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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12.
</TABLE>
THE KROGER CO.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
AND
1999 ANNUAL REPORT
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[Kroger Logo]
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FINANCIAL HIGHLIGHTS
(IN MILLIONS EXCEPT PER SHARE DATA AND RATIOS, AS REPORTED)
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<CAPTION>
PERCENT
CALENDAR YEAR ENDED DECEMBER 31, 1999 1998 CHANGE
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<S> <C> <C> <C>
Five year return on Investment (share price appreciation) 213% 501%
Closing market price per share (1) $ 18.88 $ 30.25 (38%)
Total market value of common stock $15,754 $24,947 (37%)
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<CAPTION>
JANUARY 29, JANUARY 2, PERCENT
FISCAL YEAR ENDED 2000 1999 CHANGE
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<S> <C> <C> <C>
Total sales $45,352 $43,082 5%
EBITDA (2)(3)(4) $ 3,181 $ 2,783 14%
Earnings before extraordinary items (2) $ 966 $ 763 27%
Basic earnings per share before extraordinary items (2) $ 1.16 $ 0.94 23%
Diluted earnings per share before extraordinary items (2) $ 1.13 $ 0.89 27%
Average shares outstanding 829 816 2%
Average shares outstanding assuming dilution 858 851 1%
ERONOA (4)(5) 24% 24%
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</TABLE>
(1) Per share amounts have been retroactively restated to reflect the stock
split on June 7, 1999.
(2) Excludes merger-related costs, one-time expenses, and accounting changes.
(3) Earnings before interest, taxes, depreciation, amortization, and LIFO
charge.
(4) Not a GAAP measurement.
(5) EBITDA return on net operating assets.
(LOGO)COVER PRINTED ON RECYCLED
PAPER
<PAGE> 4
[KROGER LOGOS]
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THE KROGER CO.
AT A GLANCE
The merger between The Kroger Co. and Fred Meyer, Inc. created the
nation's largest supermarket company, with the broadest geographic coverage and
widest variety of formats in the food retailing industry. Here is a snapshot of
what Kroger looked like before and after the merger was completed in 1999:
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<CAPTION>
JANUARY 2, 1999 JANUARY 29, 2000
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Sales $28.2 billion $45.4 billion
Cash Flow $ 1.6 billion $ 3.2 billion
Food Stores 1,410 2,288
Convenience Stores 797 796
Jewelry Stores 0 389
States (food stores) 24 31
Banners (includes convenience stores) 14 25
Manufacturing Plants 34 42
Employees 213,000 305,000
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<PAGE> 6
TO OUR FELLOW SHAREHOLDERS:
For The Kroger Co. and our shareholders, 1999 was a year of achievement
and frustration.
We were impressed and gratified by the commitment of colleagues throughout
Kroger and Fred Meyer as we planned the merger of the two organizations. Our 14
integration committees included representatives from the corporate offices and
divisions of both companies. The committees successfully established the
blueprint that is expected to generate $380 million of combined synergy savings
in 2002. We extend a special thanks to our associates who worked so diligently
on the planning activities that created the "new" Kroger Co., the largest
supermarket company in America.
We were pleased that the merger received governmental approval and that
Kroger was required to sell only eight stores. But we were frustrated that the
review process lasted seven months. The delay caused uncertainty, especially for
our associates in the West, and prevented the early implementation of merger
integration plans. It also narrowed our window for achieving Year 2000
compliance on a corporate-wide basis. Associates throughout the "new" Kroger met
these challenges in superior fashion and worked as a team to generate first-year
synergies in excess of original projections.
We were pleased by Kroger's strong financial results in 1999:
- Record sales of $45.4 billion
- Record cash flow of $3.2 billion
- Earnings per diluted share of $1.13, an increase of 26% over estimated
combined earnings for 1998, after excluding merger costs and an
extraordinary item
- Combined merger synergies of $160 million that exceeded our fiscal 1999
target by $5 million
- Successful execution of the Year 2000 information systems plan, without
disruption to operations
Despite these achievements, investors and management were frustrated by
the decline in Kroger's stock price that began in early 1999 and continued
throughout the year. Our share price reached a high of $34.38 in March 1999,
after adjusting for a two-for-one stock split in June, and then fell steadily to
close at $16.56 on January 28, 2000. The index of peer group supermarket stocks
experienced a similar decline as investors shifted away from "old economy"
industries toward cyclical and technology stocks. The widespread decline in
supermarket stocks also reflected investors' concerns about the rapid
consolidation of the food retailing industry. Within the past two years, four of
the major supermarket firms have completed substantial mergers and have forecast
significant cost savings from those transactions. Investors have reacted
cautiously, reflecting their concern that merger synergies might not be
realized. Kroger management is firmly committed to achieving the cost savings
that were projected at the time of the merger with Fred Meyer. We are off to a
strong start.
Over the longer term, Kroger has established a solid track record of
creating significant value for shareholders. As you will see on page 19 of this
report, the price of Kroger shares has increased at an average annual rate of
22.4% since 1994, well above the 13.4% average annual gain for Kroger's peer
group.
Management is enthused about the Company's prospects for continued growth.
We offer the broadest geographic diversity and the widest variety of formats to
meet the needs of virtually every consumer. The "new" Kroger operates 2,300
supermarkets and multi-department stores under more than a dozen banners; 796
convenience stores; and 389 fine jewelry stores. In addition, Kroger's 42
manufacturing plants produce high-quality private label products that provide
value for customers and enhanced profits for shareholders.
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The merger has created tremendous opportunities to share new products,
merchandising programs and best practices across the Company. We will reduce
costs by achieving economies of scale in purchasing, manufacturing, information
systems, logistics and support systems. These merger benefits, in combination
with the Company's strong market shares in 31 states, promise a bright future
for Kroger and our shareholders.
OPERATING REVIEW
Kroger reported fiscal 1999 earnings of $966 million, or $1.13 per diluted
share, before an extraordinary item and merger costs. These results represent an
increase of approximately 26% over estimated combined earnings for fiscal 1998.
The prior-year estimate includes the actual results of Fred Meyer before merger
costs and an estimate of Kroger's pre-merger results, adjusted to exclude
one-time expenses; reflects the change to a new fiscal calendar; and removes the
53rd week from 1998 results. The 1999 figures include 52 weeks of results from
Ralphs, which was acquired by Fred Meyer on March 10, 1998 and contributed 47
weeks of results during the 1998 period.
On the same basis, total sales for 1999 increased approximately 6.1%, to
$45.4 billion. EBITDA totaled $3.2 billion. During 1999, Kroger invested a
record $1.9 billion in capital projects including store construction, logistics,
technology and acquisitions.
Net total debt increased $366 million to $8.7 billion because of higher
working capital. Some of the working capital increase resulted from the net
addition of 92 stores in 1999. Some reflected the continued "bulge" from
inventory increases that Kroger had initiated to avoid possible shortages
associated with Year 2000 effects. Management will devote substantial attention
to inventory and working capital reduction during 2000. The Company's goal is to
reduce working capital by $500 million over the next five years.
GROWTH OPPORTUNITIES
Kroger's fundamental strategy is:
TO ACHIEVE THE RESPONSIVENESS OF DECENTRALIZED MERCHANDISING AND
OPERATIONS, COMBINED WITH THE ECONOMIES OF SCALE AVAILABLE FROM COORDINATING
VOLUME-BASED ACTIVITIES AND CONSOLIDATING SUPPORT SYSTEMS.
The merger with Fred Meyer is consistent with this strategy because it
creates the leverage of a $45 billion company to generate economies in
purchasing, manufacturing, information systems, logistics, support systems and
administrative functions. At the same time, Kroger will maintain the outstanding
divisional banners, formats, merchandising and services that our customers know
and expect.
Kroger's primary financial goal is to increase annual earnings per share
by 16-18% over the next three years. We intend to achieve that target through a
combination of sales growth, margin improvement, deleveraging, stock repurchase
and debt refinancing.
Sales increases will be driven by growth in identical food store sales and
a 4.5-5% increase in retail square footage. Kroger's combination food and drug
stores generate high same-store sales increases because this format allows
customers to purchase all of their weekly needs in one neighborhood location,
thereby saving time and travel. Our Fred Meyer multi-department stores feature a
broad array of departments including grocery, electronics, apparel and home
furnishings, offering great convenience and value for time-pressed shoppers. And
the Company's price-impact warehouse stores -- operating under the Food 4 Less,
FoodsCo and PriceRite banners -- offer budget-conscious shoppers everyday low
prices, wide selection and superior quality perishables.
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Kroger's pharmacies are a key driver of identical sales growth. Our total
pharmacy sales have more than doubled in the past five years, finishing fiscal
1999 at $3.2 billion. Management believes that pharmacy sales will double again
within three years. Kroger has a strategic advantage in pharmacy because our
Peyton warehouses purchase pharmaceuticals and pharmacy supplies on a
corporate-wide basis and distribute them to our stores at very low cost.
New products and services also will enhance sales. Here are a few
examples:
- Last fall, Kroger supermarkets sold more than 37,000 high-ticket
electronics items, including DVD players and VCRs. These were
purchased at competitive cost through Fred Meyer's general
merchandise department.
- In 1999, Kroger opened 34 "Nature's Market" natural food sections
in supermarkets to serve the rapidly growing demand for natural and
organic foods. We will open 150 additional natural food sections in
2000.
- Last year, Kroger opened 22 on-site gas stations at supermarket
locations to enhance the one-stop shopping convenience of our
combination stores. Management expects to open 50 additional sites
this year.
STORE GROWTH
Kroger plans to complete 140-160 food store projects per year over the
next three years. In fiscal 2000 we expect to open 138 supermarkets, 11
price-impact warehouse stores and six multi-department stores. Most square
footage growth will take place within the 43 major markets where we currently
operate. In-market growth is more profitable than entering new markets because
it leverages fixed expenses such as advertising, manufacturing, overhead and
distribution across a larger store base. Kroger is fortunate to be located in
some of the nation's fastest-growing metropolitan areas that provide attractive
opportunities for expanded sales and profits. In addition, the Company plans to
open 22 convenience stores and five jewelry stores in fiscal 2000. Both formats
generate strong cash flow.
Kroger will continue to search for opportunities to build our retail
grocery business through the acquisition of strong regional operators. Earlier
this year, Kroger completed the acquisitions of Pay Less Super Markets, Inc.,
which operates eight grocery stores in Indiana; and Kessel Food Markets, Inc., a
privately owned chain of 20 supermarkets in Michigan. We are awaiting the
completion of the Federal Trade Commission review of our previously announced
agreement to purchase 74 Winn-Dixie stores in Texas and Oklahoma.
MARGIN IMPROVEMENT
Margin improvement will play a key role in driving earnings per share
growth. Merger synergies will lead the way throughout the Company. In
merchandising, the combined purchasing power of the new Kroger has enabled us to
negotiate more favorable terms from vendors for items ranging from pharmacy
vials to marshmallows. We also are leveraging our manufacturing business to
generate synergies. At year-end, 405 items were already being manufactured and
transferred between Kroger's East and West Regions. There is much more to come.
Expanded private-label sales and market share will contribute
significantly to margins. Private-label currently accounts for about 25% of
grocery sales dollars and 31% of grocery units sold in the pre-merger Kroger
divisions, but only 16-18% of grocery dollar sales in the western divisions. We
believe those divisions can substantially increase private-label sales as we
continue to grow our private-label franchise across the entire company.
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DELEVERAGING AND DEBT REFINANCING
Kroger expects to generate significant free cash flow over the next three
years. This will be used to reduce debt and repurchase Kroger common stock.
Kroger's long-term objective is to reduce debt to two times EBITDA. The Company
will refinance existing debt to reduce interest costs as opportunities become
available.
