identified as duplicate
facilities and to sell three stores pursuant to a settlement agreement
with the State of California ("AG Stores"). Annual sales and operating
income for the four duplicate facilities and three AG Stores are
approximately $133 and $3, respectively. The asset write-down
represents $6 of book value in excess of sale proceeds, $19 for the
write-off of the goodwill associated with the AG Stores, and $7 of
lease termination costs. All stores have been closed or sold. The net
book value on the AG Stores representing building, fixtures and
equipment was written down to an estimated net realizable value of $6.
Depreciation expense continues to be recorded at the historical rate.

Administration Integration
--------------------------

Includes $15 for labor and severance costs. $9 has been expended and
the employees have been terminated. $9 of this amount is to conform
accounting policies of QFC and Hughes to Fred Meyer, including the
calculation of bad debt and costs for real estate transactions.

<PAGE> 11

The following table presents the activity in the reserve accounts for
1998. The beginning balance was zero:

Cash Amount Accrued
Expense Payments Reclass At January 2, 1999
------- -------- ------- ------------------
<S> <C> <C> <C> <C>
SYSTEMS INTEGRATION
Severance $ 1 $ - $ - $ 1
TRANSACTION COSTS
Stay bonus program 6 6 - -
STORE CLOSURES
Lease obligation 7 2 - 5

ADMINISTRATION INTEGRATION
Severance 12 8 - 4
----- ----- ----- ------

Total amounts included in
current liabilities $ 26 $ 16 $ - $ 10
===== ===== ===== ======
</TABLE>

Severance
---------

Severance relates to 183 Hughes administrative employees in Southern
California and 75 QFC administrative employees in Seattle. As of
year-end, all of the Hughes employees have been terminated. The QFC
employees have been notified of their terminations on various dates
ranging from February 15, 1999 to December 31, 1999. Under severance
agreements, the amount of severance will be paid over a period
following the date of termination.

Lease Obligation
----------------

Fred Meyer closed a QFC store in the first quarter of 1998 and agreed
to dispose of the AG Stores under a settlement agreement with the State
of California. The lease obligation represents future contractual lease
payments on these stores over the expected holding period, net of any
sublease income. The Company is actively marketing the stores to
potential buyers and sub-lease tenants.

Stay Bonus Program
------------------

Represents amounts that were paid under a stay bonus program in the
fourth quarter of 1998.

4. ONE-TIME EXPENSES

In the second quarter of 1998, the Company incurred a $41 one-time
expense associated with logistics projects. This expense included the
costs associated with ending a joint venture related to a warehouse
operation that formerly served the Company's Michigan stores and
several independent customers. The warehouse is now operated by a third
party that distributes the Company's inventory to its Michigan stores.
These expenses also included the transition costs related to one of the
Company's new warehouses, and one new warehouse facility operated by an
unaffiliated entity that provides services to the Company. These costs
included carrying costs of the facilities idled as a result of these
new warehouses and the associated employee severance costs. The
expenses described above included non-cash asset writedowns of $16 and
were included in merchandise costs, including warehouse and
transportation. The remaining $25 of expenses are summarized as
follows:

Cash Amount Accrued
Expense Payments At January 2, 1999
------- -------- ------------------

<S> <C> <C> <C>
Employee severance . . . . . . . . . . . $11 $ 7 $ 4
Carrying costs of idled facilities . . . 9 3 6
Ending the Joint Venture . . . . . . . . 5 5 -
--- --- ---
$25 $15 $10
=== === ===
</TABLE>

The employee severance costs will be paid through the second quarter of
1999 and we project the carrying costs of the idled warehouse
facilities will be paid through 2001.

<PAGE> 12

Additionally, in the second quarter of 1998, the Company incurred
one-time expenses of $12 associated with accounting, data and
operations consolidations in Texas. These included the cost of closing
eight stores and relocating the remaining Dallas office employees to a
smaller facility. These expenses, which included non-cash asset
writedowns of $2, were included in operating, general and
administrative expenses. Cash expenses paid to date are $1 and the
remaining accrual of $9 at January 2, 1999 represents estimated rent or
lease termination costs that will be paid on closed stores through
2013.

5. ACCOUNTING CHANGE

In the second quarter of 1998, Kroger changed its application of the
Last-In, First-Out, or LIFO method of accounting for store inventories
from the retail method to the item cost method. The change was made to
more accurately reflect inventory value by eliminating the averaging
and estimation inherent in the retail method. The cumulative effect of
this change on periods prior to December 28, 1997 cannot be determined.
The effect of the change on the December 28, 1997 inventory valuation,
which includes other immaterial modifications in inventory valuation
methods, was included in restated results for the quarter ended March
21, 1998. This change increased merchandise costs by $90 and reduced
earnings before extraordinary loss and net earnings by $56, or $0.21
per diluted share. The Company has not calculated the pro forma effect
on prior periods because cost information for these periods is not
determinable. The item cost method did not have a material impact on
earnings subsequent to its initial adoption.

6. TAXES BASED ON INCOME

The provision for taxes based on income consists of:

1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Federal
Current $ 406 $ 254 $ 186
Deferred (49) 81 54
----- ----- -----
357 335 240
State and local 20 30 25
----- ----- -----
377 365 265
Tax credit from extraordinary loss (162) (77) (2)
----- ----- -----
$ 215 $ 288 $ 263
===== ===== =====
</TABLE>

A reconciliation of the statutory federal rate and the effective rate
follows:
<TABLE>
<CAPTION>

1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.8 2.8 2.7
Non-deductible goodwill 3.2 0.6 -
Other, net 1.3 (0.1) -
----- ----- -----
43.3% 38.3% 37.7%
===== ===== =====
</TABLE>

The tax effects of significant temporary differences that comprise
deferred tax balances were as follows:
<TABLE>
<CAPTION>

1998 1997
---------- ----------
<S> <C> <C>
Current deferred tax assets:
Compensation related costs $ 69 $ 43
Depreciation 35 55
Insurance related costs 72 63
Inventory related costs 54 16
Net operating loss carryforwards 138 4
Other 116 35
----- -----
Total current deferred tax assets 484 216
----- -----

</TABLE>

<PAGE> 13

<S> <C> <C>
Current deferred tax liabilities:
Compensation related costs (103) (85)
Inventory related costs (88) (86)
Other (9) (14)
----- -----
Total current deferred tax liabilities (200) (185)
----- -----

Current deferred taxes, net included
in prepaid and other current assets $ 284 $ 31
===== =====

Long-term deferred tax assets:
Compensation related costs $ 146 $ 138
Insurance related costs 92 45
Lease accounting 58 25
Net operating loss carryforwards 319 65
Other 78 50
----- -----
693 323
Valuation allowance (157) (12)
----- -----
Long-term deferred tax assets, net 536 311
----- -----

Long-term deferred tax liabilities:
Depreciation (407) (483)
Other (55) (72)
----- -----
Total long-term deferred tax liabilities (462) (555)

Long-term deferred taxes, net $ 74 $(244)
===== =====

</TABLE>

Long-term deferred taxes, net are included in other assets at January
2, 1999 and other long-term liabilities at December 27, 1997.

The change in the valuation allowance during 1998 relates to the
allocation of the purchase price to Ralphs/Food 4 Less. At January 2,
1999, the Company had net operating loss carryforwards for federal
income tax purposes of $1,257 which expire from 2004 through 2017. In
addition, the Company has net operating loss carryforwards for state
income tax purposes of $641 which expire from 1999 through 2017. The
utilization of certain of the Company's net operating loss
carryforwards may be limited in a given year.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consists of:

1998 1997
----------- -----------
<S> <C> <C>
Land $ 979 $ 767
Buildings and improvements 2,479 2,094
Equipment 5,288 4,570
Leasehold improvements 1,692 1,368
Construction-in-progress 492 319
Leased property under capital leases 468 340
------- -------
11,398 9,458
Accumulated depreciation (4,178) (3,734)
------- -------

$ 7,220 $ 5,724
======= =======
</TABLE>

Accumulated depreciation for leased property under capital leases was
$161 at January 2, 1999 and $133 at December 27, 1997.

Approximately $271 and $369, original cost, of property, plant and
equipment collateralizes certain mortgage obligations at January 2,
1999 and December 27, 1997, respectively.

<PAGE> 14

8. DEBT OBLIGATIONS

Long-term debt consists of:

1998 1997
------- -------
<S> <C> <C>
Senior Credit Facility $ 3,010 $ 1,746
Credit Agreement 844 1,262
6% to 11% Senior Notes and Debentures due through 2018 3,475 1,267
7.875% to 10.25% mortgages due in varying amounts through 2017 465 692
Other 365 554
------- -------

Total debt 8,159 5,521
Less current portion 311 30
------- -------

Total long-term debt $ 7,848 $ 5,491
======= =======
</TABLE>

In conjunction with the acquisitions of QFC and Ralphs/Food 4 Less in
March 1998, the Company entered into new financing arrangements that
refinanced a substantial portion of the Company's debt. The Senior
Credit Facility provides for a $1,875 five-year revolving credit
agreement and a $1,625 five-year term note. All indebtedness under the
Senior Credit Facility is guaranteed by certain of the Company's
subsidiaries and collateralized by the stock of those subsidiaries. The
revolving portion of the Senior Credit Facility is available for
general corporate purposes, including the support of the commercial
paper program of the Company. Commitment fees are charged at .30% on
the unused portion of the five-year revolving credit facility. Interest
on the Senior Credit Facility is at adjusted LIBOR plus a margin of
1.0%. At January 2, 1999, the weighted average interest rate on both
the five year term note and the amounts outstanding under the revolving
credit facility was 5.9%. The Senior Credit Facility requires the
Company to comply with certain ratios related to indebtedness to
earnings before interest, taxes, depreciation and amortization
("EBITDA") and fixed charge coverage. In addition, the Senior Credit
Facility limits dividends on and redemption of capital stock. The
Company may prepay the Senior Credit Facility, in whole or in part, at
any time, without a prepayment penalty.

