<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended August 14, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-303
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
1014 Vine Street, Cincinnati, OH 45202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 762-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
-------- --------
There were 831,978,789 shares of Common Stock ($1 par value) outstanding as of
September 20, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information included in the consolidated financial statements for
the 2nd quarter and 2 quarters ended August 14, 1999 include the results of
operations of the Company for the 12 week quarter and 28 week period ended
August 14, 1999. The information for the 2nd quarter ended June 13, 1998
includes the results of operations of The Kroger Co. for the 12 week quarter
ended June 13, 1998, its wholly-owned subsidiary Dillon Companies, Inc.
("Dillon") for the 13 week quarter ended June 27, 1998, and its wholly-owned
subsidiary Fred Meyer, Inc. ("Fred Meyer") for the 12 week quarter ended August
15, 1998. The information for the 2 quarters ended June 13, 1998 includes the
results of operations of The Kroger Co. for the 24 week period ended June 13,
1998, Dillon for the 26 week period ended June 27, 1998, and Fred Meyer for the
28 week period ended August 15, 1998. It was not practicable to recast the 1998
quarterly amounts for The Kroger Co. or Dillon to conform to the quarterly
reporting periods of The Kroger Co.'s newly adopted fiscal year. Because of
these differing periods, 1999 results cannot be directly compared to 1998
results. In the opinion of management, the information reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary for a fair
presentation of results of operations for such periods but should not be
considered as indicative of results for a full year.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
-------------------- ---------------------
August 14, June 13, August 14, June 19,
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales ....................................................... $ 10,289 $ 9,947 $ 23,782 $ 20,376
Merchandise costs, including warehousing and transportation . 7,590 7,394 17,553 15,233
-------- -------- -------- --------
Gross profit .............................................. 2,699 2,553 6,229 5,143
Operating, general and administrative ....................... 1,881 1,820 4,351 3,714
Rent ........................................................ 143 142 341 303
Depreciation and amortization ............................... 221 203 502 423
Merger related costs ........................................ 200 48 235 206
-------- -------- -------- --------
Operating profit .......................................... 254 340 800 497
Interest expense ............................................ 148 155 347 319
-------- -------- -------- --------
Earnings before income tax expense and extraordinary loss . 106 185 453 178
Tax expense ................................................. 50 85 190 97
-------- -------- -------- --------
Earnings before extraordinary loss ........................ 56 100 263 81
Extraordinary loss, net of income tax benefit ............... (10) (1) (10) (222)
-------- -------- -------- --------
Net earnings (loss) ....................................... $ 46 $ 99 $ 253 $ (141)
======== ======== -------- --------
Basic earnings per common share:
Earnings before extraordinary loss ........................ $ 0.07 $ 0.12 $ 0.32 $ 0.10
Extraordinary loss ........................................ (0.01) - (0.01) (0.27)
-------- -------- -------- --------
Net earnings (loss) ................................... $ 0.06 $ 0.12 $ 0.31 $ (0.17)
======== ======== -------- --------
Average number of common shares used in basic calculation ... 829 819 828 809
Diluted earnings per common share:
Earnings before extraordinary loss ........................ $ 0.06 $ 0.12 $ 0.30 $ 0.10
Extraordinary loss ........................................ (0.01) - (0.01) (0.26)
-------- -------- -------- --------
Net earnings (loss) ................................... $ 0.05 $ 0.12 $ 0.29 $ (0.16)
======== ======== -------- --------
Average number of common shares used in diluted calculation . 860 854 861 846
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE> 3
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
August 14, January 2,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash .................................................. $ 304 $ 299
Receivables ........................................... 544 587
Inventories ........................................... 3,666 3,493
Prepaid and other current assets ...................... 550 692
-------- --------
Total current assets .............................. 5,064 5,071
Property, plant and equipment, net ...................... 7,663 7,220
Goodwill, net ........................................... 3,808 3,847
Other assets ............................................ 507 503
-------- --------
Total Assets ...................................... $ 17,042 $ 16,641
======== ========
LIABILITIES
Current liabilities
Current portion of long-term debt ..................... $ 280 $ 311
Accounts payable ...................................... 2,981 2,926
Salaries and wages .................................... 618 639
Other current liabilities ............................. 1,788 1,574
-------- --------
Total current liabilities ......................... 5,667 5,450
Long-term debt .......................................... 7,713 7,848
Other long-term liabilities ............................. 1,413 1,426
-------- --------
Total Liabilities ................................. 14,793 14,724
-------- --------
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 million shares
authorized and unissued ............................... - -
Common stock, $1 par, 1 billion shares
authorized: 880 million shares issued in 1999 and
876 million shares issued in 1998 ..................... 880 876
Additional paid-in capital .............................. 1,963 1,913
Accumulated deficit ..................................... (143) (421)
Common stock in treasury, at cost; 50 million shares .... (451) (451)
-------- --------
Total Shareowners' Equity ........................... 2,249 1,917
-------- --------
Total Liabilities and Shareowners' Equity ........... $ 17,042 $ 16,641
======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
2 Quarters Ended
--------------------------
August 14, June 13,
1999 1998
---------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 253 $ (141)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 10 221
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 449 380
Goodwill amortization. . . . . . . . . . . . . . . . . . . . 53 43
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 69 (6)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 77
Changes in operating assets and liabilities net of effects
from acquisitions of businesses:
Inventories. . . . . . . . . . . . . . . . . . . . . . . (59) 295
Receivables. . . . . . . . . . . . . . . . . . . . . . . (1) 15
Accounts payable . . . . . . . . . . . . . . . . . . . . 195 (81)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 244 203
------ ------
Net cash provided by operating activities. . . . . . . 1,215 1,006
------ ------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (846) (670)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 49 59
Payments for acquisitions, net of cash acquired . . . . . . . . - 37
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) 14
------ ------
Net cash used by investing activities. . . . . . . . . (837) (560)
------ ------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt. . . . . . . . . . . . 931 4,662
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (1,200) (4,920)
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (2) (6)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (9) (86)
Increase (decrease) in book overdrafts. . . . . . . . . . . . . (93) (77)
Proceeds from issuance of capital stock . . . . . . . . . . . . 36 71
Treasury stock purchases. . . . . . . . . . . . . . . . . . . . - (45)
------ ------
Net cash provided (used) by financing activities . . . (337) (401)
------ ------
Net increase in cash and temporary cash investments . . . . . . . 41 45
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 263 183
------ ------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 304 $ 228
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest. . . . . . . . . . . . $ 283 $ 302
Cash paid during the year for income taxes. . . . . . . . . . 69 39
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired . . . . . . . . . . . . . . . - 2,054
Goodwill recorded . . . . . . . . . . . . . . . . . . . . . - 2,343
Value of stock issued . . . . . . . . . . . . . . . . . . . - (653)
Liabilities assumed . . . . . . . . . . . . . . . . . . . . - (3,715)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------------------
The year-end condensed balance sheet data was derived from supplemental
audited financial statements, and, due to its summary nature, does not
include all disclosures required by generally accepted accounting
principles.