INTERNET
Kroger's primary Internet activity has been our participation as equity
partner in GlobalNetXchange, the first global business-to-business online
exchange serving the retail industry. We believe that business-to-business
Internet applications will increase efficiencies and reduce supply chain costs.
In addition, Kroger is continuing our analysis of home delivery and retail
Internet sales. We intend to give this activity careful attention.
COMMUNITY ACTIVITIES
Kroger has always encouraged its associates to be active, responsible
members of their communities through volunteer work, fundraising and public
service. The Company remains a strong supporter of programs to feed the hungry.
Last year, Kroger donated 14 million pounds of product to Second Harvest, a
national network of food banks. Kroger is the nation's largest retail donor of
food for the hungry.
In 1999, The Kroger Co. Foundation granted $3.1 million to non-profit
organizations, including human services, the United Way, and educational, arts
and civic groups. The Ralphs/Food 4 Less Foundation contributed $8 million to
charitable and civic groups in 1999, and The Fred Meyer Foundation donated
$600,000.
In addition, Kroger stores and divisions donated approximately $40 million
directly to communities where our customers and associates work. One example is
our practice of selling store gift certificates to non-profit groups at a
discount. Schools, churches and community groups then sell the certificates at
full face value and raise money for their charitable organization.
Kroger has a long-standing tradition of honoring colleagues who have made
extraordinary contributions to their communities. We extend our congratulations
to the winners of the Kroger Community Service Award for 1999. These colleagues
were recognized by their divisions for outstanding community service:
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Eddie Braithwaite, Ralphs Laura Leatherman, Pace Dairy Foods
Pam Bryant, Dillon Stores Bettye Mae Raymer, Louisville Division
Jason Bunch, Nashville Division Ramiro Rosales, Food 4 Less
Dixie Burmeister, City Market Elizabeth Ruckman, Fry's Food & Drug Stores
Edward Chatman Jr., Columbus Division Carolyn Ann Seiler, Southwest Division
Lillie Mae Chism, Winchester Farms Dairy Dan Setters, Cincinnati/Dayton Division
Annette Cobun, Mid-Atlantic Division Hugh Taylor, Smith's
Robert Hoyle, Atlanta Division Rose Marie Van Dick, QFC
Nancy Jones, Delta Division Robert Worley, Central Division
Mike Lara, Ralphs Deli Kitchen
Angel Tree Committee, Deli-Bakery Connection
Entire Fred Meyer Volunteer Group
Entire Staff of Store #637, Michigan Division
Southern District HOPE Committee, King Soopers
</TABLE>
EXECUTIVE CHANGES
On behalf of the entire Kroger Co., we extend thanks and congratulations
to the talented executives who announced their retirements in the past year. We
are grateful to the following colleagues for their important contributions, and
we wish them well.
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Dennis Hood, president of Fry's Food & Drug Stores, announced his
retirement in March after a 40-year career. George Golleher, President of
Ralphs, retired after 28 years in the southern California supermarket industry.
Mark Thompson, President of the Nashville Kroger Marketing Area, retired last
July after 39 years with the Company. Harold McIntire retired as President of
Food 4 Less after 39 years in the grocery business. Mike Huse, President of
Quality Food Centers, and Abel Porter, President of Smith's Food & Drug Centers,
also retired in 1999. Kenneth Martindale, formerly of Smith's and Fred Meyer,
Inc., and Laurel Hardt of Fred Meyer also retired.
PROMOTIONS
It was a busy year for executive promotions as Kroger realigned its
management team to keep pace with continued growth. The Kroger Co. extends
congratulations to the following executives who have accepted new
responsibilities.
David B. Dillon, Kroger President, assumed additional responsibilities as
Chief Operating Officer. W. Rodney McMullen was promoted to Executive Vice
President of Strategy, Planning and Finance. He previously served as Executive
Vice President and Chief Financial Officer. Mr. McMullen will be responsible for
Internet strategy, including business-to-business and retail opportunities. Don
W. McGeorge, formerly Senior Vice President, was promoted to Executive Vice
President. Geoffrey J. Covert was promoted to Senior Vice President and
President, Kroger Manufacturing. He had been Group Vice President and President,
Kroger Manufacturing. Warren F. Bryant was promoted to Senior Vice President of
Kroger after previously serving as President and CEO of Dillon Companies, Inc.
Donald E. Becker was promoted to Senior Vice President. He had been President of
the Central Kroger division in Indianapolis.
Other promotions to Kroger's senior management team were: J. Michael
Schlotman was promoted to Group Vice President and Chief Financial Officer. He
had spent the past five years as Vice President, Financial Services and Control.
Felicia D. Thornton, formerly Group Vice President of Finance and Administration
at Ralphs, was appointed Group Vice President of Retail Operations for the
Company. Carver L. Johnson joined Kroger as Group Vice President of Management
Information Systems. Derrick A. Penick was named Group Vice President of
Perishables Merchandising and Procurement. Terry L. Cox was promoted to Group
Vice President, Drug/GM Merchandising and Procurement.
At the division level, Kenneth Thrasher was named President of Fred Meyer
Stores. He had been Senior Vice President of Kroger. Paul Scutt was promoted to
President of the Central division. He previously served as Regional Vice
President of Kroger. Russell J. Dispense was promoted to President of Smith's
Food & Drug Centers. He had been Vice President of Marketing at King Soopers.
Michael J. Donnelly was appointed President of Fry's after serving as Vice
President of Merchandising. Thomas B. Rech was appointed President of the
Nashville division. He had been Executive Vice President. Dave Hirz, formerly
Group Vice President of Store Operations at Food 4 Less, was promoted to
President. Darrell Webb, formerly Group Vice President of National Procurement
for Kroger, was promoted to President of QFC.
In closing, we thank our 305,000 associates of the "new" Kroger for your
dedication to serving customers across the country. Your unmatched commitment to
service, combined with the continued support of our shareholders, will ensure
that Kroger remains the premier supermarket company in America.
/s/ Joseph A. Pichler
JOSEPH A. PICHLER
Chairman and
Chief Executive Officer
/s/ David B. Dillon
DAVID B. DILLON
President and
Chief Operating Officer
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, May 10, 2000
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the
REGAL HOTEL, 150 W. 5TH STREET, Cincinnati, Ohio, on June 22, 2000, at 11 A.M.,
for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 2003, and one director to serve until the annual
meeting of shareholders in 2001, or until their successors have been
elected and qualified;
2. To consider and act upon a proposal to ratify the selection of auditors
for the Company for the year 2000;
3. To act upon a shareholder proposal, if properly presented at the annual
meeting, to recommend that the Board take the necessary steps to cause
all directors to be elected annually as opposed to in classes;
4. To act upon a shareholder proposal, if properly presented at the annual
meeting, to request that the Board adopt a policy of removing
genetically engineered products from all private label goods and to
label those goods that may contain genetically engineered products;
5. To act upon a shareholder proposal, if properly presented at the annual
meeting, to recommend compensation limitations for officers and
directors; and
6. To transact such other business as may properly be brought before the
meeting;
all as set forth in the Proxy Statement accompanying this Notice. Holders of
common shares of record at the close of business on April 26, 2000, will be
entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED
AT THE MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA
THE INTERNET OR TELEPHONE, OR SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT AT
ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
By order of the Board of
Directors,
Paul W. Heldman, Secretary
PROXY STATEMENT
Cincinnati, Ohio, May 10, 2000
The accompanying proxy is solicited by the Board of Directors of The
Kroger Co., and the cost of solicitation will be borne by the Company. The
Company will reimburse banks, brokers, nominees, and other fiduciaries for
postage and reasonable expenses incurred by them in forwarding the proxy
material to their principals. The Company has retained Georgeson Shareholder
Communications Inc., 17 State Street, New York, New York to assist in the
solicitation of proxies and will pay that firm a fee estimated at present not to
exceed $15,000. Proxies may be solicited personally, or by telephone, as well as
by use of the mails.
Joseph A. Pichler, John T. LaMacchia, and T. Ballard Morton, Jr., all of
whom are directors of the Company, have been named members of the Proxy
Committee.
The principal executive offices of The Kroger Co. are located at 1014 Vine
Street, Cincinnati, Ohio 45202-1100. Its telephone number is 513-762-4000. This
Proxy Statement and Annual Report, and the accompanying proxy, were first sent
or given to shareholders on May 10, 2000.
As of the close of business on April 26, 2000, the Company's outstanding
voting securities consisted of 830,804,611 shares of common stock, the holders
of which will be entitled to one vote per share at the annual meeting. The
shares represented by each proxy will be voted unless the proxy is revoked
before it is exercised. Revocation may be in writing to the Secretary of the
Company or in person at the meeting or by appointment of a
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subsequent proxy. The laws of Ohio, under which the Company is organized,
provide for cumulative voting for the election of directors. If notice in
writing is given by any shareholder to the President, a Vice President, or the
Secretary of the Company not less than 48 hours before the time fixed for
holding the meeting that the shareholder intends to cumulate votes for the
election of directors and, if an announcement of the giving of that notice is
made by or on behalf of the shareholder or by the Chairman or Secretary upon the
convening of the meeting, each shareholder will have the right to cumulate votes
at the election. If cumulative voting is in effect, a shareholder voting for the
election of directors may cast a number of votes equal to the number of
directors being elected times the number of shares held on the record date for a
single nominee or divide them among nominees in full votes in any manner. Any
vote "FOR" the election of directors will constitute discretionary authority to
the Proxy Committee to cumulate votes, as the Proxy Committee determines, if
cumulative voting is requested.
The effect of broker non-votes and abstentions on matters presented for
shareholder vote is as follows:
- The election of directors is, pursuant to Ohio law, determined by
plurality; broker non-votes and abstentions, therefore, will have no
effect on that proposal.
- Ratification by shareholders of the selection of auditors requires
the affirmative vote of the majority of shares participating in the
voting. Accordingly, abstentions will have no effect on the
proposal.
- The affirmative vote of a majority of shares participating in the
voting on a shareholder proposal is required for adoption of the
resolution. Proxies will be voted AGAINST the resolution unless the
Proxy Committee is otherwise instructed on a proxy properly executed
and returned. Abstentions and broker non-votes will have no effect
on the proposal.
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PROPOSALS TO SHAREHOLDERS
ELECTION OF DIRECTORS
(ITEM NO. 1)
The Board of Directors, as now authorized, consists of 18 members divided
into three classes. Five directors are to be elected at the annual meeting to
serve until the annual meeting in 2003, and one director is to be elected at the
annual meeting to serve until the annual meeting in 2001, or until their
successors have been elected by the shareholders or by the Board of Directors
pursuant to the Company's Regulations, and qualified. Candidates for director
receiving the greatest number of votes cast by holders of shares entitled to
vote at a meeting at which a quorum is present are elected, up to the maximum
number of directors to be chosen at the meeting. The committee memberships
stated below are those in effect as of the date of this proxy statement. It is
intended that, except to the extent that authority is withheld, the accompanying
proxy will be voted for the election of the following persons:
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PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE CONTINUING UNTIL 2003
REUBEN V. ANDERSON Mr. Anderson is a member, in the Jackson, Mississippi 57 1991
office, of Phelps Dunbar, a New Orleans law firm.
Prior to joining this law firm, he was a justice of
the Supreme Court of Mississippi. Mr. Anderson is a
director of Trustmark National Bank, BellSouth
Corporation and Mississippi Chemical Corp. He is chair
of the Social Responsibility Committee and a member of
the Audit Committee.