The Company also has a $1,500 Five Year Credit Agreement and a $500
364-Day Credit Agreement (collectively the "Credit Agreement"). The
Five Year facility terminates on May 28, 2002 unless extended or
earlier terminated by the Company. The 364-Day Credit Agreement would
have terminated in May 1999, but was extended as a $430 facility. The
364-Day facility terminates on May 24, 2000 unless extended, converted
into a two year term loan, or earlier terminated by the Company. The
364-Day Credit Agreement would have terminated in May 1999, but was
extended as a $430 facility. Borrowings under the Credit Agreement bear
interest at the option of the Company at a rate equal to either (i) the
highest, from time to time, of (A) the base rate of Citibank, N.A., (B)
1/2% over a moving average of secondary market morning offering rates
for three month certificates of deposit adjusted for reserve
requirements, and (C) 1/2% over the federal funds rate or (ii) an
adjusted Eurodollar rate based upon the London Interbank Offered Rate
("Eurodollar Rate") plus an Applicable Margin. In addition, the Company
pays a Facility Fee in connection with the Credit Facility. Both the
Applicable Margin and the Facility Fee vary based on the Company's
achievement of a financial ratio. At January 2, 1999, the Applicable
Margin for the 364-Day facility was .140% and for the Five-Year
facility was .120%. The Facility Fee for the 364-Day facility was .060%
and for the Five-Year facility was .080%. The Credit Agreement contains
covenants which among other things, restrict dividends and require the
maintenance of certain financial ratios, including fixed charge
coverage ratios and leverage ratios. The Company may prepay the Credit
Agreement, in whole or in part, at any time, without a prepayment
penalty.

In December 1998, the Senior Credit Facility and the Credit Agreement
were amended to permit the merger of Kroger and Fred Meyer (See note
2). The amendments, which became effective when the merger was
completed, increased interest rates on the Credit Agreement to market
rates.

Unrated commercial paper borrowings of $830 and borrowings under money
market lines of $105 at January 2, 1999 have been classified as
long-term because the Company expects that during 1999 these borrowings
will be refinanced using the same type of securities. Additionally, the
Company has the ability to refinance these borrowings on a long-term
basis and has presented the amounts as outstanding under the Credit
Agreement or the Senior Credit Facility. The money market lines, which
generally have terms of approximately one year, allow the Company to
borrow from the banks at mutually agreed upon rates, usually below the
rates offered under the Senior Credit Facility.

<PAGE> 15

All of the Senior Notes and Debentures are subject to early redemption
at varying times and premiums beginning in 1999. In addition, subject
to certain conditions (including repayment in full of all obligations
under the Credit Agreement or obtaining the requisite consents under
the Credit Agreement), the Company's publicly issued debt will be
subject to redemption, in whole or in part, at the option of the holder
upon the occurrence of a redemption event, upon not less than five
days' notice prior to the date of redemption, at a redemption price
equal to the default amount, plus a specified premium. "Redemption
Event" is defined in the indentures as the occurrence of (i) any person
or group, together with any affiliate thereof, beneficially owning 50%
or more of the voting power of the Company or (ii) any one person or
group, or affiliate thereof, succeeding in having a majority of its
nominees elected to the Company's Board of Directors, in each case,
without the consent of a majority of the continuing directors of the
Company.

The aggregate annual maturities and scheduled payments of long-term
debt for the five years subsequent to 1998 are:

The extraordinary loss in 1998, 1997 and 1996 relates to premiums paid
to retire certain indebtedness early and the write-off of related
deferred financing costs.

9. INTEREST RATE PROTECTION PROGRAM

The Company uses derivatives to limit its exposure to rising interest
rates. The guidelines the Company follows are: (i) use average daily
bank balance to determine annual debt amounts subject to interest rate
exposure, (ii) limit the annual amount of debt subject to interest rate
reset and the amount of floating rate debt to a combined total of
$2,300 or less, (iii) include no leveraged products, and (iv) hedge
without regard to profit motive or sensitivity to current
mark-to-market status.

The table below indicates the types of derivatives used, their
duration, and their respective interest rates. The variable component
of each interest rate derivative is based on the 6 month LIBOR using
the forward yield curve.

1998 1997
---------- -------
<S> <C> <C>
Receive fixed swaps
Notional amount . . . . . . . . . . . . . . . . . . . . . $ 785 $1,085
Duration in years . . . . . . . . . . . . . . . . . . . . 2.0 3.0
Average receive rate. . . . . . . . . . . . . . . . . . . 6.50% 6.33%
Average pay rate. . . . . . . . . . . . . . . . . . . . . 5.30% 5.79%
Receive variable swaps
Notional amount . . . . . . . . . . . . . . . . . . . . . $ 925 $1,345
Duration in years . . . . . . . . . . . . . . . . . . . . 2.4 2.7
Average receive rate. . . . . . . . . . . . . . . . . . . 5.57% 5.85%
Average pay rate. . . . . . . . . . . . . . . . . . . . . 7.09% 6.91%
Interest rate caps
Notional amount . . . . . . . . . . . . . . . . . . . . . $ - $ 200
Duration in years . . . . . . . . . . . . . . . . . . . . - .9
Average receive rate. . . . . . . . . . . . . . . . . . . - 5.81%

</TABLE>

At January 2, 1999, the Company had entered into a two year $75 receive
variable swap that becomes effective July 1, 1999. In addition, the
Company has an interest rate collar which limits the interest rate on a
notional amount of $300 to a variable rate between 4.10% and 6.50%
until 2003.

<PAGE> 16

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:

Long-term Investments
---------------------
The fair values of these investments are estimated based on quoted
market prices for those or similar investments.

Long-term Debt
--------------
The fair value of the Company's long-term debt, including the current
portion, thereof, is estimated based on the quoted market price for the
same or similar issues. The fair value of commercial paper and
long-term debt outstanding under the Company's credit agreements
approximates carrying value.

Interest Rate Protection Agreements
-----------------------------------
The fair value of these agreements is based on the net present value of
the future cash flows using the forward interest rate yield curve in
effect at the respective year-ends.

The estimated fair values of the Company's financial instruments are as
follows:

1998 1997
-------------------- ------------------
Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------- --------- -------- ------
<S> <C> <C> <C> <C>
Long-term investments for which it is
Practicable ............................. $ 96 $ 97 $ 177 $ 178
Not Practicable ......................... $ 9 $ -- $ 34 $ --
Long-term debt for which it is
Practicable ............................. $ 7,687 $ 7,973 $ 5,005 $ 5,138
Not Practicable ......................... $ 472 $ -- $ 516 $ --
Interest Rate Protection Agreements
Receive fixed swaps ..................... $ -- $ 22 $ -- $ 11
Receive variable swaps .................. -- (43) -- (43)
Interest rate caps and collars .......... -- (6) 1 --
------- ------- ------- -------
$ -- $ (27) $ 1 $ (32)
======= ======= ======= =======
</TABLE>

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. In
addition, the Company is not subjected to a concentration of credit
risk related to these instruments.

The investments for which it was not practicable to estimate fair value
relate to equity investments accounted for under the equity method and
investments in real estate development partnerships for which there is
no market. The long-term debt for which it was not practicable to
estimate fair value relates to Industrial Revenue Bonds, certain
mortgages and other notes for which there is no market.

11. LEASES

The Company operates primarily in leased facilities. Lease terms
generally range from 10 to 25 years with options to renew at varying
terms. Terms of certain leases include escalation clauses, percentage
rents based on sales, or payment of executory costs such as property
taxes, utilities, or insurance and maintenance. Portions of certain
properties are subleased to others for periods of from one to 20 years.

Rent expense under operating leases consists of:

1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Minimum rentals $ 683 $ 515 $ 437
Contingent payments 18 14 13
Sublease income (82) (64) (57)
----- ----- -----
Net rent expense $ 619 $ 465 $ 393
===== ===== =====

</TABLE>

<PAGE> 17

Minimum annual rentals for the five years subsequent to 1998 and in the
aggregate are:

Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999 $ 87 $ 657
2000 77 629
2001 65 598
2002 59 553
2003 54 532
Thereafter 500 4,998
---- ------
Total 842 $7,967
======
Less estimated executory costs included
in capital leases 16
----

Net minimum lease payments under capital leases 826
Less amount representing interest 412
----
Present value of net minimum lease payments
under capital leases $414
====

</TABLE>

Total future minimum rentals under noncancellable subleases at January
2, 1999 were $417.

On March 11, 1998, the Company entered into a $500 five-year synthetic
lease credit facility that refinanced $303 in existing lease financing
facilities. Lease payments are based on LIBOR applied to the utilized
portion of the facility. As of January 2, 1999, the Company had
utilized $364 of the facility.

12. CONTINGENCIES

The Company continuously evaluates contingencies based upon the best
available evidence.

Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is
reasonable. To the extent that resolution of contingencies results in
amounts that vary from management's estimates, future earnings will be
charged or credited.

The principal contingencies are described below:

Insurance
---------
The Company's workers' compensation risks are self-insured in certain
states. In addition, other workers' compensation risks and certain
levels of insured general liability risks are based on retrospective
premium plans, deductible plans, and self-insured retention plans. The
liability for workers' compensation risks is accounted for on a present
value basis. Actual claim settlements and expenses incident thereto may
differ from the provisions for loss. Property risks have been
underwritten by a subsidiary and are reinsured with unrelated insurance
companies. Operating divisions and subsidiaries have paid premiums, and
the insurance subsidiary has provided loss allowances, based upon
actuarially determined estimates.

Litigation
----------
The Company is involved in various legal actions arising in the normal
course of business. Although occasional adverse decisions (or
settlements) may occur, the Company believes that the final disposition
of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.

Purchase commitment
-------------------
The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee") and has
a 10 year product supply agreement with Santee that requires the
Company to purchase 9 million gallons of fluid milk and other products
annually. The product supply agreement expires on July 29, 2007. Upon
acquisition of Ralphs/Food 4 Less, Santee became excess capacity and a
duplicate facility. The Company is currently

<PAGE> 18

engaged in efforts to dispose of its interest in Santee, which may
result in a loss of approximately $45 in 1999.