The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"), including Fred
Meyer, Inc. and its subsidiaries ("Fred Meyer") which were merged with
Kroger on May 27, 1999 (see note 2). The year-end condensed balance
sheet includes Kroger's January 2, 1999 balance sheet combined with
Fred Meyer's January 30, 1999 balance sheet. Amounts included in the
consolidated financial statements for the 2nd quarter and 2 quarters
ended August 14, 1999 include the results of operations of the Company
for the 12 week quarter and 28 week period ended August 14, 1999. The
information for the 2nd quarter ended June 13, 1998 includes the
results of operations of The Kroger Co. for the 12 week quarter ended
June 13, 1998, its wholly-owned subsidiary Dillon Companies, Inc.
("Dillon") for the 13 week quarter ended June 27, 1998, and its
wholly-owned subsidiary Fred Meyer for the 12 week quarter ended August
15, 1998. The information for the 2 quarters ended June 13, 1998
includes the results of operations of The Kroger Co. for the 24 week
period ended June 13, 1998, Dillon for the 26 week period ended June
27, 1998, and Fred Meyer for the 28 week period ended August 15, 1998.
It was not practicable to recast the 1998 quarterly amounts for The
Kroger Co. or Dillon to conform to the quarterly reporting periods of
Kroger's newly adopted fiscal year. Because of these differing periods,
1999 results cannot be directly compared to 1998 results. Significant
intercompany transactions and balances have been eliminated. References
to the "Company" in these consolidated financial statements mean the
consolidated company.
2. BUSINESS COMBINATIONS
---------------------
On May 27, 1999, Kroger issued 312 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. The merger was accounted for as a
pooling of interests, and the accompanying financial statements have
been restated to give effect to the consolidated results of Kroger and
Fred Meyer for all periods 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 44 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.
5
<PAGE> 6
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 changes in the
Company's accrued purchase liabilities:
Facility
Closure Employee
(in millions) Costs Severance Total
----------------------------- -------- --------- ------
Balance at December 27, 1997 ..... $ 19 $ 8 $ 27
Additions ...................... 122 22 144
Payments ....................... (13) (2) (15)
Adjustments to severance accrual - (3) (3)
----- ----- -----
Balance at January 2, 1999 ....... 128 25 153
Payments (2) (3) (5)
----- ----- -----
Balance at August 14, 1999 ....... $ 126 $ 22 $ 148
===== ===== =====
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 to be divested and
17 stores that were duplicate facilities. Divestitures of five stores
have been completed and eight of the duplicate facilities have been
closed. The remaining nine duplicate stores are expected to close by
the end of 1999. Facility closure costs accrued include obligations for
future contractual lease payments, net of sublease income, and closure
costs.
Employee Severance
------------------
Employee severance relates to 31 employees that have been terminated
and 66 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.
6
<PAGE> 7
3. MERGER RELATED COSTS
--------------------
The Company is in the process of implementing its integration plan
relating to recent mergers. The integration plan includes distribution
consolidation, systems integration, store conversions, transaction
costs, store closures, and administration integration. The following
table presents the components of the merger related costs:
<TABLE>
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
---------------------- ----------------------
August 14, June 13, August 14, June 13,
(in millions) 1999 1998 1999 1998
--------------------------------- ---------- ------- --------- --------
<S> <C> <C> <C> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation $ 6 $ 2 $ 10 $ 13
Systems integration 19 6 42 19
Store conversions 19 11 22 36
Transaction costs 85 3 87 32
Administration integration 12 2 13 7
----- ---- ----- ------
141 24 174 107
NONCASH ASSET WRITE-DOWN
Distribution consolidation - 1 - 29
Systems integration 1 2 3 21
Store closures 3 18 3 25
Administration integration 14 - 14 3
----- ---- ----- ------
18 21 20 78
ACCRUED CHARGES
Distribution consolidation 5 - 5 -
Systems integration - - - 1
Transaction costs - 2 - 4
Store closures 4 - 4 7
Administration integration 32 - 32 9
----- ---- ----- ------
41 2 41 21
----- ---- ----- ------
Total merger related costs $ 200 $ 47 $ 235 $ 206
===== ==== ===== ======
TOTAL CHARGES
Distribution consolidation $ 11 $ 3 $ 15 $ 42
Systems integration 20 8 45 41
Store conversions 19 11 22 36
Transaction costs 85 5 87 36
Store closures 7 18 7 32
Administration integration 58 2 59 19
----- ---- ----- ------
Total merger related costs $ 200 $ 47 $ 235 $ 206
===== ==== ===== ======
</TABLE>
Distribution Consolidation
--------------------------
Represents costs to consolidate manufacturing and distribution
operations and to eliminate duplicate facilities. $5 million was
accrued in the second quarter of 1999 related to severance for
distribution employees in Phoenix. The year-to-date 1998 costs include
a $29 million write-down to estimated net realizable value for a
distribution center in Southern California. The facility is held for
sale. The year-to-date 1998 costs also include $13 million 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.