CLYDE R. MOORE Mr. Moore was elected President and Chief Executive 46 1997
Officer of Thomas & Betts Corporation, a manufacturer
of electrical and electronic components, in 1997. He
is also one of its directors. Mr. Moore served as
President and Chief Operating Officer of Thomas &
Betts Corporation from 1994-1997 and as its
President-Electrical Division from 1992-1994. He is
vice chair of the Financial Policy Committee and a
member of the Audit Committee.
JOSEPH A. PICHLER Mr. Pichler is Chairman of the Board and Chief 60 1983
Executive Officer of Kroger. He is a director of
Milacron Inc. and Federated Department Stores, Inc.
Mr. Pichler is vice chair of the Executive Committee.
STEVEN R. ROGEL Mr. Rogel was elected Chairman of the Board of 57 1999
Weyerhaeuser Company in 1999 and has been President
and Chief Executive Officer and a director thereof
since December 1997. Before that time he was Chief
Executive Officer, President and a director of
Willamette Industries, Inc. Mr. Rogel served as Chief
Operating Officer of Willamette Industries, Inc. until
October 1995 and, before that time, as an executive
and group vice president for more than five years. Mr.
Rogel is a member of the Corporate Governance
Committee.
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<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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<S> <C> <C> <C>
MARTHA ROMAYNE SEGER Dr. Seger is a Financial Economist and was a 68 1991
Distinguished Visiting Professor at Central Michigan
University and Adrian College from 1994-1999. From
1991-1993 she was the John M. Olin Distinguished
Fellow at The Karl Eller Center of the University of
Arizona. Dr. Seger was a member of the Board of
Governors of the Federal Reserve System from
1984-1991. She is a director of Amerisure Companies;
Fluor Corporation; UniSource Energy Corporation;
Tucson Electric Power Company; and Xerox Corporation.
Dr. Seger is a member of the Financial Policy and
Social Responsibility Committees.
NOMINEE FOR DIRECTOR FOR TERM OF OFFICE CONTINUING UNTIL 2001
RONALD W. BURKLE Mr. Burkle became Chairman of the Executive Committee 47 1999
of the Board of Directors of Kroger, effective as of
the completion of the merger of Kroger and Fred Meyer
in May 1999. He had been Chairman of the Board of Fred
Meyer since September 1997. Mr. Burkle is the Managing
General Partner of The Yucaipa Companies, a private
investment firm that invests primarily its own capital
and was the largest shareholder of Fred Meyer. He also
serves as a director of Kaufman & Broad Home
Corporation, and a Trustee of the National Urban
League, and was a member of the Fred Meyer, Inc. Board
of Directors since 1997.
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 2002
ROBERT D. BEYER Mr. Beyer is President of Trust Company of the West, 40 1999
an investment management firm, since 1995. From 1991
to 1995, he was the co-Chief Executive Officer of
Crescent Capital Corporation, which was acquired by
TCW in 1995. Mr. Beyer is also a member of the Board
of Directors of TCW Asset Management Company, American
Restaurant Group, Inc. and a commissioner of the Los
Angeles City Employees' Retirement System. He is a
member of the Financial Policy Committee.
CARLTON J. JENKINS Mr. Jenkins is Chief Executive Officer of One Net 44 1999
Now.Com, LLC, an internet company that operates a web
site providing users with a wide array of services,
including free home-pages, e-mail, and membership in
on-line communities. Prior to that he served as
Chairman, President, and Chief Executive Officer of
Founders National Bank of Los Angeles from 1991 to
1999. Mr. Jenkins is a director of Dryades Savings
Bank. He is a member of the Audit Committee.
</TABLE>
9
<PAGE> 15
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JOHN T. LAMACCHIA Mr. LaMacchia is President, Chief Executive Officer, 58 1990
and a director of CellNet Data Systems, Inc., a
provider of wireless data communications, since May
1999. From October 1993 through February 1999, Mr.
LaMacchia was President and Chief Executive Officer,
Cincinnati Bell Inc. He is a director of Broadwing,
Inc. and Burlington Resources, Inc. CellNet Data
Systems, Inc. has filed a voluntary petition for
bankruptcy under Chapter 11 of the United States
Bankruptcy Code in connection with a proposed
acquisition of the company's assets and assumption of
certain debts by Schlumberger Ltd. Mr. LaMacchia is
vice chair of the Compensation Committee and a member
of the Corporate Governance and Executive Committees.
EDWARD M. LIDDY Mr. Liddy is Chairman of the Board, President and 54 1996
Chief Executive Officer of The Allstate Corporation,
the parent of Allstate Insurance Company, a personal
lines insurance company. Prior to this, he was
President and Chief Operating Officer of the Allstate
Corporation from 1994-1998 and Senior Vice President
and Chief Financial Officer of Sears, Roebuck and Co.,
where he held a variety of senior operating and
financial positions since 1988. Mr. Liddy is chair of
the Financial Policy Committee and a member of the
Corporate Governance Committee.
T. BALLARD MORTON, JR. Mr. Morton is Executive in Residence of the College of 67 1968
Business & Public Administration of the University of
Louisville. He is a director of LG&E Energy Corp. Mr.
Morton is chair of the Compensation Committee, vice
chair of the Audit Committee, and a member of the
Executive Committee.
KATHERINE D. ORTEGA Ms. Ortega served as an Alternate Representative of 65 1992
the United States to the 45th General Assembly of the
United Nations in 1990-1991. Prior to that, she served
as Treasurer of the United States. Ms. Ortega is a
director of Ultramar Diamond Shamrock Corporation;
Ralston Purina Co.; and Rayonier Inc.; and an Advisory
Board Member of Washington Mutual Investors Fund. She
is chair of the Audit Committee and a member of the
Social Responsibility Committee.
</TABLE>
10
<PAGE> 16
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BOBBY S. SHACKOULS Mr. Shackouls has been Chairman of the Board of 49 1999
Burlington Resources Inc., a natural resources
business, since July 1997 and its President and Chief
Executive Officer since December 1995. He has been a
director of that company since 1995 and President and
Chief Executive Officer of Burlington Resources Oil
and Gas Company (formerly known as Meridian Oil Inc.),
a wholly-owned subsidiary of Burlington Resources,
since 1994. Mr. Shackouls is a member of the Financial
Policy Committee.
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 2001
JOHN L. CLENDENIN Mr. Clendenin is Chairman Emeritus of BellSouth 65 1986
Corporation, a holding company with subsidiaries in
the telecommunications business. From January 1984
through December 1996 he was its Chairman of the Board
and Chief Executive Officer. Mr. Clendenin is a
director of Wachovia Corp.; Equifax Incorporated;
Nabisco Group Holdings Corp.; Nabisco Holdings Corp.;
Springs Industries, Inc.; Coca Cola Enterprises, Inc.;
The Home Depot, Inc.; Powerwave Technologies, Inc.;
and National Service Industries, Inc. He is chair of
the Corporate Governance Committee and a member of the
Compensation Committee.
DAVID B. DILLON Mr. Dillon was elected President and Chief Operating 49 1995
Officer of Kroger in 2000. He served as President in
1999, and prior thereto as President and Chief
Operating Officer since 1995. Mr. Dillon was elected
Executive Vice President in 1990; and President of
Dillon Companies, Inc., in 1986. He is a director of
Convergys Corporation. Mr. Dillon is a member of the
Executive Committee.
BRUCE KARATZ Mr. Karatz has been the Chairman of the Board, 54 1999
President, and Chief Executive Officer of Kaufman &
Broad Home Corporation since July 1993 and its
President, Chief Executive Officer and a director
since 1986. He is also a director of Honeywell
International Inc. and National Golf Properties, Inc.
and a Trustee of the RAND Corporation. Mr. Karatz is
Chairman of the California Business Roundtable and of
the Los Angeles World Affairs Council. He is a member
of the Compensation Committee.
THOMAS H. O'LEARY Mr. O'Leary is the retired Chairman of Burlington 66 1977
Resources Inc., a natural resources business. He is a
member of the Compensation and the Corporate
Governance Committees.
</TABLE>
11
<PAGE> 17
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JAMES D. WOODS Mr. Woods is Chairman Emeritus and Consultant of Baker 68 1994
Hughes Incorporated, a company that provides equipment
and services to the petroleum and process industries.
From 1989-1997 he was Chairman of the Board of Baker
Hughes Incorporated, and its President and Chief
Executive Officer from 1987-1996. Mr. Woods is a
director of Howmet International Inc.; Varco
International; OMI Corporation; Kaiser Aluminum and
Wynn's International Inc. He is vice chair of the
Social Responsibility Committee and a member of the
Financial Policy Committee.
</TABLE>
- --------------------------------------------------------------------------------
(1) Except as noted, each of the directors has been employed by his or her
present employer (or a subsidiary) in an executive capacity for at least
five years.
12
<PAGE> 18
INFORMATION CONCERNING THE BOARD OF DIRECTORS
DIRECTORS' COMPENSATION
Each non-employee director is currently paid an annual retainer of $32,000
plus fees of $1,500 for each board meeting and $1,200 for each committee meeting
attended. Committee chairs receive an additional annual retainer of $4,000.
Directors who are employees of the Company receive no compensation for service
as directors. The Company provides accidental death and disability insurance for
directors at a cost to the Company in 1999 of $108 per director. The Company
also provides a major medical plan for directors.
Under the 1999 Long-Term Incentive Plan, in 1999 the Company granted to
each of its non-employee directors owning a minimum of 1,000 shares of Company
common stock as of the date of the annual meeting of shareholders, options to
purchase 2,000 shares of common stock at an option price equal to the fair
market value of the stock at the date of the grant, and each non-employee
director received a grant on that date. The options vest in equal share amounts
on the five annual anniversaries of the date of grant. Based on the closing
price of Kroger stock on the New York Stock Exchange, as of January 29, 2000,
the value of each grant of options made in 1999, none of which were exercisable,
was $0.
The Company has an unfunded retirement program for outside directors first
elected to the Board prior to July 1, 1997. The Board has adopted no retirement
plan for directors newly elected after that date. The retirement benefit is the
average compensation for the five calendar years preceding retirement. Directors
who retire from the Board prior to age 70 will be credited with 50% vesting
after five years of service and an additional 10% for each year served
thereafter, up to a maximum 100%. Benefits for directors who retire prior to age
70 will commence at the time of retirement from the Board or age 65, whichever
comes later.
COMMITTEES OF THE BOARD
The Board of Directors has a number of standing committees including
Audit, Compensation, and Corporate Governance Committees. During 1999, the Audit
Committee met three times, the Compensation Committee met five times, and the
Corporate Governance Committee met four times. Committee memberships are shown
on pages 8 through 12 of this Proxy Statement. The Audit Committee reviews
external and internal auditing matters and recommends the selection of the
Company's independent auditors for approval by the Board and ratification by
shareholders. The Compensation Committee determines the compensation of the
Company's senior management and administers its stock option and benefit
programs. The Corporate Governance Committee is responsible for developing
criteria for selecting and retaining members of the Board; seeks out qualified
candidates for the Board; and reviews the performance of the Company, the Chief
Executive Officer, and the Board. The Board of Directors met nine times in 1999.
During 1999, all incumbent directors attended at least 75% of the aggregate
number of Board meetings and committee meetings on which that director was a
member except for Mr. Rogel who attended 71% of the aggregate number of Board
and committee meetings. Mr. Rogel missed one meeting due to a schedule conflict
pre-existing at the time he became a member of the Board. Had this conflict not
occurred, he would have attended at least 75% of the aggregate number of Board
meetings and committee meetings.
The Corporate Governance Committee will consider shareholder
recommendations for nominees for membership on the Board of Directors.
Recommendations relating to the Company's annual meeting in June 2001, together
with a description of the proposed nominee's qualifications and other relevant
information, must be submitted in writing to Paul W. Heldman, Secretary of the
Company, and received at the Company's executive offices not later than January
10, 2001.