13. WARRANT DIVIDEND PLAN

On February 28, 1986, Kroger adopted a warrant dividend plan providing
for stock purchase rights to owners of the Company's common stock. The
Plan was amended and restated as of April 4, 1997. Each share of common
stock currently has attached one-half of a right. Each right, when
exercisable, entitles the holder to purchase from the Company one
ten-thousandth of a share of Series A Preferred Shares, par value $100
per share, at $87.50 per on ten-thousandth of a share. The rights will
become exercisable, and separately tradeable, ten business days
following a tender offer or exchange offer resulting in a person or
group having beneficial ownership of 10% or more of the Company's
common stock. In the event the rights become exercisable and thereafter
the Company is acquired in a merger or other business combination, each
right will entitle the holder to purchase common stock of the surviving
corporation, for the exercise price, having a market value of twice the
exercise price of the right. Under certain other circumstances,
including certain acquisitions of the Company in a merger or other
business combination transaction, or if 50% or more of the Company's
assets or earning power are sold under certain circumstances, each
right will entitle the holder to receive upon payment of the exercise
price, shares of common stock of the acquiring company with a market
value of two times the exercise price. At the Company's option, the
rights, prior to becoming exercisable, are redeemable in their entirety
at a price of $.01 per right. The rights are subject to adjustment and
expire March 19, 2006.

14. BENEFIT PLANS

The Company administers non-contributory defined benefit retirement
plans for certain non-union employees. Funding for the pension plans is
based on a review of the specific requirements and on evaluation of the
assets and liabilities of each plan.

In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. The
majority of the Company's employees may become eligible for these
benefits if they reach normal retirement age while employed by the
Company. Funding of retiree health care and life insurance benefits
occurs as claims or premiums are paid.

Information with respect to change in benefit obligation, change in
plan assets, net amounts recognized at end of year, weighted average
assumptions and components of net periodic benefit cost follows:

Pension Benefits Other Benefits
------------------ ------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .......... $ 990 $ 874 $ 255 $ 259
Addition to benefit obligation from acquisitions . 94 39 16 --
Service cost ..................................... 37 28 9 10
Interest cost .................................... 77 69 18 20
Plan participants' contributions ................. -- -- 4 4
Amendments ....................................... -- -- (11) (5)
Actuarial loss (gain) ........................... 51 27 15 (13)
Curtailment credit ............................... -- -- (17) --
Benefits paid .................................... (57) (47) (17) (20)
------- ------- ------- -------
Benefit obligation at end of year ................ $ 1,192 $ 990 $ 272 $ 255
======= ======= ======= =======

CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ... $ 1,153 $ 948 $ -- $ --
Addition to plan assets from acquisitions ........ 63 57 -- --
Actual return on plan assets ..................... 206 193 -- --
Employer contribution ............................ 11 2 13 16
Plan participants' contributions ................. -- -- 4 4
Benefits paid .................................... (57) (47) (17) (20)
------- ------- ------- -------

Fair value of plan assets at end of year ......... $ 1,376 $ 1,153 $ -- $ --
======= ======= ======= =======
</TABLE>

<PAGE> 19

Pension plan assets include $167 and $149 of common stock of The Kroger
Co. at January 2, 1999 and December 27, 1997, respectively.

<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----

<S> <C> <C> <C> <C>
NET AMOUNT RECOGNIZED AT END OF YEAR:
Funded status at end of year ..................... $ 183 $ 163 $(272) $(255)
Unrecognized actuarial gain ...................... (204) (148) (35) (52)
Unrecognized prior service cost .................. 19 21 (31) (23)
Unrecognized net transition asset ................ (5) (6) $ 1 1
----- ----- ----- -----

Net amount recognized at end of year ............. $ (7) $ 30 $(337) $(329)
===== ===== ===== =====

Prepaid benefit cost ............................. $ 48 $ 54 $ -- $ --
Accrued benefit liability ........................ (55) (24) (337) (329)
----- ----- ----- -----
$ (7) $ 30 $(337) $(329)
===== ===== ===== =====

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate .................................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets ................... 9.50% 9.50%
Rate of compensation increase .................... 3.25% 3.75% 3.25% 3.75%

</TABLE>

For measurement purposes, a 5 percent annual rate of increase in the
per capita cost of other benefits was assumed for 1999 and thereafter.

Pension Benefits Other Benefits
------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ........................... $ 37 $ 28 $ 26 $ 9 $ 10 $ 10
Interest cost .......................... 77 69 61 18 20 19
Expected return on plan assets ......... (98) (82) (76) -- -- --
Amortization of:
Transition asset ................... -- (9) (8) -- -- --
Prior service cost ................. 2 2 2 (3) (1) (1)
Actuarial (gain) loss .............. 1 -- -- (1) (1) --
Curtailment credit ..................... -- -- -- (17) -- --
---- ---- ---- ---- ---- ----

Net periodic benefit cost .............. $ 19 $ 8 $ 5 $ 6 $ 28 $ 28
==== ==== ==== ==== ==== ====
</TABLE>

The accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan
assets were $123 and $69 at January 2, 1999 and $24 and $0 at December
27, 1997.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point
change in the assumed health care cost trend rates would have the
following effects:

<TABLE>
<CAPTION>
1% POINT 1% POINT
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components ........ $ 3 $ (3)
Effect on postretirement benefit obligation .................... $ 28 $(24)
</TABLE>

The Company also administers certain defined contribution plans for
eligible union and non-union employees. The cost of these plans for
1998, 1997, and 1996 was $40, $32, and $29, respectively.

The Company participates in various multi-employer plans for
substantially all union employees. Benefits are generally based on a
fixed amount for each year of service. Contributions and expense for
1998, 1997, and 1996 were $133, $119, and $103, respectively.

<PAGE> 20

15. STOCK OPTION PLANS

The Company grants options for common stock to employees under various
plans, as well as to its non-employee directors owning a minimum of
1,000 shares of common stock of the Company, at an option price equal
to the fair market value of the stock at the date of grant. In addition
to cash payments, the plans provide for the exercise of options by
exchanging issued shares of stock of the Company. At January 2, 1999,
7.8 million shares of common stock were available for future options.
Options generally will expire 10 years from the date of grant.
Currently granted options vest in one year to five years or, for
certain options, upon the Company's stock reaching certain
pre-determined market prices within ten years from the date of the
grant. Outstanding options generally become immediately exercisable
upon certain changes of control of the Company.

Changes in options outstanding under the stock option plans, excluding
restricted stock grants were:

<TABLE>
<CAPTION>
Shares subject Weighted average
to option exercise price
-------------- ----------------
(In millions)

<S> <C> <C>
Outstanding, year-end 1995 33.0 $ 10.32
Granted 10.5 $ 17.92
Exercised (5.7) $ 8.96
Canceled or expired (2.0) $ 16.60
----

Outstanding, year-end 1996 35.8 $ 12.41
Granted 8.3 $ 25.68
Options of an acquired company 1.5 $ 7.33
Exercised (7.3) $ 10.34
Canceled or expired (.5) $ 12.92
----

Outstanding, year-end 1997 37.8 $ 15.50
Granted 5.0 $ 41.09
Exercised (9.5) $ 12.60
Canceled or expired (.5) $ 27.25
----

Outstanding, year-end 1998 32.8 $ 20.39
====
</TABLE>

A summary of options outstanding and exercisable at January 2, 1999
follows:

Weighted-Average
Range of Number Remaining Weighted-Average Options Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
(In millions) (In years) (In millions)

<S> <C> <C> <C> <C> <C>
$ 3.33 - $10.29 5.5 3.0 $ 8.08 5.5 $ 8.08
10.57 - 12.97 9.3 5.1 12.07 9.1 11.84
13.02 - 20.75 7.5 7.4 18.89 5.7 19.05
21.19 - 41.63 6.8 8.6 30.18 1.8 27.92
42.13 - 54.47 3.7 9.3 44.64 - -
----- -----

$ 3.33 - $54.47 32.8 6.5 $ 20.39 22.1 $ 14.16
===== =====
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees", and related interpretations
in accounting for its plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company's net earnings
and diluted earnings per common share would have been reduced to the
pro forma amounts below:

<PAGE> 21

1998 1997 1996
------------------- ------------------- ------------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma

<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 237 $ 195 $ 465 $ 425 $ 433 $ 416

Diluted earnings per common share $ 0.56 $ 0.46 $ 1.25 $ 1.14 $1.26 $ 1.21

</TABLE>

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, based on historical
assumptions from each respective Company. These amounts reflected in
this proforma disclosure are not indicative of future amounts. The
following table reflects the assumptions used for grants awarded in
each year to option holders of the respective companies:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------

<S> <C> <C> <C>
Kroger
------
Weighted average expected volatility (based on historical volatility) 26.60% 24.00% 22.70%
Weighted average risk-free interest rate 4.60% 5.70% 6.30%
Expected term 7.8 years 5.4 years 3.3 years

Fred Meyer
----------
Weighted average expected volatility (based on historical volatility) 39.37% 33.67% 34.97%
Weighted average risk-free interest rate 5.32% 6.10% 5.77%
Expected term 5.0 years 5.0 years 5.0 years

QFC
---
Weighted average expected volatility (based on historical volatility) n/a 43.50% 44.70%
Weighted average risk-free interest rate n/a 5.50% 5.12%
Expected term n/a 5.0 years 5.0 years

</TABLE>

The weighted average fair value of options granted during 1998, 1997,
and 1996 was $19.73, $11.72, and $5.94, respectively.

16. EARNINGS PER COMMON SHARE

Basic earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding. Diluted
earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding after giving
effect to dilutive stock options and warrants.

The following table provides a reconciliation of earnings before
extraordinary loss and shares used in calculating basic earnings
per share to those used in calculating diluted earnings per share.

