<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 1-303
January 29, 2000
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
Address Telephone Number
1014 Vine St. (513) 762-4000
Cincinnati, Ohio 45202
Securities registered pursuant to section 12 (b) of the Act:
Name of Exchange on
Title of Class which Registered
Common $1 par value New York Stock Exchange
830,804,611 shares outstanding on
April 26, 2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K[ ].
The aggregate market value of the Common Stock of The Kroger Co. held by
non-affiliates as of March 6, 2000: $12,256,639,106.
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act
on or before May 28, 2000, incorporated by reference into Parts II and III
of Form 10-K.
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PART I
ITEM 1. BUSINESS
The Kroger Co. (the "Company") was founded in 1883 and incorporated in
1902. As of January 29, 2000, the Company was the largest grocery retailer in
the United States based on annual sales. The Company also manufactures and
processes food for sale by its supermarkets. The Company's principal executive
offices are located at 1014 Vine Street, Cincinnati, Ohio 45202 and its
telephone number is (513) 762-4000.
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. On March 9, 1998, Fred Meyer issued 82 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 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.
On September 9, 1997, Fred Meyer acquired Smith's Food & Drug Centers,
Inc., ("Smith's") a regional supermarket and drug store chain operating in the
Intermountain and Southwestern regions of the United States, by issuing 66
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 its indirect 50% interest in Santee Dairy, 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, 20
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, 4
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.
As of January 29, 2000, the Company operated 2,288 supermarkets, most of
which are leased. Of this number 1,201 supermarkets were operated, directly,
through a wholly-owned subsidiary, or through a partnership composed of the
Company and wholly-owned subsidiaries of the Company, principally under the
Kroger name in the Midwest and South. Dillon Companies, Inc. ("Dillon"), a
wholly-owned subsidiary of the Company, operated 211 supermarkets directly or
through wholly-owned subsidiaries (the "Dillon Supermarkets"). The Dillon
Supermarkets, principally located in Colorado, Kansas, and Missouri, operate
under the names "King Soopers," "Dillon Food Stores," and "City Market." Fred
Meyer, Inc. ("Fred Meyer"), a wholly-owned subsidiary of the Company, operated
876 supermarkets directly or through wholly-owned subsidiaries (the "Fred Meyer
Supermarkets"). The Fred Meyer Supermarkets, principally located in California,
Utah, Arizona, Nevada, Washington, and Oregon operate under the names "Fred
Meyer," "Smiths," "Food 4 Less," "Ralphs," "Fry's," and "QFC." Fred Meyer also
operated 389 jewelry stores. The Company employs approximately 305,000 full and
part-time employees.
As of January 29, 2000, the Company, through its Dillon subsidiary,
operated 796 convenience stores under the trade names of "Kwik Shop," "Quik Stop
Markets," "Tom Thumb Food Stores," "Turkey Hill Minit Markets," "Loaf 'N Jug,"
and "Mini-Mart." The Company owned and operated 692 of these stores while 104
were operated through franchise agreements. The convenience stores offer a
limited assortment of staple food items and general merchandise and, in most
cases, sell gasoline.
The Company intends to develop new food and convenience store locations
and will continue to assess existing stores as to possible replacement,
remodeling, enlarging, or closing.
SEGMENTS
The Company operates retail food and drug stores, multi-department stores,
jewelry stores, and convenience stores in the Midwest, South and West. The
Company's retail operations, which represent approximately 98% of consolidated
sales, is its only reportable segment. All of the Company's operations are
domestic.
<PAGE> 3
ITEM 2. PROPERTIES
As of January 29, 2000, the Company operated more than 3,300 owned or leased
supermarkets, convenience stores, distribution warehouses, and food processing
facilities through divisions, marketing areas, subsidiaries or affiliates. These
facilities are located principally in the Southern, Midwestern, and Western
portions of the United States. A majority of the properties used to conduct the
Company's business are leased.
The Company generally owns store equipment, fixtures and leasehold improvements,
as well as processing and manufacturing equipment. The total cost of the
Company's owned assets and capitalized leases at January 29, 2000 was $13.04
billion while the accumulated depreciation was $4.77 billion.
Leased premises generally have base terms ranging from ten to twenty-five years
with renewal options for additional periods. Some options provide the right to
purchase the property after conclusion of the lease term. Store rentals are
normally payable monthly at a stated amount or at a guaranteed minimum amount
plus a percentage of sales over a stated dollar volume. Rentals for the
distribution, processing and miscellaneous facilities generally are payable
monthly at stated amounts. For additional information on leased premises, see
footnote 10 in the Notes to Consolidated Financial Statements.
2
<PAGE> 4
ITEM 3. LEGAL PROCEEDINGS
On September 13, 1996, a class action lawsuit titled McCampbell, et al. v.
Ralphs Grocery Company, et al, as filed in the Superior Court of the State of
California, County of San Diego, against Ralphs Grocery Company ("Ralphs/Food 4
Less") and two other grocery store chains operating in the Southern California
area. The complaint alleged, among other things, that Ralphs/Food 4 Less and
others conspired to fix the retail price of eggs in Southern California. The
plaintiffs claimed that the defendants' actions violated provisions of the
California Cartwright Act and constituted unfair competition. The plaintiffs
sought damages they purported to have sustained as a result of the defendants'
alleged actions, which damages were subject to trebling under the applicable
statute, and an injunction from future actions in restraint of trade and unfair
competition. A class was certified consisting of all retail purchasers of white
chicken eggs sold by the dozen in Los Angeles, Riverside, San Diego, San
Bernardino, Imperial and Orange counties from September 13, 1992.
The case proceeded to trial before a jury in July and August 1999. On September
2, 1999, the jury returned a verdict in favor of Ralphs/Food 4 Less and against
the plaintiffs. Judgment was entered in favor of Ralphs/Food 4 Less on November
1, 1999. Plaintiffs have appealed the judgment.
There are pending against the Company various claims and lawsuits arising in the
normal course of business, including suits charging violations of certain
antitrust and civil rights laws. Some of these suits purport or have been
determined to be class actions and/or seek substantial damages. Any damages that
may be awarded in antitrust cases will be automatically trebled. Although it is
not possible at this time to evaluate the merits of these claims and lawsuits,
nor their likelihood of success, the Company is of the opinion that any
resulting liability will not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Price Range
- -----------------------------------------------------------------------------
2000 1999
---- ----
Quarter High Low High Low
- ------- --------- --------- --------- ---------
1st 34-29/32 24-7/8 23-21/32 16-17/32
2nd 31-3/8 24-1/8 23-3/4 20-3/32
3rd 26-15/16 19-1/2 27-1/16 21
4th 24-1/4 14-7/8 30-13/32 22
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1999: 51,000.
Number of shareowners at April 26, 2000: 51,286.
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past three fiscal
years. Under the Company's Credit Agreement dated may 28, 1997, the Company is
prohibited from paying cash dividends during the term of the Credit Agreement.
The Company is permitted to pay dividends in the form of stock of the Company.
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<PAGE> 6
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------------------------------
JANUARY 29, January 2, December 27, December 28, December 30,
2000 1999 1997 1996 1995
(52 WEEKS) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
---------------------------------------------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales.................................... $45,352 $43,082 $33,927 $29,701 $28,090
Earnings before extraordinary loss....... 638 494 589 436 369
Extraordinary loss (net of income tax
benefit) (A)........................... (10) (257) (124) (3) (16)
Net earnings............................. 628 237 465 433 353
Diluted earnings per share
Earnings before extraordinary loss..... 0.74 0.58 0.79 0.64 0.55
Extraordinary loss (A)................. (0.01) (0.30) (0.16) (0.01) (0.03)
Net earnings........................... 0.73 0.28 0.63 0.63 0.52
Total assets............................. 17,966 16,641 11,718 7,889 6,999
Long-term obligations, including
obligations under capital leases....... 9,555 9,274 6,665 5,079 4,310
Shareowners' deficit..................... 2,683 1,917 917 (537) (988)
Cash dividends per common share.......... (B) (B) (B) (B) (B)
</TABLE>
- --------------------------------------------------------------------------------
(A) See Note 7 to Consolidated Financial Statements.
(B) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
5
<PAGE> 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. On March 9, 1998, Fred Meyer issued 82 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 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.
On September 9, 1997, Fred Meyer acquired Smith's Food & Drug Centers,
Inc., ("Smith's") a regional supermarket and drug store chain operating in the
Intermountain and Southwestern regions of the United States, by issuing 66
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 its indirect 50% interest in Santee Dairy, 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, 20
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, 4
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 1999
compared to 1998 and 1998 compared to 1997. However, 1999 results are not
directly comparable to 1998 results and 1998 results are not directly comparable
to 1997 results due to recent acquisitions (see footnote 2 of the financial
statements) and also due to the change in our fiscal calendar in 1999 (the
"Calendar Change"). As a result of our change in fiscal calendar, results of
operations and cash flows for the 28 day period ended January 30, 1999 for
pre-merger Kroger are not included in the Statements of Income and Cash Flow.
The 1998 results include the results of Ralphs/Food 4 Less from March 10,
1998. The 1997 results include the results of KUI from February 14, 1997, Hughes
from March 19, 1997 and Smith's from September 9, 1997, and exclude the results
of Ralphs/Food 4 Less.
1999 VS. 1998
Sales
Total sales for 1999 increased 5.3% or $2.3 billion from $43.1 billion in
1998. For some Kroger divisions, fiscal 1999 contained 52 weeks compared to 53
weeks in 1998. Total sales increased 6.1%, after adjusting for the
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<PAGE> 8
change in Kroger's fiscal calendar, a 53rd week of sales in 1998, and excluding
sales from divested stores. The sales increase was driven by recent
acquisitions, our capital expenditure program, and strong comparable store
sales.
Our sales in identical food stores, which include stores in operation and
not expanded or relocated for four full quarters, increased 2.3% in 1999.
Comparable store sales, which include expansions and relocations, increased 3.0%
in 1999. Excluding the Fry's Division, which converted 35 former Smith's stores
to the Fry's banner, identical food store sales increased 2.8% and comparable
store sales increased 3.4%.
Merchandise Costs
Merchandise costs include advertising, warehousing and transportation
expenses. Merchandise costs, net of one-time expenses, an accounting change made
in 1998 (see note 4 of the financial statements) and the effect of LIFO for the
year, as a percent of sales were 73.43% in 1999 and 74.06% in 1998. After
adjusting for the calendar change and excluding costs related to mergers,
merchandise costs as a percent of sales were 73.87% in 1998. Coordinated
purchasing, category management, technology related efficiencies and increases
in private label sales were primarily responsible for the decline.
Operating and Administrative Expenses
Operating and administrative expenses as a percent of sales were 18.1% in
1999 and 18.0% in 1998. Adjusting 1998 amounts to reflect the calendar change
and a 52-week year, administrative expenses as a percent of sales were 18.2%.
These costs remained flat during 1999 due to a continued high incentive payout
based on performance. Additionally, we incurred $27 million of one-time
operating and administrative expenses in 1999 compared to only $12 million in
1998.
Income Taxes
Our effective tax rate increased to 43.6% in 1999 from 43.3% in 1998, due
to non deductible transaction costs related to mergers of approximately $26
million in 1999.
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
29, 2000 were:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
---------------------
<S> <C> <C>
Earnings before extraordinary loss excluding merger related
costs, one-time expenses and the accounting change........ $ 966 $ 763
Merger related costs, net of income tax benefit............. 277 181
One-time expenses, net of income tax benefit................ 51 32
Accounting change, net of income tax benefit................ -- 56
------- -------
Earnings before extraordinary loss.......................... 638 494
Extraordinary loss, net of income tax benefit............... (10) (257)
------- -------
Net Earnings................................................ $ 628 $ 237
======= =======
Diluted earnings per share before extraordinary loss
excluding merger related costs, one-time expenses and
accounting change......................................... $ 1.13 $ 0.89
</TABLE>
Extraordinary losses were incurred from the early retirement of debt. In
addition to the above mentioned items, net earnings in 1999 compared to 1998
were affected by net interest expense of $652 million in 1999
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<PAGE> 9
compared to $645 million in 1998 and depreciation and amortization expenses of
$961 million in 1999 compared to $837 million in 1998.
EBITDA
Our Credit Agreement, Senior Credit Facility and the indentures underlying
approximately $162 million of publicly issued debt, contain various restrictive
covenants. Many of these covenants are based on earnings before interest, taxes,
depreciation, amortization, LIFO charge, extraordinary loss, and one-time items
("EBITDA"). The ability to generate EBITDA at levels sufficient to satisfy the
requirements of these agreements is a key measure of our financial strategy. 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 January 29, 2000.
EBITDA for 1999 increased 14.3% to $3.2 billion from $2.8 billion in 1998.
EBITDA increased primarily due to recent acquisitions, economies of scale
resulting from increased sales, and from the efficiencies mentioned in
"Merchandise Costs" above.
The following is a summary of the calculation of EBITDA for the 1999 and
1998 fiscal years:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
---------------------
<S> <C> <C>
Earnings before tax expense and extraordinary loss.......... $1,129 $ 871
Interest.................................................... 652 645
Depreciation................................................ 861 745
Goodwill amortization....................................... 100 92
LIFO effect................................................. (29) 10
One-time items included in merchandise costs................ 58 49
One-time items included in operating, general and
administrative expenses................................... 27 12
Merger related costs........................................ 383 269
Accounting change........................................... -- 90
------ ------
EBITDA...................................................... $3,181 $2,783
====== ======
</TABLE>
1998 VS. 1997
Sales
Total sales for 1998 increased 27% or $9.2 billion from $33.9 billion in
1997. For some 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. Recent acquisitions, our capital expenditure program and strong
comparable store sales drove the sales increase. The Ralphs/Food 4 Less and
Smith's acquisitions accounted for $6.9 billion of the increase.
Pre-merger Kroger sales in identical food stores, which includes stores in
operation and not expanded or relocated for four full quarters, increased 1.0%
in 1998. For purposes of this calculation, 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 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.
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<PAGE> 10
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
$0.07 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.
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 74.06% 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 totaling $45 million for
1998 to some of our multi-employer pension and benefit plans.
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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(MILLIONS OF DOLLARS)
---------------------
<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......................................... $ 0.89 $ 0.79
</TABLE>
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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 $592 million in 1997.
EBITDA
EBITDA for 1998 increased 43.7% to $2.8 billion from $1.9 billion in 1997.
EBITDA increased primarily due to recent acquisitions, economies of scale
resulting from increased sales and from the efficiencies mentioned in
"Merchandise Costs" above.
The following is a summary of the calculation of EBITDA for the 1998 and
1997 fiscal years:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(MILLIONS OF DOLLARS)
---------------------
<S> <C> <C>
Earnings before tax expense and extraordinary loss.......... $ 871 $ 954
Interest.................................................... 645 388
Depreciation................................................ 745 576
Goodwill amortization....................................... 92 16
LIFO........................................................ 10 3
One-time items included in merchandise costs................ 49 --
One-time items included in operating, general and
administrative expenses................................... 12 --
Merger related costs........................................ 269 --
Accounting change........................................... 90 --
------ ------
EBITDA...................................................... $2,783 $1,937
====== ======
</TABLE>
MERGER RELATED COSTS AND ONE TIME EXPENSES
MERGER RELATED COSTS
We are continuing 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. Total merger related costs incurred
were $383 million in 1999 and $269 million in 1998. We did not incur any merger
related costs during 1997.
The following table presents the components of the merger related costs:
<TABLE>
<CAPTION>
1999 1998
------- -------
(MILLIONS OF DOLLARS)
---------------------
<S> <C> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation............................. $ 30 $ 16
Systems integration.................................... 85 50
Store conversions...................................... 51 48
Transaction costs...................................... 93 34
Administration integration............................. 19 12
---- ----
278 160
</TABLE>
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<TABLE>
<CAPTION>
1999 1998
------- -------
(MILLIONS OF DOLLARS)
---------------------
<S> <C> <C>
NONCASH ASSET WRITEDOWN
Distribution consolidation............................. $ -- $ 29
Systems integration.................................... 3 26
Store conversions...................................... 10 --
Store closures......................................... 4 25
Administration integration............................. 27 3
---- ----
44 83
ACCRUED CHARGES
Distribution consolidation............................. 5 --
Systems integration.................................... 1 1
Transaction costs...................................... -- 6
Store closures......................................... 8 7
Administration integration............................. 47 12
---- ----
61 26
---- ----
Total merger related costs.................................. $383 $269
==== ====
TOTAL CHARGES
Distribution consolidation............................. $ 35 $ 45
Systems integration.................................... 89 77
Store conversions...................................... 61 48
Transaction costs...................................... 93 40
Store closures......................................... 12 32
Administration integration............................. 93 27
---- ----
Total merger related costs.................................. $383 $269
==== ====
</TABLE>
Distribution Consolidation
This represents costs to consolidate manufacturing and distribution
operations and eliminate duplicate facilities. During 1999, approximately $30
million of these costs was recorded as cash was expended. These costs include
approximately $20 million of Tolleson warehouse expenses. Severance costs of $5
million were accrued during 1999 for distribution employees in Phoenix. The 1998
costs include a $29 million writedown to estimated net realizable value of the
Hughes distribution center in Southern California. The facility was sold in
March of 2000. The 1998 costs also include $13 million for incremental labor
incurred during the closing of the distribution center and other incremental
costs incurred as part of the realignment of our distribution system.
Systems Integration
This represents the costs of integrating systems and the related
conversions of corporate office and store systems. Charges recorded as cash was
expended totaled $85 million and $50 million in 1999 and 1998, respectively.
These costs represent incremental operating costs, principally labor, during the
conversion process, payments to third parties, and training costs. The 1998
costs include a $26 million writedown of computer equipment and related software
that has been abandoned and the depreciation associated with computer equipment
at QFC which is being written off over 18 months, at which time it will be
abandoned.
Store Conversions
This includes the cost to convert store banners. In 1999, $51 million
represented cash expenditures and $10 million represented asset write offs. In
1998 all costs represented incremental cash expenditures for advertising
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<PAGE> 13
and promotions to establish the banner, changing store signage, labor required
to remerchandise the store inventory and other services that were expensed as
incurred.