7
<PAGE> 8
Systems Integration
-------------------
Represents the costs of integrating systems and the related conversion
of all corporate office and store systems. Charges recorded as cash was
expended totaled $19 million and $6 million in the second quarter of
1999 and 1998, respectively, and $42 million and $19 million
year-to-date 1999 and 1998, respectively. These costs represent
incremental operating costs, principally labor, during the conversion
process, payments to third parties and training costs. The year-to-date
1998 costs include a $19 million write-down of computer equipment and
related software that have been abandoned and $2 million of
depreciation associated with computer equipment which is being written
off over 18 months at which time it will be abandoned.
Store Conversions
-----------------
Includes the cost to convert store banners. All costs represent
incremental cash expenditures for advertising and promotions to
establish the banner, changing store signage, labor required to
remerchandise the store inventory and other services that are expensed
as incurred.
Transaction Costs
-----------------
Represents fees paid to outside parties, employee bonuses that were
contingent upon the completion of the mergers, and an employee stay
bonus program. The Company incurred costs totaling $85 million and $3
million in the second quarter of 1999 and 1998, respectively, and $87
million and $32 million year-to-date 1999 and 1998, respectively,
related to fees and employee bonuses recorded as the cash was expended.
All accrued amounts relate to the employee stay bonus program.
Store Closures
--------------
Includes the costs to close stores identified as duplicate facilities
and to sell stores pursuant to settlement agreements. $4 million of
costs were accrued in the second quarter of 1999 to close five stores
identified as duplicate facilities and to sell five stores pursuant to
a settlement with the Federal Trade Commission. The second quarter 1998
and year-to-date 1998 includes 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"). The asset
write-down of $18 million in the second quarter of 1998 and $25 million
year-to-date 1998 relates to the AG Stores. Lease termination costs
totaling $7 million were accrued year-to-date 1998.
Administration Integration
--------------------------
Includes labor and severance costs, charitable contributions, and costs
to conform accounting policies. The Company accrued severance costs
totaling $12 million in the second quarter of 1999 and $9 million
year-to-date 1998. The Company also accrued $20 million in the second
quarter of 1999 in connection with the Fred Meyer merger for charitable
contributions that will be made to a foundation.
The following table presents the activity in merger related accrued
charges.
<TABLE>
<CAPTION>
Lease
(in millions) Other Obligation Severance Total
---------------------------- ------- ---------- -------------- ------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 6 7 13 26
Payments 6 2 8 16
---- ---- ---- ----
Balance at January 2, 1999 - 5 5 10
Expense 20 4 17 41
Payments - 2 8 10
---- ---- ---- ----
Balance at August 14, 1999 $ 20 $ 7 $ 14 $ 41
==== ==== ==== ====
</TABLE>
8
<PAGE> 9
Severance
---------
Relates to administrative, systems, and distribution employees. All of
the employees have been terminated or notified of their terminations.
Under severance agreements, the amount of severance will be paid over a
period following the date of termination.
Lease Obligation
----------------
The lease obligation represents future contractual lease payments on
closed stores and stores that will be sold pursuant to settlement
agreements over the expected holding period, net of any sublease
income. The Company is actively marketing the stores to potential
buyers and sub-lease tenants.
Other
-----
The 1998 costs represent amounts that were paid under a stay bonus
program in the fourth quarter of 1998. The Company accrued $20 million
in the second quarter of 1999 in connection with the Fred Meyer merger
for charitable contributions that will be made to a foundation.
4. ONE-TIME EXPENSES
-----------------
In the second quarter of 1998, the Company incurred a $41 million
one-time expense for 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
million and were included in merchandise costs, including warehouse and
transportation. The remaining $25 million of expenses are summarized as
follows:
<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
---------------------------- --------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 $ - 10
===
Payments 4 4 8
--- --- ---
Balance at August 14, 1999 $ - $ 2 $ 2
=== === ===
</TABLE>
The carrying costs of the idled warehouse facilities will be paid
through 2001.
Additionally, in the second quarter of 1998, the Company incurred
one-time expenses of $12 million 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 $2 million and
the remaining accrual of $8 million at August 14, 1999 represents
estimated rent or lease termination costs that will be paid on closed
stores through 2013.
9
<PAGE> 10
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 million and
reduced earnings before extraordinary loss and net earnings by $56
million. The item cost method did not have a material impact on
earnings subsequent to its initial adoption.
6. INCOME TAXES
------------
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and non-deductible
goodwill.
7 EARNINGS PER COMMON SHARE
-------------------------
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.