1998 1997 1996
------------------------- ------------------------- -------------------------
(In millions, except per share amounts)
-----------------------------------------------------------------------------

Income Shares Per Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount ator) nator) Amount
--------- ------- ------ -------- -------- ------ -------- ------- ------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per
common share.............. $ 494 408 $ 1.21 $ 589 359 $ 1.64 $ 436 331 $ 1.32
Dilutive effect of stock
options and warrants...... - 18 - 13 - 12
-------- -------- -------- -------- -------- --------

Diluted earnings per
common share.............. $ 494 426 $ 1.16 $ 589 372 $ 1.58 $ 436 343 $ 1.27
======== ======== ======== ======== ======== ========

</TABLE>

<PAGE> 22

17. RELATED-PARTY TRANSACTIONS

The Company had a management agreement for management and financial
services with The Yucaipa Companies ("Yucaipa"), whose managing general
partner became Chairman of the Executive Committee of the Board
effective May 27, 1999. The arrangement provides for annual
management fees of $.5 plus reimbursement of Yucaipa's reasonable
out-of-pocket costs and expenses. In 1998, the Company paid to Yucaipa
approximately $20 for services rendered in conjunction with the
Ralphs/Food 4 Less and QFC mergers and termination fees of Ralphs/Food
4 Less management agreement. This agreement was terminated by Yucaipa
upon consummation of the Kroger and Fred Meyer merger (see note 2).

Yucaipa holds a warrant for the purchase of up to 3.9 million shares of
Common Stock at an exercise price of $23.81 per share. Half of the
warrant expires in 2005 and half expires in 2006. Additionally, at the
option of Yucaipa, the warrant is exercisable without the payment of
cash consideration. Under this condition, the Company will withhold
upon exercise the number of shares having a market value equal to the
aggregate exercise price from the shares issuable.

18. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require a change in the
way that the Company accounts for its interest rate protection
agreements. In May 1999, the Financial Accounting Standards Board
issued an exposure draft requiring adoption of the standard for all
fiscal years beginning after June 15, 2000. Because of the uncertainty
of the Company's interest rate protection agreements and potential
changes in the debt portfolio as a result of the Fred Meyer merger, the
Company has not yet determined the expected impact, if any, that the
adoption of the standard will have on the financial statements.

The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", which is effective for fiscal years beginning after
December 15, 1998. The Company's accounting policy is consistent with
this statement. The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants also issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities", which is effective for fiscal years beginning after
December 15, 1998. This statement is expected to have no effect on the
financial statements.

19. SUBSEQUENT EVENT

On January 6, 1999, the Company changed its fiscal year-end to the
Saturday nearest January 31 of each year. The first new fiscal year
ends January 29, 2000 and includes a 16-week first quarter ending May
22, 1999, and 12-week second, third and fourth quarters ending August
14, 1999, November 6, 1999, and January 29, 2000, respectively.

On May 20, 1999, the Company announced a distribution in the nature of
a two-for-one split, to shareholders of record of common stock on June
7, 1999. The supplemental financial statements do not reflect this
distribution.

<PAGE> 23

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders of The Kroger Co.

In our opinion, based upon our audits and the report of other auditors, the
accompanying supplemental consolidated balance sheet, and the related
supplemental consolidated statements of operations, changes in shareowners'
equity (deficit) and cash flows present fairly, in all material respects, the
financial position of The Kroger Co. and its subsidiaries at January 2, 1999 and
December 27, 1997, and the results of their operations and their cash flows for
the years ended January 2, 1999, December 27, 1997, and December 28, 1996, in
conformity with generally accepted accounting principles applicable after
financial statements are issued for a period which includes the date of
consummation of a business combination accounted for as a pooling of interests.
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 did not audit the financial statements of Fred Meyer, Inc., a
wholly-owned subsidiary, which statements reflect total assets of $10.2 billion
and $5.4 billion at January 2, 1999 and December 27, 1997, respectively, and
sales of $14.9 billion, $7.4 billion and $4.5 billion for the fiscal years ended
January 2, 1999, December 27, 1997 and December 28, 1996, respectively. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Fred Meyer, Inc., is based solely on the report of the
other auditors. We conducted our audits of the supplemental consolidated
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.

As described in Note 5 to the supplemental consolidated financial statements,
the Company changed its application of the LIFO method of accounting for store
inventories as of December 28, 1997.

The supplemental financial statements give retroactive effect to the merger of
The Kroger Co. and Fred Meyer, Inc. on May 27, 1999, which has been accounted
for as a pooling of interests as described in note 2 to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of The Kroger Co. and subsidiaries after financial statements
covering the date of consummation of the business combination are issued.

(PricewaterhouseCoopers LLP)

Cincinnati, Ohio
May 28, 1999

<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

BUSINESS COMBINATIONS

On May 27, 1999 Kroger issued 156 million shares of Kroger common stock in
connection with a merger, for all of the outstanding common stock of Fred Meyer
Inc., which operates stores primarily in the Western region of the United
States. On March 9, 1998, Fred Meyer issued 41 million shares of Fred Meyer
common stock in connection with a merger, for all of the outstanding stock of
Quality Food Centers, Inc. ("QFC"), a supermarket chain operating in the
Seattle/Puget Sound region of Washington state, and in Southern California. The
mergers were accounted for as poolings of interests, and the accompanying
financial statements have been restated to give effect to the consolidated
results of Kroger, Fred Meyer and QFC for all years presented.

On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc. ("Ralphs/Food
4 Less"), a supermarket chain operating primarily in Southern California by
issuing 22 million shares of common stock to the Ralphs/Food 4 Less
stockholders. The acquisition was accounted for under the purchase method of
accounting. The financial statements include the operating results of
Ralphs/Food 4 Less from the date of acquisition.

On September 9, 1997, Fred Meyer acquired Smith's, a regional supermarket and
drug store chain operating in the Intermountain and Southwestern regions of the
United States, by issuing 33 million shares of common stock to the Smith's
stockholders. The acquisition was accounted for under the purchase method of
accounting. The financial statements include the operating results of Smith's
from the date of acquisition.

On March 19, 1997, QFC acquired the principal operations of Hughes Markets, Inc.
("Hughes"), a supermarket chain operating in Southern California and a 50%
interest in Santee Dairies, Inc., one of the largest dairy plants in California.
The merger was effected through the acquisition of 100% of the outstanding
voting securities of Hughes for approximately $361 million cash , 10 million
shares of common stock, and the assumption of $33 million of indebtedness of
Hughes. The acquisition was accounted for under the purchase method of
accounting. The financial statements include the operating results of Hughes
from the date of acquisition.

On February 14, 1997, QFC acquired the principal operations of Keith Uddenberg,
Inc. ("KUI"), a supermarket chain operating in the western and southern Puget
Sound region of Washington. The merger was effected through the acquisition of
the outstanding voting securities of KUI for $35 million cash, 2 million shares
of common stock and the assumption of approximately $24 million of indebtedness
of KUI. The acquisition was accounted for under the purchase method of
accounting. The financial statements include the operating results of KUI from
the date of acquisition.

RESULTS OF OPERATIONS

The following discussion summarizes our operating results for 1998 compared with
1997 and 1997 compared with 1996. However, 1998 results are not comparable to
1997 results and 1997 results are not comparable to 1996 results due to recent
acquisitions (see footnote 2 of the supplemental financial statements). The 1998
results include the results of Ralphs/Food 4 Less from March 10, 1998. The 1997
results include the results of Hughes from March 19, 1997 and Smith's from
September 9, 1997 and exclude the results of Ralphs/Food 4 Less.

1998 VS. 1997

Sales
- -----

Total sales for 1998 increased 27% or $9.2 billion from $33.9 billion in 1997.
For certain Kroger divisions, fiscal 1998 contained 53 weeks compared to 52
weeks in 1997. Adjusting for the extra week, total sales increased 26% or $8.7
billion. The sales increase was driven by recent acquisitions, our capital
expenditure program and strong comparable store sales. The Ralphs/Food 4 Less
and Smith's acquisitions accounted for $6.9 billion of the increase.

The Kroger Co.'s sales in identical food stores, which includes stores in
operation and not expanded or relocated for five quarters, increased 1.0% in
1998. For purposes of this calculation, The Kroger Co. is defined as Kroger and
its consolidated subsidiaries before the merger with Fred Meyer. Fred Meyer
Inc.'s comparable store sales, which include identical stores plus expanded and
relocated stores, increased 3.2% in 1998. For purposes of this calculation, Fred
Meyer Inc. is defined as Fred Meyer and its consolidated subsidiaries before the
merger with Kroger. The comparable store sales calculation assumed that the

<PAGE> 25

Ralphs/Food 4 Less and Smith's acquisitions occurred at the beginning of the
comparable periods and excluded the Hughes and Smitty's stores which are
currently being converted to other formats.

Merger Related Costs
- --------------------

Fred Meyer is in the process of implementing its plan to integrate Fred Meyer
Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes, resulting in merger related
costs of $269 million in 1998. The integration plan includes the consolidation
of distribution, information systems, and administrative functions, conversion
of 78 store banners, closure of seven stores, and transaction costs incurred to
complete the mergers. The costs were reported in the periods in which cash was
expended except for $26 million that was accrued for liabilities incurred to
discontinue activities and retain key employees and an $83 million charge to
write-down assets. The following table presents components of the merger related
costs:

(In millions) 1998
-------------------------------- -----
<S> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation $ 16
Systems integration 50
Store conversions 48
Transaction costs 34
Administration integration 12
-----
160

NONCASH ASSET WRITE-DOWN
Distribution consolidation 29
Systems integration 26
Store closures 25
Administration integration 3
-----
83

ACCRUED CHARGES
Systems integration 1
Transaction costs 6
Store closures 7
Administration integration 12
-----
26
-----

Total merger related costs $ 269
=====

Distribution Consolidation

These represent costs to consolidate manufacturing and distribution operations
and eliminate duplicate facilities. The costs include a $29 million write-down
to estimated net realizable value for the Hughes distribution center in Southern
California. Net realizable value was determined by a market analysis. The
facilities are held for sale and depreciation expense for the closed Hughes
distribution facility has been suspended. Depreciation expense in the second and
third quarters would have totaled $2 million if it had not been suspended.
Efforts to dispose of the facilities are ongoing and a sale is expected in 1999.
Also included is $13 million incurred for incremental labor during the closing
of the distribution center and other incremental costs incurred as a part of the
realignment of the Company's distribution system.