Transaction Costs
This 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 $93 million and $40 million for 1999 and
1998, respectively, related primarily to professional fees and employee bonuses
recorded as the cash was expended. All accrued amounts relate to the employee
stay bonus program.
Store Closures
This includes the costs to close stores identified as duplicate facilities
and to sell stores pursuant to settlement agreements. 1999 costs of $8 million
were accrued to close seven stores identified as duplicate facilities and to
sell three stores pursuant to a settlement with the Federal Trade Commission
("FTC Stores"). Included in 1998 amounts were 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
writedown of $25 million in 1998 relates to certain California stores.
Termination costs totaling $7 million were accrued in 1998.
Administration Integration
This represents $19 million of severance and travel and consulting
services related to integration work; $27 million of asset write downs including
video tapes and equipment used in our stores; and $47 million of accrued
expenses. The accrued expenses include an obligation to make a charitable
contribution (within seven years from the date of the Fred Meyer merger) as
required by the merger agreement, a restricted stock award related to the
achievement of expected merger synergy benefits, and severance costs for some
Fred Meyer executives who informed us of their intention to leave Kroger, which
have subsequently been paid.
ONE-TIME EXPENSES
During 1999, we incurred one-time expenses of $85 million associated with
costs related to recent mergers. These expenses are included in merchandise
costs, $58 million, and operating, general and administrative expenses, $27
million.
During 1998, we incurred a 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. Additionally,
in the second quarter of 1998, we incurred one-time expenses associated with
accounting, data, and operations consolidations in Texas. These included the
costs of closing eight stores and relocating the remaining Dallas office
employees to a smaller facility. These expenses, which included non-cash asset
writedowns, were included in operating, general and administrative expenses.
These expenses include an amount for estimated rent or lease termination costs
that will be paid on closed stores through 2013. The "Other" column in the table
below details the activity for amounts accrued related to these one-time
expenses. The remaining balance at January 29, 2000 represents $2 million of
idled warehouse facilities that will be paid through 2001 and $7 million of
estimated rent or lease termination costs that will be paid on closed stores
through 2013.
12
<PAGE> 14
A summary of changes in accruals related to various business combinations
and other one-time expenses follows:
<TABLE>
<CAPTION>
INCENTIVE
FACILITY EMPLOYEE AWARDS AND
CLOSURE COSTS SEVERANCE CONTRIBUTIONS OTHER
------------- --------- ------------- -----
<S> <C> <C> <C> <C>
Balance at December 26, 1996....................... $ -- $-- $-- $--
Additions........................................ 23 9 -- --
Payments......................................... (4) (1) -- --
---- --- --- ---
Balance at December 27, 1997....................... 19 8 -- --
Additions........................................ 129 41 -- 35
Payments......................................... (15) (16) -- (16)
Adjustments...................................... -- (3) -- --
---- --- --- ---
Balance at January 2, 1999......................... 133 30 -- 19
Additions........................................ 8 24 29 --
Payments......................................... (11) (25) -- (10)
---- --- --- ---
Balance at January 29, 2000........................ $130 $29 $29 $ 9
==== === === ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
We have several lines of credit totaling approximately $4 billion with
$874 million of unused balances at January 29, 2000. In addition, we have a $500
million synthetic lease credit facility and a $195 million money market line
with unused balances of $38 million and $100 million, respectively, at January
29, 2000.
Total debt, including capital leases and current portion thereof,
increased $400 million to $9.0 billion in 1999 and $2.8 billion to $8.6 billion
in 1998. 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 1999 and 1998 compared to $168 million at year-end 1997. 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 $8.7 billion at year-end 1999 compared to $8.3 billion at year-end 1998,
and $5.5 billion at year-end 1997. We utilize interest rate swaps to manage net
exposure to interest rate changes related to our portfolio of borrowings. See
footnotes eight and nine of our financial statements for further detail on our
debt portfolio and interest rate swaps.
In addition to the available credit mentioned above, we currently have
available for issuance $1.225 billion of securities under a shelf registration
statement filed with the Securities and Exchange Commission and declared
effective on February 2, 2000.
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 in October 1997. We made open market purchases totaling $122
million in 1998, and $85 million in 1997. On October 18, 1998, we rescinded the
repurchase program as a result of execution of the merger agreement between
Kroger and Fred Meyer. In December 1999, we began a new program to repurchase
common stock to
13
<PAGE> 15
reduce dilution caused by our stock option plans for employees. This program is
solely funded by proceeds from stock option exercises, including the tax
benefit. In January 2000 the Board of Directors authorized an additional
repurchase plan for up to $100 million of common stock. During 1999, we made
open market purchases of approximately $4 million under the stock option program
and $2 million under the $100 million program.
In addition, on March 31, 2000 the Board of Directors authorized the
repurchase of up to $750 million of Kroger common stock. This repurchase program
replaces the $100 million program authorized in January 2000.
14
<PAGE> 16
CONSOLIDATED STATEMENT OF CASH FLOWS
Operating cash flow decreased 15% or $280 million in 1999 and increased
65% or $725 million in 1998. The changes in operating cash flow were primarily
due to changes in operating assets and liabilities that used $340 million of
cash in 1999, provided $455 million of cash in 1998 and used $133 million of
cash in 1997. The decrease in 1999 and increase in 1998 also included non-cash
charges from extraordinary losses, depreciation expense and goodwill
amortization totaling $971 million in 1999, $1,094 million in 1998, and $716
million in 1997.
Cash used by investing activities increased 24% or $355 million in 1999
and 24% or $287 million in 1998. Investing activities consisted primarily of
capital expenditures and business acquisitions. Capital expenditures were $1,701
million in 1999, $1,646 million in 1998, and $942 million in 1997 (see "Capital
Expenditures" below for further detail). Cash used for business acquisitions,
net of cash acquired, was $230 million in 1999, $86 million in 1998 and, $354
million in 1997.
Cash provided by financing activities was $280 million in 1999 compared to
$257 million used in 1998, and $118 million provided in 1997. In addition to
finance charges of $11 million in 1999, $118 in 1998, and $33 million in 1997
related to debt issues, we paid premiums of $2 million in 1999, $308 million in
1998, and $127 million in 1997 to retire debt early. The table below provides
information about debt repurchases and redemptions for the three years ended
January 29, 2000.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Senior Debt repurchases and redemptions................ $ -- $1,246 $ 117
Senior subordinated debt repurchases................... $ 238 $ 835 $ 889
Term note repurchases.................................. $ 1,406 $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.
15
<PAGE> 17
CAPITAL EXPENDITURES
Capital expenditures excluding acquisitions totaled $1.7 billion in 1999
compared to $1.6 billion in 1998 and $0.9 billion in 1997, most of which was
incurred to construct new stores. The table below shows our storing activity for
food stores and multi-department stores:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Beginning of year.......................................... 2,191 1,660 1,465
Opened..................................................... 100 101 71
Acquired................................................... 78 572 167
Closed..................................................... (81) (142) (43)
----- ----- -----
End of year................................................ 2,288 2,191 1,660
===== ===== =====
</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. Although management believes there was
inflation in retail prices, we experienced deflation in our costs of product due
to synergies and the economies of scale created by recent mergers. By attempting
to control costs and efficiently utilize resources, we strive to minimize the
effects of inflation on operations.
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. 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
included Kroger and its consolidated subsidiaries before the merger with Fred
Meyer. During the transition period we had sales of $2,160 million, costs and
expenses of $2,135 million, and net earnings of $25 million.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, as amended, is effective for
fiscal years beginning after June 15, 2000. As a result, implementation of this
standard is not mandatory for the Company until February 4, 2001. Based on our
current portfolio, we expect that the adoption of this standard will not have a
material impact on the financial statements. We will continue to evaluate the
impact this standard will have as our portfolio changes.
We indirectly own a 50% interest in the entity that owns the Santee Dairy
in Los Angeles, California, 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.
16
<PAGE> 18
We are party to more than 345 collective bargaining agreements with local
unions representing approximately 218,000 employees. During 1999 we negotiated
82 labor contracts without any material work stoppages. Typical agreements are
three to five years in duration and, as agreements expire, we expect to enter
into new collective bargaining agreements. In 2000, 90 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, as well as pages three
through seven of the accompanying proxy statement, regarding our expectations,
hopes, beliefs, intentions or strategies are forward looking statements within
the meaning of Section 21 E 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 2000 full year
square footage to grow 4.5% to 5%. 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 by $500 million over the next five
years.
- We expect our earnings per share target to be a 16%-18% average annual
increase over the next three years.
- We expect capital expenditures for fiscal 2000 to total $1.5-$1.7
billion, excluding acquisitions. Capital expenditures reflect Kroger's
strategy of growth through expansion and acquisitions as well as our
emphasis, whenever possible, on self-development and ownership of store
real estate, and on logistics and technology improvements.
- We intend to use the combination of cash flows from operations and
borrowings under credit facilities to finance capital expenditure
requirements for 2000, currently budgeted to be approximately $1.5
billion - $1.7 billion, excluding acquisitions. If determined
preferable, we may fund capital expenditure requirements by mortgaging
facilities, entering into sale/leaseback transactions, or by issuing
additional debt or equity.
17
<PAGE> 19
- We expect to achieve $380 million in synergy savings over the next three
years as a result of our mergers. We project the timing of the annual
savings by fiscal year to be as follows: $260 million in 2000, $345
million in 2001, and $380 million in 2002 and beyond.
The following factors are among the principal factors that could cause
actual results to differ materially from forward looking statements:
- General business and economic conditions in our operating regions,
including the rate of inflation, population, employment and job growth
in our markets,
- Pricing pressures and competitive factors, which could include pricing
strategies, store openings and remodels,
- Results of our programs to reduce costs and improve working capital,
- The ability to integrate any companies we acquire or have acquired and
achieve operating improvements at those companies,
- Increases in labor costs and relations with union bargaining units
representing our employees,
- Changes in laws and regulations, including changes in accounting
standards and taxation requirements,
- Opportunities or acquisitions that we pursue, and
- The availability and terms of financing.
In particular, our ability to achieve the expected increases in sales and
earnings could be adversely affected by the increasingly competitive environment
in which we operate. In addition any labor dispute, delays in opening new
stores, or changes in the economic climate could cause us to fall short of our
sales and earnings targets. While we expect to reduce working capital, our
ability to do so may be impaired by any changes in vendor payment terms or
systems problems that result in increases in inventory levels. Our capital
expenditures could fall outside of the expected range if we are unsuccessful in
acquiring suitable sites for new stores, if development costs exceed those
budgeted, or if our logistics and technology projects are not completed in the
time frame expected or on budget. While we expect to achieve benefits through
logistics and technology, development of new systems and integration of systems
due to our merger with Fred Meyer carry inherent uncertainties, and we may not
achieve the expected benefits. Unforeseen difficulties in integrating Fred Meyer
with Kroger, or any other acquired entity, could cause us to fail to achieve the
anticipated synergy savings, and could otherwise adversely affect our ability to
meet our 16% - 18% earnings per share expectations. Accordingly, actual events
and results may vary significantly from those included in or contemplated or
implied by forward looking statements contained within this document.
YEAR 2000 DISCLOSURE
We did not experience any significant malfunctions or errors in our
operating or business systems either when the date changed from 1999 to 2000 or
on February 29, 2000. Based on operations since January 1, 2000, we do not
expect any significant impact on our ongoing business as a result of the "Year
2000" issue. However, it is possible that the full impact of the date change,
which was of concern due to computer programs that use two digits instead of
four digits to define years, has not been fully recognized. For example, it is
possible that Year 2000 or similar issues may occur with billing, payroll, or
financial closings at period, quarter, or year-end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively affected if the Year 2000 or similar issues adversely affect our
customers or suppliers. We currently are not aware of any significant Year 2000
or similar problems that have arisen for our customers and suppliers.
18
<PAGE> 20
We spent $23 million on Year 2000 readiness efforts in 1999 and a total of
$49 million from 1997 through 1999. These efforts included replacing some
outdated, noncompliant hardware and noncompliant software as well as identifying
and remediating Year 2000 problems.
19
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kroger has historically used derivatives to limit its exposure to rising
interest rates. During 1999, as a result of the merger with Fred Meyer, the
nature and magnitude of our debt portfolio changed significantly, including a
permanent reduction in the combined company's variable rate borrowings. This
fundamental change in our debt portfolio resulted in the existing derivative
portfolio no longer being aligned with the debt portfolio, and prompted us to
eliminate all existing interest rate swap and cap agreements, at a cost of $17
million.
Going forward, we will use derivatives primarily to fix the rates on
variable rate debt. To do this, we use the following guidelines:
- 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
by April of 2000,
- 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. The guidelines may
change as our business needs dictate.
The table below provides information about our interest rate derivative
and underlying debt portfolio. The amount each year represents 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 the variable rate debt is based on six month LIBOR
using the forward yield curve as of January 29, 2000. The Fair-Value column
includes the fair-value of those debt instruments for which it is reasonably
possible to calculate a fair value and the fair value of our interest rate
derivatives as of January 29, 2000. (See footnotes eight and nine).
<TABLE>
<CAPTION>
EXPECTED YEAR OF MATURITY
-------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR-VALUE
----- ----- ----- ------ ----- ---------- ------ ----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
- --------------
Fixed rate.................... (261) (305) (129) (301) (283) (4.207) (5,486) (4,656)
Average interest rate......... 7.58% 7.65% 7.62% 7.64% 7.50% 7.50%
Variable rate................. (275) (1,459) (1,362) (3,096) (3,096)
Average interest rate......... 6.86% 8.00% 8.09% 8.10%
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AVERAGE NOTIONAL AMOUNTS OUTSTANDING
-------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR-VALUE
----- ----- ----- ------ ----- ---------- ------ ----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE DERIVATIVES
- -------------------------
Variable to fixed............. 300 275 300 2
Average pay rate.............. 6.66% 6.66% 6.66%
Average receive rate.......... 6.23% 7.37% 6.78%
Interest Rate Collar.......... 300 300 300 150 300 1
</TABLE>
It was not practicable to determine a fair value for $678 million of fixed rate
debt. The interest rate collar is reset based on the three month LIBOR with the
following impact:
- if the three month LIBOR is less than or equal to 4.10%, we pay 5.50%
for that three month period;
- if the three month LIBOR is greater than 4.10% and less than or equal to
6.50%, we are exposed to floating interest rates for that three month
period;
- if the three month LIBOR is greater than 6.50% and less than 7.50%, we
pay 6.50%; and
- if the three month LIBOR is greater than or equal to 7.50%, we are
exposed to floating interest rates for that three month period.
21
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, 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 29, 2000 and January 2, 1999, and the results of
their operations and their cash flows for the years ended January 29, 2000,
January 2, 1999 and December 27, 1997 in conformity with accounting principles
generally accepted in the United States. 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. The consolidated
financial statements give retroactive effect to the merger of Fred Meyer, Inc.