CERTAIN TRANSACTIONS
The law firm of Phelps Dunbar, of which Reuben V. Anderson is a partner,
rendered legal services to the Company that resulted in fees paid to the law
firm by the Company in 1999 of $75,951. The management of the Company has
determined that amounts paid by the Company for the services are fair and
competitive.
13
<PAGE> 19
COMPENSATION OF EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION
The following table shows the compensation for the past three years of the
Chief Executive Officer and each of the Company's four most highly compensated
executive officers, excluding the Chief Executive Officer (the "named executive
officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION(1)
---------------------------------- -------------------------
AWARDS
-------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(2) (3) (4) (5)
Joseph A. Pichler 1999 $903,077 $813,213 $45,803 200,000 $65,356
Chairman and Chief (6) $ 44,615 $ 47,045
Executive Officer 1998 $560,385 $634,550 $32,133 100,000 $45,974
1997 $471,508 $381,688 $21,441 90,000 $30,575
David B. Dillon 1999 $481,539 $469,241 $10,350 100,000 $16,066
President and Chief (6) $ 32,308 $ 33,253
Operating Officer 1998 $409,615 $407,925 $ 7,702 70,000 $12,157
1997 $351,477 $254,458 $ 5,934 60,000 $ 9,280
Michael S. Heschel 1999 $393,269 $319,601 $20,871 60,000 $30,356
Executive Vice
President (6) $ 25,962 $ 20,321
and Chief Information 1998 $332,452 $216,488 $14,525 $ 533,626 45,000 $21,255
Officer 1997 $291,292 $207,548 $11,703 45,000 $16,020
W. Rodney McMullen 1999 $380,000 $302,974 $ 4,360 60,000 $ 7,657
Executive Vice
President (6) $ 21,538 $ 14,779
1998 $268,462 $181,300 $ 2,709 $ 667,032 60,000 $ 5,147
1997 $205,769 $114,506 $ 1,578 $ 79,375 50,000 $ 3,524
Warren F. Bryant 1999 $415,028 $248,661 $12,295 60,000 $18,860(7)
Senior Vice President (6) $ 25,417 $ 13,301
1998 $302,296 $208,257 $ 5,839 45,000 $12,511
1997 $292,972 $ 36,492 $ 5,087 45,000 $10,630
</TABLE>
- ------------
(1) During the period presented, the Company has made no long-term incentive
plan payouts other than restricted stock and stock options.
(2) Represents reimbursement for the tax effects of payment for certain premiums
on a policy of life insurance.
(3) Messrs. Pichler, Dillon, Heschel, McMullen, and Bryant had 600,000, 49,600,
68,000, 73,000, and 56,000, shares outstanding, respectively, at January 29,
2000. These shares had an aggregate value of $9,825,000, $812,200,
$1,113,500, $1,195,375, and $917,000, respectively, based on the market
price of the Company's common stock on January 29, 2000. Restrictions
remaining on 400,000 shares of restricted stock awarded to Mr. Pichler in
1995, previously reported as a long-term incentive plan award, lapsed on
February 15, 2000, based on performance goals achieved in 1995 through 1999
and more particularly described in the Compensation Committee report that
follows. The restrictions on 9,600 shares of restricted stock awarded to Mr.
Dillon lapse in 2000. The restrictions on 8,000, 4,000, 8,000, and 8,000
shares, respectively, awarded to Mr. Heschel, lapse in 2000, 2001, 2002, and
2003, respectively. The restrictions on 9,000, 7,000, 7,000, and 10,000
shares, respectively, awarded to Mr. McMullen, lapse in 2000, 2001, 2002,
and 2003, respectively. The restrictions on 6,400, 2,400, 2,400, 2,400, and
2,400 shares, respectively, awarded to Mr. Bryant, lapse in 2000, 2001,
2002, 2003, and 2004, respectively. The restrictions on Mr. Pichler's
remaining 200,000 shares, Mr. Dillon's remaining 40,000 shares, Mr.
Heschel's remaining 40,000 shares, Mr. McMullen's remaining 40,000 shares,
and Mr. Bryant's remaining 40,000, all awarded in 1999, lapse as to 20%,
30%, and 50%, respectively, on each of the three annual anniversary dates of
the award, but only to the extent that the performance criteria established
by the Compensation Committee on the date of the grant are achieved. The
Company is currently prohibited by contract from paying cash dividends on
its common stock but, should this prohibition be lifted, dividends, as and
when declared, would be payable on these shares.
14
<PAGE> 20
(4) Represents options granted during the respective fiscal year. Half of the
options granted vest for equal number of shares in the five succeeding years
from the date of grant. The other half vest based on the performance of the
Company's common stock, as more particularly described below. Options
terminate in 10 years if not earlier exercised or terminated. No stock
appreciation rights ("SARs") were granted in any of the three years
presented.
(5) For 1999, these amounts include the Company's matching contribution under
The Kroger Co. Savings Plan in the amounts of $1,056, $1,536, $1,056,
$1,536, and $1,600 respectively, for Messrs. Pichler, Dillon, Heschel,
McMullen, and Bryant and reimbursement of certain premiums for policies of
life insurance in the amounts of $64,300, $14,530, $29,300, $6,121, and
$17,260, respectively, for Messrs. Pichler, Dillon, Heschel, McMullen and
Bryant.
(6) The amounts shown in this row reflect the transition period of January
3 -- January 30, 1999, due to the change in the Company's fiscal year.
(7) $10,266 of this amount represents an additional payment to Mr. Bryant
pursuant to the Company's relocation program.
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which
options to purchase common stock of the Company are granted to officers and
other employees of the Company and its subsidiaries. Half of the stock option
grants made in 1999 to key executives of the Company, including the named
executive officers, are performance-based options. Those options vest during the
first four years from the date of grant only if the Company's stock price has
achieved a 75% appreciation from the option price. Thereafter, those options
vest only if the Company's stock price has achieved a minimum of a 15%
appreciation per annum from the date of grant or 252% appreciation, whichever is
less. The following table shows option grants in fiscal year 1999 to the named
executive officers:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
- --------------------------------------------------------------------------- -----------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED (1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 0% 5% (2) 10% (2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Pichler 200,000 1.95% $27.17 5/26/2009 $0 $3,392,285 $8,582,311
David B. Dillon 100,000 0.97% $27.17 5/26/2009 $0 $1,696,143 $4,291,156
Michael S. Heschel 60,000 0.58% $27.17 5/26/2009 $0 $1,017,686 $2,574,693
W. Rodney McMullen 60,000 0.58% $27.17 5/26/2009 $0 $1,017,686 $2,574,693
Warren F. Bryant 60,000 0.58% $27.17 5/26/2009 $0 $1,017,686 $2,574,693
</TABLE>
- ------------
(1) No SARs were granted or outstanding during the fiscal year. Half of these
options vest in equal number of shares on the five annual anniversary dates
of the date of grant. The other half vest as described above this chart. The
options terminate in 10 years if not earlier exercised or terminated.
(2) At these levels of assumed annual appreciation of stock price, none of the
performance-based options will vest.
The assumptions set forth in the chart above are merely examples and do
not represent predictions of future stock prices or a forecast by the Company
with regard to stock prices.
15
<PAGE> 21
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR AND OPTION/SAR VALUES
The following table shows information concerning the exercise of stock
options during fiscal year 1999 by each of the named executive officers and the
fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES TABLE
- -----------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS
ACQUIRED F/Y END (1)(#) AT F/Y END (1)($)
ON
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph A. Pichler 60,000 $1,429,026 901,000/317,000 $ 9,191,770/$84,308
David B. Dillon 20,000 $ 451,550 553,000/181,000 $ 5,518,290/$56,205
Michael S. Heschel 0 $ 0 79,334/114,000 $ 366,544/$42,154
W. Rodney McMullen 12,000 $ 218,236 381,000/129,000 $ 3,617,600/$46,838
Warren F. Bryant 0 $ 0 328,000/114,000 $ 3,091,145/$42,154
</TABLE>
- ------------
(1) No SARs were granted or outstanding during the fiscal year.
LONG-TERM INCENTIVE PLAN AWARDS
During fiscal 1999, the following Long-Term Incentive Plan awards were
made:
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
PERFORMANCE OR PRICE-BASED PLANS
NUMBER OF SHARES, OTHER PERIOD UNTIL ------------------------------------------
UNITS OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS(#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Joseph A. Pichler 200,000 May 27(1) 0 200,000 200,000
David B. Dillon 40,000 May 27(1) 0 40,000 40,000
Michael S. Heschel 40,000 May 27(1) 0 40,000 40,000
W. Rodney McMullen 40,000 May 27(1) 0 40,000 40,000
Warren F. Bryant 40,000 May 27(1) 0 40,000 40,000
</TABLE>
- ------------
(1) The performance-based restricted stock awards to the named executive
officers provide that the restrictions will lapse as to 20%, 30%, and 50% of
the shares, on the first, second, and third annual anniversaries of the date
of the award, but only if the merger-related cost reductions as determined
by the Compensation Committee equal or exceed $75 million, $150 million, and
$225 million, respectively.
COMPENSATION COMMITTEE REPORT
The Company's compensation policies are applicable to virtually all levels
of its work force, including its executive officers. These policies require the
Company to:
- be competitive in total compensation;
- include, as part of total compensation, opportunities for equity
ownership;
- use incentives that offer more than competitive compensation when the
Company achieves superior results;
- base incentive payments on earnings before interest, taxes,
depreciation, amortization, and LIFO charges ("EBITDA") and on sales
results.
Accordingly, the Company's compensation plans include grants of stock
options for executive, management, and some hourly employees. In determining the
size of option grants to the Chief Executive Officer and the other
16
<PAGE> 22
executive officers, the Compensation Committee considers, without use of a
formula, competitive practices among retailers, the individual executive
officer's level within Kroger and the level of past awards of stock options and
restricted stock to the individual.
The 1999 Long-Term Incentive Plan, approved by the shareholders at the
Annual Meeting in 1999, authorized the issuance of 20,000,000 shares of common
stock. During 1999, Kroger granted 11,265,000 stock options to approximately
8,600 employees throughout the Company. The number of options granted and the
number of employees receiving options was typical of grants made in the past
several years considering the effect of the merger of Kroger and Fred Meyer,
Inc. The Company expects to continue to use a broad-based stock option program
as a means of attracting and retaining employees, due to the direct relationship
between value received by the optionee and shareholder return.
The Compensation Committee establishes the fixed portion of executive
officer cash compensation, or salary, by considering internal equity and
competitor salary data as described below. Additionally, a large percentage of
employees at all levels of the organization, including executive officers, are
eligible to receive a bonus incentive based upon Company or unit performance.
Bonus potentials for executives are established by level within the Company, and
actual payouts are based on achievement of sales and EBITDA targets. Actual
payouts can exceed these potentials if results exceed the targets. Approximately
50% of total potential cash compensation of the executive officers is based on
Company or unit EBITDA and sales performance.
The Committee establishes salaries for executive officers that generally
are at or above the median of compensation paid by peer group companies for
comparable positions (where data for comparable positions are available) with a
bonus potential that, if realized, would cause their total cash compensation to
be in the upper quartile of peer group compensation. In 1998, the Compensation
Committee engaged two outside consultants, Towers Perrin and SCA Consulting,
Inc., to determine whether the compensation of executive officers actually met
this compensation philosophy. Each consultant independently concluded that cash
compensation for the Chief Executive Officer and the other executive officers
fell short of the Committee's goal. Accordingly, the Committee has determined to
make appropriate adjustments to salaries and bonuses over a 2-year period. The
Committee has engaged the same consultants for 1999. The Committee is satisfied
that the compensation of the executive officers meets the Committee's
objectives.