<TABLE>
<CAPTION>
For the quarter ended For the quarter ended
August 14, 1999 June 13, 1998
--------------------------- --------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
--------- --------- -------- ---------- -------- -------
(in millions, except per share amounts)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
common share . . . . . . . $ 56 829 $0.07 $ 100 819 $ 0.12
Dilutive effect of stock
options and warrants . . . - 31 - 35
---- ----- ----- -----
Diluted earnings per
common share . . . . . . . $ 56 860 $0.06 $ 100 854 $ 0.12
==== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
For the 2 quarters ended For the 2 quarters ended
August 14, 1999 June 13, 1998
--------------------------- --------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
--------- --------- -------- ---------- -------- -------
(in millions, except per share amounts)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
common share . . . . . . . $263 828 $0.32 $ 81 809 $ 0.10
Dilutive effect of stock
options and warrants . . . - 33 - 37
---- ----- ----- -----
Diluted earnings per
common share . . . . . . . $263 861 $0.30 $ 81 846 $ 0.10
==== ===== ===== =====
</TABLE>
10
<PAGE> 11
On May 20, 1999, the Company announced a distribution in the nature of
a two-for-one stock split, to shareholders of record of common stock on
June 7, 1999. All share amounts prior to this date have been restated
to reflect the split.
8. 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 represent approximately 98% of
consolidated sales, are its only reportable segment. All of the
Company's operations are domestic.
9. COMPREHENSIVE INCOME
--------------------
The Company has no items of other comprehensive income in any period
presented. Therefore, net earnings as presented in the Consolidated
Statement of Operations equals comprehensive income.
10. 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". This standard, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company
has not yet determined the expected impact, if any, that the adoption
of the standard will have on the financial statements.
11. GUARANTOR SUBSIDIARIES
----------------------
The Company's Senior Notes and Senior Subordinated Notes (the
"Guaranteed Notes") are jointly and severally, fully and
unconditionally guaranteed by certain Kroger subsidiaries (the
"Guarantor Subsidiaries"). At August 14, 1999 a total of approximately
$4.0 billion of Guaranteed Notes were outstanding. The Guarantor
Subsidiaries and non-guarantor subsidiaries are wholly-owned
subsidiaries of Kroger. Separate financial statements of Kroger and
each of the Guarantor Subsidiaries are not presented because the
guarantees are full and unconditional and the Guarantor Subsidiaries
are jointly and severally liable. The Company believes that separate
financial statements and other disclosures concerning the Guarantor
Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an
individual and aggregate basis of consolidated assets, pretax earnings,
cash flow, and equity. Therefore, the non-guarantor subsidiaries'
information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor
Subsidiaries to make payments under the guarantees referred to above,
except, however, the obligations of each guarantor under its guarantee
are limited to the maximum amount as will result in obligations of such
guarantor under its guarantee not constituting a fraudulent conveyance
or fraudulent transfer for purposes of Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any
similar Federal or state law (e.g. adequate capital to pay dividends
under corporate laws).
The following tables present summarized financial information as of
August 14, 1999 and January 2, 1999, and for the two quarters ended
August 14, 1999 and June 13, 1998. For the summarized financial
information as of August 14, 1999 and for the two quarters then ended,
the Kroger column includes approximately $3.5 billion of debt issued by
Fred Meyer that has been jointly and severally guaranteed by Kroger. As
a result, this amount is not also included in the Guarantor
Subsidiaries column.
11
<PAGE> 12
SUMMARIZED FINANCIAL INFORMATION AS OF AUGUST 14, 1999 AND FOR THE 2
QUARTERS THEN ENDED:
<TABLE>
<CAPTION>
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------ ---------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Current assets $ 670 $ 4,394 $ - $ 5,064
Non-current assets 10,464 10,503 (8,989) 11,978
Current liabilities 1,086 4,581 - 5,667
Non-current liabilities 7,798 1,328 - 9,126
Sales 4,914 19,191 (323) 23,782
Gross profit 988 5,268 (27) 6,229
Operating profit (143) 943 - 800
Net earnings 253 449 (449) 253
SUMMARIZED FINANCIAL INFORMATION AS OF JANUARY 2, 1999:
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------ ---------- -------------- ---------------- -------------
Current assets $ 734 $ 4,337 $ - $ 5,071
Non-current assets 5,622 10,398 (4,450) 11,570
Current liabilities 1,199 4,251 - 5,450
Non-current liabilities 3,240 6,034 - 9,274
SUMMARIZED FINANCIAL INFORMATION FOR THE 2 QUARTERS ENDED JUNE 13,
1998:
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------ ---------- -------------- ---------------- -------------
Sales $ 5,164 $ 15,468 $ (256) $ 20,376
Gross profit 1,020 4,175 (52) 5,143
Operating profit 62 435 - 497
Net earnings (141) (121) 121 (141)
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
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 us 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 engaged in efforts to dispose of its
interest in Santee that may result in a loss.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for the second quarter
and first two quarters of 1999 compared to the second quarter and first two
quarters of 1998. Amounts included in the consolidated financial statements for
the 2nd quarter and 2 quarters ended August 14, 1999 include the results of
operations of the Company for the 12 week quarter and 28 week period ended
August 14, 1999. The information for the quarter ended June 13, 1998 includes
the results of operations of The Kroger Co. for the 12 week quarter ended June
13, 1998, its wholly-owned subsidiary Dillon Companies, Inc. ("Dillon") for the
13 week quarter ended June 27, 1998, and its wholly-owned subsidiary Fred Meyer,
Inc. ("Fred Meyer") for the 12 week quarter ended August 15, 1998. The
information for the 2 quarters ended June 13, 1998, includes the results of
operations of The Kroger Co. for the 24 week period ended June 13, 1998, Dillon
for the 26 week period ended June 27, 1998 and Fred Meyer for the 28 week period
ended August 15, 1998. It was not practicable to recast the 1998 quarterly
amounts for The Kroger Co. or Dillon to conform to the quarterly reporting
periods of Kroger's newly adopted fiscal year. Because of these differing
periods, 1999 results cannot be directly compared to 1998 results.