on May 27, 1999 in a transaction accounted for as a pooling of interests, as
described in Note 2 to the consolidated financial statements. We did not audit
the financial statements of Fred Meyer, Inc., a wholly-owned subsidiary, as of
January 2, 1999 and for the fiscal years ended January 2, 1999 and December 27,
1997, respectively. Those statements reflect total assets of $10.2 billion as of
January 2, 1999, and sales of $14.9 billion and $7.4 billion for the fiscal
years ended January 2, 1999 and December 27, 1997. 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 these statements in accordance with auditing standards generally
accepted in the United States, 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 report of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 4 to the consolidated financial statements, the
Company changed its application of the LIFO method of accounting for store
inventories as of December 28, 1997.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 9, 2000
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Fred Meyer, Inc.:
We have audited the consolidated balance sheet of Fred Meyer, Inc. and
subsidiaries as of January 30, 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the two
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 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 at January 30, 1999, and
the results of their operations and their cash flows for each of the two fiscal
years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
March 10, 1999
22
<PAGE> 24
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 29, January 2,
(In millions except per share amounts) 2000 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 281 $ 299
Receivables............................................... 622 587
Inventories............................................... 3,938 3,493
Prepaid and other current assets.......................... 690 692
----------- ----------
Total current assets.............................. 5,531 5,071
Property, plant and equipment, net.......................... 8,275 7,220
Goodwill, net............................................... 3,761 3,847
Other assets................................................ 399 503
----------- ----------
Total Assets...................................... $ 17,966 $ 16,641
=========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt......................... $ 536 $ 311
Accounts payable.......................................... 2,867 2,926
Accrued salaries and wages................................ 695 639
Other current liabilities................................. 1,630 1,574
----------- ----------
Total current liabilities......................... 5,728 5,450
Long-term debt.............................................. 8,045 7,848
Other long-term liabilities................................. 1,510 1,426
----------- ----------
Total Liabilities................................. 15,283 14,724
----------- ----------
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 shares authorized and
unissued.................................................. -- --
Common stock, $1 par, 1,000 shares Authorized: 885 shares
issued in 1999 and 876 shares issued in 1998.............. 885 876
Additional paid-in capital.................................. 2,023 1,913
Accumulated earnings (deficit).............................. 232 (421)
Common stock in treasury, at cost, 50 shares in 1999 and 50
shares in 1998............................................ (457) (451)
----------- ----------
Total Shareowners' Equity......................... 2,683 1,917
----------- ----------
Total Liabilities and Shareowners' Equity......... $ 17,966 $ 16,641
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 25
CONSOLIDATED STATEMENT OF INCOME
Years Ended January 29, 2000, January 2, 1999, and December 27, 1997
<TABLE>
<CAPTION>
1999 1998 1997
(In millions, except per share amounts) (52 WEEKS) (53 weeks) (52 weeks)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales....................................................... $ 45,352 $43,082 $33,927
Merchandise costs, including advertising, warehousing, and
transportation............................................ 33,331 32,058 25,468
-------- ------- -------
Gross profit........................................... 12,021 11,024 8,459
Operating, general and administrative....................... 8,244 7,783 6,060
Rent........................................................ 652 619 465
Depreciation and amortization............................... 861 745 576
Goodwill amortization....................................... 100 92 16
Merger related costs........................................ 383 269 --
-------- ------- -------
Operating profit....................................... 1,781 1,516 1,342
Interest expense............................................ 652 645 388
-------- ------- -------
Earnings before income tax expense and extraordinary
loss................................................. 1,129 871 954
Tax expense................................................. 491 377 365
-------- ------- -------
Earnings before extraordinary loss..................... 638 494 589
Extraordinary loss, net of income tax benefit............... (10) (257) (124)
-------- ------- -------
Net earnings........................................... $ 628 $ 237 $ 465
======== ======= =======
Basic earnings per Common share
Earnings before extraordinary loss..................... $ 0.77 $ 0.61 $ 0.82
Extraordinary loss..................................... (0.01) (0.32) (0.17)
-------- ------- -------
Net earnings...................................... $ 0.76 $ 0.29 $ 0.65
======== ======= =======
Average number of common shares used in basic calculation... 829 816 718
Diluted earnings per Common Share
Earnings before extraordinary loss..................... $ 0.74 $ 0.58 $ 0.79
Extraordinary loss..................................... (0.01) (0.30) (0.16)
-------- ------- -------
Net earnings...................................... $ 0.73 $ 0.28 $ 0.63
======== ======= =======
Average number of common shares used in diluted
calculation............................................... 858 851 744
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 26
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended January 29, 2000, January 2, 1999, and December 27, 1997
<TABLE>
<CAPTION>
1999 1998 1997
(In millions) (52 WEEKS) (53 weeks) (52 weeks)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings............................................. $ 628 $ 237 $ 465
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss.................................... 10 257 124
Depreciation.......................................... 861 745 576
Goodwill amortization................................. 100 92 16
Deferred income taxes................................. 308 (49) 81
Other................................................. (9) 101 (16)
Changes in operating assets and liabilities net of
effects from acquisitions of businesses:
Inventories......................................... (271) 86 (198)
Receivables......................................... (66) (56) (76)
Accounts payable.................................... 50 93 65
Other............................................... (53) 332 76
----------- --------- ---------
Net cash provided by operating activities........ 1,558 1,838 1,113
----------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures..................................... (1,701) (1,646) (942)
Proceeds from sale of assets............................. 139 96 104
Payments for acquisitions, net of cash acquired.......... (230) (86) (354)
Other.................................................... (28) 171 14
----------- --------- ---------
Net cash used by investing activities............ (1,820) (1,465) (1,178)
----------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt................. 1,763 5,307 2,520
Reductions in long-term debt............................. (1,469) (5,089) (2,411)
Debt prepayment costs.................................... (2) (308) (127)
Financing charges incurred............................... (11) (118) (33)
Decrease in book overdrafts.............................. (62) (44) (7)
Proceeds from issuance of capital stock.................. 67 122 269
Treasury stock purchases................................. (6) (122) (85)
Other.................................................... -- (5) (8)
----------- --------- ---------
Net cash provided (used) by financing
activities..................................... 280 (257) 118
----------- --------- ---------
Net increase in cash and temporary cash investments........ 18 116 53
Cash and temporary cash investments:
Beginning of year........................................ 263 183 130
----------- --------- ---------
End of year.............................................. $ 281 $ 299 $ 183
=========== ========= =========
Disclosure of cash flow information:
Cash paid during the year for interest................... $ 536 $ 635 $ 402
Cash paid during the year for income taxes............... $ 113 $ 172 $ 199
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired......................... $ 201 $ 2,209 $ 1,986
Goodwill recorded..................................... $ 53 $ 2,389 $ 1,252
Value of stock issued................................. $ -- $ (652) $ (765)
Liabilities assumed................................... $ (19) $ (3,791) $ (2,047)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 27
CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY (DEFICIT)
Years Ended January 29, 2000, January 2, 1999, and December 27, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK ACCUMULATED
--------------- PAID-IN --------------- EARNINGS
(In millions) SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 28, 1996......... 716 $716 $ 181 48 $(314) $(1,123) $ (540)
Issuance of common stock:
Stock options exercised............. 14 14 63 -- -- -- 77
KUI acquisition..................... 4 4 32 -- -- -- 36
Hughes acquisition.................. 20 20 172 -- -- -- 192
Smith's acquisition................. 66 66 654 -- -- -- 720
Other............................... 2 2 11 -- -- -- 13
Treasury stock purchases.............. -- -- -- 6 (85) -- (85)
Tax benefits from exercise of stock
options............................. -- -- 40 -- -- -- 40
Retirement of treasury stock.......... (10) (10) (61) (10) 70 -- (1)
Net earnings.......................... -- -- -- -- -- 465 465
--- ---- ------ --- ----- ------- ------
Balances at December 27, 1997......... 812 812 1,092 44 (329) (658) 917
Issuance of common stock:
Stock options exercised............. 20 20 101 -- -- -- 121
Ralphs acquisition.................. 44 44 609 -- -- -- 653
Other............................... -- -- 10 -- -- -- 10
Treasury stock purchases.............. -- -- -- 6 (122) -- (122)
Tax benefits from exercise of stock
options............................. -- -- 101 -- -- -- 101
Net earnings.......................... -- -- -- -- -- 237 237
--- ---- ------ --- ----- ------- ------
Balances at January 2, 1999........... 876 876 1,913 50 (451) (421) 1,917
Equity changes during transition
period.............................. 1 1 13 -- -- 25 39
Issuance of common stock:
Stock options exercised............. 8 8 69 -- -- -- 77
Treasury stock purchases.............. -- -- -- -- (6) -- (6)
Tax benefits from exercise of stock
options............................. -- -- 28 -- -- -- 28
Net earnings.......................... -- -- -- -- -- 628 628
--- ---- ------ --- ----- ------- ------
Balances at January 29, 2000.......... 885 $885 $2,023 50 $(457) $ 232 $2,683
=== ==== ====== === ===== ======= ======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All 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
Business Combinations). Fred Meyer amounts included in the consolidated
financial statements as of January 2, 1999 and December 27, 1997 and for the two
years ended January 2, 1999 relate to Fred Meyer's fiscal years ended January
30, 1999 and January 31, 1998, respectively. Significant intercompany
transactions and balances have been eliminated.
Transition Period
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. 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. During the transition period we had sales of $2,160, costs and expenses
of $2,135, and net earnings of $25.
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 1999 and 1998 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 $501 at January
29, 2000 and $530 at January 2, 1999.
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 10 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 $861 in 1999, $745 in 1998, and $576
in 1997.
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.
Goodwill
Goodwill is generally being amortized on a straight-line basis over 40
years. Accumulated amortization was approximately $215 at January 29, 2000 and
$115 at January 2, 1999.
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. The fair value is estimated based on
expected discounted future cash flows.
Interest Rate Protection Agreements
The Company uses interest rate swaps, caps, and collars 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.
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 footnote six 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.
Advertising Costs
The Company's advertising costs are expensed as incurred and included in
merchandise costs in the Consolidated Statement of Income. Advertising expenses
amounted to $511 in 1999, $489 in 1998 and $375 in 1997.
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
Income equals comprehensive income.
Consolidated Statement of Cash Flows
For purposes of the 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.
Stock Split
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 and per-share amounts in the accompanying consolidated financial
statements have been retroactively restated to give effect to the stock split.
Segments
The Company operates retail food and drug stores, multi-department stores,
jewelry stores, and convenience stores in the Midwest, South and West. The
Company's retail operations, which represent approximately 98% of consolidated
sales, is its only reportable segment. All of the Company's operations are
domestic.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. BUSINESS COMBINATIONS
On May 27, 1999 Kroger issued 312 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 82 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 44 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 66 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 its indirect 50% interest in Santee Dairy, 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 cash, 20 shares
of common stock, and the assumption of $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, 4 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 form the date of
acquisition.
The accompanying Consolidated Financial Statements reflect the
consolidated results as follows:
<TABLE>
<CAPTION>
Kroger Fred Meyer Consolidated
Historical Historical Company
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Subsequent to Consummation date
Sales..................................................... $ -- $ -- $31,859
Extraordinary loss, net of income tax benefit............. $ -- $ -- $ (10)
Net Earnings.............................................. $ -- $ -- $ 421
Diluted earnings per common share......................... $ -- $ -- $ 0.49
1999
Prior to Consummation date*
Sales..................................................... $ 8,789 $ 4,704 $13,493
Extraordinary loss, net of income tax benefit............. $ -- $ -- $ --
Net Earnings.............................................. $ 176 $ 31 $ 207
Diluted earnings per common share......................... $ 0.33 $ 0.09 $ 0.24
</TABLE>
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Kroger Fred Meyer Consolidated
Historical Historical Company
- ------------------------------------------------------------------------------------------------------
<S> <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......................... $ 0.78 $ (0.55) $ 0.28
1997
Sales..................................................... $26,567 $ 7,360 $33,927
Extraordinary loss, net of income tax benefit............. $ (32) $ (92) $ (124)
Net Earnings.............................................. $ 412 $ 53 $ 465
Diluted earnings per common share......................... $ 0.79 $ 0.24 $ 0.63
</TABLE>
- --------------------------------------------------------------------------------
* The period prior to consummation date represents amounts for the first quarter
ended May 22, 1999, as this was the period ended closest to the consummation
date.
3. MERGER RELATED COSTS AND ONE TIME EXPENSES
MERGER RELATED COSTS
We are continuing 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 administrative integration. Total merger related costs incurred
were $383 in 1999 and $269 in 1998. We did not incur any merger related costs
during 1997.
The following table presents the components of the merger related costs:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation................................ $ 30 $ 16
Systems integration....................................... 85 50
Store conversions......................................... 51 48
Transaction costs......................................... 93 34
Administration integration................................ 19 12
---- ----
278 160
NONCASH ASSET WRITEDOWN
Distribution consolidation................................ -- 29
Systems integration....................................... 3 26
Store conversions......................................... 10 --
Store closures............................................ 4 25
Administration integration................................ 27 3
---- ----
44 83
ACCRUED CHARGES
Distribution consolidation................................ $ 5 $ --
Systems integration....................................... 1 1
Transaction costs......................................... -- 6
Store closures............................................ 8 7
Administration integration................................ 47 12
---- ----
61 26
---- ----
Total merger related costs.................................. $383 $269
==== ====
</TABLE>
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
TOTAL CHARGES
Distribution consolidation................................ $ 35 $ 45
Systems integration....................................... 89 77
Store conversions......................................... 61 48
Transaction costs......................................... 93 40
Store closures............................................ 12 32
Administration integration................................ 93 27
---- ----
Total merger related costs.................................. $383 $269
==== ====
</TABLE>
Distribution Consolidation
Represents costs to consolidate manufacturing and distribution operations
and eliminate duplicate facilities. During 1999, approximately $30 of these
costs was recorded as cash was expended. These costs include approximately $20
of Tolleson warehouse expenses. Severance costs of $5 were accrued during 1999
for distribution employees in Phoenix. The 1998 costs include a $29 writedown to
estimated net realizable value of the Hughes distribution center in Southern
California. The facility was sold in March 2000. The 1998 costs also include $13
for incremental labor incurred during the closing of the distribution center and
other incremental costs incurred as part of the realignment of the Company's
distribution system.
Systems Integration
Represents the costs of integrating systems and the related conversions of
corporate office and store systems. Charges recorded as cash was expended
totaled $85 and $50 in 1999 and 1998, respectively. These costs represent
incremental operating costs, principally labor, during the conversion process,
payments to third parties, and training costs. The 1998 costs include a $26
writedown of computer equipment and related software that has been abandoned and
the depreciation associated with computer equipment at QFC which is being
written off over 18 months at which time it will be abandoned.
Store Conversions
Includes the cost to convert store banners. In 1999, $51 represented cash
expenditures, and $10 represented asset write-offs. In 1998, all costs
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 that were 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 $93 and $40 for 1999 and 1998,
respectively, related primarily to professional fees and employee bonuses
recorded as the cash was expended.
Store Closures
Includes the costs to close stores identified as duplicate facilities and
to sell stores pursuant to settlement agreements. 1999 costs of $8 were accrued
to close seven stores identified as duplicate facilities and to sell three
stores pursuant to a settlement with the Federal Trade Commission ("FTC
Stores"). Included in 1998 amounts were 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 writedown of $25 in 1998
relates to certain California stores. Termination costs totaling $7 were accrued
in 1998.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Administration Integration
This represents $19 of severance and travel and consulting services
related to integration work; $27 of asset write downs including video tapes and
equipment used in the Company's stores; and $47 of accrued expenses. The accrued
expenses include an obligation to make a charitable contribution (within seven
years from the date of the Fred Meyer merger) as required by the merger
agreement, a restricted stock award related to the achievement of expected
merger synergy benefits, and severance costs for certain Fred Meyer executives
who informed the Company of their intention to leave, which have subsequently
been paid.
One-Time Expenses
During 1999, we incurred one-time expenses of $85 associated with costs
related to recent mergers. These expenses are included in merchandise costs,
$58, and operating, general and administrative expenses, $27.
During 1998, we incurred a 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. Additionally,
in the second quarter of 1998, the Company incurred one-time expenses associated
with accounting, data, and operations consolidations in Texas. These included
the costs of closing eight stores and relocating the remaining Dallas office
employees to a smaller facility. These expenses, which included non-cash asset
writedowns, were included in operating, general and administrative expenses.
These expenses include an amount for estimated rent or lease termination costs
that will be paid on closed stores through 2013. The "Other" column in the table
below details the activity for amounts accrued related to these one-time
expenses. The remaining balance at January 29, 2000 represents $2 of idled
warehouse facilities that will be paid through 2001 and $7 of estimated rent or
lease termination costs that will be paid on closed stores through 2013.
A summary of changes in accruals related to various business combinations
and other one-time expenses follows:
<TABLE>
<CAPTION>
FACILITY EMPLOYEE INCENTIVE AWARDS
CLOSURE COSTS SEVERANCE AND CONTRIBUTIONS OTHER
------------- --------- ----------------- -----
<S> <C> <C> <C> <C>
Balance at December 28, 1996................... $ -- $-- $ -- $--
Additions.................................... 23 9 -- --
Payments..................................... (4) (1) -- --
---- --- ---- ---
Balance at December 27, 1997................... 19 8 -- --
Additions.................................... 129 41 -- 35
Payments..................................... (15) (16) -- (16)
Adjustments.................................. -- (3) -- --
---- --- ---- ---
Balance at January 2, 1999..................... 133 30 -- 19
Additions.................................... 8 24 29 --
Payments..................................... (11) (25) -- (10)
---- --- ---- ---
Balance at January 29, 2000.................... $130 $29 $ 29 $ 9
==== === ==== ===
</TABLE>
4. 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
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
$0.07 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.
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
<TABLE>
<CAPTION>
1999 1998
----------------
<S> <C> <C>
Land........................................................ $1,071 $ 979
Buildings and land improvements............................. 2,753 2,479
Equipment................................................... 6,014 5,288
Leasehold improvements...................................... 1,970 1,692
Construction-in-progress.................................... 712 492
Leased property under capital leases........................ 522 468
------ ------
13,042 11,398
Accumulated depreciation and amortization................... (4,767) (4,178)
------ ------
$8,275 $7,220
====== ======
</TABLE>
Accumulated depreciation for leased property under Capital Leases was $195
at January 29, 2000 and $161 at January 2, 1999.
Approximately $258 and $271, original cost, of Property, Plant and
Equipment collateralizes certain mortgage obligations at January 29, 2000 and
January 2, 1999, respectively.
6. TAXES BASED ON INCOME
The provision for taxes based on income consists of:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------
<S> <C> <C> <C>
Federal
Current................................................... $ 134 $ 406 $ 254
Deferred.................................................. 308 (49) 81
----- ----- -----
442 357 335
State and local............................................. 49 20 30
----- ----- -----
491 377 365
Tax benefit from extraordinary loss......................... (6) (162) (77)
----- ----- -----
$ 485 $ 215 $ 288
===== ===== =====
</TABLE>
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of the statutory federal rate and the effective rate
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------
<S> <C> <C> <C>
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 2.9 3.8 2.8
Non-deductible goodwill..................................... 2.7 3.2 0.6
Other, net.................................................. 3.0 1.3 (0.1)
----- ----- -----
43.6% 43.3% 38.3%
===== ===== =====
</TABLE>
The tax effects of significant temporary differences that comprise
deferred tax balances were as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Depreciation.............................................. $ 8 $ 35
Insurance related costs................................... 68 72
Net operating loss carryforwards.......................... 176 138
Other..................................................... 12 107
----- -----
Total current deferred tax assets................. 264 352
----- -----
Current deferred tax liabilities:
Compensation related costs................................ (38) (34)
Inventory related costs................................... (54) (34)
----- -----
Total current deferred tax liabilities............ (92) (68)
----- -----
Current deferred taxes, net included in prepaid and other
current assets............................................ $ 172 $ 284
===== =====
Long-term deferred tax assets:
Compensation related costs................................ $ 148 $ 146
Insurance related costs................................... 86 92
Lease accounting.......................................... 60 58
Net operating loss carryforwards.......................... 178 319
Other..................................................... 40 23
----- -----
512 638
Valuation allowance....................................... (157) (157)
----- -----
Long-term deferred tax assets, net................ 355 481
----- -----
Long-term deferred tax liabilities:
Depreciation.............................................. (465) (407)
----- -----
Total long-term deferred tax liabilities.......... (465) (407)
----- -----
Long-term deferred taxes, net............................... $(110) $ 74
===== =====
</TABLE>
Long-term deferred taxes, net are included in other liabilities at January
29, 2000 and other assets at January 2, 1999.
At January 29, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of $970 which expire from 2004 through 2017. In
addition, the Company had net operating loss carryforwards for state income tax
purposes of $351 which expire from 2000 through 2017. The utilization of certain
of the Company's net operating loss carryforwards may be limited in a given
year.
At January 29, 2000, the Company had federal and state Alternative Minimum
Tax Credit carryforwards of $10 and $2, respectively. In addition, the Company
has Other Federal and State credits of $3 and $14, respectively,
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
which expire from 2000 through 2017. The utilization of certain of the Company's
credits may be limited in a given year.