The Company's outstanding performance in 1999 is reflected by bonuses paid
for all executive officers. Bonus payments to the executive officers for 1999
were based on the combined operations of the Company, including the new
operations resulting from the Fred Meyer merger for the second half of the year.
Excluding the Chief Executive Officer and the others named below, executive
officers earned 96.07% of their bonus potentials. Mr. Covert earned 153.58% of
his bonus potential as his bonus plan is based on the performance of the
manufacturing group's operation in addition to the Company's as a whole. Mr.
Cox, whose bonus plan is also based on the performance of specific operations
for which he is responsible, as well as the Company as a whole, earned 133.18%
of his bonus potential.
Contemporaneous with the closing of the Fred Meyer merger, each of the
named executive officers, along with approximately 150 other executives,
received an award of performance-based restricted stock. The restrictions on
these awards, more particularly described under the heading "Long-Term Incentive
Plan Awards" above, lapse only if the Company achieves or exceeds the expected
cost savings from the Fred Meyer merger.
The compensation of Kroger's Chief Executive Officer is determined
annually pursuant to the policies described above. Mr. Pichler's variable
compensation or bonus for the last fiscal year, which represented 87.37% of his
bonus potential, reflects the extent to which the Company achieved the EBITDA
and sales targets that were established by this Committee at the beginning of
the year. The value of stock options granted to Mr. Pichler in the last fiscal
year fluctuates based on the Company's performance in the stock market.
17
<PAGE> 23
In 1995, the Compensation Committee engaged a consultant, Towers Perrin,
to compare the Chief Executive Officer's compensation to that of CEOs of other
retailers and found that Mr. Pichler's compensation was not competitive. As a
result, the Board made a performance-based restricted stock award under which
Mr. Pichler could earn as many as 100,000 shares over a five-year period. As
with all other shares of Company common stock, these were adjusted to 400,000
shares to reflect the effect of the 2-for-1 stock split in 1997 and the 2-for-1
stock split in 1999. The restrictions on these shares lapsed on February 15,
2000, but only as to that number of shares remaining after certain reductions
based on a comparison of the Company's shareholder return to that of a group
including the Peer Group (see Performance Graph, below). In general, each fiscal
year the Chief Executive Officer could earn up to 80,000 of the shares depending
upon the extent to which the Company's performance exceeded that of the
reference group. On the other hand, up to 40,000 otherwise previously earned
shares could be forfeited in those years in which the Company's performance did
not exceed the median compared to that same group. Mr. Pichler earned the
following shares under the Plan:
<TABLE>
<S> <C>
1995 80,000
1996 40,000
1997 80,000
1998 80,000
1999 (20,000)
-------
Total 260,000
</TABLE>
Mr. Pichler also is party to an employment contract with the Company that is
more particularly described elsewhere in the Proxy statement. (See p. 22). That
agreement establishes minimum compensation at levels below his total
compensation determined in consideration of the factors identified above.
The Omnibus Budget Reconciliation Act of 1993 places a $1,000,000 limit on
the amount of certain types of compensation for each of the executive officers
that is tax deductible by the Company. The Company believes that its 1999
Long-Term Incentive Plan, under which stock option grants and restricted stock
awards were made to the executive officers, complies with the Internal Revenue
Service's regulations on the deductibility limit. Accordingly, the compensation
expense incurred thereunder should be deductible. The Company continues to
consider modifications to its other compensation programs based on the
regulations. The Company's policy is, primarily, to design and administer
compensation plans that support the achievement of long-term strategic
objectives and enhance shareholder value. Where it is material and supports the
Company's compensation philosophy, the Committee also will attempt to maximize
the amount of compensation expense that is tax deductible by the Company.
Compensation Committee:
T. Ballard Morton, Jr., Chair
John T. LaMacchia, Vice-Chair
John L. Clendenin
Thomas H. O'Leary
Bruce Karatz
18
<PAGE> 24
PERFORMANCE GRAPH
Set forth below is a line graph comparing the five year cumulative total
shareholder return on the Company's common stock, based on the market price of
the common stock and assuming reinvestment of dividends, with the cumulative
total return of companies on the Standard & Poor's 500 Stock Index and the Peer
Group comprised of major food companies:
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
OF THE KROGER CO., S&P 500 AND PEER GROUP**
<TABLE>
<CAPTION>
KROGER S&P 500 PEER GROUP
------ ------- ----------
<S> <C> <C> <C>
1994 100 100 100
1995 154.92 137.58 128.87
1996 191.71 169.17 161.49
1997 274.61 225.6 210.32
1998 501.55 290.08 327.82
1999 274.61 328.23 187.26
</TABLE>
Prior to fiscal year 1999, the Company's fiscal year ended on the Saturday
closest to December 31. Beginning in 1999, the Company's fiscal year ends on the
Saturday closest to January 31. Performance for 1999 includes the 28 day
transition period resulting from the fiscal year change.
- ------------
*Total assumes $100 invested on January 2, 1994 in The Kroger Co., S&P 500
Index, and major food companies (the "Peer Group"), with reinvestment of
dividends.
**The Peer Group consists of Albertson's, Inc., American Stores Company,
Fleming Companies, Inc., Giant Food Inc. (Class A), Great Atlantic & Pacific
Tea Company, Inc., Safeway Inc., Supervalu Inc., The Vons Companies, Inc.,
and Winn-Dixie Stores, Inc. The Vons Companies, Inc. was acquired by Safeway
Inc. on June 16, 1997. Giant Food Inc. was acquired by Koninklijke Ahold
N.V. on December 14, 1998. American Stores Company was acquired by
Albertson's, Inc. on June 23, 1999. As a result, Vons, Giant Food, and
American Stores are excluded from this performance graph beginning with the
year of their acquisition.
The Company's peer group is composed of major food companies with which
the Company competes.
Neither the foregoing Compensation Committee Report nor the foregoing
Performance Graph will be deemed incorporated by reference into any other
filing, absent an express reference thereto.
19
<PAGE> 25
COMPENSATION PURSUANT TO PLANS
The Company maintains various benefit plans that are available to
management and certain other employees. The Company derives the benefit of
certain tax deductions as a result of its contributions to some of the plans.
Each of the executive officers of the Company was eligible to participate in one
or more of the following plans.
THE KROGER CO. EMPLOYEE PROTECTION PLAN
The Company adopted The Kroger Co. Employee Protection Plan ("KEPP")
during fiscal 1988 and renewed the plan in 1993 and in 1998. All management
employees, including the executive officers, and administrative support
personnel of the Company with at least one year of service are covered. KEPP
provides for severance benefits and the extension of Company paid health care in
the event an eligible employee actually or constructively is terminated from
employment without cause within two years following a change of control of the
Company (as defined in the plan). For persons over 40 years of age with more
than six years of service, severance pay ranges from approximately 9 to 18
months' salary and bonus, depending upon Company pay level and other benefits.
KEPP may be amended or terminated by the Board of Directors at any time prior to
a change of control, and will expire in 2003 unless renewed by the Board of
Directors.
PENSION PLANS
The Company maintains the Kroger Retirement Benefit Plan, a defined
benefit plan, to provide pension benefits to retired or disabled management
employees and certain groups of hourly personnel. The Plan generally provides
for benefits at age 62 or later equal to 1 1/2% times the years of service,
after attaining age 21, (or, for participants prior to January 1, 1986, after
attaining age 25) times the highest average earnings for any five years during
the ten calendar years preceding retirement, less an offset tied to Social
Security benefits. The Company also maintains an Excess Benefits Plan under
which the Company pays benefits which exceed the maximum benefit payable under
ERISA by defined benefit plans. The following table gives examples of annual
retirement benefits payable on a straight-life basis under the Company's
retirement program.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FIVE YEAR -----------------------------------------------------------------
AVERAGE REMUNERATION 15 20 25 30 35 40
-------------------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
450,000 101,250 135,000 168,750 202,500 236,250 270,000
650,000 146,250 195,000 243,750 292,500 341,250 390,000
850,000 191,250 255,000 318,750 382,500 446,250 510,000
900,000 202,500 270,000 337,500 405,000 472,500 540,000
1,200,000 270,000 360,000 450,000 540,000 630,000 720,000
1,500,000 337,500 450,000 562,500 675,000 787,500 900,000
1,800,000 405,000 540,000 675,000 810,000 945,000 1,080,000
</TABLE>
No deductions have been made in the above table for offsets tied to Social
Security benefits.
Remuneration earned by Messrs. Pichler, Dillon, Heschel, McMullen, and
Bryant in 1999, which was covered by the Plan, was $1,505,319, $883,310,
$597,258, $544,377, and $236,923, respectively. As of January 29, 2000, they had
12, 4, 8, 14, and 18 years of credited service, respectively.
DILLON PLANS
Dillon Companies, Inc. and its subsidiaries maintain pension, profit
sharing, stock ownership, and savings plans that provide benefits at levels
comparable to the plans described above. David B. Dillon has 20 years of
credited service and Joseph A. Pichler has six years of credited service under
certain of the pension and profit sharing plans, but no further credited service
will be accrued for either of them under those plans. Warren F.
20
<PAGE> 26
Bryant has 10 years of credited service under these plans and remuneration
earned by him which was covered by those plans during 1999 was $375,240.
Under the Dillon Employees' Profit Sharing Plan, Dillon and each of its
participating subsidiaries contributes a certain percentage of net income,
determined annually, to be allocated among participating employees based on the
percent that the participating employee's total compensation bears to the total
compensation of all participating employees employed by the particular Dillon
division or subsidiary. On participating employees' termination upon attaining
the age 60, death or disability, they are entitled to their full contribution
account balance. In addition to this plan, Dillon and several of its
subsidiaries have adopted the Dillon Pension Plan, a defined benefit plan, for
their eligible employees. Under the pension plan, the normal retirement benefit
for eligible employees is a certain percentage of average compensation during a
certain period of employment multiplied by the years of credited service (in
some of these plans there is a maximum period of credited service), minus the
benefit provided by the Profit Sharing Plan (except as may be limited by
provisions of ERISA).
The following table shows the estimated annual pension payable upon
retirement to persons covered by Dillon's Plans. Benefits payable under the
Profit Sharing Plan may exceed the amount payable under the Pension Plan, and
participants are entitled to the greater of the two. The table does not reflect
benefits payable under Dillon's Profit Sharing Plan, since benefits under that
plan are not determined by years of service, and no deductions have been made in
the table for offsets tied to Social Security benefits. Dillon also maintains an
Excess Benefit Plan that pays benefits which exceed the maximum benefit payable
under ERISA by defined benefit and defined contribution plans.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
450,000 101,250 135,000 168,750 202,500 236,250 270,000
650,000 146,250 195,000 243,750 292,500 341,250 390,000
850,000 191,500 255,000 318,750 382,500 446,250 510,000
</TABLE>
The amounts contributed by Dillon and its subsidiaries pursuant to these
retirement plans are not readily ascertainable for any individual, and thus are
not set forth above.
FRED MEYER PLAN
Fred Meyer, Inc. adopted a nonqualified Supplemental Income Plan to
provide supplemental retirement and death benefits to key employees. Any key
executive of Fred Meyer who held a position of Senior Vice President or higher
was eligible to participate in this plan. A participant is entitled to receive
full benefits under the Supplemental Income Plan upon normal retirement by
termination of employment after age 62. A participant is also entitled to
receive reduced benefits if the participant voluntarily terminates his or her
employment, is terminated without cause or dies before age 62. The normal
retirement benefit under the Supplemental Income Plan is a projected annual
amount, to be paid in equal monthly installments for 15 years, based upon the
estimated cash surrender value, less the premiums paid and other expenses of
Fred Meyer, of a Fred Meyer-owned life insurance policy purchased on the life of
the executive. The actual benefit will vary from the projected benefit based on
actual dividend experience. Fred Meyer guarantees each participant a minimum
benefit equal to at least 60 percent of the projected benefit. None of the named
executive officers participated in the Fred Meyer Plan.