BUSINESS COMBINATIONS
On May 27, 1999 Kroger issued 312 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. The merger was accounted for as a pooling of interests, and the
accompanying financial statements have been restated to give effect to the
consolidated results of Kroger and Fred Meyer 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 44 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.
MERGER RELATED COSTS
We are in the process of implementing our integration plan relating to recent
mergers. The integration plan includes distribution consolidation, systems
integration, store conversions, transaction costs, store closures, and
administration integration. The following table presents the components of the
merger related costs:
13
<PAGE> 14
<TABLE>
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
-------------------- -------------------
August 14, June 13, August 14, June 13,
(in millions) 1999 1998 1999 1998
--------------------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation $ 6 $ 2 $ 10 $ 13
Systems integration 19 6 42 19
Store conversions 19 11 22 36
Transaction costs 85 3 87 32
Administration integration 12 2 13 7
------ ----- ------ -----
141 24 174 107
NONCASH ASSET WRITE-DOWN
Distribution consolidation - 1 - 29
Systems integration 1 2 3 21
Store closures 3 18 3 25
Administration integration 14 - 14 3
------ ----- ------ -----
18 21 20 78
ACCRUED CHARGES
Distribution consolidation 5 - 5 -
Systems integration - - - 1
Transaction costs - 2 - 4
Store closures 4 - 4 7
Administration integration 32 - 32 9
------ ----- ------ -----
41 2 41 21
------ ----- ------ -----
Total merger related costs $ 200 $ 47 $ 235 $ 206
====== ===== ====== =====
TOTAL CHARGES
Distribution consolidation $ 11 $ 3 $ 15 $ 42
Systems integration 20 8 45 41
Store conversions 19 11 22 36
Transaction costs 85 5 87 36
Store closures 7 18 7 32
Administration integration 58 2 59 19
------ ----- ------ -----
Total merger related costs $ 200 $ 47 $ 235 $ 206
====== ===== ====== =====
</TABLE>
Distribution Consolidation
- --------------------------
Represents costs to consolidate manufacturing and distribution operations and to
eliminate duplicate facilities. $5 million was accrued in the second quarter of
1999 related to severance for distribution employees in Phoenix. The
year-to-date 1998 costs include a $29 million write-down to estimated net
realizable value for a distribution center in Southern California. The facility
is held for sale. The year-to-date 1998 costs also include $13 million for
incremental labor during the closing of the distribution center and other
incremental costs incurred as a part of the realignment of our distribution
system.
14
<PAGE> 15
Systems Integration
- -------------------
Represents the costs of integrating systems and the related conversion of all
corporate office and store systems. Charges recorded as cash was expended
totaled $19 million and $6 million in the second quarter of 1999 and 1998,
respectively, and $42 million and $19 million year-to-date 1999 and 1998,
respectively. These costs represent incremental operating costs, principally
labor, during the conversion process, payments to third parties and training
costs. The year-to-date 1998 costs include a $19 million write-down of computer
equipment and related software that have been abandoned and $2 million of
depreciation associated with computer equipment which is being written off over
18 months at which time it will be abandoned.
Store Conversions
- -----------------
Includes the cost to convert store banners. All costs represent incremental cash
expenditures for advertising and promotions to establish the banner, changing
store signage, labor required to remerchandise the store inventory and other
services that are expensed as incurred.
Transaction Costs
- -----------------
Represents fees paid to outside parties, employee bonuses that were contingent
upon the completion of the mergers, and an employee stay bonus program. We
incurred costs totaling $85 million and $3 million in the second quarter of 1999
and 1998, respectively, and $87 million and $32 million year-to-date 1999 and
1998, respectively, related to fees and employee bonuses recorded as the cash
was expended. All accrued amounts relate to the employee stay bonus program.
Store Closures
- --------------
Includes the costs to close stores identified as duplicate facilities and to
sell stores pursuant to settlement agreements. $4 million of costs were accrued
in the second quarter of 1999 to close five stores identified as duplicate
facilities and to sell five stores pursuant to a settlement with the Federal
Trade Commission. The second quarter 1998 and year-to-date 1998 includes 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").
The asset write-down of $18 million in the second quarter of 1998 and $25
million year-to-date 1998 relates to the AG Stores. Lease termination costs
totaling $7 million were accrued year-to-date 1998.
Administration Integration
- --------------------------
Includes labor and severance costs, charitable contributions, and costs to
conform accounting policies. We accrued severance costs totaling $12 million in
the second quarter of 1999 and $9 million year-to-date 1998. We also accrued $20
million in the second quarter of 1999 in connection with the Fred Meyer merger
for charitable contributions that will be made to a foundation.
15
<PAGE> 16
The following table presents the activity in merger related accrued charges.
<TABLE>
<CAPTION>
Lease
(in millions) Other Obligation Severance Total
---------------------------- ------- ---------- -------------- ------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 6 7 13 26
Payments 6 2 8 16
--- --- --- ---
Balance at January 2, 1999 - 5 5 10
Expense 20 4 17 41
Payments - 2 8 10
--- --- --- ---
Balance at August 14, 1999 $20 $ 7 $14 $41
=== === === ===
</TABLE>
Severance
- ---------
Relates to administrative, systems, and distribution employees. All of the
employees have been terminated or notified of their terminations. Under
severance agreements, the amount of severance will be paid over a period
following the date of termination.