7. DEBT OBLIGATIONS
Long-term debt consists of:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Senior Credit Facility...................................... $1,362 $3,010
Credit Agreement............................................ 1,459 844
6.34% to 11.25% Senior Notes and Debentures due through
2029...................................................... 4,822 3,475
7.0% to 10.25% mortgages due in varying amounts through
2017...................................................... 473 465
Other....................................................... 465 365
------ ------
Total debt.................................................. 8,581 8,159
Less current portion........................................ 536 311
------ ------
Total long-term debt........................................ $8,045 $7,848
====== ======
</TABLE>
In conjunction with the acquisitions of QFC and Ralphs/Food 4 Less in
March 1998, Fred Meyer entered into new financing arrangements that refinanced a
substantial portion of Fred Meyer's debt. The Senior Credit Facility provides
for a $1,875 five-year revolving credit agreement and a five-year term note.
During 1999, capacity under the term note was permanently reduced by $1,450.
Borrowings under the term note at year-end were $175. All indebtedness under the
Senior Credit Facility is guaranteed by some of the Company's subsidiaries and
collateralized by the stock of those subsidiaries that were guarantors prior to
the Kroger/Fred Meyer merger. The revolving portion of the Senior Credit
Facility is available for general corporate purposes, including the support of
Fred Meyer's commercial paper program. Commitment fees are charged at .20% 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 .425%. At January
29, 2000, the weighted average interest rate on both the five year term note and
the amounts outstanding under the revolving credit facility was 6.52%. 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 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. 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 29, 2000, the Applicable Margin for the 364-Day facility was
.525% and for the Five-Year facility was .475%. The Facility Fee for the 364-Day
facility was .10% and for the Five-Year facility was .15%. The Credit Agreement
contains covenants which among other things, restrict dividends and
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 and changed the covenants
in the Senior Credit Facility to parallel those in the Credit Agreement.
Unrated commercial paper borrowings of $384 and borrowings under money
market lines of $155 at January 29, 2000 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.
All of the Senior Notes and Debentures are subject to early redemption at
varying times and premiums beginning in 2000. In addition, subject to certain
conditions, some of 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 1999 are:
<TABLE>
<S> <C>
2000....................................................... $ 536
2001....................................................... $ 305
2002....................................................... $1,588
2003....................................................... $1,663
2004....................................................... $ 283
</TABLE>
The extraordinary losses in 1999, 1998, and 1997 relate to premiums paid
to retire certain indebtedness early and the write-off of deferred financing
costs.
8. INTEREST RATE PROTECTION PROGRAM
The Company has historically used derivatives to limit its exposure to
rising interest rates. During 1999, as a result of the merger with Fred Meyer,
the nature and magnitude of the Company's debt portfolio changed significantly,
including a permanent reduction in the combined Company's variable rate
borrowings. This fundamental change in the Company's debt portfolio resulted in
the existing derivative portfolio no longer being aligned with the debt
portfolio and prompted the Company to eliminate all existing interest rate swap
and cap agreements, at a cost of $17.
Going forward, the Company's program relative to interest rate protection
primarily contemplates fixing the rates on variable rate debt. To do this, the
Company uses the following guidelines: (i) use average daily bank balance
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 by April of 2000, (iii)
include no leveraged products, and (iv) hedge without regard to profit motive or
sensitivity to current mark-to-market status.
The Company reviews compliance with these guidelines annually with the
Financial Policy Committee of the Board of Directors. In addition, the Company's
internal auditors review compliance with these guidelines on an annual basis.
The guidelines may change as the Company's business needs dictate.
The table below indicates the types of swaps used, their duration, and
their respective interest rates. The variable component of each interest rate
derivative is based on the six month LIBOR using the forward yield curve as of
January 29, 2000.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Receive fixed swaps
Notional amount........................................... $ -- $785
Duration in years......................................... -- 2.0
Average receive rate...................................... -- 6.50%
Average pay rate.......................................... -- 5.30%
Receive variable swaps
Notional amount........................................... $300 $925
Duration in years......................................... 1.9 2.4
Average receive rate...................................... 6.36% 5.57%
Average pay rate.......................................... 6.66% 7.09%
</TABLE>
In addition, as of January 29, 2000, the Company has an interest rate
collar on a notional amount of $300 million with a maturity date of July 24,
2003. Every three months, actual three month LIBOR is reviewed and the collar
has the following impact on the Company for the notional amount.
- If the three month LIBOR is less than or equal to 4.10%, the Company
pays 5.50% for that three month period;
- If the three month LIBOR is greater than 4.10% and less than or equal
to 6.50%, the Company is exposed to floating interest rates for that
three month period;
- If the three month LIBOR is greater than 6.50% and less than 7.50%,
the Company pays 6.50%; and
- If the three month LIBOR is greater than or equal to 7.50%, the
Company is exposed to floating interest rates for that three month
period.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value:
Cash, Receivables, Prepaid and Other Current Assets, Other Long-term Assets,
Accounts Payable, Accrued Salaries and Wages, Other Current Liabilities, and
Other Long-term Liabilities
The carrying amounts of these items approximate fair value.
Long-term Investments
The fair values of these investments are estimated based on quoted market
prices for those or similar investments.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 carrying value of $2,821 of long-term debt outstanding under
the Company's Credit Agreement and Senior Credit Facility approximates fair
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-end.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
ESTIMATED Estimated
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term investments for which it is
Practicable............................... $ 100 $ 103 $ 96 $ 97
Not Practicable........................... $ 4 -- $ 9 $ --
Long-term debt for which it is
Practicable............................... $ (7,904) $ (7,752) $ (7,687) $ (7,973)
Not Practicable........................... $ (677) -- $ (472) $ --
Interest Rate Protection Agreements
Receive fixed swaps....................... $ -- $ 2 $ -- $ 22
Receive variable swaps.................... -- -- -- (43)
Interest rate collar...................... -- 1 -- (6)
---------- ---------- ---------- ----------
$ -- $ 3 $ -- $ (27)
========== ========== ========== ==========
</TABLE>
The use of different assumptions 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.
10. LEASES
The Company operates primarily in leased facilities. Lease terms generally
range from 10 to 25 years with options to renew for 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
from one to 20 years.
Rent expense (under operating leases) consists of:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals............................................. $ 731 $ 683 $ 515
Contingent payments......................................... 15 18 14
Sublease income............................................. (94) (82) (64)
-------- -------- --------
$ 652 $ 619 $ 465
======== ======== ========
</TABLE>
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Minimum annual rentals for the five years subsequent to 1999 and in the
aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................................ $ 85 $ 741
2001........................................................ 73 701
2002........................................................ 67 672
2003........................................................ 63 609
2004........................................................ 59 575
Thereafter.................................................. 556 5,220
---- ------
903 $8,518
======
Less estimated executory costs included in capital leases... 14
----
Net minimum lease payments under capital leases............. 889
Less amount representing interest........................... 461
----
Present value of net minimum lease payments under capital
leases.................................................... $428
====
</TABLE>
Total future minimum rentals under noncancellable subleases at January 29,
2000 were $452.
The current and long-term portions of obligations under capital leases are
included in other current liabilities and other long-term liabilities on the
balance sheet.
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 29, 2000, the Company had utilized $462 of the
facility, which matures March 2003.
11. 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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED For the year ended For the year ended
JANUARY 29, 2000 January 2, 1999 December 27, 1997
---------------------------- --------------------------- ---------------------------
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 EPS..................... $ 638 829 $0.77 $494 816 $0.61 $589 718 $0.82
Dilutive effect of stock
option awards............... 29 35 26
-------- ------- ---- --- ---- ---
Diluted EPS................... $ 638 858 $0.74 $494 851 $0.58 $589 744 $0.79
======== ======= ==== === ==== ===
</TABLE>
At January 29, 2000, there were options outstanding for approximately 18.2
shares of common stock that were excluded from the computation of diluted EPS.
These shares were excluded because their inclusion would have had an
antidilutive effect on EPS. There were no items that would have had an
antidilutive effect at January 2, 1999 or December 27, 1997.
On May 20, 1999, the Company announced 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.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. 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 one-thousand
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 29, 2000, 21.6 shares of common stock were
available for future options. Options generally will expire 10 years from the
date of grant. 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 grant. All grants outstanding 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 1996.................................. 71.6 $ 6.21
Granted..................................................... 16.6 $12.84
Options of an acquired company.............................. 3.0 $ 3.67
Exercised................................................... (14.6) $ 5.17
Canceled or expired......................................... (1.0) $ 6.46
-----
Outstanding, year-end 1997.................................. 75.6 $ 7.75
Granted..................................................... 10.0 $20.55
Exercised................................................... (19.0) $ 6.30
Canceled or expired......................................... (1.0) $13.63
-----
Outstanding, year-end 1998.................................. 65.6 $10.20
Exercised during transition period.......................... (1.0) $ 6.16
Granted..................................................... 11.3 $26.97
Exercised................................................... (7.3) $ 9.19
Canceled or Expired......................................... (2.6) $19.76
-----
Outstanding, year-end 1999.................................. 66.0 $12.75
=====
</TABLE>
A summary of options outstanding and exercisable at January 29, 2000
follows:
<TABLE>
<CAPTION>
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>
$ 2.91 - $ 5.86 17.8 2.76 $ 4.96 17.7 $ 4.96
$ 5.92 - $10.38 20.7 5.98 $ 8.39 19.5 $ 8.39
$10.46 - $17.97 11.2 7.56 $14.73 5.9 $14.14
$18.23 - $25.03 6.1 8.27 $22.30 1.8 $22.25
$26.45 - $31.91 10.2 9.30 $27.20 0.1 $27.24
---- ----
$ 2.91 - $31.91 66.0 6.11 $12.75 45.0 $ 8.37
==== ====
</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
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
ACTUAL PRO FORMA Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings................................ $ 628 $ 590 $ 237 $ 195 $ 465 $ 425
Diluted earnings per common share........... $0.73 $0.69 $0.28 $0.23 $0.63 $0.57
</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 shown in the table below. 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>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Kroger
- ------
Weighted average expected volatility (based on historical
volatility)............................................... 26.23% 26.60% 24.00%
Weighted average risk-free interest rate.................... 6.64% 4.60% 5.70%
Expected term............................................... 8.0 YEARS 7.8 years 5.4 years
Fred Meyer
- ----------
Weighted average expected volatility (based on historical
volatility)............................................... N/A 39.37% 33.67%
Weighted average risk-free interest rate.................... N/A 5.32% 6.10%
Expected term............................................... N/A 5.0 years 5.0 years
QFC
- ---
Weighted average expected volatility (based on historical
volatility)............................................... N/A n/a 43.50%
Weighted average risk-free interest rate.................... N/A n/a 5.50%
Expected term............................................... N/A n/a 5.0 years
</TABLE>
The weighted average fair value of options granted during 1999, 1998, and
1997 was $12.93, $9.87, and $5.86, respectively.
13. 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.
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 indirectly owns a 50% interest in the
Santee Dairy ("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 engaged in efforts to dispose of its interest
in Santee, which may result in a loss.
14. WARRANT DIVIDEND PLAN
On February 28, 1986, the Company 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 and further amended on October
18, 1998. 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 one ten-thousandth of a share. The rights will become
exercisable, and separately tradable, 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 earnings 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 $0.01 per right. The rights are subject to adjustment and
expire March 19, 2006.
15. BENEFIT PLANS
The Company administers non-contributory defined benefit retirement plans
for substantially all 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.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 follow:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 1,192 $ 990 $ 272 $ 255
Change in benefit obligation during transition period....... 4 -- 1 --
Addition to benefit obligation from acquisitions............ -- 94 -- 16
Service cost................................................ 37 37 11 9
Interest cost............................................... 82 77 19 18
Plan participants' contributions............................ -- -- 4 4
Amendments.................................................. 15 -- 4 (11)
Actuarial loss (gain)....................................... (140) 51 (39) 15
Settlements................................................. (2) -- -- --
Curtailment credit.......................................... (2) -- (7) (17)
Benefits paid............................................... (58) (57) (12) (17)
------- ------- ------- -------
Benefit obligation at end of year........................... $ 1,128 $ 1,192 $ 253 $ 272
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 1,375 $ 1,153 $ -- $ --
Change in fair value of plan assets during transition
period.................................................... 15 -- -- --
Addition to plan assets from acquisitions................... -- 63 -- --
Actual return on plan assets................................ 57 205 6 --
Employer contribution....................................... 4 11 5 13
Plan participants' contributions............................ -- -- 1 4
Benefits paid............................................... (58) (57) (12) (17)
------- ------- ------- -------
Fair value of plan assets at end of year.................... $ 1,393 $ 1,375 $ -- $ --
======= ======= ======= =======
</TABLE>
Pension plan assets include $121 and $167 of common stock of The Kroger Co. at
January 29, 2000 and January 2, 1999, respectively.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET AMOUNT RECOGNIZED AT END OF YEAR:
Funded status at end of year................................ $ 265 $ 183 $ (253) $ (272)
Unrecognized actuarial gain................................. (307) (204) (81) (35)
Unrecognized prior service cost............................. 33 19 (17) (31)
Unrecognized net transition asset........................... (5) (5) $ 1 $ 1
------- ------- ------- -------
Net amount recognized at end of year........................ $ (14) $ (7) $ (350) $ (337)
======= ======= ======= =======
Prepaid benefit cost........................................ $ 33 $ 48 $ -- $ --
Accrued benefit liability................................... (47) (55) (350) (337)
------- ------- ------- -------
$ (14) $ (7) $ (350) $ (337)
======= ======= ======= =======
</TABLE>
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate............................................... 8.00% 6.75% 8.00% 6.75%
Expected return on plan assets.............................. 9.50% 9.50%
Rate of compensation increase............................... 4.50% 3.25% 4.50% 3.25%
</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.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost....................................... $ 37 $ 37 $ 28 $ 11 $ 9 $ 10
Interest cost...................................... 82 77 69 19 18 20
Expected return on plan assets..................... (109) (98) (82) -- -- --
Amortization of:
Transition asset.............................. (1) -- (9) -- -- --
Prior service cost............................ 4 2 2 (3) (3) (1)
Actuarial (gain) loss......................... -- 1 -- -- (1) (1)
Curtailment credit................................. (2) -- -- (7) (17) --
---- ---- ---- ---- ---- ----
Net periodic benefit cost.......................... $ 11 $ 19 $ 8 $ 20 $ 6 $ 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 $185
and $140 at January 29, 2000 and $123 and $69 at January 2, 1999.
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................. 26 (22)
</TABLE>
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1999, 1998, and 1997
was $46, $40, and $32, 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 for 1999, 1998, and 1997 were $121, $133, and $119,
respectively.
16. 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 provided for annual management fees of $0.5 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/Fred Meyer merger (see note 2).
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Yucaipa holds a warrant for the purchase of up to 7.8 million shares of
Common Stock at an exercise price of $11.91 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.
17. 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. As a result, implementation of this
standard is not mandatory for the Company until February 4, 2001. Based on the
Company's current portfolio, management expects that the adoption of this
standard will not have a material impact on the financial statements. Management
will continue to evaluate the impact this standard will have as the Company's
portfolio changes.
In 1999, the Company adopted Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
SOP requires that certain external costs and internal payroll and payroll
related costs be capitalized. The adoption of this accounting standard did not
have a material impact on the financial statements.
In 1999, the Company adopted SOP 98-5 "Reporting on the Costs of Start-up
Activities." The SOP requires that entities expense start-up as incurred. The
adoption of this accounting standard did not have a material impact on the
financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation." This standard becomes effective July 1, 2000. We expect that the
adoption of the standard will not have a material impact on the financial
statements.
18. SUBSEQUENT EVENTS
On February 2, 2000, the Company filed a Registration Statement on form
S-3 with the Securities and Exchange Commission. This Registration Statement
permits the Company to issue up to $1.725 billion of securities, of which amount
$1.225 billion remains unissued.
The Board of Directors approved a $750 common stock repurchase program, on
March 31, 2000. This repurchase program replaces the $100 program authorized in
January of 2000.
19. GUARANTOR SUBSIDIARIES
The Company's outstanding public debt (the "Guaranteed Notes") is jointly
and severally, fully and unconditionally guaranteed by certain Kroger
subsidiaries (the "Guarantor Subsidiaries"). At January 29, 2000 a total of
approximately $5.1 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.
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
January 29, 2000 and January 2, 1999, and for the three years ended January 29,
2000.