21
<PAGE> 27
EMPLOYMENT CONTRACTS
The Company entered into an amended and restated employment agreement with
Mr. Pichler dated as of July 22, 1993. During his employment, the Company agrees
to pay Mr. Pichler at least $420,000 a year, unless the amount is reduced due to
adverse business conditions. Mr. Pichler's employment may be terminated at the
discretion of the Board of Directors. The contract also provides that the
Company will continue to pay Mr. Pichler's salary to his beneficiary for a
period of five years after a termination of employment resulting from his death,
or will pay to Mr. Pichler his salary for a term equal to the lesser of five
years or until October 4, 2005, if Mr. Pichler's termination of employment
results from his involuntary separation. The Company also has agreed to
reimburse Mr. Pichler for premiums on a policy of life insurance plus the tax
effects of that reimbursement. After his termination of employment for any
reason after age 62, if he is not entitled to receive the salary continuation
described above, Mr. Pichler will, in exchange for his availability to provide
certain consulting services, then receive each year until his death an amount
equal to 25% of the highest salary paid him during the term of this agreement.
22
<PAGE> 28
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of March 6, 2000, the directors of the Company, the named executive
officers and the directors and executive officers as a group, beneficially owned
shares of the Company's common stock as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP
- ------------------------------------------------------------------------------------------------
<S> <C>
Reuben V. Anderson.......................................... 30,400(1)
Robert D. Beyer............................................. 2,812
Warren F. Bryant............................................ 450,839(2)(3)(4)
Ronald W. Burkle............................................ 19,843,811(5)
John L. Clendenin........................................... 30,400(6)
David B. Dillon............................................. 289,399(2)(3)(7)
Michael S. Heschel.......................................... 188,048(2)(3)
Carlton J. Jenkins.......................................... 1,404
Bruce Karatz................................................ 6,706
John T. LaMacchia........................................... 30,400(1)
Edward M. Liddy............................................. 20,000(8)
W. Rodney McMullen.......................................... 551,053(2)(3)
Clyde R. Moore.............................................. 4,400(6)
T. Ballard Morton, Jr. ..................................... 66,400(1)
Thomas H. O'Leary........................................... 30,400(1)
Katherine D. Ortega......................................... 32,756(1)
Joseph A. Pichler........................................... 2,397,051(2)(3)(9)
Steven R. Rogel............................................. 15,028
Martha Romayne Seger........................................ 31,200(1)
Bobby S. Shackouls.......................................... 2,000
James D. Woods.............................................. 30,400(1)
Directors and Executive Officers as a group (including those
named above).............................................. 27,034,450(2)(3)(10)(11)
</TABLE>
- --------------------------------------------------------------------------------
(1) This amount includes 26,400 shares that represent options exercisable on or
before May 5, 2000.
(2) This amount includes shares that represent options exercisable on or before
May 5, 2000, in the following amounts: Mr. Bryant, 328,000; Mr. Dillon,
513,000; Mr. Heschel, 79,334; Mr. McMullen, 381,000; Mr. Pichler, 901,000;
and all directors and executive officers as a group, 3,757,490.
(3) The fractional interest resulting from allocations under Kroger's 401(k)
plan and Dillon's ESOP and 401(k) plan has been rounded to the nearest
whole number.
(4) This amount includes 9,712 shares owned by Mr. Bryant's wife. Mr. Bryant
disclaims beneficial ownership of these shares.
(5) Mr. Burkle disclaims beneficial ownership of his shares, except to the
extent of his pecuniary interest in them. Mr. Burkle's total includes a
currently exercisable warrant held by affiliates to purchase 7,738,732
shares, and 50,000 shares held by a charitable trust of which Mr. Burkle is
trustee.
(6) This amount includes 2,400 shares that represent options exercisable on or
before May 5, 2000.
(7) This amount includes 176,318 shares owned by Mr. Dillon's wife, 54,024
shares in his children's trust and 137,760 shares owned by his children.
Mr. Dillon disclaims beneficial ownership of these shares.
(8) This amount includes 10,400 shares that represent options exercisable on or
before May 5, 2000.
(9) This amount includes 32,070 shares owned by Mr. Pichler's wife. Mr. Pichler
disclaims beneficial ownership of these shares.
(10) The figure shown includes an aggregate of 29,526 additional shares held by,
or for the benefit of, the immediate families or other relatives of all
directors and executive officers as a group not listed above. In each case
the director or executive officer disclaims beneficial ownership of those
shares.
23
<PAGE> 29
(11) Mr. Burkle and his affiliates own 2.3% of the common stock of the Company.
No other director or executive officer owned as much as 1% of the common
stock of the Company. The directors and executive officers as a group
beneficially owned 3.1% of the common stock of the Company.
As of March 6, 2000, the following persons reported beneficial ownership
of the Company's common stock based on reports on Schedule 13G filed with the
Securities and Exchange Commission or other reliable information as follows:
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENTAGE
NAME ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AXA Assurances 21, rue de Chateaudun 89,715,479 10.2%
I.A.R.D. Mutuelle 75009 Paris, France
The Kroger Co. Savings Plan 1014 Vine Street 57,274,157(1) 6.5%
Cincinnati, OH 45202
Oppenheimer Capital 1345 Avenue of the Americas 50,255,891 5.7%
New York, NY 10105-4800
</TABLE>
- ------------
(1) Shares beneficially owned by plan trustees for the benefit of participants
in employee benefit plans.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Those officers, directors, and shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of forms received by the Company,
or written representations from certain reporting 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.
24
<PAGE> 30
SELECTION OF AUDITORS
(ITEM NO. 2)
The Board of Directors, on March 31, 2000, appointed the firm of
PricewaterhouseCoopers LLP as Company auditors for 2000, subject to ratification
by shareholders. This appointment was recommended by the Company's Audit
Committee, comprised of directors who are not employees of the Company. If the
firm is unable for any reason to perform these services, or if selection of the
auditors is not ratified, other independent auditors will be selected to serve.
Ratification of this appointment requires the adoption of the following
resolution by the affirmative vote of the holders of a majority of the shares
represented at the meeting:
"RESOLVED, That the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as Company auditors for 2000 be, and it hereby
is, ratified."
A representative of PricewaterhouseCoopers LLP is expected to be present
at the meeting to respond to appropriate questions and to make a statement if he
or she desires to do so.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
SHAREHOLDER PROPOSAL
(ITEM NO. 3)
The Company has been notified by Larry Lee Hogue, 385 Davis Road, Hiram,
Georgia 30141, the beneficial owner of 170 shares of Kroger common stock, that
he intends to propose the following resolution at the annual meeting:
RESOLVED: That The Kroger Company stockholders urge the Board of Directors
take the necessary steps, in compliance with state law, to declassify the Board
for the purpose of director election. The board declassification shall be
completed in a manner that does not affect the unexpired terms of directors
previously elected.
SUPPORTING STATEMENT: The Kroger Company's board is divided into three
classes of directors serving staggered three-year terms. This means an
individual director faces election only once every three years, and shareholders
only vote on roughly a third of the board each year.
Companies often defend classified boards by suggesting that they preserve
continuity. We think continuity is insured through director re-elections. When
directors are performing well they routinely are re-elected with majorities over
95%.
We believe that annual elections can pave the way for improved board
sensitivity to important shareholder issues. In particular, it can help speed
the diversification of Kroger's board and introduce new perspectives.
In addition, a declassified board allows the company to respond quickly to
changes by giving the board the ability to appoint more qualified candidates
each year. A declassified board can help give The Kroger Co. the flexibility it
needs as it moves into the next century.
Generally, shareholders have grown hostile to classified boards. This is
especially important for employee shareholders. In 1999, shareholders voted to
declassify boards with a majority at Condant, Cooper Tire & Rubber, Kaufman &
Broad home, Oregon Steel and Tenneco. In 1998, Walt Disney Company agreed to
change the by-laws after the resolution passes with 65% of the vote. At Fleming
and Eastman Kodak more than 70% of shareholders voted to declassify the board.
By adopting annual elections, The Kroger Co. can demonstrate its
commitment to fuller accountability to shareholders, accountability that honors
shareholder prerogatives.
I urge you to vote YES for this proposal.
25
<PAGE> 31
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL FOR THE
FOLLOWING REASONS:
At the annual meeting held in May 1999, the shareholders adopted a
proposal requesting the Board of Directors to take those steps necessary to
provide for the annual election of all directors. Approximately 101 million
shares were voted in favor of the proposal. This amount was approximately 52.4%
of the shares voted and 39.7% of the then outstanding shares entitled to vote.
The Board's Corporate Governance Committee considered the issue at its July 1999
meeting and recommended that the Board consult with outside advisors before
deciding on a course of action. At its regularly scheduled meeting held in
December 1999, the Board, in consultation with its outside advisors, discussed
and considered (A) election of all directors on an annual basis as recommended
in the proposal, (B) election of all directors every three years as suggested in
another shareholder letter, and (C) retaining the current "classified" method of
electing directors. The Board determined that it is in the best interests of
shareholders and other affected constituents to retain the current classified
Board structure.
The Board of Directors believes that the classification gives the Board a
greater continuity of experience since a majority of directors at any given time
will have experience with the business affairs and operations of the Company.
This should permit more effective long-term strategic planning in use of Company
resources. The Board believes that continuity and quality of leadership that
results from the classified Board can create long-term value for the
shareholders.
A classified Board also reduces the possibility of a sudden or surprise
change in majority control of the Board. It also has the effect, in tandem with
the warrant dividend plan adopted in 1986 and extended for 10 years in 1996, of
impeding disruptive and inequitable tactics that have become relatively common
corporate take-over practices. Without the classified board, the beneficial
effects of the warrant dividend plan could be circumvented by a third party.
In the event of a hostile take-over attempt, the fact that approximately
two-thirds of the Board members have tenure for more than a year would encourage
initiation of arms-length discussions with the Board. The Board is in the best
position to evaluate and negotiate a transaction that is in the best interest of
shareholders and other affected constituencies.
Directors elected for staggered terms are not any less accountable or
responsive to shareholders than they would be if all were elected annually or
every three years. The same standards of performance apply to all directors
regardless of the term of service. The shareholders always retain the ability to
replace directors or propose and elect alternate nominees for the class of
directors to be elected each year. Therefore, shareholders continue to enjoy a
significant opportunity to express their views regarding the Board's performance
and to influence the Board's composition.
EFFECT OF ADOPTION
If approved, this proposal will serve as a recommendation to the Board of
Directors to take the necessary steps to eliminate the classified Board, but it
will not declassify the board. If the proposal is adopted, and if the Board
subsequently agrees with the recommendation, implementation of the proposal
would require the modification of Kroger's regulations regarding the terms of
directors. In accordance with amendments to the regulations approved by Kroger
shareholders in 1986, the necessary modification of the regulations to implement
annual election of all Board members requires the favorable vote at a subsequent
shareholders' meeting of the holders of at least 75% of the then outstanding
shares of voting stock of Kroger.
