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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED February 3, 2001.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-303
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THE KROGER CO.
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(Exact name of registrant as specified in its charter)
Ohio 31-0345740
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1014 Vine Street, Cincinnati, OH 45202 45202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 762-4000
-----------------------
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock $1 par value New York Stock Exchange
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810,729,610 shares
outstanding on April 27, 2001
- ------------------------------- -------------------------------
Securities registered pursuant to section 12(g) of the Act:
NONE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of The Kroger Co. held by
non-affiliates as of March 7, 2001: $19,466,148,862.
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange
Act on or before June 3, 2001, incorporated by reference into Parts II
and III of Form 10-K.
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PART I
ITEM 1. BUSINESS
The Kroger Co. (the "Company") was founded in 1883 and incorporated in
1902. As of February 3, 2001, the Company was one of the largest grocery
retailers in the United States based on annual sales. The Company also
manufactures and processes food for sale by its supermarkets. The Company's
principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio
45202 and its telephone number is (513) 762-4000.
On May 27, 1999 Kroger issued 312 million shares of Kroger common stock in
connection with a merger, for all of the outstanding common stock of Fred Meyer
Inc., which operates stores primarily in the Western region of the United
States. On March 9, 1998, Fred Meyer issued 82 million shares of Fred Meyer
common stock in connection with a merger, for all of the outstanding stock of
Quality Food Centers, Inc. ("QFC"), a supermarket chain operating in the
Seattle/Puget Sound region of Washington state, and in Southern California. The
mergers were accounted for as poolings of interests, and the accompanying
financial statements have been restated to give effect to the consolidated
results of Kroger, Fred Meyer and QFC for all years presented.
On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc.
("Ralphs/Food 4 Less"), a supermarket chain operating primarily in Southern
California by issuing 44 million shares of common stock to the Ralphs/Food 4
Less stockholders. The acquisition was accounted for under the purchase method
of accounting. The financial statements include the operating results of
Ralphs/Food 4 Less from the date of acquisition.
On September 9, 1997, Fred Meyer acquired Smith's Food & Drug Centers,
Inc., ("Smith's") a regional supermarket and drug store chain operating in the
Intermountain and Southwestern regions of the United States, by issuing 66
million shares of common stock to the Smith's stockholders. The acquisition was
accounted for under the purchase method of accounting. The financial statements
include the operating results of Smith's from the date of acquisition.
On March 19, 1997, QFC acquired the principal operations of Hughes
Markets, Inc. ("Hughes"), a supermarket chain operating in Southern California
and its indirect 50% interest in Santee Dairy, one of the largest dairy plants
in California. The merger was effected through the acquisition of 100% of the
outstanding voting securities of Hughes for approximately $361 million cash, 20
million shares of common stock, and the assumption of $33 million of
indebtedness of Hughes. The acquisition was accounted for under the purchase
method of accounting. The financial statements include the operating results of
Hughes from the date of acquisition.
On February 14, 1997, QFC acquired the principal operations of Keith
Uddenberg, Inc. ("KUI"), a supermarket chain operating in the western and
southern Puget Sound region of Washington. The merger was effected through the
acquisition of the outstanding voting securities of KUI for $35 million cash, 4
million shares of common stock and the assumption of approximately $24 million
of indebtedness of KUI. The acquisition was accounted for under the purchase
method of accounting. The financial statements include the operating results of
KUI from the date of acquisition.
As of February 3, 2001, the Company operated 2,354 supermarkets, most of
which were leased. These supermarkets are generally operated under one of the
Company's three operating formats: combination food and drug stores ("combo
stores"); multi-department stores; or price impact warehouse stores. The combo
stores are the Company's primary food store format. The combo stores are able to
earn a return above the cost of capital by drawing customers from a 2 - 2 1/2
mile radius. The Company finds this format to be successful because the stores
are large enough to offer the specialty departments that customers desire for
one-stop shopping, including "whole health" sections, pharmacies, pet centers
and world-class perishables, such as fresh seafood and organic produce. The
Company operates its stores under several banners that have strong local ties
and brand equity.
In addition to supermarkets, the Company operated 789 convenience stores,
77 supermarket fuel centers, and 398 Jewelry Stores. The Company owned and
operated 693 of the convenience stores while 96 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
employs approximately 312,000 full and part-time employees.
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.