Summarized financial information as of January 29, 2000 and the year then
ended:
<TABLE>
<CAPTION>
GUARANTOR
KROGER SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets.................................. $ 578 $ 4,953 $ -- $ 5,531
Non-current assets.............................. $11,652 $11,180 $(10,397) $12,435
Current liabilities............................. $ 1,109 $ 4,619 $ -- $ 5,728
Non-current liabilities......................... $ 8,437 $ 1,118 $ -- $ 9,555
Sales........................................... $ 6,333 $39,617 $ (598) $45,352
Gross profit.................................... $ 1,250 $10,821 $ (50) $12,021
Operating profit................................ $ 31 $ 1,750 $ -- $ 1,781
Net earnings.................................... $ 628 $ 1,002 $ (1,002) $ 628
</TABLE>
Summarized financial information as of January 2, 1999 and for the year
then ended:
<TABLE>
<CAPTION>
GUARANTOR
KROGER SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Sales........................................... $ 8,849 $34,845 $ (612) $43,082
Gross profit.................................... $ 1,566 $ 9,543 $ (85) $11,024
Operating profit................................ $ (94) $ 1,610 $ -- $ 1,516
Net earnings.................................... $ 237 $ 453 $ (453) $ 237
</TABLE>
Summarized financial information for the year ended December 27, 1997:
<TABLE>
<CAPTION>
GUARANTOR
KROGER SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales........................................... $ 8,220 $26,299 $ (592) $33,927
Gross profit.................................... $ 1,604 $ 6,957 $ (102) $ 8,459
Operating profit................................ $ 114 $ 1,228 $ -- $ 1,342
Net earnings.................................... $ 465 $ 566 $ (566) $ 465
</TABLE>
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
20. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
1999 (16 WEEKS) (12 WEEKS) (12 WEEKS) (12 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES......................................... $13,493 $10,289 $10,329 $11,241 $45,352
GROSS PROFIT.................................. $ 3,531 $ 2,699 $ 2,723 $ 3,068 $12,021
EARNINGS BEFORE EXTRAORDINARY ITEMS........... $ 207 $ 56 $ 129 $ 246 $ 638
EXTRAORDINARY LOSS............................ $ -- $ (10) $ -- $ -- $ (10)
NET EARNINGS.................................. $ 207 $ 46 $ 129 $ 246 $ 628
NET EARNINGS PER COMMON SHARE:
EARNINGS BEFORE EXTRAORDINARY LOSS....... $ 0.25 $ 0.07 $ 0.16 $ 0.29 $ 0.77
EXTRAORDINARY LOSS....................... -- (0.01) -- -- (0.01)
------- ------- ------- ------- -------
BASIC NET EARNINGS PER COMMON SHARE........... $ 0.25 $ 0.06 $ 0.16 $ 0.29 $ 0.76
DILUTED EARNINGS PER COMMON SHARE:
EARNINGS BEFORE EXTRAORDINARY LOSS....... $ 0.24 $ 0.06 $ 0.15 $ 0.29 $ 0.74
EXTRAORDINARY LOSS....................... -- (0.01) -- -- (0.01)
------- ------- ------- ------- -------
DILUTED NET EARNINGS PER COMMON SHARE......... $ 0.24 $ 0.05 $ 0.15 $ 0.29 $ 0.73
</TABLE>
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------
First Second Third Fourth Total Year
1998 (12 weeks) (12 weeks) (16 weeks) (13 weeks) (53 weeks)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales.......................................... $10,429 $ 9,947 $11,501 $11,205 $43,082
Gross Profit................................... $ 2,590 $ 2,553 $ 2,949 $ 2,932 $11,024
Earnings before extraordinary items............ $ (20) $ 100 $ 151 $ 263 $ 494
Extraordinary loss............................. $ (221) $ (1) $ (7) $ (28) $ (257)
Net earnings................................... $ (241) $ 99 $ 144 $ 235 $ 237
Net earning per common share:
Earnings before extraordinary loss........ $ (0.02) $ 0.12 $ 0.18 $ 0.33 $ 0.61
Extraordinary loss........................ (0.28) -- (0.01) (0.03) (0.32)
------- ------- ------- ------- -------
Basic net earnings per common share............ $ (0.30) $ 0.12 $ 0.17 $ 0.30 $ 0.29
Diluted earnings per common share:
Earnings before extraordinary loss........ $ (0.02) $ 0.12 $ 0.18 $ 0.30 $ 0.58
Extraordinary loss........................ (0.28) -- (0.01) (0.01) (0.30)
------- ------- ------- ------- -------
Diluted net earnings per common share.......... $ (0.30) $ 0.12 $ 0.17 $ 0.29 $ 0.28
</TABLE>
Quarterly amounts for the 1st quarter of 1999 and all four quarters of
1998 do not match amounts previously filed on the respective Forms 10-Q as the
amounts above reflect a business combination accounted for as a pooling of
interests (See note 2 of the financial statements).
46
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is set forth in Item
No. 1, Election of Directors, of the definitive proxy statement to be filed by
the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of the copies of all Section 16(a) forms received by
the Company, or written representations from certain persons that no Forms 5
were required for those persons, the Company believes that during fiscal year
1999 all filing requirements applicable to its officers, directors and ten
percent beneficial owners were timely satisfied except that Mr. Geoffrey Covert
filed a Form 4 reporting the sale of 1,700 shares of stock that inadvertently
was not reported on a prior Form 4 during 1999, Mr. Warren Bryant filed a Form 5
reporting the purchase of 3,000 shares of stock that inadvertently was not
reported on a Form 4 during 1999, and Mr. John L. Clendenin filed a Form 5
reporting the exercise of three stock options aggregating 24,000 shares of stock
and the acquisition of the underlying securities that inadvertently were not
reported on a Form 4 during 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the names and ages of the executive officers and the
positions held by each such person or those chosen to become executive officers
as of March 6, 2000. Except as otherwise noted below, each person has held
office for at least five years and was elected to that office at the 1999
Organizational Meeting of the Board of Directors held May 20, 2000. Each officer
will hold office at the discretion of the Board for the ensuing year until
removed or replaced.
<TABLE>
<CAPTION>
Recent
Name Age Employment History
<S> <C> <C>
Donald E. Becker 50 Mr. Becker was promoted to
Senior Vice President
effective January 26, 2000.
Prior to his election, Mr.
Becker was appointed
President of the Company's
Central Marketing Area in
1996. Before this, Mr.
Becker served in a number
of key management positions
in the Company's
Cincinnati/Dayton Marketing
Area, including Vice
President of Operations and
Vice President of
Merchandising. He joined
the Company in 1969.
Warren F. Bryant 54 Mr. Bryant was promoted to
Senior Vice President of
The Kroger Co. in January
1999. He was elected
President and Chief
Executive Officer of Dillon
Companies, Inc., a
subsidiary of the Company,
effective September 1,
1996. Prior to this Mr.
Bryant was elected
President and Chief
Operating Officer of Dillon
Companies, Inc. on June 18,
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C> <C>
1995, Senior Vice President
of Dillon Companies, Inc.
on May 1, 1993, and Vice
President of Dillon
Companies, Inc. on March 1,
1990. Before this, he
served as Vice President of
Marketing, Dillon Stores
Division, from June 1988
until March 1990, and in a
number of key management
positions with the Company,
including Director of
Merchandising for the
Mid-Atlantic Marketing Area
and Director of Operations
for the Charleston, West
Virginia division of the
Mid-Atlantic Marketing
Area. Mr. Bryant joined the
Company in 1964.
Geoffrey J. Covert 48 Mr. Covert was promoted to
Senior Vice President
effective April 25, 1999.
Prior to that he was Group
Vice President and
President of Kroger
Manufacturing effective
April 19, 1998. Mr. Covert
joined the Company and was
appointed Vice President,
Grocery Products Group, on
March 18, 1996. Prior to
joining the Company, he had
23 years of service with
Procter & Gamble. In his
last role with Procter &
Gamble, Mr. Covert was
responsible for
Manufacturing Purchasing,
Customer Service/Logistics,
Engineering, Human
Resources, and Contract
Manufacturing for Procter
& Gamble's Hard Surface
Cleaner business for North
America.
Terry L. Cox 58 Mr. Cox was promoted to
Group Vice President -
Drug/GM Merchandising and
Procurement effective April
25, 1999. He was promoted
to Vice President, Drug/GM
Merchandising in December
1989. Prior to that Mr. Cox
served as President of
Peyton's, Inc., Kroger's
drug and general
merchandise procurement and
distribution division, and
as Director of Marketing in
the Company's Grocery
Merchandising Department.
He joined Kroger in 1962.
David B. Dillon 48 Mr. Dillon was named
President and Chief
Operating Officer effective
January 26, 2000. Upon the
merger with Fred Meyer,
Inc., he was named
President of the combined
Company. Prior thereto, Mr.
Dillon was elected
President and Chief
Operating Officer of Kroger
effective June 18, 1995.
Prior to this he was
elected Executive Vice
President of Kroger on
September 13, 1990,
Chairman of the Board of
Dillon Companies, Inc. on
September 8, 1992, and
President of Dillon
Companies, Inc. on April
22, 1986. Before his
election he was appointed
President of Dillon
Companies, Inc.
Paul W. Heldman 48 Mr. Heldman was elected
Senior Vice President
effective October 5, 1997,
Secretary on May 21, 1992,
and Vice President and
General Counsel effective
June 18, 1989. Prior to his
election Mr. Heldman held
various positions in the
Company's Law Department.
He joined the Company in
1982.
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C> <C>
Michael S. Heschel 58 Mr. Heschel was elected
Executive Vice President
effective June 18, 1995.
Prior to this he was
elected Senior Vice
President - Information
Systems and Services
on February 10, 1994, and
Group Vice President -
Management Information
Services on July 18, 1991.
Before this Mr. Heschel
served as Chairman and
Chief Executive Officer of
Security Pacific Automation
Company. From 1985 to 1990
he was Vice President of
Baxter International, Inc.
Carver L. Johnson 50 Mr. Johnson joined the
Company as Group Vice
President of Management
Information Systems in
December 1999. Prior to
joining the Company, he
served as Vice President
and Chief Information
Officer of Gymboree. From
1993 to 1998, Mr. Johnson
was Senior Systems Director
of Corporate Services for
Sears, Roebuck & Co. He
previously held management
positions with Jamesway
Corp., Linens 'n Things,
and Pay 'n Save Stores,
Inc.
Lynn Marmer 47 Ms. Marmer was elected
Group Vice President
effective January 19, 1998.
Prior to her election, Ms.
Marmer was an attorney in
the Company's Law
Department. Ms. Marmer
joined the Company in 1997.
Before joining the Company
she was a partner in the
law firm of Dinsmore &
Shohl.
Don W. McGeorge 45 Mr. McGeorge was promoted
to Executive Vice President
effective January 26, 2000.
Prior to that he was
elected Senior Vice
President effective August
10, 1997. Before his
election, Mr. McGeorge was
President of the Company's
Columbus Marketing Area
effective December 29,
1996; and prior thereto
President of the Company's
Michigan Marketing Area
effective June 20, 1993.
Before this he served in a
number of key management
positions with the Company,
including Vice President of
Merchandising of the
Company's Nashville
Marketing Area. Mr.
McGeorge joined the Company
in 1977.
W. Rodney McMullen 39 Mr. McMullen was named
Executive Vice President -
Strategy, Planning and
Finance effective January
26, 2000. Prior to that he
was elected Executive Vice
President and Chief
Financial Officer on May
20, 1999, and elected
Senior Vice President
effective October 5, 1997,
and Group Vice President
and Chief Financial Officer
effective June 18, 1995.
Before that he was
appointed Vice President-
Control and Financial
Services on March 4,
1993, and Vice President,
Planning and Capital
Management effective
December 31, 1989.
Mr. McMullen joined
the Company in 1978 as a
part-time stock clerk.
Derrick A. Penick 44 Mr. Penick was promoted to
Group Vice President,
Perishables Merchandising
and Procurement effective
April 25, 1999. Prior to
that he was appointed Vice
President Corporate
Meat/Seafood/Deli
Merchandising and
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
<S> <C> <C>
Procurement in 1996; and
Vice President,
Merchandising in the Dallas
Marketing Area in 1993.
Before that Mr. Penick held
various management
positions in meat and deli
merchandising as well as
operations since joining
Kroger in 1974.
Joseph A. Pichler 60 Mr. Pichler was elected
Chairman of the Board on
September 13, 1990, and
Chief Executive Officer
effective June 17, 1990.
Prior to this he was
elected President and Chief
Operating Officer on
October 24, 1986, and
Executive Vice President on
July 16, 1985. Mr. Pichler
joined Dillon Companies,
Inc. in 1980 as Executive
Vice President and was
elected President of Dillon
Companies, Inc. in 1982.
J. Michael Schlotman 42 Mr. Schlotman was promoted
to Group Vice President and
Chief Financial Officer
effective January 26, 2000.
Prior to that he was
appointed Vice President,
Financial Services and
Control in 1995, and served
in various positions in
corporate accounting since
joining Kroger in 1985.
James R. Thorne 53 Mr. Thorne was elected
Senior Vice President
effective June 18, 1995.
Prior to his election he
was appointed President of
the Company's Mid-Atlantic
Marketing Area in 1993.
Before this Mr. Thorne
served in a number of key
management positions in the
Mid-Atlantic Marketing
Area, including Advertising
Manager, Zone Manager,
Director of Operations, and
Vice President-
Merchandising. He joined
the Company in 1966
as a part-time grocery
clerk.
Felicia Thornton 36 Ms. Thornton was named
Group Vice President of
Retail Operations effective
March 12, 2000. She
previously served as Group
Vice President of Finance
and Administration and also
as Vice President of
Administration with Ralphs
Grocery Co., a wholly-owned
subsidiary of the Company.
During her seven years at
Ralphs, Ms. Thornton held a
series of management
positions in corporate
planning, strategic
projects, accounting and
administration.
Lawrence M. Turner 52 Mr. Turner was elected Vice
President on December 5,
1986. He was elected
Treasurer on December 2,
1984. Mr. Turner has been
with the Company since
1974.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the section entitled
Compensation of Executive Officers in the definitive proxy statement to be filed
by the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<PAGE> 52
The information required by this item is set forth in the tabulation of the
amount and nature of Beneficial Ownership of the Company's securities in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section entitled
Information Concerning The Board Of Directors - Certain Transactions in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet as of January 29, 2000 and January 2, 1999
Consolidated Statement of Income for the years ended January 29, 2000,
January 2, 1999, and December 27, 1997
Consolidated Statement of Cash Flows for the years ended January 29,
2000 and January 2, 1999
Consolidated Statement of Changes in Shareowners' Equity (Deficit)
Notes to Consolidated Financial Statements
Financial Statement Schedules:
There are no Financial Statement Schedules included with this filing for
the reason that they are not applicable or are not required or the
information is included in the financial statements or notes thereto
(b) Reports on Form 8-K:
On December 6, 1999, The Kroger Co. filed a Current Report on Form 8-K
with the SEC disclosing its earnings release for the third quarter 1999,
disclosing the text of prepared remarks for an investor conference call
on December 6, 1999, disclosing identical store sales increases thus far
for the fourth quarter, and disclosing a revision in its estimate of
what combined sales and earnings per share for the third and fourth
quarters 1998 would have been taking into account the merger with Fred
Meyer and the change in its fiscal year.
On January 12, 2000, The Kroger Co. filed a Current Report on Form 8-K
with the SEC disclosing its reaffirmation of its earnings per share
estimate for fourth quarter 1999, of its estimated earnings per share
growth rate for 2000-2002, and of its expected combined synergy savings
from the Kroger/Fred Meyer merger and prior Fred Meyer mergers. In that
same Current Report, Kroger disclosed adjustments to sales and earnings
per share estimates for fourth quarter 1998, adjusting for the 53rd week
calendar in 1998 for pre-merger Kroger, and normalization of Ralphs'
depreciation and amortization during the fourth quarter of 1998. It also
disclosed its best estimates of reasonable assumptions to be used for
2000 by analysts in completing models. Finally, it filed as an exhibit
to the Current Report detailed income statements year-to-date.
(c) Exhibits
3.1 Amended Articles of Incorporation of The Kroger Co.
are incorporated by reference to Exhibit 3.1 of The
Kroger Co.'s Quarterly Report on Form 10-Q for the
quarter ended
<PAGE> 53
October 3, 1998. The Kroger Co.'s Regulations are
incorporated by reference to Exhibit 4.2 of The
Kroger Co.'s Registration Statement on Form S-3
(Registration No. 33-57552) filed with the SEC on
January 28, 1993.
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.
10.1 Material Contracts - Third Amended and Restated
Employment Agreement dated as of July 22, 1993,
between the Company and Joseph A. Pichler is hereby
incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended October 9,
1993.
10.2 Non-Employee Directors' Deferred Compensation Plan.
Incorporated by reference to Appendix J to Exhibit
99.1 of Fred Meyer, Inc.'s Current Report on Form 8-K
dated September 9, 1997, SEC File No. 1-13339.
10.3 Yucaipa Warrant Agreement. Incorporated by reference
to Exhibit 10.3 of Smith's Food & Drug Centers,
Inc.'s Registration Statement on Form S-3, No.
333-14953, filed on October 28, 1996. Supplemental
Warrant, dated as of September 9, 1997, among Fred
Meyer, Inc. (formerly Meyer-Smith Holdco, Inc.) and
the Yucaipa Companies. Incorporated by reference to
Exhibit 10.3 of Fred Meyer, Inc.'s Form 10-Q for the
quarter ended November 8, 1997, SEC File No. 1-13339.
Second Supplemental Warrant, dated as of May 27,
1999, between The Kroger Co. and the Yucaipa
Companies.
12.1 Statement of Computation of Ratio of Earnings to
Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
23.2 Consent of Independent Public Accountants.
23.3 Consent of Independent Public Accountants.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
99.1 Annual Reports on Form 11-K for The Kroger Co.
Savings Plan and the Dillon Companies, Inc. Employee
Stock Ownership Plan and Trust for the Year 1999.
99.2 Annual Report on Form 11-K for the Fred Meyer, Inc.
401(k) Savings Plan for the Plan Year ended March 31,
2000 will be filed by amendment on or before
September 27, 2000.
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE KROGER CO.
<TABLE>
<CAPTION>
<S> <C> <C>
Dated: April 27, 2000 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: April 27, 2000 By (*J. Michael Schlotman)
J. Michael Schlotman
Group Vice President and
Chief Financial Officer
Dated: April 27, 2000 By (*M. Elizabeth Van Oflen)
M. Elizabeth Van Oflen
Vice President & Corporate Controller
and Principal Accounting Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on the 27th day of April, 2000.
<TABLE>
<CAPTION>
<S> <C>
(*Reuben V. Anderson) Director
Reuben V. Anderson
(*Robert D. Beyer) Director
Robert D. Beyer
(*Ronald W. Burkle) Director
Ronald W. Burkle
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
<S> <C>
(*Carlton J. Jenkins) Director
Carlton J. Jenkins
(*Bruce Karatz) Director
Bruce Karatz
(*John T. LaMacchia) Director
John T. LaMacchia
________________________ Director
Edward M. Liddy
(*Clyde R. Moore) Director
Clyde R. Moore
(*T. Ballard Morton, Jr.) Director
T. Ballard Morton, Jr.
(*Thomas H. O'Leary) Director
Thomas H. O'Leary
(*Katherine D. Ortega) Director
Katherine D. Ortega
(*Joseph A. Pichler) Chairman of the Board of
Joseph A. Pichler Directors, Chief Executive
Officer, and Director
(*Steven R. Rogel) Director
Steven R. Rogel
________________________ Director
Martha Romayne Seger
(*Bobby S. Shackouls) Director
Bobby S. Shackouls
(*James D. Woods) Director
James D. Woods
</TABLE>
*By: (Bruce M. Gack)
Bruce M. Gack
Attorney-in-fact
<PAGE> 1
Exhibit 10.3
SECOND SUPPLEMENTAL WARRANT AGREEMENT
SECOND SUPPLEMENTAL WARRANT AGREEMENT (the "Agreement") dated as of
May 27, 1999, between THE KROGER CO., an Ohio corporation (the "Company"), and
THE YUCAIPA COMPANIES, a California general partnership, or its registered
permitted assigns (the "Consultant").