Lease Obligation
- ----------------
The lease obligation represents future contractual lease payments on closed
stores and stores that will be sold pursuant to settlement agreements over the
expected holding period, net of any sublease income. We are actively marketing
the stores to potential buyers and sub-lease tenants.
Other
- -----
The 1998 costs represents amounts that were paid under a stay bonus program in
the fourth quarter of 1998. We accrued $20 million in the second quarter of 1999
in connection with the Fred Meyer merger for charitable contributions that will
be made to a foundation.
In addition to the merger related costs mentioned above, we incurred costs
related to the merger of $12 million and $1 million in the second quarter of
1999 and 1998, respectively, and $18 million and $7 million year-to-date 1999
and 1998, respectively. These costs related to inventory adjustments to
inventory made obsolete or marked down for liquidation as a result of the store
integration program. These costs were reported in merchandise costs. In the
second quarter of 1999 we incurred costs, which were reported as operating,
general and administrative expenses, of $17 million from terminating all of our
interest rate swap contracts.
ONE-TIME EXPENSES
In the second quarter of 1998, we incurred a $41 million one-time expense for
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:
16
<PAGE> 17
<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
----------------------------- --------- --------- ------- -----
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 $ - 10
===
Payments 4 4 8
--- --- ---
Balance at August 14, 1999 $ - $ 2 $ 2
=== === ===
</TABLE>
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 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 $2 million
and the remaining accrual of $8 million at May 22, 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. The item
cost method did not have a material impact on earnings subsequent to its initial
adoption.
17
<PAGE> 18
SECOND QUARTER 1999 VS. SECOND QUARTER 1998; AND FIRST TWO QUARTERS 1999 VS.
FIRST TWO QUARTERS 1998
Sales
- -----
Adjusting for the change in our fiscal calendar and excluding sales from
divested stores, total sales for the second quarter of 1999 increased 6.2% to
$10.3 billion and total sales year-to-date increased 5.6% to $23.7 billion.
Identical food stores sales, which includes stores in operation and not expanded
or relocated for five quarters, grew 2.6%. Comparable stores sales, which
include relocations and expansions, rose 3.6%. Identical and comparable sales
exclude stores that changed names during the past year.
Merchandise Costs
- -----------------
Merchandise costs include advertising, warehousing and transportation expenses.
Merchandise costs, net of one-time items and LIFO, as a percent of sales were
73.7% in the second quarter of 1999 and 73.8% in the second quarter of 1998. On
this same basis, year-to-date merchandise costs as a percent of sales were 73.7%
in 1999 and 74.0% in 1998. Merchandise costs were affected positively by our
strategic initiatives in coordinated purchasing, category management and
operating improvements due to logistics and technology related efficiencies.
Operating, General and Administrative Expenses
- ----------------------------------------------
Operating, general and administrative expenses, net of one-time items, as a
percent of sales were 18.1% in the second quarter of 1999 and 18.2% in the
second quarter of 1998. No specific cost reduction caused the decline. On this
same basis, year-to-date operating, general and administrative expenses as a
percent of sales were 18.2% in 1999 and 18.2% in 1998.
Income Taxes
- ------------
The effective tax rate differs from the expected statutory rate primarily due to
the effect of certain taxes and non-deductible goodwill. Goodwill amortization
was $23 million in the second quarter of 1999 and $21 million in the second
quarter of 1998. Year-to-date goodwill amortization was $53 million in 1999 and
$43 million in 1998.
Net Earnings
- ------------
Earnings before extraordinary loss, excluding one-time items, were $202 million
or $0.24 per diluted share in the second quarter of 1999. These results
represent an increase of approximately 26% over estimated earnings before
extraordinary loss of $0.19 per diluted share for the second quarter of 1998. On
this same basis, year-to-date 1999 earnings before extraordinary loss were $433
million or $0.50 per diluted share. These results represent an increase of
approximately 22% over estimated year-to-date 1998 earnings before extraordinary
loss of $0.41 per diluted share. The prior year estimate includes the actual
results, net of one-time items, of Fred Meyer and an estimate of Kroger's
results, net of one-time items, to reflect the change to our new fiscal
calendar.
18
<PAGE> 19
EBITDA
- ------
Our Credit Agreement, Senior Credit Facility and the indentures underlying our
publicly issued debt, contain various restrictive covenants. Many of these
covenants are based on earnings before interest, taxes, depreciation,
amortization, LIFO, extraordinary losses and one-time items 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 EBITDA-based Credit Agreement, Senior Credit Facility and
indenture covenants on August 14, 1999.
The following is a summary of the calculation of EBITDA for the second quarters
of 1999 and 1998 and for the first two quarters of 1999 and 1998.
<TABLE>
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
---------------------- ---------------------
August 14, June 13, August 14, June 13,
(in millions) 1999 1998 1999 1998
- ---------------------------------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Earnings before tax expense and extraordinary loss.. $ 106 $ 185 $ 453 $ 178
Interest............................................ 148 155 347 319
Depreciation........................................ 198 182 449 380
Goodwill amortization............................... 23 21 53 43
LIFO................................................ - 9 12 19
One-time items included in merchandise costs........ 13 41 18 137
One-time items included in operating, general and
administrative expenses........................... 17 11 17 12
Merger related costs................................ 200 48 235 206
----- ----- ------ ------
EBITDA.............................................. $ 705 $ 652 $1,584 $1,294
===== ===== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
- ---------------
We had several lines of credit totaling $4.0 billion, with $0.9 billion in
unused balances at August 14, 1999. In addition, we had a $500 million synthetic
lease credit facility and a $100 million money market line with unused balances
of $109 million and $75 million, respectively, at August 14, 1999.