<PAGE> 26

Systems Integration

These represent the costs of integrating systems from QFC, Hughes and Smith's
computer platforms into Fred Meyer and Ralphs' platforms and the related
conversion of all corporate office and store systems. The asset write-down of
$26 million includes $18 million for computer equipment and related software
that have been abandoned and $8 million associated with computer equipment at
QFC which is being written off over 18 months at which time it will be
abandoned. Costs totaling $50 million were expensed as incurred and include $27
million of incremental operating costs, principally labor, during the conversion
process, $14 million paid to third parties, and $9 million of training costs.
Also included are severance costs for system employees who will be terminated as
the integration is completed.

Store Conversions

These include the costs to convert 55 Hughes stores to the Ralph's banner, 15
Smitty's stores to the Fred Meyer banner, five QFC stores to the Fred Meyer
banner, and three Fred Meyer stores to the Smith's banner. The conversion of the
Hughes and QFC stores are substantially complete. Costs totaling $48 million
represented incremental cash expenditures for advertising and promotions to
establish the banner, changing store signage, labor required to remerchandise
the store inventory and other services which were expensed as incurred.

Transaction Costs

These include $34 million for fees paid to outside parties and employee bonuses
that were contingent upon the completion of the mergers and $6 million for an
employee stay bonus program. The stay bonus program was accrued ratably over the
stay period and was paid in the fourth quarter of 1998.

Store Closures

These include the costs to close four stores identified as duplicate facilities
and to sell three stores pursuant to a settlement agreement with the State of
California ("AG Stores"). Annual sales and operating income for the four
duplicate facilities and three AG Stores are approximately $133 million and $3
million, respectively. The asset write-down represents $6 million of book value
in excess of sale proceeds, $19 million for the write-off of the goodwill
associated with the AG Stores, and $7 million of lease termination costs. All
stores have been closed or sold. The net book value on the AG Stores
representing building, fixtures and equipment was written down to an estimated
net realizable value of $6 million. Depreciation expense continues to be
recorded at the historical rate.

Administration Integration

These include $15 million for labor and severance costs. $9 million has been
expended and the employees have been terminated. $9 million of this amount is to
conform accounting policies of QFC and Hughes to Fred Meyer, including the
calculation of bad debt and costs for real estate transactions.

The following table presents the activity in the reserve accounts for 1998. The
beginning balance was zero:

<TABLE>
<CAPTION>
Cash Amount Accrued
(In millions) Expense Payments Reclass At January 2, 1999
-------------------------- ------- -------- ------- ------------------
<S> <C> <C> <C> <C>
SYSTEMS INTEGRATION
Severance $ 1 $ - $ - $ 1
TRANSACTION COSTS
Stay bonus program 6 6 - -
STORE CLOSURES
Lease obligation 7 2 - 5
ADMINISTRATION INTEGRATION
Severance 12 8 - 4
----- ----- ----- ------

Total amounts included in
current liabilities $ 26 $ 16 $ - $ 10
===== ===== ===== ======

</TABLE>

Severance

<PAGE> 27

have been notified of their terminations on various dates ranging from February
15, 1999 to December 31, 1999. Under severance agreements, the amount of
severance will be paid over a period following the date of termination.

Lease Obligation

Fred Meyer closed a QFC store in the first quarter of 1998 and agreed to dispose
of the AG Stores under a settlement agreement with the State of California. The
lease obligation represents future contractual lease payments on these stores
over the expected holding period, net of any sublease income. We are actively
marketing the stores to potential buyers and sub-lease tenants.

Stay Bonus Program

Represents amounts that were paid under a stay bonus program in the fourth
quarter of 1998.

One-Time Expenses
- -----------------

In the second quarter of 1998, we incurred a $41 million pre-tax, $25 million
after-tax or $.09 per diluted share, one-time expense associated with logistics
projects. This expense included the costs associated with ending a joint venture
related to a warehouse operation that formerly served our Michigan stores and
several independent customers. The warehouse is now operated by a third party
that distributes our inventory to our Michigan stores. These expenses also
included the transition costs related to one of our new warehouses, and one new
warehouse facility operated by an unaffiliated entity that provides services to
us. These costs included carrying costs of the facilities idled as a result of
these new warehouses and the associated employee severance costs. The expenses
described above included non-cash asset writedowns of $16 million and were
included in merchandise costs, including warehouse and transportation. The
remaining $25 million of expenses are summarized as follows:

Cash Amount Accrued
(In millions) Expense Payments At January 2, 1999
- ---------------------------------------- ------- -------- ------------------

<S> <C> <C> <C>
Employee severance ..................... $11 $ 7 $ 4
Carrying costs of idled facilities ..... 9 3 6
Ending the Joint Venture ............... 5 5 --
--- --- ---
$25 $15 $10
=== === ===
</TABLE>

The employee severance costs will be paid through the second quarter of 1999 and
we project the carrying costs of the idled warehouse facilities will be paid
through 2001.

Additionally, in the second quarter of 1998, we incurred one-time expenses of
$12 million pre-tax, $7 million after-tax or $.03 per diluted share, associated
with accounting, data and operations consolidations in Texas. These included the
cost of closing eight stores and relocating the remaining Dallas office
employees to a smaller facility. These expenses, which included non-cash asset
writedowns of $2 million, were included in operating, general and administrative
expenses. Cash expenses paid to date are $1 million and the remaining accrual of
$9 million at January 2, 1999 represents estimated rent or lease termination
costs that will be paid on closed stores through 2013.

Accounting Change
- -----------------

In the second quarter of 1998, Kroger changed its application of the Last-In,
First-Out, or LIFO method of accounting for store inventories from the retail
method to the item cost method. The change was made to more accurately reflect
inventory value by eliminating the averaging and estimation inherent in the
retail method. The cumulative effect of this change on periods prior to December
28, 1997 cannot be determined. The effect of the change on the December 28, 1997
inventory valuation, which includes other immaterial modifications in inventory
valuation methods, was included in restated results for the quarter ended March
21, 1998. This change increased merchandise costs by $90 million and reduced
earnings before extraordinary loss and net earnings by $56 million, or $0.21 per
diluted share. We have not calculated the pro forma effect on prior periods
because cost information for these periods is not determinable. The item cost
method did not have a material impact on earnings subsequent to its initial
adoption.

<PAGE> 28

Merchandise Costs
- -----------------

Merchandise costs include advertising, warehousing and transportation expenses.
Merchandise costs, net of one-time expenses, the accounting change and LIFO
charge, as a percent of sales were 73.46% in 1998 and 75.06% in 1997.
Coordinated purchasing, category management, technology related efficiencies and
increases in private label sales caused the decline.

Operating and Administrative Expenses
- -------------------------------------

Operating and administrative expenses as a percent of sales were 18.0% in 1998
and 17.9% in 1997. The slight increase was due to higher incentive payouts based
on our 1998 performance and $12 million of one-time expenses. These were
partially offset by the suspension of contributions to certain multi-employer
pension and benefit plans totaling $45 million for 1998.

Income Taxes
- ------------

The effective tax rate increased to 43.3% in 1998 from 38.3% in 1997 due to
acquisitions accounted for under the purchase method of accounting resulting in
goodwill amortization that is not deductible for tax purposes. Goodwill
amortization was $92 million in 1998 and $16 million in 1997.

Net Earnings
- ------------

Net earnings and the effects of merger related costs, one-time expenses, the
accounting change and extraordinary losses for the two years ended January 2,
1999 were:

(In millions) 1998 1997
- -------------------------------------------------------------------- ---- ----
<S> <C> <C>
Earnings before extraordinary loss excluding merger related costs,
one-time expenses and the accounting change ...................... $ 763 $ 589
Merger related costs, net of income tax benefit .................... 181 --
One-time expenses, net of income tax benefit ....................... 32 --
Accounting change, net of income tax benefit ....................... 56 --
----- -----

Earnings before extraordinary loss ................................. 494 589
Extraordinary loss, net of income tax benefit ...................... (257) (124)
----- -----

Net Earnings ....................................................... $ 237 $ 465
===== =====

Diluted earnings per share before extraordinary loss excluding
merger related costs, one-time expenses and accounting change .... $1.79 $1.58

</TABLE>

Extraordinary losses were from the early retirement of debt. In addition to the
above mentioned items, net earnings in 1998 compared to 1997 were affected by
net interest expense of $645 million in 1998 compared to $388 million in 1997
and depreciation and amortization expenses of $837 million in 1998 compared to
$590 million in 1997.

EBITDA
- ------

Our Credit Agreement, Senior Credit Facility and the indentures underlying
approximately $377 million of publicly issued debt, contain various restrictive
covenants. Many of these covenants are based on earnings before interest, taxes,
depreciation, amortization and LIFO charge, or EBITDA. The ability to generate
EBITDA at levels sufficient to satisfy the requirements of these agreements is a
key measure of our financial strength. We do not intend to present EBITDA as an
alternative to any generally accepted accounting principle measure of
performance. Rather, we believe the presentation of EBITDA is important for
understanding our performance compared to our debt covenants. The calculation of
EBITDA is based on the definition contained in our Credit Agreement. This may be
a different definition than other companies use. We were in compliance with all
Credit Agreement, Senior Credit Facility and indenture covenants on January 2,
1999.

<PAGE> 29

EBITDA for 1998 increased 22% to $2.4 billion from $1.9 billion in 1997.
Excluding merger related costs, one-time expenses and the accounting change,
EBITDA for 1998 would have been $2.8 billion. EBITDA increased primarily due to
recent acquisitions, economies of scale resulting from increased sales and from
the efficiencies mentioned in "Merchandise Costs" above.