26
<PAGE> 32
SHAREHOLDER PROPOSAL
(ITEM NO. 4)
The Company has been notified by Walden Asset Management, 40 Court Street,
Boston, Massachusetts 02108, the beneficial owner of 3,200 shares of Kroger
common stock, along with five other co-sponsors whose names, addresses and
holdings will be provided to any shareholder upon request, that it intends to
propose the following resolution at the annual meeting:
WHEREAS:
International markets for genetically engineered (GE) foods are threatened
by extensive resistance to gene protection technology, transgenic technology and
genetically altered foods;
- Several of Europe's largest food retailers, including Tesco, Sainsbury
Group, Carrefour, and Rewe, have committed to removing GE ingredients
from their store-brand products;
- In the UK, three fast-food giants -- McDonald's, Burger King, and
Kentucky Fried Chicken -- are eliminating GE soya and corn ingredients
from their menus;
- Gerber Products Co. announced in July 1999 that they would not allow GE
corn or soybeans in any of their baby foods;
- Archer Daniels Midland asked its grain suppliers in August 1999 to
segregate their genetically engineered crops from conventional crops.
There is increasing scientific concern that genetically engineered
agricultural products may be harmful to humans, animals, or the environment;
- The U.S. Department of Agriculture has acknowledged (July 13, 1999) the
need to develop a comprehensive approach to evaluating long-term and
secondary effects of GE products;
- Some GE crops have been engineered to have higher levels of toxins, such
as Bacillus thuringiensis (Bt), to make them insect-resistant;
- In 1998, research showed that Bt crops are building up Bt toxins in the
soil;
- In 1999, the European Union suspended approval of new genetically
engineered organisms until a new safety law for genetically engineered
organisms is implemented in 2002. This followed a new study that showed
Bt corn pollen may harm monarch butterflies.
In the U.S., we have a long tradition of citizens' "Right to Know"; an
expression of this includes the current laws requiring nutritional labeling of
foods;
- A January 1999 Time/CNN poll indicated that 81% of Americans said that
GE food should be labeled as such;
- GE crops may incorporate genes that are allergens or from animal
species. Individuals can not avoid them for health or religious reasons
unless they are labeled;
- The European Union requires labeling of GE foods, as will Japan, New
Zealand, and Australia.
RESOLVED: Shareholders request the Board of Directors to adopt a policy of
removing genetically engineered crops, organisms, or products thereof from all
products sold under its brand names or private labels, where feasible, until
long-term safety testing has shown that they are not harmful to humans, animals,
and the environment; with the interim step of labeling and identifying these
products that may contain these ingredients, and reporting to the shareholders
by August 2000.
27
<PAGE> 33
The proponent has issued the following statement in support of the
proposal. We believe that this technology involves significant social, economic,
and environmental risks. Our company should take a leadership position in
delaying market adoption of genetically engineered crops and foods. Failure to
do so could leave our company financially liable, should detrimental effects to
public health or the environment appear in the future.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL FOR THE
FOLLOWING REASONS:
We share and actively support our customers' interests in food safety. We
also believe consumers have a right to relevant information about the food they
buy so that they can make informed purchasing decisions. As a retailer, however,
we are neither qualified nor entitled to establish food safety regulations and
labeling requirements.
To date, the Food and Drug Administration, the Environmental Protection
Agency, the U.S. Department of Agriculture, the World Health Organization, the
American Medical Association and the American Dietetic Association have
generally endorsed the use of genetic modification and food biotechnology and
stand firmly behind their safety. The FDA already requires labeling of
genetically engineered foods if the food is significantly changed from its
traditional form (for instance, if the nutritional content is altered), or if
there is a potential health or safety effect (such as the presence of an
allergen). We believe that the FDA's regulations in this area are based on sound
scientific principles, and that the FDA possesses the best available safety and
risk assessment procedures. Moreover, we believe that the FDA and other
regulatory authorities who are charged with protecting the health and safety of
the public and the environment are the proper entities, rather than a retailer
like Kroger, to evaluate and make judgments about the sale and labeling of
genetically engineered products. Kroger complies, and will continue in the
future to comply, with all government food labeling regulations.
This proposal is not practicable because Kroger would have serious
difficulty determining what constitutes "genetically engineered crops, organisms
or products thereof." FDA Commissioner Jane E. Henney, M.D. has stated that
virtually all crops have been genetically modified through traditional plant
breeding for more than a hundred years. Even if we could determine what
constituted "genetically engineered" ingredients, we believe it is currently
impracticable for us to identify which of our private label products contain
these ingredients. We understand that certain genetically engineered ingredients
are so similar to their unmodified counterparts that they are virtually
undetectable with current testing techniques. It would be impracticable (even if
we had the testing capability) for our quality assurance operations to identify
all genetically engineered foods in our private label products and to label them
accordingly. Moreover, we do not believe we could require food manufacturers to
test for and label genetically engineered ingredients that may be used in our
private label products. Therefore, we do not believe it would be possible for
Kroger to enforce the policy requested by the proposal.
We also understand that the use of genetic engineering with respect to
certain staple foods (such as soybeans) is widespread in the U.S. Even when
these foods are produced in unmodified form, under current practices they are
combined with other genetically engineered foods during storage and
distribution, making it extremely difficult, if not impossible, for us to obtain
these staple foods, in an unmodified or uncombined form, in sufficient
quantities for sale or processing of private label food products.
If we were simply to label all of our private label products as possibly,
but not necessarily, containing genetically engineered ingredients, we would
face additional problems. Labeling a product to say that it "may" contain
genetically engineered ingredients would not advance the consumer's ability to
make an informed choice, would create confusion and would likely place Kroger's
products at a competitive disadvantage. Because other products would not be
required to carry the same label information, consumers who are concerned about
genetically engineered ingredients might choose a competing product which itself
might contain genetically engineered ingredients but not be so labeled while the
Kroger label product would be labeled as "possibly"
28
<PAGE> 34
containing genetically engineered ingredients even if it did not. Moreover,
because private label products are intended generally to provide a lower-priced
alternative to national brand items, they tend to follow the national brands
regarding product specifications and in response to consumer trends. Kroger
would likely face significant competitive harm if it were required to take a
novel position in the market regarding the use and labeling of genetically
engineered ingredients in its private label products.
Accordingly we believe that this proposal is impracticable and, even if it
could be implemented, could put Kroger at a competitive disadvantage.
SHAREHOLDER PROPOSAL
(ITEM NO. 5)
The Company has been notified by Carl E. Freije and Beverly Freije, 305 N.
Mount St., Indianapolis, Indiana 46222, the beneficial owners of 256 shares of
Kroger common stock, that they intend to propose the following resolution at the
annual meeting:
That the pay and remunerations of all officers, C.E.O. and Board members
be limited to not more than 2% above the lowest paid hourly employee or 2% above
the C.P.I. at the end of the year. This proposal will allow the "GRANDFATHER
CLAUSE" to apply and apply to new or future contracts.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL FOR THE
FOLLOWING REASONS:
Ohio law places the responsibility on the Board of Directors for managing
and directing the business and affairs of Kroger. This includes setting
compensation policies (as more particularly described in the Compensation
Committee report included at page 16 of this Proxy Statement) for all of the
officers. Although the proposal is unclear regarding how to calculate the
proposed compensation limitations, the Board of Directors believes that it would
be impossible to attract and retain qualified officers at the compensation
levels suggested. Furthermore, implementation of the proposal would directly
conflict with the Compensation Committee's stated policy of being competitive in
total compensation.
---------------------------
SHAREHOLDER PROPOSALS--2001 ANNUAL MEETING. Shareholder proposals intended
for inclusion in the Company's proxy material relating to the Company's annual
meeting in June 2001 should be addressed to the Secretary of the Company and
must be received at the Company's executive offices not later than January 10,
2001. These proposals must comply with the proxy rules established by the
Securities and Exchange Commission. In addition, the proxy solicited by the
Board of Directors for the 2001 annual meeting of shareholders will confer
discretionary authority to vote on any shareholder proposal presented at the
meeting unless the Company is provided with notice of the proposal before March
26, 2001.
---------------------------
Attached to this Proxy Statement is the Company's 1999 Annual Report which
includes a brief description of the Company's business indicating its general
scope and nature during 1999, together with the audited financial information
contained in the Company's 1999 report to the Securities and Exchange Commission
on Form 10-K. A COPY OF THAT REPORT IS AVAILABLE TO SHAREHOLDERS ON REQUEST BY
WRITING: LAWRENCE M. TURNER, VICE PRESIDENT AND TREASURER, THE KROGER CO., 1014
VINE STREET, CINCINNATI, OHIO 45202-1100 OR BY CALLING 1-513-762-1220. The
Company's SEC filings are available to the public from the SEC's web site at
http://www.sec.gov.
The management knows of no other matters that are to be presented at the
meeting but, if any should be presented, the Proxy Committee expects to vote
thereon according to its best judgment.
By order of the Board of Directors,
Paul W. Heldman, Secretary
29
<PAGE> 35
1999 ANNUAL REPORT
<PAGE> 36
FINANCIAL REPORT 1999
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Kroger Co. has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis and are not misstated due to material
error or fraud. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the report and is responsible for its accuracy and consistency
with the financial statements.
The Company's financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, approved by the
shareholders. Management has made available to PricewaterhouseCoopers LLP all of
the Company's financial records and related data, as well as the minutes of
stockholders' and directors' meetings. Furthermore, management believes that all
representations made to PricewaterhouseCoopers LLP during its audit were valid
and appropriate.
Management of the Company has established and maintains a system of
internal control that provides reasonable assurance as to the integrity of the
financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial reporting.
The system of internal control provides for appropriate division of
responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process. The policies and procedures are updated as necessary. Management
continually monitors the system of internal control for compliance. The Company
maintains a strong internal auditing program that independently assesses the
effectiveness of the internal controls and recommends possible improvements
thereto. In addition, as part of its audit of the Company's financial
statements, PricewaterhouseCoopers LLP completed a review of selected internal
accounting controls to establish a basis for reliance thereon in determining the
nature, timing and extent of audit tests to be applied. Management has
considered the internal auditor's and PricewaterhouseCoopers LLP's
recommendations concerning the Company's system of internal control and has
taken actions that we believe are cost-effective in the circumstances to respond
appropriately to these recommendations. Management believes that, as of January
29, 2000, the Company's system of internal control is adequate to accomplish the
objectives discussed herein.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which is
publicized throughout the Company. The code of conduct addresses, among other
things, the necessity of ensuring open communication within the Company;
potential conflicts of interests; compliance with all domestic and foreign laws,
including those relating to financial disclosure; and the confidentiality of
proprietary information. The Company maintains a systematic program to assess
compliance with these policies.
JOSEPH A. PICHLER J. MICHAEL SCHLOTMAN
Group Vice President and Chairman of the Board and
Chief Executive Officer Chief Financial Officer
AUDIT COMMITTEE CHAIR'S LETTER
The Audit Committee of the Board of Directors is composed of five
independent directors. The committee held three meetings during fiscal year
1999. In addition, members of the committee received and reviewed various
reports from the Company's internal auditor and from PricewaterhouseCoopers LLP
throughout the year.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareowner approval,
the selection of the Company's independent public accountant,
PricewaterhouseCoopers LLP. The Audit Committee discussed with the Company's
internal auditor and PricewaterhouseCoopers LLP the overall scope and specific
plans for their respective audits. The committee also discussed the Company's
consolidated financial statements and the adequacy of the Company's internal
controls. At each meeting, the Committee met with the Company's internal auditor
and PricewaterhouseCoopers LLP, in each case without management present, to
discuss the results of their audits, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting. Those
meetings also were designed to facilitate any private communications with the
Committee desired by the Company's internal auditor or PricewaterhouseCoopers
LLP.
KATHERINE D. ORTEGA
Audit Committee Chair
A-1
<PAGE> 37
THE COMPANY
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.
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.
A-2
<PAGE> 38
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
A-3
<PAGE> 39
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
A-4
<PAGE> 40
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.