WHEREAS, Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"), has
become a wholly-owned subsidiary of the Company as a result of the transactions
(collectively, the "Merger") contemplated in the Agreement and Plan of Merger
dated as of October 18, 1998 (the "Merger Agreement") by and between the
Company, Jobsite Holdings, Inc., a Delaware corporation, and Fred Meyer.
WHEREAS, Smith's Food and Drug Centers, Inc., a Delaware corporation
("Smith's"), became a wholly-owned subsidiary of Fred Meyer as a result of the
transaction (the "Smith's Merger") contemplated in the Agreement and Plan of
Reorganization and Merger dated as of May 11, 1997, between Smith's and FM
Stores, Inc., a Delaware corporation and predecessor to Fred Meyer.
WHEREAS, prior to the effective date of the Smith's Merger, Smith's was a
party to a Warrant Agreement dated May 23, 1996 (the "Warrant Agreement")
between Smith's and the Consultant pursuant to which Smith's issued 1,842,555
warrants to purchase an aggregate of 1,842,555 shares of Class C Common Stock,
$.01 par value per share, of Smith's.
WHEREAS, upon consummation of the Smith's Merger, the Warrant Agreement
was supplemented pursuant to its terms and Fred Meyer became a party to a
Supplemental Warrant Agreement dated September 9, 1997 (the "First Supplement")
between Fred Meyer and the Consultant pursuant to which Fred Meyer issued
3,869,366 warrants to purchase an aggregate of 3,869,366 shares of common
stock, $.01 par value per share, of Fred Meyer (as adjusted to account for a
2-for-1 stock split subsequent to the effective date of the First Supplement).
Defined terms used herein and not otherwise defined herein have the meanings
set forth in the Warrant Agreement as supplemented by the First Supplement.
WHEREAS, pursuant to the terms of the Merger Agreement, the Warrant
Agreement and the First Supplement, the Company is required to enter into a
supplemental warrant agreement to provide for the issuance of common stock
("Common Stock") of the Company upon exercise of the warrants subject to the
Warrant Agreement and the First Supplement.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth in this Agreement, the Warrant Agreement, the First Supplement and
the Merger Agreement, the parties hereto agree as follows:
SECTION 1. The Warrant Agreement, as supplemented by the First Supplement,
is hereby amended such that, unless the context requires otherwise, the
following defined terms contained therein shall have the meanings set forth
below:
(a) "Common Stock" shall mean and refer to the Common Stock of the
Company.
(b) "Company" shall mean and refer to The Kroger Co., an Ohio
corporation.
(c) "Holder(s)" shall mean and refer to the registered holder(s) of
the Warrant Certificates or the New Warrant Certificates, as defined below.
(d) "Merger Agreement" shall mean and refer to the Agreement and Plan
of Merger dated as of October 18, 1998, by and between the Company, Jobsite
Holdings, Inc. and Fred Meyer.
(e) "Warrant Shares" shall mean and refer to the Common Stock of the
Company issuable upon exercise of the Warrants.
(f) "Warrants" shall mean and refer to the 3,869,366 warrants, as
described herein, in the First Supplement and in the Warrant Agreement, to
purchase an aggregate of 3,869,366 shares (subject to adjustment) of Common
Stock of the Company, pursuant hereto and pursuant to the Merger Agreement.
SECTION 2. Subject to the terms and conditions of the Warrant Agreement
and the First Supplement, the Company shall issue shares of its Common Stock as
set forth in Section 3 hereof to Holders of Warrants upon exercise of such
Warrants.
SECTION 3. The Warrants shall be exercisable initially for an aggregate of
3,869,366 Warrant Shares at an Exercise Price of $23.80952 per share, subject
in each case to the adjustment provisions contained in the Warrant Agreement.
SECTION 4. Upon tender and delivery to the Company by any Holder of Series
A Warrant Certificates or Series B Warrant Certificates (as defined in the
Warrant Agreement) or both and upon cancellation thereof, the Company shall
issue and deliver new warrant certificates ("New Warrant Certificates")
evidencing the Warrants of such tendering Holders. The New Warrant Certificates
shall reflect the amendments to the Warrant Agreement and the First
Supplement contained herein.
<PAGE> 3
Series A Warrant Certificates and Series B Warrant Certificates shall continue
to be valid evidence of the Warrants, and shall continue to be exercisable for
the Common Stock of the Company pursuant to the terms hereof and in the Warrant
Agreement, as supplemented by the First Supplement. The New Warrant
Certificates shall comply with and be subject to all of the terms and
conditions of the Warrant Agreement, as supplemented, applicable to the Warrant
Certificates.
SECTION 5. Section 12 of the Warrant Agreement is hereby amended so that
notices shall be made as set forth therein to the Company at 1014 Vine Street,
Cincinnati, Ohio 45202, Attn: Chief Financial Officer, with a copy to the
General Counsel.
SECTION 6. The Company hereby assumes all obligations of Fred Meyer under
the Warrant Agreement and the First Supplement thereto and agrees to be bound
by all of the provisions thereof, as amended by this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
THE KROGER CO.
By: /s/ Paul W. Heldman
------------------------------
Name: Paul W. Heldman
Title: Senior Vice President
THE YUCAIPA COMPANIES
By: /s/ Ronald W. Burkle
------------------------------
Name: Ronald W. Burkle
Title: Managing General Partner
<PAGE> 1
Exhibit 12.1
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 29, 2000
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------------------------
January 29, January 2, December 27, December 28, December 30,
2000 1999 1997 1996 1995
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings before
tax expense
(credit), and
extraordinary loss ... $ 1,129 $ 871 $ 954 $ 701 $ 591
Fixed charges ............ 1,031 1,038 679 595 596
Capitalized interest ..... (5) (9) (10) (12) (11)
------- ------- ------- ------- -------
$ 2,155 $ 1,900 $ 1,623 $ 1,284 $ 1,176
======= ======= ======= ======= =======
Fixed charges:
Interest ................. $ 659 $ 654 $ 397 $ 361 $ 369
Portion of rental
payments deemed
to be interest ....... 372 384 282 234 227
------- ------- ------- ------- -------
$ 1,031 $ 1,038 $ 679 $ 595 $ 596
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges ............ 2.1 1.8 2.4 2.2 2.0
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Agri-Products, Inc. Arkansas
Bluefield Beverage Company Ohio
Country Oven, Inc. Ohio
Dillon Companies, Inc. Kansas
Also Doing Business As:
Dillon Food Stores N/A*
Dillon Stores Division, Inc. N/A*
GHC Merchandise Distribution, Inc. N/A*
Gerbes Supermarkets N/A*
King Soopers, Inc. N/A*
Sav-Mor N/A*
Dotto, Inc. Indiana
Drug Distributors, Inc. Indiana
Embassy International, Inc. Ohio
Fred Meyer, Inc. Delaware
Ft. Wayne Food Stores, Inc. Ohio
Henke & Pillot, Inc. Texas
Henpil, Inc. Texas
(Subsidiary of Rocket Newco, Inc.)
Inter-American Foods, Inc. Ohio
Inter-American Products, Inc. Ohio
(Formerly known as Jubilee Products, Inc.)
J.V. Distributing, Inc. Michigan
KRGP Inc. Ohio
KRLP Inc. Ohio
The Kroger Co. of Michigan Michigan
Also Doing Business As:
The Apple Orchard Fruit Market N/A*
Bi-Lo Discount Foods N/A*
World of Videos, Movies and Munch More N/A*
Michigan Dairy, L.L.C. Michigan (limited liability company)
Kroger Dedicated Logistics Co. Ohio
Kroger Limited Partnership I Ohio (limited partnership)
Also Doing Business As:
Kentucky Distribution Center N/A*
Kroger Kare Home Infusion N/A*
The Pet Food Super Center N/A*
The Petfood Place N/A*
Peyton's Southeastern N/A*
Peyton's Southeastern, Inc. N/A*
Kroger Limited Partnership II Ohio (limited partnership)
Also Doing Business As:
Country Oven Bakery N/A*
Crossroad Farms Dairy N/A*
Indianapolis Bakery N/A*
K. B. Specialty Foods N/A*
Kenlake Foods N/A*
</TABLE>
<PAGE> 2
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Pace Dairy of Indiana N/A*
Peyton's N/A*
Peyton's Mid-South Company N/A*
Peyton's Northern N/A*
Winchester Farms Dairy N/A*
Kroger Management Co. Michigan
Kroger Texas L.P. Ohio (limited partnership)
Also Doing Business As:
America's Beverage Company N/A*
Vandervoort's Dairy Food Company N/A*
MANUCO Incorporated Ohio
One Holdings, Inc. Delaware
Also Doing Business As:
Seven Holdings, Inc. N/A*
Pace Dairy Foods Company Ohio
Pay Less Super Markets, Inc. Indiana
Peyton's-Southeastern, Inc. Tennessee
Also Doing Business As:
Supermarket Merchandisers Co. N/A*
Pontiac Foods, Inc. South Carolina
RJD Assurance, Inc. Vermont
Rocket Newco, Inc. Texas
Southern Ice Cream Specialties, Inc. Ohio
Ten Holdings, Inc. Delaware
Three Holdings, Inc. Delaware
Topvalco, Inc. Ohio
Two Holdings, Inc. Delaware
Vine Court Assurance Incorporated Vermont
Wydiv, Inc. Texas
(Subsidiary of Rocket Newco, Inc.)
</TABLE>
Subsidiaries of Dillon Companies, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
City Market, Inc. Colorado
Also Doing Business As:
Circle Super N/A*
Dillon Real Estate Co., Inc. Kansas
Jackson Ice Cream Co., Inc. Kansas
Also Doing Business As:
Jackson & Company N/A*
</TABLE>
<PAGE> 3
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
Subsidiaries of Dillon Companies, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Junior Food Stores of West Florida, Inc. Florida
Also Doing Business As:
Tom Thumb Food Stores N/A*
Kwik Shop, Inc. Kansas
Mini Mart, Inc. Wyoming
Also Doing Business As:
Loaf 'N Jug, Inc. N/A*
Quik Stop Markets, Inc. California
Royalty Enterprises, Ltd. Colorado
(Subsidiary of Mini Mart, Inc.)
THGP Co., Inc. Pennsylvania
THLP Co., Inc. Pennsylvania
Turkey Hill, L.P. Pennsylvania (limited partnership)
Also Doing Business As:
Turkey Hill Dairy, Inc. N/A*
Turkey Hill Minit Markets N/A*
Wells Aircraft, Inc. Kansas
(Subsidiary of Dillon Real Estate Co., Inc.)
</TABLE>
Subsidiaries of Fred Meyer, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Fred Meyer Stores, Inc. Delaware
(Subsidiary of Fred Meyer, Inc.)
CB&S Advertising Agency, Inc. Oregon
(Subsidiary of Fred Meyer Stores, Inc.)
Distribution Trucking Company Oregon
(Subsidiary of Fred Meyer Stores, Inc.)
FM, Inc. Utah
(Subsidiary of Fred Meyer Stores, Inc.)
FM Holding Corporation Delaware
(Subsidiary of Fred Meyer Stores, Inc.)
Grand Central, Inc. Utah
(Subsidiary of FM Holding Corporation)
FM Retail Services, Inc. Washington
(Subsidiary of Fred Meyer Stores, Inc.)
Fred Meyer, Inc. Washington
(Subsidiary of Fred Meyer Stores, Inc.)
Fred Meyer of Alaska, Inc. Alaska
(Subsidiary of Fred Meyer Stores, Inc.)
Fred Meyer of California, Inc. California
(Subsidiary of Fred Meyer Stores, Inc.)
Fred Meyer (HK) Limited Hong Kong
(Subsidiary of Fred Meyer Stores, Inc.)
Fred Meyer Jewelers, Inc. Delaware
(Subsidiary of Fred Meyer Stores, Inc.)
</TABLE>
<PAGE> 4
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
Subsidiaries of Fred Meyer, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Merksamer Jewelers, Inc. California
(Subsidiary of Fred Meyer Jewelers, Inc.)
Natur Glo, Inc. Oregon
(Subsidiary of Fred Meyer Stores, Inc.)
Roundup Co. Washington
(Subsidiary of Fred Meyer Stores, Inc.)
JH Properties, Inc. Washington
(Subsidiary of Roundup Co.)
Smith's Food & Drug Centers, Inc. Delaware
(Subsidiary of Fred Meyer, Inc.)
Richie's, Inc. Texas
(Subsidiary of Smith's Food & Drug Centers, Inc.)
Smith's Beverage of Wyoming Wyoming
(Subsidiary of Smith's Food & Drug Centers, Inc.)
Smitty's Supermarkets, Inc. Delaware
(Subsidiary of Smith's Food & Drug Centers, Inc.)
Smitty's Super Valu, Inc. Delaware
(Subsidiary of Smitty's Supermarkets, Inc.)
Compare, Inc. Delaware
(Subsidiary of Smitty's Super Valu, Inc.)
Saint Lawrence Holding Company Delaware
(Subsidiary of Smitty's Super Valu, Inc.)
SLHC 2, Inc. Delaware
(Subsidiary of Saint Lawrence Holding Company)
Smitty's Equipment Leasing, Inc. Delaware
(Subsidiary of Smitty's Super Valu, Inc.)
Treasure Valley Land Company, L.C. Idaho
(Subsidiary of Smith's Food & Drug Centers, Inc.)
Western Property Investment Group, Inc. California
(Subsidiary of Smith's Food & Drug Centers, Inc.)
Healthy Options Inc. Delaware
(Subsidiary of Fred Meyer, Inc.)
Quality Food Centers, Inc. Washington
(Subsidiary of Fred Meyer, Inc.)
Hughes Markets, Inc. California
(Subsidiary of Quality Food Centers, Inc.)
Hughes Realty, Inc. California
(Subsidiary of Hughes Markets, Inc.)
KU Acquisition Corporation Washington
(Subsidiary of Quality Food Centers, Inc.)
Quality Food, Inc. Delaware
(Subsidiary of Quality Food Centers, Inc.)
Quality Food Holdings, Inc. Delaware
(Subsidiary of Quality Food, Inc.)
QFC Sub, Inc. Washington
(Subsidiary of Quality Food Holdings, Inc.)
</TABLE>
<PAGE> 5
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
Subsidiaries of Fred Meyer, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation/Organization
- ---- -----------------------------------
<S> <C>
Second Story, Inc. Washington
(Subsidiary of Quality Food Centers, Inc.)
Art's Food Center, Inc. Washington
(Subsidiary of Quality Food Centers, Inc.)
Food 4 Less Holdings, Inc. Delaware
(Subsidiary of Fred Meyer, Inc.)
Ralphs Grocery Company Delaware
(Subsidiary of Food 4 Less Holdings, Inc.)
Cala Co. Delaware
(Subsidiary of Ralphs Grocery Company)
Bay Area Warehouse Stores, Inc. California
(Subsidiary of Cala Co.)
Bell Markets, Inc. California
(Subsidiary of Cala Co.)
Cala Foods, Inc. California
(Subsidiary of Cala Co.)
Crawford Stores, Inc. California
(Subsidiary of Ralphs Grocery Company)
Food 4 Less of Southern California, Inc. Delaware
(Subsidiary of Ralphs Grocery Company)
Alpha Beta Company California
(Subsidiary of Food 4 Less of Southern California, Inc.)
Food 4 Less GM, Inc. California
(Subsidiary of Alpha Beta Company)
Food 4 Less of California, Inc. California
(Subsidiary of Alpha Beta Company)
Food 4 Less Merchandising, Inc. California
(Subsidiary of Alpha Beta Company)
</TABLE>
<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-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-8 (File No.333-78935), Form S-4 (File No. 333-85725), Form
S-8 (File No. 333-89977), and Form S-3 (File No. 333-95955) 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 March 9, 2000, on our audits of the consolidated
financial statements of The Kroger Co. as of and for the three years ended
January 29, 2000, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 27, 2000
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-2056, 2-98858, 33-20734, 33-25698, 33-38121, 33-38122, 33-53747, 33-55501,
333-11859, 333-11909, 333-27211, 333-78935, and 333-89977 of The Kroger Co., all
on Form S-8, Registration Statement Nos. 333-66961 and 333-85725 of The Kroger
Co., all on Form S-4, and Registration Statement No. 333-95955 of The Kroger Co.
on Form S-3, of our report dated March 10, 1999 on our audits of the
consolidated financial statements of Fred Meyer, Inc. as of January 30, 1999 and
for the years ended January 30, 1999 and January 31, 1998, which statements are
included by The Kroger Co. in its consolidated financial statements as of
January 29, 2000 and January 2, 1999, and for the years ended January 29, 2000,
January 2, 1999, and December 27, 1999, giving retroactive effect to the merger
of Fred Meyer, Inc. on May 27, 1999 in a transaction accounted for as a pooling
of interests, which report is included in this Annual Report on Form 10-K.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
April 25, 2000
<PAGE> 1
EXHIBIT 23.3
------------
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration statement of
The Kroger Co. on Form S-8 (333-11859) of our report dated April 18, 2000, on
our audits of the financial statements and financial statement schedules of The
Kroger Co. Savings Plan as of December 31, 1999 and 1998, and for the years then
ended, which report is included in this annual report on Form 10-K.
We also consent to the incorporation by reference in the registration statement
of The Kroger Co. on Form S-8 (333-11909) of our report dated April 7, 2000, on
our audits of the financial statements and financial statement schedules of
Dillon Companies, Inc. Employees' Stock Ownership and Savings Plan as of
December 31, 1999 and 1998, and for the years then ended, which report is
included in this annual report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 27, 2000
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, That each of the undersigned directors of
THE KROGER CO. (the "Company") hereby makes, constitutes and appoints Paul W.
Heldman and Bruce M. Gack, or either of them, his or her true and lawful
attorneys-in-fact to sign and execute for and on his or her behalf the
Company's annual report on Form 10-K, and any and all amendments thereto, to be
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended, in such form as they, or either of them, may
approve and to do any and all other acts which said attorneys-in-fact, or
either of them, may deem necessary or desirable to enable The Kroger Co. to
comply with said Act or the rules and regulations thereunder.