Net debt increased $204 million to $8.3 billion at the end of the second quarter
of 1999 compared to $8.1 billion at the end of the second quarter of 1998. Net
debt is defined as long-term debt, including capital leases and current portion
thereof, less investments in debt securities and prefunded employee benefits.
Our merger with Fred Meyer changed the structure of our debt portfolio. As a
result of this change all of our interest rate swap positions were terminated
for a cost of $17 million.
Cash Flow
- ---------
We generated $1,215 million of cash from operating activities year-to-date 1999
compared to $1,006 million year-to-date 1998.
Investing activities used $837 million of cash year-to-date 1999 compared to
$560 million year-to-date 1998. Capital expenditures increased $176 million
year-to-date 1999 compared to $670 million year-to-date 1998.
Financing activities used $337 million of cash year-to-date 1999 compared to
$401 million year-to-date 1998. Debt prepayment costs and new financing charges
used $11 million of cash year-to-date 1999 compared to $92 million year-to-date
1998. The change in the balance of book overdrafts used $93 million of cash
year-to-date 1999 compared to $77 million year-to-date 1998.
19
<PAGE> 20
CAPITAL EXPENDITURES
Capital expenditures totaled $404 million in the second quarter of 1999 compared
to $373 million in the second quarter of 1998. During the second quarter of 1999
we opened, acquired, expanded, or relocated 19 stores. We had 25 operational
closings and completed 28 within the wall remodels. Square footage increased
4.1% excluding divested stores.
Year-to-date capital expenditures totaled $846 million compared to $669 million
year-to-date 1998. Year- to-date we opened, acquired, expanded, or relocated 63
stores. We had 44 operational closings and completed 67 within the wall
remodels.
EFFECT OF INFLATION
While we believe 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". This standard, as amended, is effective for fiscal
years beginning after June 15, 2000. We have not yet determined the expected
impact, if any, that the adoption of the standard will have on our financial
statements.
OTHER ISSUES
On May 20, 1999, we announced a distribution in the nature of a two-for-one
stock split, to shareholders of record of common stock on June 7, 1999. All
share amounts prior to this date have been restated to reflect the split.
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 15, 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 through January 30, 1999 on a Current
Report of Form 8-K dated May 10, 1999. These financial statements include Kroger
and its consolidated subsidiaries before the merger with Fred Meyer.
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 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.
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.
20
<PAGE> 21
- 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, manufacturing, 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.
- Our earnings per share target is 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,
net of acquisitions, 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.
- We expect to achieve $225 million in synergy savings over the next
three years as a result of our merger. We project the timing of the
annual savings by fiscal year to be as follows: $40 million in 1999,
$115 million in 2000, $190 million in 2001, and $225 million in 2002
and beyond.
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 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 August 14, 1999.
Phase 1 2 3
---------------- ---- ---- ----
IT Systems 97% 94% 73%
Non-IT Systems 99% 95% 91%
21
<PAGE> 22
Phase 1 was completed for all critical business systems as of August 14, 1999.
We expect to complete Phase 1 for the systems that are not critical to our
business by the end of the third quarter. Phases 2 and 3 are expected to be
completed by late 1999. However, our ability to timely execute our plan may be
adversely affected by a variety of factors, some of which are beyond our
control, including the potential for unseen implementation problems, delays in
the delivery of products, or inefficiencies in store operations resulting from
loss of power or communication links between stores, distribution centers, and
headquarters.
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, we are
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 $48
million. 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 totaled $38 million at August 14, 1999. Of the remaining $10
million to be spent, approximately 15% relates to non-business critical hardware
and software needs, 50% relates to the development and implementation of
contingency plans, and the remaining 35% relates primarily to the completion of
testing and implementation subsequent to remediation.
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. Unexpected costs or
difficulties in integrating our operations with those of Fred Meyer could affect
our ability to achieve the expected synergy cost savings. 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.
22
<PAGE> 23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries are not
filed as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets of the
Company. The Company undertakes to file these instruments with
the Commission upon request.
EXHIBIT 27.1 - Financial Data Schedule.
EXHIBIT 27.2 - Financial Data Schedule.
EXHIBIT 27.3 - Financial Data Schedule.
EXHIBIT 99.1 - Additional Exhibits - Statement of Computation
of Ratio of Earnings to Fixed Charges.
(b) The Company disclosed and filed amendments to its audited
supplemental pooled financials in its Current Report on Form
8-K dated May 28, 1999, as amended; its earnings release for
the first quarter 1999 in its Current Report on Form 8-K dated
June 17, 1999; accountant consents in its Current Report on
Form 8-K dated June 23, 1999; its release announcing
completion of a debt offering in its Current Report on Form
8-K dated June 25, 1999; and its sales, net earnings, and
diluted net earnings per share for the 21 weeks ended June 26,
1999, in its Current Report on Form 8-K dated July 20, 1999.
23
<PAGE> 24
SIGNATURES
----------
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 thereunto duly authorized.
THE KROGER CO.