1997 VS. 1996

Sales
- -----

Our total sales for 1997 increased 14% or $4.2 billion from $29.7 billion in
1996. The sales increase was driven by business acquisitions, our capital
expenditure program and strong comparable store sales. Sales from acquired
stores accounted for $2.3 billion of the increase.

The Kroger Co.'s sales in identical food stores, which includes stores in
operation and not expanded or relocated for five quarters, were flat in 1997.
For purposes of this calculation, The Kroger Co. is defined as Kroger and its
consolidated subsidiaries before the merger with Fred Meyer. Fred Meyer Inc.'s
comparable store sales, which include identical stores plus expanded and
relocated stores, increased 6.5% in 1997. For purposes of this calculation, Fred
Meyer Inc. is defined as Fred Meyer and its consolidated subsidiaries before the
merger with Kroger.

Merchandise Costs
- -----------------

Merchandise costs include advertising, warehousing and transportation expenses.
Merchandise costs, net of LIFO charge, as a percent of sales were 75.06% in 1997
and 75.67% in 1996. Coordinated purchasing, category management, technology
related efficiencies and increases in private label sales were primarily
responsible for the decline. Also contributing to the decline were increased
1996 merchandise costs resulting from work stoppages in Colorado.

Operating and Administrative Expenses
- -------------------------------------

Operating and administrative expenses as a percent of sales were 17.9% in 1997
and 17.8% in 1996. The increase is due to acquired companies that have a higher
ratio of operating and administrative expenses to sales than we had before the
acquisitions.

Income Taxes
- ------------

The effective tax rate increased to 38.3% in 1997 from 37.7% in 1996 due to
acquisitions accounted for under the purchase method of accounting resulting in
goodwill amortization that is not deductible for tax purposes. Goodwill
amortization was $16 million in 1997 and $1 million in 1996.

Net Earnings
- ------------

Net earnings increased 7% or $32 million from $433 million in 1996. Net earnings
in 1997 compared to 1996 were affected by extraordinary losses, net of income
tax benefits, of $124 million in 1997 and $3 million in 1996. Extraordinary
losses were from the early retirement of debt. Also, net earnings were affected
by net interest expense of $388 million in 1997 compared to $349 million in 1996
and depreciation and amortization expenses of $592 million in 1997 compared to
$480 million in 1996.

EBITDA
- ------

EBITDA for 1997 increased 26% to $1.9 billion from $1.5 billion in 1996.
Excluding the effect of strikes in the King Soopers and City Market divisions,
EBITDA would have been approximately $1.6 billion in 1996. As in 1998, EBITDA
increased primarily due to business acquisitions, economies of scale resulting
from increased sales and from the efficiencies mentioned in "Merchandise Costs"
above.

<PAGE> 30

LIQUIDITY AND CAPITAL RESOURCES

Debt Management
- ---------------

We intend to use the combination of cash flows from operations and borrowings
under credit facilities to finance capital expenditure requirements for 1999,
currently budgeted to be approximately $1.5-$1.6 billion. If determined
preferable, we may fund capital expenditure requirements by mortgaging
facilities, entering into sale/leaseback transactions, or by issuing additional
debt or equity.

We have several lines of credit totaling $3.9 billion, with $1.7 billion in
unused balances at January 2, 1999. In addition, we have a $500 million
synthetic lease credit facility and a $125 million money market line with unused
balances of $136 million and $20 million, respectively, at January 2, 1999.
During May 1999, the 364-Day Credit Agreement was extended as a $430 million
facility.

Total debt, including capital leases and current portion thereof, increased $2.6
billion to $8.2 billion in 1998 and $1.4 billion to $5.5 billion in 1997.
Business acquisitions accounted for under the purchase method of accounting
primarily caused the increases. We purchased a portion of the debt issued by the
lenders of some structured financings in an effort to reduce our effective
interest expense. We also prefunded $200 million of employee benefit costs at
year-end 1998 compared to $168 million at year-end 1997 and $110 million at
year-end 1996. If we exclude the debt incurred to make these purchases, which we
classify as investments, and the prefunding of employee benefits, our total
debt would have been $7.9 billion at year-end 1998, compared to $5.2 billion at
year-end 1997 and $3.9 billion at year-end 1996. We utilize interest rate swaps
to manage net exposure to interest rate changes related to our portfolio of
borrowings. See footnotes 8 and 9 of our supplemental financial statements, and
"Quantitative and Qualitative Disclosures About Market Risks" below for further
detail on our debt portfolio and interest rate swaps.

In addition to the available credit mentioned above, we may sell up to $2
billion of securities under a shelf registration statement previously filed with
the Securities and Exchange Commission.

Cash Flow
- ---------

Operating cash flow increased 65% or $725 million in 1998 and 52% or $382
million in 1997. The increases were primarily due to changes in operating assets
and liabilities that provided $455 million of cash in 1998 and used $133 million
of cash in 1997 and $249 million of cash in 1996. The increases also included
non-cash charges from extraordinary losses, depreciation expense and goodwill
amortization totaling $1,094 million in 1998, $716 million in 1997 and $483
million in 1996.

Cash used by investing activities increased 24% or $287 million in 1998 and 31%
or $279 million in 1997. Investing activities consisted primarily of capital
expenditures and business acquisitions. Capital expenditures were $1,646 million
in 1998, $942 million in 1997 and $914 million in 1996 (see "Capital
Expenditures" below for further detail). Cash used for business acquisitions,
net of cash acquired, was $86 million in 1998, $354 million in 1997 and $0 in
1996.

Cash used in financing activities was $257 million 1998 compared to cash
provided by financing activities of $118 million in 1997 and $165 million in
1996. In addition to finance charges of $118 in 1998, $33 million in 1997 and
$18 million in 1996 related to debt issues, we paid premiums of $308 million in
1998, $127 million in 1997 and $4 million in 1996 to retire debt early. The
table below provides information about debt repurchases and redemptions for the
three years ended January 2, 1999.

(In millions) 1998 1997 1996
- ------------------------------------------------------ ------ ------ -------
<S> <C> <C> <C>
Senior debt repurchases and redemptions .............. $1,246 $ 117 $ 23
Senior subordinated debt repurchases ................. $ 835 $ 889 $ 161
Term note repurchases ................................ $1,047 $ 654 $ -
Mortgage loan prepayments ............................ $ 219 $ 178 $ -

</TABLE>

We used the proceeds from the issuance of new senior debt, additional bank
borrowings and cash generated from operations to make these repurchases,
redemptions and prepayments.

<PAGE> 31

Common Stock Repurchase Program
- -------------------------------

On January 29, 1997, we began repurchasing common stock in order to reduce
dilution caused by our stock option plans for employees. These repurchases were
made using the proceeds, including the tax benefit, from options exercised.
Further repurchases of up to $100 million of common stock were authorized by the
Board of Directors during October 1997. We made open market purchases totaling
$122 million in 1998, $85 million in 1997 and $70 million in 1996. On October
18, 1998, we rescinded the repurchase program as result of execution of the
merger agreement between Kroger and Fred Meyer.

CAPITAL EXPENDITURES

Capital expenditures totaled $1,646 million in 1998 compared to $942 million in
1997 and $914 million in 1996. The table below shows our storing activity for
food stores and multi-department stores:

1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Beginning of year ......................... 1,660 1,465 1,427
Opened .................................... 101 71 80
Acquired .................................. 572 167 7
Closed .................................... (142) (43) (49)
------ ------ ------
End of year ............................... 2,191 1,660 1,465
====== ====== ======

</TABLE>

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, we strive to minimize the effects of inflation on
operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which will require a change in the way that we account
for interest rate protection agreements. In May 1999, the Financial Accounting
Standards Board issued an exposure draft requiring adoption of the standard for
all fiscal years beginning after June 15, 2000. Because of the uncertainty of
our interest rate protection agreements in light of potential changes in the
debt portfolio as a result of the Fred Meyer merger, we have not yet determined
the expected impact, if any, that the adoption of the standard will have on the
financial statements.

The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", which is
effective for fiscal years beginning after December 15, 1998. Our accounting
policy is consistent with this statement. The Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants also issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities",
which is effective for fiscal years beginning after December 15, 1998. This
statement is expected to have no effect on the financial statements.

OTHER ISSUES

On January 6, 1999, we changed our fiscal year-end to the Saturday nearest
January 31 of each year. This change is disclosed in our Current Report on Form
8-K dated January 6, 1999. Our first new fiscal year will end January 29, 2000.
It includes a 16-week first quarter ending May 22, 1999, and 12-week second,
third and fourth quarters ending August 14, 1999, November 6, 1999, and January
29, 2000, respectively. We filed separate audited financial statements covering
the transition period from January 3, 1999 to January 30, 1999 on a Current
Report on Form 8-K dated May 10, 1999. These financial statements include Kroger
and its consolidated subsidiaries before the merger with Fred Meyer.

On May 20, 1999, we announced a distribution in the nature of a two-for one
stock split. Shareholders of record of common stock on June 7, 1999 will receive
one common share for each share held on that date. The supplemental financial
statements do not reflect this distribution.

We are a 50% owner of Santee Dairies, L.L.C. ("Santee") and have a 10 year
product supply agreement with Santee that requires us to purchase 9 million
gallons of fluid milk and other products annually. The product supply

<PAGE> 32

agreement expires on July 29, 2007. Upon acquisition of Ralphs/Food 4 Less,
Santee became excess capacity and a duplicate facility. We are currently engaged
in efforts to dispose of our interest in Santee which may result in a loss of
approximately $45 in 1999.