IN WITNESS WHEREOF, the undersigned directors have hereunto set their hands as
of the 31st day of March, 2000.
(John L. Clendenin) (Bruce Karatz)
John L. Clendenin Bruce Karatz
(Katherine D. Ortega) (Robert D. Beyer)
Katherine D. Ortega Robert D. Beyer
(T. Ballard Morton, Jr.) (John T. LaMacchia)
T. Ballard Morton, Jr. John T. LaMacchia
(Steven R. Rogel) (Carlton J. Jenkins)
Steven R. Rogel Carlton J. Jenkins
(Ronald W. Burkle) (Reuben V. Anderson)
Ronald W. Burkle Reuben V. Anderson
(Joseph A. Pichler) (Clyde R. Moore)
Joseph A. Pichler Clyde R. Moore
(David B. Dillon) (Bobby S. Shackouls)
David B. Dillon Bobby S. Shackouls
(Thomas H. O'Leary)
Thomas H. O'Leary
(James D. Woods)
James D. Woods
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company") does hereby
severally make, constitute and appoint Paul W. Heldman and Bruce M. Gack, or
either of them, his true and lawful attorneys-in-fact to sign and execute for
and on his behalf the Company's annual report on Form 10-K, and any and all
amendments thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in such form as
they, or either of them, may approve and to do any and all other acts which
said attorneys-in-fact, or either of them, may deem necessary or desirable to
enable The Kroger Co. to comply with said Act or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
March 31, 2000
(J. Michael Schlotman)
J. Michael Schlotman
Group Vice President &
Chief Financial Officer
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company") does hereby
severally make, constitute and appoint Paul W. Heldman and Bruce M. Gack, or
either of them, his true and lawful attorneys-in-fact to sign and execute for
and on his behalf the Company's annual report on Form 10-K, and any and all
amendments thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in such form as
they, or either of them, may approve and to do any and all other acts which
said attorneys-in-fact, or either of them, may deem necessary or desirable to
enable The Kroger Co. to comply with said Act or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(Joseph A. Pichler) March 31, 2000
Joseph A. Pichler
Chief Executive Officer
and Director
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company") does hereby
severally make, constitute and appoint Paul W. Heldman and Bruce M. Gack, or
either of them, his true and lawful attorneys-in-fact to sign and execute for
and on his behalf the Company's annual report on Form 10-K, and any and all
amendments thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in such form as
they, or either of them, may approve and to do any and all other acts which
said attorneys-in-fact, or either of them, may deem necessary or desirable to
enable The Kroger Co. to comply with said Act or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(M. Elizabeth Van Oflen) March 31, 2000
M. Elizabeth Van Oflen
Vice President, Corporate Controller
and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 29, 2000 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 281
<SECURITIES> 0
<RECEIVABLES> 622
<ALLOWANCES> 0
<INVENTORY> 3,938
<CURRENT-ASSETS> 5,531
<PP&E> 13,042
<DEPRECIATION> 4,767
<TOTAL-ASSETS> 17,966
<CURRENT-LIABILITIES> 5,728
<BONDS> 9,014
0
0
<COMMON> 885
<OTHER-SE> 1,798
<TOTAL-LIABILITY-AND-EQUITY> 17,966
<SALES> 45,352
<TOTAL-REVENUES> 45,352
<CGS> 33,331
<TOTAL-COSTS> 33,331
<OTHER-EXPENSES> 10,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 652
<INCOME-PRETAX> 1,129
<INCOME-TAX> 491
<INCOME-CONTINUING> 638
<DISCONTINUED> 0
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> 628
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.73
</TABLE>
<PAGE> 1
EXHIBIT 99.1
The Kroger Co. Savings Plan
Report On Audits Of Financial Statements And Supplemental Schedules
For The Years Ended December 31, 1999 and 1998
<PAGE> 2
The Kroger Co. Savings Plan
Index To Financial Statements
December 31, 1999 and 1998
Pages
-----
Report of Independent Accountants 2
Statement of Net Assets Available
For Plan Benefits at December 31, 1999 and 1998 3
Statement of Changes in Net Assets
Available For Plan Benefits for
the years ended December 31, 1999 and 1998 4
Notes to Financial Statements 5-7
Item 27a - Schedule of Assets Held for Investment
Purposes at December 31, 1999 8
Item 27d - Schedule of Reportable Transactions
for the year ended December 31, 1999 9
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Administrative Committee of The Kroger Co. Savings Plan
In our opinion, the accompanying statement of net assets available for benefits
and the related statement of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of The Kroger Co. Savings Plan (the "Plan") at December 31, 1999 and 1998, and
the changes in net assets available for benefits for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Plan's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 provide a reasonable basis
for the opinion expressed above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules referred to in
the Index to Financial Statements are presented for the purpose of additional
analysis and are not a required part of the basic financial statements but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. These supplemental schedules are the responsibility of the
Plan's management. The supplemental schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 18, 2000
<PAGE> 4
THE KROGER CO. SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
at December 31, 1999 and 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Assets
Investments:
Employer Stock Fund $1,080,905 $1,636,141
Merrill Lynch Equity Index Trust 136,422 118,631
Merrill Lynch Basic Value 25,569 26,195
Merrill Lynch Global Allocation 14,807 9,271
American Capital Emerging Growth 70,421 32,398
Templeton Foreign 13,644 11,014
Fixed Income 141,567 159,273
Participation Loans 28,869 27,059
Temporary Investment Fund 650 5,028
---------- ----------
Total investments 1,512,854 2,025,010
Receivables:
Contributions 10,270 6,293
Interest and dividends 508 388
---------- ----------
Total assets 1,523,632 2,031,691
---------- ----------
Liabilities
Payable for administrative fees 207 140
---------- ----------
Total liabilities 207 140
---------- ----------
Net assets available for plan benefits $1,523,425 $2,031,551
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE> 5
THE KROGER CO. SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
for the years ended December 31, 1999 and 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Additions to (reduction in) net assets
attributable to:
Employee contributions $ 75,244 $ 60,770
Employer contributions 9,504 6,296
Transfer from (to) other trusts 89,397 -
---------- ----------
Total contributions and transfers 174,145 67,066
Investment activity
Dividends 11,860 5,937
Interest 12,180 11,376
Net (depreciation) appreciation (607,066) 673,043
---------- ----------
Total (reductions) additions (408,881) 757,422
---------- ----------
Distributions to participants 98,193 83,248
Payable for administrative fees 1,052 425
---------- ----------
Total deductions 99,245 83,673
---------- ----------
Net (decrease) increase (508,126) 673,749
Net assets available for plan benefits:
Beginning of year 2,031,551 1,357,802
---------- ----------
End of year $1,523,425 $2,031,551
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE> 6
THE KROGER CO. SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant policies followed in the
preparation of these financial statements.
INVESTMENTS VALUATION
Investments in equity securities, mutual funds and collective trusts
are valued at fair value (quoted market prices where available) or
estimated fair values. Investment contracts are valued at contract
value (cost plus accrued interest).
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 net assets
available for plan benefits as of the date of the Plan's financial
statements and the reported changes in net assets available for plan
benefits during the reporting period. Actual results could differ from
those estimates.
OTHER
Purchases and sales of securities are reflected on a trade date basis.
Gain or loss on sales of securities are based on average cost.
Dividend income is recorded on the ex-dividend date. Income from other
investments is recorded as earned.
The Plan presents in the statement of changes in net assets available
for plan benefits the net appreciation or depreciation in the fair
value of its investments which consists of the realized gains or losses
and the unrealized appreciation or depreciation on those investments.
Participants may borrow from their fund accounts a minimum of $1,000 up
to a maximum equal to the lowest of: a) account balance less $2,500; b)
50% of account balance; c) $50,000 less the highest outstanding loan
balance over the last 12 months. Loan transactions are treated as a
transfer from the investment fund to the Participant Loan Fund. Loan
terms range from 1-4 years or up to 6 years for the purchase of a
primary residence. The loans are collateralized by the balance in the
participant's account and bear interest at a rate of Prime plus 1.5%.
The rate is changed quarterly and the Prime rate used for a quarter is
the Prime rate on the last business day of the previous quarter.
Principal and interest are paid through periodic payroll deductions.
2. PLAN DESCRIPTION
The Plan provides for eligible employees of The Kroger Co. and
subsidiaries (the "Company") to redirect a portion of their salary, up
to limits defined in the Plan, to the seven investment funds of the
Plan at any time.
Employee contributions to the Plan are limited to the lower of $10,000
or 19% (6% if the participant is a highly compensated employee as
defined by the Internal Revenue Service) of the employee's annual
compensation during the period in which they are a participant in the
Plan, subject to Internal Revenue Service Code limitations.
At the end of each year, the Company makes a basic matching
contribution into the Employer Stock Fund equal to ten percent (10%) of
the salary directed by participants to the Employer Stock Fund during
the year. A supplemental matching contribution is allocated in
proportion to salary directed to all investment funds. This
supplemental contribution is automatically invested in the Employer
Stock Fund. The supplemental contribution is based on the annual
financial results of the Company and determined annually by the Board
of Directors. The supplemental contribution ranges from none to twenty
percent (20%) of participant contributions.
5
<PAGE> 7
In 1999, the Company made matching and supplemental contributions. The
supplemental contribution was 6%. In 1998, the Company made a matching
contribution and a supplemental contribution of 4%.
Each participant's account is credited with the participant's
contribution and an allocation of the Company's matching contribution,
Plan earnings, and other adjustments as defined in the Plan.
Allocations are based on participant earnings or account balances as
defined. The benefit to which a participant is entitled is the benefit
that can be provided from the participant's account.
Further information about the Plan, including vesting, allocation and
benefit provisions, and employer and employee contributions is
contained in the Plan, and Plan amendments. Copies of these documents
are available from the Company's Personnel Department.
3. INVESTMENT CONTRACTS
The Plan's Fixed Income Fund contains various investment contracts
which are fully benefit-responsive. A fully benefit-responsive
investment provides a liquidity guarantee by a financially responsible
third party of principal and previously accrued interest for
liquidations, transfers, loans, or withdrawals initiated by plan
participants under the terms of the ongoing Plan. Certain employer
initiated events (i.e., lay-offs, mergers, bankruptcy, plan
termination) are not eligible for the liquidity guarantee.
The following information is presented in the aggregate for the
investment contracts:
1999 1998
------------ ------------
Fair value $137,432,142 $135,981,239
Crediting interest rates 5.2% to 7.2% 5.4% to 7.3%
Average yield 6.6% 6.8%
The crediting interest rates for the investment contracts are based
upon the contract rate or a predetermined formula which factors in
duration, market value and book value of the investment. Certain of the
crediting rates are adjusted quarterly. The minimum crediting interest
rate for these investments is zero.
The fair value of the investment contracts is calculated as the
aggregate present value of the underlying cash flows using interest
rates quoted for securities with similar duration and credit risk.
4. TAX STATUS
The Plan obtained its latest determination letter in March 1998, in
which the Internal Revenue Service stated that the Plan, as then
designed, was in compliance with the Internal Revenue Code. Therefore,
no provision for income taxes has been included in the Plan's financial
statements.
Participant contributions and earnings of the Plan are not subject to
federal income tax until distribution, at which time they are taxable
to the recipient.
5. NONPARTICIPANT-DIRECTED INVESTMENTS
-----------------------------------
Investments in the Employer Stock Fund are generated from
participant-directed contributions, the Company's basic matching
contribution, and the Company's supplemental matching contribution.
Employee and employer amounts included in the Employer Stock Fund
cannot be separately determined. Accordingly, the investments in the
Employer Stock Fund are considered non-participant directed for
disclosure purposes.
6
<PAGE> 8
The information about the net assets and the significant components of
the changes in net assets relating to the nonparticipant-directed
investments in the Employer Stock Fund is as follows:
<TABLE>
<CAPTION>
Net Assets:
December 31,
------------------------
1999 1998
---------- -----------
<S> <C> <C>
Employer Stock Fund $1,080,905 $1,636,141
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
------------------
<S> <C>
Change in Net Assets in the
Employer Stock Fund:
Employee contributions $ 50,787
Employer contributions 6,493
Transfer from other trusts 9,975
Interest 1,931
Net depreciation (663,689)
Distributions to participants (58,717)
Administrative expenses (261)
Transfers from other funds 98,245
----------
$ (555,236)
==========
</TABLE>
7
<PAGE> 9
THE KROGER CO. SAVINGS PLAN
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
at December 31, 1999
(In Thousands of Dollars)
-------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES 1999
----------------------
CARRYING
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST VALUE
- --------------------------------- ----------------- ---------- --------
<S> <C> <C> <C>
EMPLOYER STOCK FUND
The Kroger Co. common shares* 57,266,000 shs. $ 436,520 $1,080,905
MERRILL LYNCH EQUITY INDEX TRUST
Collective Investment Trust 1,348,000 shs. 62,248 136,422
MERRILL LYNCH BASIC VALUE
Mutual Funds 670,000 shs. 23,359 25,569
MERRILL LYNCH GLOBAL ALLOCATION
Mutual Funds 1,056,000 shs. 15,182 14,807
AMERICAN CAPITAL EMERGING GROWTH
Mutual Funds 806,000 shs. 37,697 70,421
TEMPLETON FOREIGN
Mutual Funds 1,216,000 shs. 11,913 13,644
FIXED INCOME
Guaranteed Investment Contracts(GICs) 2,055 2,055
Synthetic GICs 139,512 137,432
Wrapper Contracts for Synthetic GICs 0 2,080
--------- ----------
141,567 141,567
PARTICIPANT LOANS
Loans to Participants 0 28,869
Temporary Cash Investments 650 650
--------- ----------
Total $ 729,136 $1,512,854
========= ==========
</TABLE>
*Represents party in interest transactions.
8
<PAGE> 10
THE KROGER CO. SAVINGS PLAN
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
For the Year Ended December 31, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
Transaction # of # of Realized
Type Security Description Trans Shares Cost Proceeds Gain(loss)
- ----------- ----------------------- ----- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
KROGER COMMON STOCK*
BUY Kroger Co. Common Stock 1,085 6,732,080 $175,603
SELL Kroger Co. Common Stock 1,420 2,643,663 $ 44,934 $110,780 $65,846
POOLED SEPARATE A/C(GICS)
BUY Fixed Income Fund 1,122 83,697,257 $ 83,697
SELL Fixed Income Fund 1,251 101,403,139 $101,403 $101,403 $ -
TEMPORARY INVESTMENT FUNDS
BUY Temporary Investment Fund 252 146,196,046 $146,196
SELL Temporary Investment Fund 252 148,012,767 $148,013 $148,013 $ -
</TABLE>
*Represents party in interest transactions.
9
<PAGE> 11
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE> 12
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
December 31, 1999 and 1998
TABLE OF CONTENTS
Financial Statements: Pages
- --------------------- -----
Report of Independent Accountants 2
Statement of Net Assets Available for Plan Benefits 3
Statement of Changes in Net Assets Available for Plan Benefits 4
Notes to Financial Statements 5-8
Supplemental Schedules: Schedule
- ----------------------- --------
Item 27(a) - Schedule of Assets Held for Investment Purposes 1
Item 27(d) - Schedule of Reportable Transactions 2
All other schedules required by Form 5500 have been omitted as being not
applicable.
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Trust Committee
Dillon Companies, Inc.
Employees' Stock Ownership and Savings Plan
In our opinion, the accompanying statement of net assets available for benefits
and the related statement of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of Dillon Companies, Inc. Employees' Stock Ownership and Savings Plan (the
"Plan") at December 31, 1999 and 1998, and the changes in net assets available
for benefits for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Plan's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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 provide a reasonable basis for the opinion expressed above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules referred to in
the Table of Contents are presented for the purpose of additional analysis and
are not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. These supplemental schedules are the responsibility of the Plan's
management. The supplemental schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
- --------------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 7, 2000
2
<PAGE> 14
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Statement of Net Assets
Available for Plan Benefits
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,954,492 $ 4,919,899
Investment contracts with insurance companies 0 661,350
Investments in BASIC 23,715,578 28,853,965
Investments in PIMCO 20,655,524 22,279,441
Investments in State Street Fixed Fund 13,245,099 16,127,809
Investments in CDC Investment Management 3,060,815 5,264,821
Investments in Transamerica Life Insurance 8,015,337 8,103,865
The Kroger Co. common stock 378,176,896 654,913,963
Trust funds managed by:
Sanford C. Bernstein & Co. 21,699,098 27,196,483
State Street Global Advisors Index Fund 36,223,166 37,551,936
----------- -----------
Total assets 507,746,005 805,873,532
----------- -----------
LIABILITIES
Accounts payable 184,032 187,427
Dividends payable 16,763 16,763
----------- -----------
Total liabilities 200,795 204,190
----------- -----------
Net assets available for plan benefits $507,545,210 $805,669,342
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 15
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Statement of Changes in Net Assets
Available for Plan Benefits
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Additions to net assets attributed to:
Investment income:
Net appreciation (depreciation)in fair value of investments:
The Kroger Co. common stock $(223,185,255) $260,908,978
------------- -----------
Interest:
Short-term investments 99,724 186,902
Investment contracts with insurance companies, investments in BASIC,
investments in PIMCO, investments in State Street Fixed Fund,
investments in CDC Investment Management,
investments in Transamerica Life Insurance 5,854,266 5,627,138
----------- -----------
5,953,990 5,814,040
----------- -----------
Net investment income of trust funds managed by:
Sanford C. Bernstein & Co. 1,587,174 3,309,564
State Street Global Advisors Index Fund 7,170,884 8,085,828
----------- -----------
8,758,058 11,395,392
----------- -----------
Contributions:
Employer 2,933,393 2,533,545
Employee 26,759,713 27,018,626
----------- -----------
29,693,106 29,552,171
----------- -----------
Total additions (178,780,101) 307,670,581
------------- -----------
Deductions from net assets attributed to:
Benefits paid to participants 41,062,823 49,711,845
Assets transferred to another trust 78,196,732 0
Administrative expenses 84,476 79,153
----------- -----------
Total deductions 119,344,031 49,790,998
----------- -----------
Increase (Decrease) in net assets available for plan benefits (298,124,132) 257,879,583
Net assets available at beginning of period 805,669,342 547,789,759
----------- -----------
Net assets available at end of period $507,545,210 $805,669,342
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 16
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on an accrual
basis and present the net assets available for plan benefits and
changes in those net assets based on fair value (quoted market prices
where available). Fixed investments are valued at contract value (cost
plus accrued interest). Purchases and sales of The Kroger Co. common
stock are recorded on a trade date basis. The Dillon Companies, Inc.