Dated: September 28, 1999 By: /s/ Joseph A. Pichler
--------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: September 28, 1999 By: /s/ J. Michael Schlotman
-------------------------
J. Michael Schlotman
Vice President and
Corporate Controller
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of August 14, 1999, and the consolidated statement
of operations for the two quarters then ended and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> AUG-14-1999
<EXCHANGE-RATE> 1
<CASH> 304
<SECURITIES> 0
<RECEIVABLES> 544
<ALLOWANCES> 0
<INVENTORY> 3,666
<CURRENT-ASSETS> 5,064
<PP&E> 12,187
<DEPRECIATION> 4,524
<TOTAL-ASSETS> 17,042
<CURRENT-LIABILITIES> 5,667
<BONDS> 8,411
0
0
<COMMON> 880
<OTHER-SE> 1,369
<TOTAL-LIABILITY-AND-EQUITY> 17,042
<SALES> 23,782
<TOTAL-REVENUES> 23,782
<CGS> 17,553
<TOTAL-COSTS> 17,553
<OTHER-EXPENSES> 5,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347
<INCOME-PRETAX> 453
<INCOME-TAX> 190
<INCOME-CONTINUING> 263
<DISCONTINUED> 0
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> 253
<EPS-BASIC> .31<F1>
<EPS-DILUTED> .29<F1>
<FN>
<F1>On May 20, 1999, the Company announced a distribution in the nature of a
two-for-one stock split to shareholders of record of common stock on June 7,
1999. All share amounts prior to this date have been restated to reflect the
split.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of June 13, 1998, and the consolidated statement
of operations for the two quarters then ended and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER>1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUN-13-1998
<EXCHANGE-RATE> 1
<CASH> 228
<SECURITIES> 0
<RECEIVABLES> 499
<ALLOWANCES> 0
<INVENTORY> 3,269
<CURRENT-ASSETS> 4,487
<PP&E> 10,973
<DEPRECIATION> 4,020
<TOTAL-ASSETS> 15,644
<CURRENT-LIABILITIES> 5,173
<BONDS> 8,341
0
0
<COMMON> 867
<OTHER-SE> 595
<TOTAL-LIABILITY-AND-EQUITY> 15,644
<SALES> 20,376
<TOTAL-REVENUES> 20,376
<CGS> 15,233
<TOTAL-COSTS> 15,233
<OTHER-EXPENSES> 4,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 178
<INCOME-TAX> 97
<INCOME-CONTINUING> 81
<DISCONTINUED> 0
<EXTRAORDINARY> (222)
<CHANGES> 0
<NET-INCOME> (141)
<EPS-BASIC> (.17)<F1>
<EPS-DILUTED> (.16)<F1>
<FN>
<F1>On May 20, 1999, the Company announced a distribution in the nature of a
two-for-one stock split to shareholders of record of common stock on June 7,
1999. All share amounts prior to this date have been restated to reflect the
split.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of May 22, 1999, and the consolidated statement of
operations for the quarter then ended and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER>1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-22-1999
<EXCHANGE-RATE> 1
<CASH> 314
<SECURITIES> 0
<RECEIVABLES> 487
<ALLOWANCES> 0
<INVENTORY> 3,590
<CURRENT-ASSETS> 5,058
<PP&E> 11,850
<DEPRECIATION> 4,402
<TOTAL-ASSETS> 16,857
<CURRENT-LIABILITIES> 5,384
<BONDS> 8,496
0
0
<COMMON> 878
<OTHER-SE> 1,311
<TOTAL-LIABILITY-AND-EQUITY> 16,857
<SALES> 13,493
<TOTAL-REVENUES> 13,493
<CGS> 9,962
<TOTAL-COSTS> 9,962
<OTHER-EXPENSES> 2,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> 347
<INCOME-TAX> 140
<INCOME-CONTINUING> 207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-BASIC> .25<F1>
<EPS-DILUTED> .24<F1>
<FN>
<F1>On May 20, 1999, the Company announced a distribution in the nature of a
two-for-one stock split to shareholders of record of common stock on June 7,
1999. All share amounts prior to this date have been restated to reflect the
split.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Schedule of computation of ratio of earnings to fixed charges of The Kroger Co.
and consolidated subsidiary companies for the five fiscal years ended January 2,
1999 and for the two quarters ended August 14, 1999 and June 13, 1998.
<TABLE>
<CAPTION>
2 Quarters Ended Fiscal Years Ended
------------------------ ----------------------------------------------------------------
August 14, June 13, January 2, December 27, December 28, December 30, December 31,
1999 1998 1999 1997 1996 1995 1994
(28 Weeks) (24 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 weeks) (52 weeks)
---------- ----------- ------------ ------------ ----------- ------------ ------------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Earnings (loss) from
continuing operations
before tax expense
and extraordinary loss . $ 453 $ 178 $ 871 $ 954 $ 701 $ 591 $ 473
Fixed charges. . . . . . 563 512 1,038 679 595 596 582
Capitalized interest . . (3) (4) (9) (10) (12) (11) (5)
------ ------ ------ ------ ------ ------ ------
$1,013 $ 686 $1,900 $1,623 $1,284 $1,176 $1,050
====== ====== ====== ====== ====== ====== ======
Fixed Charges
Interest . . . . . . . . $ 351 $ 324 $ 654 $ 397 $ 361 $ 369 $ 356
Portion of rental
payments deemed to be
interest. . . . . . . . 212 188 384 282 234 227 226
------ ------ ------ ------ ------- ------ ------
$ 563 $ 512 $1,038 $ 679 $ 595 $ 596 $ 582
====== ====== ====== ====== ======= ====== ======
Ratio of earnings to
fixed charges . . . . . 1.8 1.3 1.8 2.4 2.2 2.0 1.8
</TABLE>