We are party to more than 336 collective bargaining agreements with local unions
representing approximately 218,000 employees. During 1998 we negotiated 68 labor
contracts without any material work stoppages. Typical agreements are 3 to 5
years in duration and, as agreements expire, we expect to enter into new
collective bargaining agreements. In 1999, 95 collective bargaining agreements
will expire. We cannot be certain that agreements will be reached without work
stoppage. A prolonged work stoppage affecting a substantial number of stores
could have a material adverse effect on the results of our operations.

OUTLOOK

Statements elsewhere in this report and below regarding our expectations, hopes,
beliefs, intentions or strategies are forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. While we believe
that the statements are accurate, uncertainties and other factors could cause
actual results to differ materially from those statements. In particular:

- We obtain sales growth from new square footage, as well as from
increased productivity from existing locations. We expect 1999 full
year square footage to grow 4.5% to 5.0%. We expect to continue to
realize savings from economies of scale in technology and logistics,
some of which may be reinvested in retail price reductions to increase
sales volume and enhance market share.

- We expect combination stores to generate higher sales per customer by
the inclusion of numerous specialty departments, such as pharmacies,
seafood shops, floral shops and bakeries. We believe the combination
store format will allow us to withstand continued competition from
other food retailers, supercenters, mass merchandisers and restaurants.

- We believe we have adequate coverage of our debt covenants to continue
to respond effectively to competitive conditions.

- We expect to continue capital spending in technology focusing on
improved store operations, logistics, procurement, category management,
merchandising and distribution practices, which should continue to
reduce merchandising costs as a percent of sales.

- We expect to reduce working capital over the next 2 years.

- In the second quarter of 1998 we raised our earnings per share target
to a 15%-17% average annual increase over fiscal years 1999-2001 from
the previously stated target of a 13%-15% average annual increase.
Assuming consummation of the merger referenced in the "Other Issues"
section above, we are raising our earnings per share target to a
16%-18% average annual increase over the next three years effective
with the year 2000.

- We expect capital expenditures for the year to total $1.5-$1.6 billion
compared to $1.6 billion during 1998. Capital expenditures reflect
Kroger's strategy of growth through expansion and acquisition as well
as our emphasis, whenever possible, on self-development and ownership
of store real estate, and on logistics and technology improvements.

- We are dependent on computer hardware, software, systems and processes
("IT Systems") and non-information technology systems such as
telephones, clocks, scales and refrigeration controllers, and other
equipment containing embedded microprocessor technology ("Non-IT
Systems"). These systems are used in several critical operating areas
including store and distribution operations, product merchandising and
procurement, manufacturing plant operations, inventory and labor
management, and accounting and administrative systems.

YEAR 2000 READINESS DISCLOSURE

We are currently working to resolve the potential effect of the year 2000 on the
processing of date-sensitive information within these various systems. The year
2000 problem is the result of computer programs being

<PAGE> 33

written using two digits (rather than four) to define the applicable year. Any
of our programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.

We have developed a plan to assess and update our IT Systems and Non-IT Systems
for year 2000 compliance requirements and provide for continued functionality.
The plan consists of three major phases:

1) create an inventory of systems subject to the year 2000 problem and
assess the scope of the problem as it relates to those systems

2) remediate any year 2000 problems

3) test and implement systems subsequent to remediation

The chart below shows the estimated completion status of each of these
phases expressed as a percent of completion as of the end of 1998.

Phase 1 2 3
---------------- ---- ---- ---
<S> <C> <C> <C>
IT Systems 95% 79% 59%
Non-IT Systems 83% 48% 25%

</TABLE>

This summary includes all IT and Non-IT Systems without regard to their effect
on the operation of the Company. We expect to complete assessment and
remediation of these by the end of the second quarter of 1999. We will continue
to test our systems, including a simulation of the year 2000, and expect to
complete all work by the end of the third quarter of 1999.

Critical business partners have been contacted for their status on year 2000
readiness. Based on our assessment of their responses, we believe that the
majority of our business partners are taking action for year 2000 readiness.
Notwithstanding the substantial efforts by us and our key business partners, we
could potentially experience disruptions to some aspects of our various
activities and operations. Consequently, in conjunction with the Plan,
management is formulating contingency plans for critical functions and
processes, which may be implemented to minimize the risk of interruption to our
business in the event of a year 2000 occurrence.

Contingency planning, which utilizes a business process approach, focuses on the
following priorities: ability to sell products to customers, continuously
replenish stores with goods (ordering and distribution), pay employees, collect
and remit on outstanding accounts, meet other regulatory and administrative
needs, and address merchandising objectives. We expect that documented
contingency plans for critical business processes will be in place by the end of
the third quarter of 1999.

The total estimated cost for the project, over a four year period, is $60
million, most of which is being expensed as incurred. This cost is being funded
through operating cash flow. This represents an immaterial part of our
information technology budget over the period. Costs incurred to date totalled
$24 million at January 2, 1999.

If we, our customers or vendors are unable to resolve processing issues in a
timely manner, it could result in the disruption of the operation of IT Systems
and or Non-IT Systems, and in a material financial risk. We believe that we have
allocated the resources necessary to mitigate all significant year 2000 issues
in a timely manner.

Inflationary factors, increased competition, construction delays, and labor
disputes could affect our ability to obtain expected increases in sales and
earnings. Delays in store maturity, increased competition and increased capital
spending could adversely affect the anticipated increase in sales per square
foot. Increases in gross profit rate may not be achieved if start-up costs are
higher than expected or if problems associated with integrating new systems
occur. Increased operating costs and changes in inflationary trends could
prevent us from reducing operating, general and administrative expenses. New
technologies could fail to achieve the desired savings and efficiencies. Net
interest expenses could exceed expectations due to acquisitions, higher working
capital usage, inflation, or increased competition. Our ability to achieve our
storing goals could be hampered by construction delays, labor disputes,
increased competition or delays in technology projects.

<PAGE> 34

The effects of the merger and the inherent complexity of computer software and
reliance on third party software vendors to interface with our systems could
affect the completion of necessary "Year 2000" modifications.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We use derivatives to limit our exposure to rising interest rates. During 1998
we followed these guidelines in using derivatives:

- use average daily bank balance to determine annual debt amounts subject
to interest rate exposure,

- limit the annual amount of debt subject to interest rate reset and the
amount of floating rate debt to a combined total of $2.3 billion or
less,

- include no leveraged derivative products, and

- hedge without regard to profit motive or sensitivity to current
mark-to-market status.

We review compliance with these guidelines annually with the Financial Policy
Committee of our Board of Directors. In addition, our internal auditors review
compliance with these guidelines on an annual basis. These guidelines may change
as our business needs dictate.

The table below provides information about our interest rate derivative and
underlying debt portfolio. The amounts each year represent the contractual
maturities of long-term debt, excluding capital leases, and the outstanding
notional amount of interest rate derivatives. Interest rates reflect the
weighted average for the maturing instruments. The variable component of each
interest rate derivative and variable rate debt is based on 6 month LIBOR using
the forward yield curve as of January 2, 1999. The Fair-Value column includes
only those debt instruments for which it is reasonably possible to calculate a
fair value and interest rate derivatives as of January 2, 1999 (see footnote 10
of our supplemental financial statements).

EXPECTED YEAR OF MATURITY
------------------------------------------------------------------
(IN MILLIONS OF DOLLARS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR-VALUE
- ------------------------- -------- --------- -------- ------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT:
Fixed rate ............... 193 240 28 168 330 3,339 4,298 4,112
Average interest rate .... 8.97% 6.18% 7.21% 9.27% 7.56% 7.65%
Variable rate ............ 118 222 357 1,312 1,848 4 3,861 3,861
Average interest rate .... 5.69% 5.75% 5.91% 6.02% 6.02% 6.04%

INTEREST RATE DERIVATIVES:
Variable to fixed ........ 963 753 392 88 65 59 1,000 (43)
Average pay rate ......... 7.08% 7.05% 7.24% 6.71% 6.80% 6.80% 7.07%
Average receive rate ..... 5.10% 5.16% 5.32 5.43% 5.43% 5.45% 5.19%

Fixed to variable ........ 695 493 250 150 -- -- 785 22
Average pay rate ......... 5.10% 5.16% 5.32% 5.43% 5.19%
Average receive rate ..... 6.39% 6.27% 6.86% 6.86% 6.47%
</TABLE>

We also have an interest rate collar which limits the interest rate on a
notional amount of $300 million to a variable rate between 4.10% and 6.50% until
2003. It was not practicable to determine a fair value for $472 million of fixed
rate debt.

<PAGE> 1
Exhibit 99.2

[KROGER LOGO] FRED MEYER, INC.

PRESS RELEASE

- -------------------------------------------------------------------------------

Media Contacts: Lynn Marmer, The Kroger Co. (513) 762-4449
Ken Thrasher, Fred Meyer, Inc. (503) 797-7008

Investor Contacts: Kathy Kelly, The Kroger Co. (513) 762-4969
David Jessick, Fred Meyer, Inc. (503) 797-7900

KROGER AND FRED MEYER MERGER APPROVED

CINCINNATI, OH and Portland, OR May 27, 1999 -- The Kroger Co. (NYSE:
KR) and Fred Meyer, Inc. (NYSE: FMY) announced today that the Federal Trade
Commission (FTC) has approved the merger of the two companies. The terms of the
approval require the sale of eight stores. The eight stores that will be
divested are located in Prescott, Sierra Vista and Yuma, Arizona; Cheyenne,
Green River and Rock Springs, Wyoming; and Price, Utah. ( A chart is attached.)

"We are pleased to receive regulatory approval of the merger," said
Joseph A. Pichler, Chairman and CEO of Kroger. "The FTC review process was
comprehensive and thorough."

Mr. Pichler expressed confidence that the merger will produce the
expected synergies on schedule. "Under the leadership of Bob Miller (Fred
Meyer's CEO) and Dave Dillon (Kroger's President), Kroger and Fred Meyer
executives have led integration teams since October 1998. The teams have
identified significant synergy

-1-
<PAGE> 2

opportunities, which we will begin to implement immediately," he stated. "The
Kroger Co. is confident that we will achieve our projected synergies ."