MERCHANDISING AND MANUFACTURING
Corporate brand products play an important role in the Company's
merchandising strategy. Supermarket divisions typically stock approximately
5,500 private label items. The Company's corporate brand products are produced
and sold in three quality "tiers." Private Selection(R) is the premium quality
brand designed to meet or beat the "gourmet" or "upscale" national or regional
brands. The "banner brand" (Kroger, Ralphs, King Soopers, etc.), which
represents the majority of our private label items, is designed to be equal or
better than the national brand and carries the "Try It, Like It, or Get the
National Brand Free" guarantee. FMV (For Maximum Value) is the value brand,
which is designed to deliver good quality at a very affordable price.
The majority of the corporate brand items are produced in one of the
Company's manufacturing plants; the remainder are produced to strict Company
specifications by outside manufacturers. Management performs a "make or buy"
analysis on corporate brand products and decisions are based upon a comparison
of market-based transfer prices versus open market purchases. As of February 3,
2001, the Company operated 42 manufacturing plants. These plants consisted of 15
dairies, 12 deli or bakery plants, five grocery product plants, five ice cream
or beverage plants, three meat plants, and two cheese plants.
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.
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ITEM 2. PROPERTIES
As of February 3, 2001, the Company operated more than 3,000 owned or leased
supermarkets, convenience stores, distribution warehouses, and food processing
facilities through divisions, marketing areas, subsidiaries or affiliates. These
facilities are located principally in the Southern, Midwestern, and Western
portions of the United States. A majority of the properties used to conduct the
Company's business are leased.
The Company generally owns store equipment, fixtures and leasehold improvements,
as well as processing and manufacturing equipment. The total cost of the
Company's owned assets and capitalized leases at February 3, 2001 was $14,241
million while the accumulated depreciation was $5,421 million.
Leased premises generally have base terms ranging from ten to twenty-five years
with renewal options for additional periods. Some options provide the right to
purchase the property after conclusion of the lease term. Store rentals are
normally payable monthly at a stated amount or at a guaranteed minimum amount
plus a percentage of sales over a stated dollar volume. Rentals for the
distribution, processing and miscellaneous facilities generally are payable
monthly at stated amounts. For additional information on leased premises, see
footnote 12 in the Notes to Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS
On September 13, 1996, a class action lawsuit titled McCampbell, et al. v.
Ralphs Grocery Company, et al, as filed in the Superior Court of the State of
California, County of San Diego, against Ralphs Grocery Company ("Ralphs/Food 4
Less") and two other grocery store chains operating in the Southern California
area. The complaint alleged, among other things, that Ralphs/Food 4 Less and
others conspired to fix the retail price of eggs in Southern California. The
plaintiffs claimed that the defendants' actions violated provisions of the
California Cartwright Act and constituted unfair competition. The plaintiffs
sought damages they purported to have sustained as a result of the defendants'
alleged actions, which damages were subject to trebling under the applicable
statute, and an injunction from future actions in restraint of trade and unfair
competition. A class was certified consisting of all retail purchasers of white
chicken eggs sold by the dozen in Los Angeles, Riverside, San Diego, San
Bernardino, Imperial and Orange counties from September 13, 1992.
The case proceeded to trial before a jury in July and August 1999. On September
2, 1999, the jury returned a verdict in favor of Ralphs/Food 4 Less and against
the plaintiffs. Judgment was entered in favor of Ralphs/Food 4 Less on November
1, 1999. Plaintiffs have appealed the judgment.
There are pending against the Company various claims and lawsuits arising in the
normal course of business, including suits charging violations of certain
antitrust and civil rights laws. Some of these suits purport or have been
determined to be class actions and/or seek substantial damages. Any damages that
may be awarded in antitrust cases will be automatically trebled. Although it is
not possible at this time to evaluate the merits of these claims and lawsuits,
nor their likelihood of success, the Company is of the opinion that any
resulting liability will not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK PRICE RANGE
2000 1999
---------------------- ----------------------
Quarter HIGH LOW High Low
- -----------------------------------------------------------------------
1st.................. 21.94 14.06 34.91 24.88
2nd.................. 23.19 17.94 31.38 24.13
3rd.................. 23.75 19.88 26.94 19.50
4th.................. 27.94 22.06 24.25 14.88
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 2000: 54,964
Number of shareowners at April 27, 2001: 54,673
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past three fiscal
years. Under the Company's Credit Agreement dated may 28, 1997, the Company is
prohibited from paying cash dividends during the term of the Credit Agreement.