Employees' Stock Ownership and Savings Plan (the Plan) presents in the
statement of changes in net assets the net appreciation (depreciation)
in the fair value of its investments which consists of the realized
gains or losses and the unrealized appreciation (depreciation) on those
investments.
2) DESCRIPTION OF DILLON COMPANIES, INC. EMPLOYEES' STOCK OWNERSHIP AND
SAVINGS PLAN
Employees of Dillon Companies, Inc. (the Company) and its subsidiaries
with one year of service and who have attained age 21 are eligible to
become a participant on January 1 or July 1 following completion of
eligibility requirements.
The interest of all participants in the Plan is fully vested at all
times and is not subject to forfeiture or cancellation under any
circumstances. Plan assets are for participants only and may never
revert to the employer.
Plan income and expenses for each period are allocated to the
participants' accounts in the ratio that the balance in the account of
each participant bears to the balance of all the participants' accounts
immediately before the allocation. Employer contributions are allocated
based on participants' salaries as stated in the Plan.
All distributions to participants are in cash or in whole shares of The
Kroger Co. common stock (cash is paid for fractional shares).
Participants and beneficiaries individually exercise voting rights on
the shares of The Kroger Co. common stock allocated to their account.
Under the 401(k) salary reduction provision, Plan participants may make
an election to have the Company contribute to the Plan on their behalf
from two percent (2%) to twenty percent (20%) of the qualifying
compensation that would otherwise be payable to them for the Plan year.
A basic matching employer contribution is allocated to participants of
the Stock Fund equal to ten percent (10%) of salaries directed by
participants. A supplemental employer contribution is allocated in
proportion to all participants' salaries directed to all investments.
The supplemental contribution is based on the annual financial results
of The Kroger Co. and determined annually by the Board of Directors.
The Company currently has discontinued contributions to the ESOP
portion of the Plan and has no present intentions to resume such
contributions.
5
<PAGE> 17
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Notes to Financial Statements, Continued
December 31, 1999 and 1998
2) DESCRIPTION OF DILLON COMPANIES, INC. EMPLOYEES' STOCK OWNERSHIP AND
SAVINGS PLAN, CONTINUED
Participants of the 401(k) portion of the Plan and participants of the
ESOP portion of the Plan who are over age 55 are allowed monthly and
annual investment option selections, respectively, to direct all or a
portion of their contributions to the following funds:
Fixed
Index
Balanced
Kroger Stock
3) INVESTMENTS
The Dillon Companies, Inc. Employee Master Trust (the Trust) was formed
on July 1, 1987, as the funding medium for various employee benefit
plans administered by the Company. All assets of the Dillon Companies,
Inc. Profit Sharing and Savings Plan, Dillon Companies, Inc. Pension
Plan, and Dillon Companies, Inc. Employees' Stock Ownership and Savings
Plan are funded through the Dillon Companies, Inc. Employee Master
Trust. The allocation of assets between plans is based upon individual
plan assets adjusted monthly for contributions, benefit payments,
earnings and administrative expenses.
The Plan's investments are held by the Trust and are administered by
the Dillon Companies, Inc. Trust Committee. The Trust Committee selects
investment managers to manage certain assets of the Plan. The net
change in funds managed by investment managers includes revenue earned,
unrealized and realized gains and losses on investments, and fiduciary
expenses. The investments and changes therein of the trust funds
managed by investment managers have been reported to the Plan by the
trustees as having been determined through the use of fair value or
estimated fair values for all assets and liabilities of the trust
funds.
During 1999, certain employees of Smith's, a wholly-owned subsidiary of
the Kroger Co., became employees of Fry's Food Stores (Fry's).
Previously, Fry's employees participated in the Dillon Companies, Inc.
Employees' Stock Ownership and Savings Plan, while Smith's employees
participated in a different 401(K) plan. In order to conform all
current Fry's employees into the same plan, all such employee balances
under previously existing plans were transferred to The Kroger Co.
401(K) and Savings Plan. As such, approximately $78 million was
transferred out of the Trust in 1999.
4) FIXED INVESTMENTS
The Plan had the following fixed investments in the fixed fund as of
December 31, 1999:
* Benefit Accessible Securities Investment Contracts (BASIC)
with annual crediting interest rates ranging from 6.00% to
7.88% and maturities from one to nine years.
* Investment in Pacific Investment Management Company (PIMCO)
with a variable crediting interest rate of 6.64%. The variable
crediting interest rate is adjusted quarterly.
* Investment in Diversified Financial Products Inc. (State
Street Fixed Fund) with a variable crediting interest rate of
6.48%. The variable crediting interest rate is adjusted
quarterly.
6
<PAGE> 18
4) FIXED INVESTMENTS, CONTINUED
* CDC Investment Management with annual crediting interest rates
ranging from 6.20% to 6.45% and maturities from one to two
years.
* Investment in Transamerica Life Insurance and Annuity Company
(J.P. Morgan Investment Management Inc.) with a variable
crediting interest rate of 6.05%. The variable crediting
interest rate is adjusted quarterly.
The crediting interest rate for investment contracts with BASIC, and
CDC Investment Management is the contract rate. The crediting interest
rate for investments in PIMCO, State Street Fixed Fund, and J.P. Morgan
Investment Management Inc. is based upon a predetermined formula which
factors in duration, market value, and book value of the portfolio. The
minimum crediting interest rate for these investments is zero percent.
All of the Plan's fixed investments are fully benefit-responsive. A
fully benefit-responsive investment provides a liquidity guarantee by a
financially responsible third party of principal and previously accrued
interest for liquidations, transfers, loans, or withdrawals initiated
by plan participants under the terms of the ongoing Plan. Certain
employer initiated events (i.e. lay-offs, mergers, bankruptcy, plan
termination) are not eligible for the liquidity guarantee.
The following information is presented in the aggregate for the fixed
investments:
<TABLE>
<CAPTION>
1999 1998
------------- ---------
<S> <C> <C>
Fair Value $70,698,625 $90,158,673
Average Yield 7.80% 7.19%
</TABLE>
The fair value of the fixed investments are calculated as the aggregate
present value of the underlying cash flows using interest rates quoted
for securities with similar duration and credit risk.
5) TAX STATUS
The Internal Revenue Service has issued a determination letter to the
Plan that the requirements for a qualified plan under Section 401(a) of
the Internal Revenue Code have been met and the Plan is exempt from
federal and state income taxes.
6) PRIORITIES UPON TERMINATION OF THE PLAN
It is the intent of the Company to continue the Plan indefinitely;
however, the Company reserves the right to terminate the Plan at any
time.
In the event of termination of the Plan, the Trustees shall continue to
administer the Plan in accordance with the provisions of the Plan until
all obligations have been discharged or satisfied.
7) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of net assets
available for plan benefits as of the date of the Plan's financial
statements and the reported changes in net assets available for plan
benefits during the reporting period. Actual results could differ from
those estimates.
7
<PAGE> 19
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Notes to Financial Statement, Continued
December 31, 1999 and 1998
8) NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to the nonparticipant-directed
investments is as follow
<TABLE>
<CAPTION>
NET ASSETS 1999 1998
---------- ---------------- ---------------
<S> <C> <C>
The Kroger Co. common stock $ 378,176,896 $ 654,913,963
================ ===============
CHANGES IN NET ASSETS 1999 1998
--------------------- ---------------- ---------------
Contributions $ 20,569,936 $ 18,443,212
Net appreciation(depreciation) (223,185,255) 260,908,978
Benefits paid to participants (28,613,716) (37,814,424)
Transfers in 16,077,288 638,544
Transfers to another trust (61,585,320)
---------------- ---------------
$ 276,737,067 $ 242,176,310
================ ===============
</TABLE>
8
<PAGE> 20
SCHEDULE 1
----------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(a) - Schedule of Assets Held for Investment Purposes
(Master Trust)
December 31, 1999
<TABLE>
<CAPTION>
Annual
Interest Maturity Carrying
Rate Date Cost Value
---------- -------- ------------ ---------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS:
- -------------------------
Short Term Investments with PIMCO $ 12,412,583 $ 12,408,956
=========== ===========
ALLOCATION:
----------
Profit Sharing $ 8,476,769 $ 8,474,292
Pension 318,786 318,693
ESOP 401(k) 3,617,028 3,615,971
----------- -----------
$ 12,412,583 $ 12,408,956
=========== ===========
</TABLE>
<PAGE> 21
SCHEDULE 1, CONT.
-----------------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(a) - Schedule of Assets Held for Investment Purposes
(Master Trust)
December 31, 1999
<TABLE>
<CAPTION>
Annual
Interest Maturity Carrying
Rate Date Cost Value
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENTS IN BASIC:
- --------------------
FNMA 92-16KD 7.000% 2005 4,759,312 4,924,296
FHLMC 1365PI 7.250% 2005 3,961,844 4,102,804
FNMA 92-182PH 7.000% 2005 2,881,109 3,066,915
FNMA 92-200H 7.000% 2006 2,946,875 3,091,259
FHLMC 1458J 7.000% 2005 4,856,601 5,072,994
FHLMC 1457PJ 7.000% 2006 4,922,875 5,100,398
FHLMC 1542H 6.500% 2003 5,915,832 6,014,579
FHLMC 1625H 6.000% 2008 9,695,313 9,881,290
FNMA 93-134G 6.500% 2006 7,415,000 7,749,473
FNMA 94-48E 6.000% 2007 6,002,062 6,363,531
FNMA 94-10PC 6.500% 2005 9,006,250 9,474,607
10 YR UST 7.875% 2004 4,042,185 4,064,910
FNMA 93-107D 6.500% 2002 2,902,969 2,980,593
FNMA 93-118H 6.500% 2004 5,932,992 5,986,453
FNMA 93-209J 6.000% 2008 4,641,333 4,770,699
------------ ------------
Total Dillon Companies, Inc.
Employee Master Trust $ 79,882,552 $ 82,644,801
============ ============
Fair Value $ 87,792,783
Wrap Value (5,147,982)
------------
$ 82,644,801
============
ALLOCATION:
----------
Profit Sharing $ 56,072,139 $ 58,011,051
Pension 887,484 918,172
ESOP 401(k) 22,922,929 23,715,578
------------ ------------
$ 79,882,552 $ 82,644,801
============ ============
</TABLE>
<PAGE> 22
SCHEDULE 1, CONT.
-----------------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(a) - Schedule of Assets Held for Investment Purposes
(Master Trust)
December 31, 1999
<TABLE>
<CAPTION>
Annual
Interest Maturity Carrying
Rate Date Cost Value
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
INVESTMENTS IN PIMCO:
- --------------------
Total Dillon Companies, Inc.
Employee Master Trust 6.640% Variable $ 45,750,000 $ 71,181,328
=========== ===========
Fair Value $ 68,938,237
Wrap Value 2,243,091
-----------
$ 71,181,328
===========
ALLOCATION:
----------
Profit Sharing $ 32,474,184 $ 50,525,804
Pension - -
ESOP 401(k) 13,275,816 20,655,524
----------- -----------
$ 45,750,000 $ 71,181,328
=========== ===========
INVESTMENTS IN STATE STREET FIXED FUND:
- --------------------------------------
Total Dillon Companies, Inc.
Employee Master Trust 6.476% Variable $ 28,750,000 $ 45,644,145
=========== ===========
Fair Value $ 43,668,592
Wrap Value 1,975,553
----------
$ 45,644,145
===========
ALLOCATION:
----------
Profit Sharing $ 20,407,274 $ 32,399,046
Pension - -
ESOP 401(k) 8,342,726 13,245,099
----------- -----------
$ 28,750,000 $ 45,644,145
=========== ===========
INVESTMENTS IN CDC INVESTMENT MANAGEMENT:
- ----------------------------------------
Total Dillon Companies, Inc. 6.200%
Employee Master Trust to 6.450% Variable $ 8,078,769 $ 10,547,923
=========== ===========
Fair Value $ 10,523,926
===========
Wrap Value 23,997
-----------
$ 10,547,923
===========
ALLOCATION:
----------
Profit Sharing $ 5,734,457 $ 7,487,108
Pension - -
ESOP 401(k) 2,344,312 3,060,815
----------- -----------
$ 8,078,769 $ 10,547,923
=========== ===========
</TABLE>
<PAGE> 23
SCHEDULE 1, CONT.
-----------------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(a) - Schedule of Assets Held for Investment Purposes
(Master Trust)
December 31, 1999
<TABLE>
<CAPTION>
Annual
Interest Maturity Carrying
Rate Date Cost Value
---------- -------- ------------ --------------
<S> <C> <C> <C> <C>
INVESTMENTS IN TRANSAMERICA LIFE INSURANCE:
- ------------------------------------------
Total Dillon Companies, Inc.
Employee Master Trust 6.05% Variable $ 25,000,000 $ 27,621,778
============ =============
Fair Value $ 26,001,380
Wrap Value 1,620,398
-------------
$ 27,621,778
=============
ALLOCATION:
----------
Profit Sharing $ 17,745,455 $ 19,606,441
Pension - -
ESOP 401(k) 7,254,545 8,015,337
----------- -------------
$ 25,000,000 $ 27,621,778
=========== =============
INVESTMENTS IN THE KROGER CO. COMMON STOCK:*
- ------------------------------------------
Total Dillon Companies, Inc.
Employee Master Trust $212,835,359 $ 640,803,185
=========== =============
ALLOCATION: SHARES
-----------
Profit Sharing 13,358,014 $111,943,070 $ 252,132,519
Pension 555,962 3,382,308 10,493,770
ESOP 401(k) 20,035,862 97,509,981 378,176,896
---------- ----------- -------------
33,949,838 $212,835,359 $ 640,803,185
========== =========== =============
</TABLE>
*Represents party in interest transactions.
<PAGE> 24
SCHEDULE 1, CONT.
-----------------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(a) - Schedule of Assets Held for Investment Purposes
(Master Trust)
December 31, 1999
<TABLE>
<CAPTION>
Annual
Interest Maturity Carrying
Rate Date Cost Value
---------- -------- ------------ --------------
<S> <C> <C> <C> <C>
INVESTMENTS IN TRUST FUNDS MANAGED BY:
- -------------------------------------
SANFORD C. BERNSTEIN & CO.:
--------------------------
Total Dillon Companies, Inc.
Employee Master Trust $ 62,168,505 $ 69,711,516
=========== ===========
ALLOCATION:
----------
Profit Sharing $ 42,817,319 $ 48,012,418
Pension - -
ESOP 401(k) 19,351,186 21,699,098
----------- -----------
$ 62,168,505 $ 69,711,516
=========== ===========
STATE STREET GLOBAL ADVISORS INDEX FUND:
---------------------------------------
Total Dillon Companies, Inc.
Employee Master Trust $ 86,307,797 $ 97,752,976
=========== ===========
ALLOCATION:
----------
Profit Sharing $ 54,325,736 $ 61,529,810
Pension - -
ESOP 401(k) 31,982,061 36,223,166
----------- -----------
$ 86,307,797 $ 97,752,976
=========== ===========
INVESTMENTS IN MELLON TRUST:
- ---------------------------
Total Dillon Companies, Inc.
Employee Master Trust $ 47,970,875 $ 93,702,898
=========== ===========
ALLOCATION:
----------
Profit Sharing $ - $ -
Pension 47,970,875 93,702,898
ESOP 401(k) - -
----------- -----------
$ 47,970,875 $ 93,702,898
=========== ===========
</TABLE>
<PAGE> 25
SCHEDULE 2
----------
DILLON COMPANIES, INC.
EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN
Item 27(d) - Schedule of Reportable Transactions
(Master Trust)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Current
Value on
Selling Cost of Date of Net Gain
Description of Transaction Price Price Asset Transactions or (Loss)
- -------------------------------------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
PIMCO
time deposits $82,180,000 -- $82,180,000 $82,180,000 --
PIMCO
time deposits -- $89,600,000 89,600,000 89,600,000 --
Mutual Benefit Life of New Jersey
investment contract -- 1,500,000 1,500,000 1,500,000 --
FNMA 90-128H
investment contract -- 69,669 69,669 69,669 --
FNMA 92-134H
investment contract -- 6,838,022 6,838,022 6,838,022 --
5 YR UST
investment contract -- 4,005,212 4,005,212 4,005,212 --
State Street Fixed Fund
trust investment -- 10,000,000 10,000,000 10,000,000 --
PIMCO
trust investment -- 6,000,000 6,000,000 6,000,000 --
CDC Investment Management
trust investment -- 6,921,256 6,921,256 6,921,256 --
Merrill Lynch
The Kroger Co. common stock*
724,445 shares 13,799,986 -- 13,799,986 13,799,986 --
Morgan Stanley
The Kroger Co. common stock*
1,697,500 shares 45,501,880 -- 45,501,880 45,501,880 --
Morgan Stanley
The Kroger Co. common stock*
423,800 shares -- 12,122,754 2,204,562 12,122,754 $ 9,918,192
Mellon Trust
The Kroger Co. common stock*
134,092 shares 2,110,904 -- 2,110,904 2,110,904 --
Sanford C. Bernstein & Co.
trust investment 400,000 -- 400,000 400,000 --
Sanford C. Bernstein & Co.
trust investment -- 15,036,095 15,036,095 15,036,095 --
Mellon Capital Index Fund
trust investment 1,000,000 -- 1,000,000 1,000,000 --
Mellon Capital Index Fund
trust investment -- 2,100,000 2,100,000 2,100,000 --
State Street Global Advisors Index Fund
trust investment -- 14,145,306 14,145,306 14,145,306 --
Mellon Trust
trust investment -- 3,610,904 3,610,904 3,610,904 --
</TABLE>
*Represents party in interest transactions.