A-5
<PAGE> 41
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>
A-6
<PAGE> 42
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>
A-7
<PAGE> 43
<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
A-8
<PAGE> 44
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.
A-9
<PAGE> 45
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
A-10
<PAGE> 46
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.
Interest Rate Protection Program
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>
A-11
<PAGE> 47
<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.
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.
A-12
<PAGE> 48
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.
A-13
<PAGE> 49
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 one
through five 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.
A-14
<PAGE> 50
- 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.
A-15
<PAGE> 51
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.
A-16
<PAGE> 52
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
A-17
<PAGE> 53
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.
A-18
<PAGE> 54
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.
A-19
<PAGE> 55
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.
A-20
<PAGE> 56
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.
A-21
<PAGE> 57
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.
A-22
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
A-23
<PAGE> 59
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>
A-24
<PAGE> 60
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>
A-25
<PAGE> 61
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.
A-26
<PAGE> 62
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
A-27
<PAGE> 63
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>
A-28
<PAGE> 64
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,
A-29
<PAGE> 65
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
A-30
<PAGE> 66
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
A-31
<PAGE> 67
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.
A-32
<PAGE> 68
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>
A-33
<PAGE> 69
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.
A-34
<PAGE> 70
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
A-35
<PAGE> 71
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.
A-36
<PAGE> 72
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.
A-37
<PAGE> 73
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>
A-38
<PAGE> 74
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).
A-39
<PAGE> 75
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.
A-40
<PAGE> 76
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>
A-41
<PAGE> 77
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).
A-42
<PAGE> 78
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.
COMMON STOCK PRICE RANGE
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
QUARTER HIGH LOW HIGH LOW
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
The number of shareowners of record of common stock as of April 26, 2000,
was 51,286.
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.
A-43
<PAGE> 79
- --------------------------------------------------------------------------------
The Company has a variety of plans designed to allow employees to acquire stock
in Kroger. Employees of Kroger and its subsidiaries own shares through a profit
sharing plan, as well as 401(k) plans and a payroll deduction plan called the
Kroger Stock Exchange. If employees have questions concerning their shares in
the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
Firstar, N.A. Cincinnati
P.O. Box 5277
Cincinnati, Ohio 45201
Toll Free 1-800-872-3307
Questions regarding the Company's 401(k) plan should be directed to the
employee's Human Resources Manager or 1-800-2KROGER.
Questions concerning any of the other plans should be directed to the employee's
local Human Resources Manager.
SHAREOWNERS: The Bank of New York is Registrar and Transfer Agent for the
Company's Common Stock. For questions concerning changes of address, etc.,
individual shareowners should contact:
<TABLE>
<S> <C>
Written inquiries: Certificate transfer and address changes:
- ------------------ -----------------------------------------
The Bank of New York The Bank of New York
Shareholder Relations Department-11E Receive and Deliver Department-11W
P.O. Box 11258 P.O. Box 11002
Church Street Station Church Street Station
New York, New York 10286 New York, New York 10286
</TABLE>
The Bank's toll-free number is: 1-800-524-4458. E-mail:
[email protected]
Shareholder questions and requests for forms available on the Internet at:
http://stock.bankofny.com
SHAREOWNER UPDATES: The Kroger Co. provides a pre-recorded overview of the
Company's most recent quarter. Call 1-800-4STOCKX or, in Cincinnati, 762-4723.
Other information is available on our Internet site at http://www.kroger.com.
FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial
information, including the Company's most recent report on Form 10-Q or 10-K, or
press release. Written inquiries should be addressed to Shareholder Relations,
The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100. Financial
information also is available on the Internet at http://www.cfonews.com/kr.
- --------------------------------------------------------------------------------
<PAGE> 80
EXECUTIVE OFFICERS
DONALD E. BECKER
Senior Vice President
WARREN F. BRYANT
Senior Vice President
GEOFFREY J. COVERT
President--Manufacturing
Senior Vice President
TERRY L. COX
Group Vice President
DAVID B. DILLON
President and Chief
Operating Officer
PAUL W. HELDMAN
Senior Vice President, Secretary and General Counsel
MICHAEL S. HESCHEL
Executive Vice President and
Chief Information Officer
CARVER L. JOHNSON
Group Vice President
LYNN MARMER
Group Vice President
DON W. MCGEORGE
Executive Vice President
W. RODNEY MCMULLEN
Executive Vice President
DERRICK A. PENICK
Group Vice President
JOSEPH A. PICHLER
Chairman of the Board and
Chief Executive Officer
J. MICHAEL SCHLOTMAN
Group Vice President and
Chief Financial Officer
JAMES R. THORNE
Senior Vice President
FELICIA D. THORNTON
Group Vice President
LAWRENCE M. TURNER
Vice President and Treasurer
OPERATING UNIT HEADS
E. JOHN BURGON
King Soopers
ROBERT G. COLVEY
Dillon Stores
RUSSELL J. DISPENSE
Smith's
MIKE DON
Fred Meyer Jewelers
MICHAEL J. DONNELLY
Fry's
SAM K. DUNCAN
Ralphs
JOHN P. HACKETT
Louisville KMA
DAVID G. HIRZ
Food 4 Less
ROBERT J. HODGE
Cincinnati KMA
JIM LEONARD
Turkey Hill Minit Markets
BRUCE A. LUCIA
Columbus KMA
JAMES T. MCCOY
Jay C
M. MARNETTE PARRY
Michigan KMA
ANTHONY F. PRINSTER
City Market
THOMAS B. RECH
Nashville KMA
MARK SALISBURY
Tom Thumb
PAUL SCUTT
Central KMA
SAMUEL L. SHARP
Loaf 'N Jug/MiniMart
PAUL M. SMITH
Atlanta KMA
VAN TARVER
Quik Stop
KENNETH THRASHER
Fred Meyer Stores
RICHARD L. TILLMAN
Delta KMA
HENRY R. WAGUESPACK
Kwik Shop
DARRELL WEBB
QFC
R. PETE WILLIAMS
Mid-Atlantic KMA
ROBERT E. ZINCKE
Southwest KMA
<PAGE> 81
THE KROGER CO. - 1014 VINE STREET - CINCINNATI, OHIO 45202 - (513) 762-4000
<PAGE> 82
Appendix
Form of Proxy
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
---------------------------------------
Two New Ways to Vote
THE KROGER CO. VOTE BY INTERNET OR TELEPHONE
24 Hours a Day - 7 Days a Week
It's Fast and Convenient
---------------------------------------
INTERNET TELEPHONE MAIL
-------- --------- ----
http://proxy.shareholder.com/xxx 1-800-xxx-xxxx
- - Go to the website address listed - Use any touch-tone telephone. - Mark, sign and date your proxy card.
above.
- Have your proxy card ready. - Detach your proxy card.
- - Have your proxy card ready.
- Enter your Control Number located - Return your proxy card in the
- - Enter your Control Number located in OR in the box below. OR postage-paid envelope provided.
the box below.
- Follow the simple recorded
- - Follow the simple instructions on the instructions.
website.
Your Internet or telephone vote authorizes
the named proxies to vote your shares in the
same manner as if you marked, signed and
returned your proxy card. If you have
submitted your proxy by the Internet or
telephone there is no need for you to mail
back your proxy card.
1-800-xxx-xxxx
CALL TOLL-FREE TO VOTE
------------------------------
CONTROL NUMBER
FOR INTERNET/TELEPHONE VOTING
-------------------------------
THE INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M. E.D.T. ON JUNE 21, 2000.
DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY THE INTERNET OR TELEPHONE
- ------------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES AND FOR PROPOSAL 2.
1. ELECTION OF DIRECTORS FOR all nominees WITHHOLD AUTHORITY to vote (*)EXCEPTIONS
listed below [ ] for all nominees listed below [ ] [ ]
Nominees: 01 Reuben V. Anderson, 02 Ronald W. Burkle, 03 Clyde R. Moore, 04 Joseph A. Pichler, 05 Steven R. Rogel,
and 06 Martha Romayne Seger.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE MARK THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S
NAME ON THE SPACE PROVIDED BELOW.)
(*)EXCEPTIONS_____________________________________________________________________________________________________________
2. Approval of PricewaterhouseCoopers LLP, as auditors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 3.
3. Approve shareholder proposal, if properly presented, to
FOR [ ] AGAINST [ ] ABSTAIN [ ] recommend implementation of annual election of all
directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.
If you wish to vote in accordance with the recommendations of 4. Approve shareholder proposal, if properly presented, to
management, all you need do is sign and return this card. The recommend removal of genetically engineered products from
Proxy Committee cannot vote your shares unless you sign and private label goods.
return the card.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 5.
5. Approve shareholder proposal, if properly presented, to
recommend compensation limitations for officers and
directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Change of Address or
Comments Mark Here [ ]
Please sign exactly as name appears hereon.
Joint owners should each sign. Where
applicable, indicate position or
representative capacity.
Dated:___________________, 2000
Signature
Signature
Votes MUST be indicated [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE. (x) in Black or Blue ink.
Please Detach Here
You Must Detach This Portion of the Proxy Card
Before Returning it in the Enclosed Envelope
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 83
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, May 10, 2000
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at
the REGAL HOTEL, 150 W. 5TH Street, Cincinnati, Ohio, on June 22, 2000, at 11
A.M., for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 2003 and one director to serve until the
annual meeting of shareholders in 2001, or until their
successors have been elected and qualified;
2. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 2000;
3. To act upon a shareholder proposal, if properly presented at
the annual meeting, to recommend that the Board take the
necessary steps to cause all directors to be elected annually
as opposed to in classes;
4. To act upon a shareholder proposal, if properly presented at
the annual meeting, to request that the Board adopt a policy
of removing genetically engineered products from all private
label goods and to label those goods that may contain
genetically engineered products;
5. To act upon a shareholder proposal, if properly presented at
the annual meeting, to recommend compensation limitations
for officers and directors; and
6. To transact such other business as may properly be brought
before the meeting;
all as set forth in the Proxy Statement accompanying this Notice.
Holders of common shares of record at the close of business on April
26, 2000, will be entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS
REPRESENTED AT THE MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY
ELECTRONICALLY VIA THE INTERNET OR TELEPHONE, OR SIGN AND DATE THE ENCLOSED
PROXY AND MAIL IT AT ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
By order of the Board of Directors,
Paul W. Heldman, Secretary
FOLD AND DETACH HERE
- --------------------------------------------------------------------------------
THE KROGER CO.
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD JUNE 22, 2000
The undersigned hereby appoints each of JOSEPH A. PICHLER, JOHN T. LA
MACCHIA and T. BALLARD MORTON, JR., or if more than one is present and acting
then a majority thereof, proxies, with full power of substitution and
revocation, to vote the common shares of The Kroger Co. which the undersigned is
entitled to vote at the annual meeting of shareholders, and at any adjournment
thereof, with all the powers the undersigned would possess if personally
present, including authority to vote on the matters shown on the reverse in the
manner directed, and upon any other matter which properly may come before the
meeting. The undersigned hereby revokes any proxy previously given to vote those
shares at the meeting or at any adjournment.
THE PROXIES ARE DIRECTED TO VOTE AS SPECIFIED ON THE REVERSE HEREOF AND
IN THEIR DISCRETION ON ALL OTHER MATTERS COMING BEFORE THE MEETING. EXCEPT AS
SPECIFIED TO THE CONTRARY ON THE REVERSE, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED FOR ALL NOMINEES LISTED, INCLUDING THE DISCRETION TO CUMULATE
VOTES, FOR PROPOSAL 2 AND AGAINST PROPOSALS 3, 4 AND 5.
(continued, and to be signed, on other side)
THE KROGER CO.
P.O. BOX 11127
NEW YORK, N.Y. 10203-0127