The Company expects to achieve $75 million in synergy savings in the
first 12 months, $150 million in the second 12 months and $225 million in third
12 months. Based on fiscal years, the Company projects the timing of the savings
to be as follows: 1999--$40 million; 2000--$115 million; 2001--$190 million; and
2002 and beyond--$225 million.

Robert G. Miller, who becomes Kroger's Vice-Chairman and Chief
Operating Officer when the merger closes, said "customers will see great stores
become even better. Our fundamental strategy is to leverage our size while, at
the same time, allowing our operators the freedom to respond to local
communities and markets. As we integrate the two companies, all of us are
focused on keeping the customer our number one priority. We feel confident we
will accomplish that goal because of the strong operators who lead our
divisions."

David B. Dillon, Kroger's President, believes a key to the merger's
success is that the identities and traditions of the various operating units
will not change. "Customers will continue to see the neighborhood chain they are
familiar with today. The combined company will have 18 food store divisions,
each with the authority to establish operating, merchandising and pricing
strategies in response to the demographic, economic and competitive conditions
in each market."

The companies expect to close the merger by the end of business today.

-2-
<PAGE> 3

The $13.5 billion merger creates the nation's largest grocery store
chain, with combined sales in fiscal year 1998 of $43 billion and EBITDA of $2.8
billion. Following the closing, Kroger will have 2,200 grocery stores in 31
states.

The merged company holds the #1 or #2 market share position in 33 of
the nation's 100 largest markets. In addition, Kroger will have a major presence
in 10 of the 15 fastest growing markets. The banners of the food stores are
Kroger, Ralphs Supermarkets, Smith's Food & Drug Stores, Fred Meyer, Quality
Food Centers (QFC), King Soopers, Dillon Stores, Fry's Food & Drug Stores, City
Market, Gerbes, Food 4 Less, Cala Foods, Bell Markets, PriceRite, FoodsCo,
Owen's Supermarkets and Hilander Food Stores.

In addition, the Company holds a leading position in two other retail
businesses. Fred Meyer is the fourth largest fine jewelry store operator, with
381 stores under five names in 26 states. As the fourth largest convenience
store operator, the Company has 797 stores under 6 banners in 15 states. Kroger
also is one of the nation's leading grocery and dairy manufacturer with 44
facilities in 17 states.

The combined Company has approximately 430 million shares outstanding
(on a diluted basis). Fred Meyer shareholders will receive one share of Kroger
common stock for each share of Fred Meyer common stock as a result of the
merger. The transaction is being treated as a "pooling of interests" for
accounting purposes.

In addition, the Company said that it plans to guarantee the public
debt of Fred Meyer and its subsidiaries.

The transaction is expected to be neutral to earnings per share in the
first 12 months and accretive thereafter. On a cash flow per share basis the
merger is

-3-
<PAGE> 4

anticipated to be immediately accretive. The Company has set an annual earnings
per share growth target of 16 -18% beginning in the year 2000. The Company
stated it is comfortable with analysts' consensus estimates for the first
quarter, which ended May 22, 1999, and for the 1999 fiscal year.

# # #

This press release contains certain forward-looking statements about
the future performance of the Company. These statements are based on
management's assumptions and beliefs in light of the information currently
available to it. We assume no obligation to update the information contained
herein. These forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements including, but not limited to, material adverse changes in the
business or financial condition of Kroger and other factors affecting the
businesses of the Company which are described in filings with the Securities and
Exchange Commission.

<TABLE>
<CAPTION>
LOCATION STORE TO BE SOLD PURCHASER
<S> <C> <C>
Prescott, Arizona Fry's of Arizona Fleming Companies

Sierra Vista, Arizona Smith's Fleming Companies

Yuma, Arizona Fry's of Arizona Fleming Companies

Cheyenne, Wyoming Smith's (2) Nash Finch

Green River, Wyoming City Market Fleming Companies

Rock Springs, Wyoming City Market Fleming Companies

Price, Utah City Market Albertson's
</TABLE>

-4-

<PAGE> 1
Exhibit 99.3

UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The unaudited pro forma combined financial statements are based on the
historical consolidated financial statements of The Kroger Co. ("Kroger") and
Fred Meyer, Inc. ("Fred Meyer") and give effect to the merger as a pooling of
interests. The pro forma information includes the historical results of
operations of Kroger as of and for the 53 weeks ended January 2, 1999 and the
historical results of operations of Fred Meyer as of and for the 52 weeks ended
January 30, 1999.

The unaudited pro forma combined statements of earnings assume that the merger
had been completed on December 28, 1997. Amounts for Fred Meyer have not been
adjusted on a pro forma basis to reflect the acquisition of Food 4 Less in March
of 1998 as if it had been acquired at the beginning of the period presented, as
the amounts are not material on a pro forma combined basis. The audited
supplemental consolidated financial statements attached as Exhibit 99.1 of this
report include adjustments to conform the accounting practices of Kroger and
Fred Meyer with respect to certain inventory related costs and the
capitalization policy for property, plant and equipment as described in Note 2
to the supplemental consolidated financial statements.

The unaudited pro forma financial statements are not necessarily indicative of
the actual or future financial position or results of operations of the combined
company. They should be read in conjunction with the audited and unaudited
historical consolidated financial statements, including the notes thereto, of
Kroger and Fred Meyer.

<PAGE> 2

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
Kroger as of Fred Meyer as of Pro Forma Pro Forma
January 2, 1999 January 30, 1999 Adjustments Combined
--------------- ---------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 121,431 $ 177,907 ($75,000)(1) $ 224,338
Receivables 456,917 126,315 583,232
Inventories
FIFO cost 2,202,088 1,877,886 4,079,974
Less LIFO reserve (471,932) (57,700) (529,632)
---------- ----------- -----------
1,730,156 1,820,186 3,550,342
Property held for sale 10,291 0 10,291
Prepaid and other current assets 354,385 70,576 424,961
Deferred income taxes 0 256,417 256,417
---------- ----------- -------- -----------
Total current assets 2,673,180 2,451,401 (75,000) 5,049,581

Property, plant and equipment, net 3,785 122 3,449,586 7,234,708
Investments and other assets 213,493 183,816 397,309
Goodwill, net 28,276 3,791,334 3,819,610
Long-term deferred tax assets 0 275,077 275,077
---------- ----------- -------- -----------
Total Assets $6,700,071 $10,151,214 ($75,000) $16,776,285
========== =========== ======== ===========

LIABILITIES
Current liabilities
Current portion of long-term debt
and lease obligations $ 175,204 $ 188,059 $ 363,263
Accounts payable 1,785,630 1,140,386 2,926,016
Other current liabilities 1,231,234 929,438 2,160,672
---------- ----------- -----------
Total current liabilities 3,192,068 2,257,883 5,449,951

Long-term debt 3,025,980 4,821,635 7,847,615
Obligations under capital leases 202,683 158,938 361,621
Deferred income taxes 200,952 0 200,952
Other long-term liabilities 466,220 598,353 1,064,573
---------- ----------- -----------
Total Liabilities 7,087,903 7,836,809 14,924,712

SHAREOWNERS' EQUITY
Common capital stock 836,802 1,558 $1,948,486 (2) 2,711,846
(75,000)(1)
Additional paid-in capital 0 1,948,486 (1,948,486)(2) 0
Other 0 (3,991) (3,991)
Accumulated earnings (deficit) (773,605) 368,601 (405,004)
Common stock in treasury, at cost (451,029) (249) (451,278)
---------- ----------- -------- -----------
Total Shareowners'
Equity (Deficit) (387,832) 2,314,405 (75,000) 1,851,573
---------- ----------- -------- -----------
Total Liabilities and
Shareowners' Equity $6,700,071 $10,151,214 ($75,000) $16,776,285
========== =========== ======== ===========
</TABLE>

See accompanying notes to unaudited pro forma combined financial data.

<PAGE> 3

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
Fiscal Year 1998
-----------------------------------------------------------------
Kroger Fiscal Fred Meyer Fiscal
Year Ended Year Ended Pro Forma Pro Forma
January 2, 1999 January 30, 1999 Adjustments Combined
--------------- ---------------- ----------- --------
<S> <C> <C> <C> <C>
Sales $28,203,304 $14,878,771 $43,082,075

Costs and expenses
Merchandise costs, including
warehousing and transportation 21,523,021 10,418,893 31,941,914
Operating, general
and administrative 4,912,215 3,536,104 $(584,063)(3) 7,864,256
Rent 358,254 261,034 (3) 619,288
Depreciation and amortization 429,954 92,268 323,029 (3) 845,251
Net interest expense 266,896 378,236 645,132
Merger related costs 0 268,854 268,854
----------- ----------- -----------
Total 27,490,340 14,694,355 42,184,695
----------- ----------- -----------

Earnings before tax expense
and extraordinary loss 712,964 184,416 897,380
Tax expense 263,052 129,244 392,296
----------- ----------- ----------
Earnings before extraordinary loss $ 449,912 $ 55,172 $ 505,084
=========== =========== ==========

Basic earnings per common share
before extraordinary loss $1.76 $0.36 $1.24
===== ===== =====

Average number of common shares
used in basic calculation 255,814 151,699 407,513

Diluted earnings per common share
before extraordinary loss $1.70 $0.34 $1.19
===== ===== =====

Average number of common shares
used in diluted calculation 265,382 160,218 425,600
</TABLE>

See accompanying notes to unaudited pro forma combined financial data.

<PAGE> 4

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

(1) Kroger and Fred Meyer estimate that they will incur direct transaction
costs of approximately $75 million associated with the merger. These costs
consist primarily of investment banking, legal, bank amendment fees,
accounting, printing and regulatory filing fees. The unaudited pro forma
combined balance sheet reflects these expenses as if they had been paid as
of January 2, 1999.

(2) Represents the conversion of Fred Meyer common stock into Kroger common
shares

(3) Represents the reclassification of rent expense, depreciation and
amortization to conform the presentation of Fred Meyer results to that of
Kroger.