The Company is permitted to pay dividends in the form of stock of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
----------------------------------------------------------------------
February 3, January 29, January 2, December 27, December 28,
2001 2000 1999 1997 1996
(53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
(as restated) (as restated)
----------- ------------- ------------- ------------ ------------
(in millions, except per share amounts)
Sales.................................... $49,000 $45,352 $43,082 $33,927 $29,701
Gross profit............................. 13,194 12,036 11,019 8,459 7,215
Earnings before extraordinary loss....... 880 623 504 589 436
Extraordinary loss (net of income tax
benefit) (A)........................... (3) (10) (257) (124) (3)
Net earnings............................. 877 613 247 465 433
Diluted earnings per share
Earnings before extraordinary loss..... 1.04 0.73 0.59 0.79 0.64
Extraordinary loss (A)................. -- (0.01) (0.30) (0.16) (0.01)
Net earnings........................... 1.04 0.72 0.29 0.63 0.63
Total assets............................. 18,190 17,932 16,604 11,718 7,889
Long-term obligations, including
obligations under capital leases....... 9,510 9,590 9,307 6,665 5,079
Shareowners' equity (deficit)............ 3,089 2,678 1,927 917 (537)
Cash dividends per common share.......... (B) (B) (B) (B) (B)
- --------------------------------------------------------------------------------
(A) See Note 9 to Consolidated Financial Statements.
(B) The Company is prohibited from paying cash dividend under the terms of its
Credit Agreement.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS COMBINATIONS
On May 27, 1999, Kroger issued 312 million shares of Kroger common stock
in connection with a merger, for all of the outstanding common stock of Fred
Meyer Inc., which operates stores primarily in the Western region of the United
States. On March 9, 1998, Fred Meyer issued 82 million shares of Fred Meyer
common stock in connection with a merger, for all of the outstanding stock of
Quality Food Centers, Inc. ("QFC"), a supermarket chain operating in the
Seattle/Puget Sound region of Washington state, and in Southern California. The
mergers were accounted for as poolings of interest, 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.
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. The
Board of Directors authorized further repurchases of up to $100 million of
common stock in October 1997. Under these plans, we made open market purchases
totaling $122 million in 1998. 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
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. On March 31, 2000, the Board of
Directors authorized the repurchase of up to $750 million of Kroger common
stock. This repurchase program replaced the $100 million program authorized in
January 2000. During 2000, we made open market purchases of approximately $43
million under the stock option program and $539 million under the $750 million
program. On March 1, 2001, the Board of Directors authorized the repurchase of
an incremental $1 billion of Kroger common stock which we expect to utilize over
the next 24 months based on current stock prices. This new repurchase program is
in addition to the $750 million stock buyback plan.
CAPITAL EXPENDITURES
Capital expenditures excluding acquisitions totaled $1.6 billion in 2000
compared to $1.7 billion in 1999 and $1.6 billion in 1998, most of which was
incurred to construct new stores. The table below shows our supermarket storing
activity:
2000 1999 1998
----- ----- -----
Beginning of year........................................... 2,288 2,191 1,660
Opened...................................................... 59 100 101
Acquired.................................................... 45 78 572
Closed...................................................... (38) (81) (142)
----- ----- -----
End of year................................................. 2,354 2,288 2,191
===== ===== =====
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RESTATEMENT
The financial information included in this report reflects the effect of
restatements resulting from certain intentional improper accounting practices at
the Company's Ralphs subsidiary. This restatement resulted in changes to
previously reported amounts in the consolidated financial statements as follows:
1999 1998
--------- ---------
(in millions except
per share amounts)
INCREASE/(DECREASE)
STATEMENT OF INCOME
Sales................................................ No change No change
Merchandise Costs.................................... $ (1) $ 5
Operating, general and administrative................ $ 30 $ (21)
Depreciation and amortization expense................ $ (2) $ (1)
Net Earnings......................................... $ (14) $ 10
Basic earnings per common share...................... $ (0.02) $ 0.01
Diluted earnings per common share.................... $ (0.01) $ 0.01
BALANCE SHEET
Current assets....................................... $ 14 $ 10
Total assets......................................... $ (35) $ (32)
Current and total liabilities........................ $ (31) $ (42)
Total shareowners' equity............................ $ (4) $ 10
STATEMENT OF CASH FLOWS
Cash provided by operating activities................ $ (10) $ --
Cash provided by investing activities................ $ 10 $ --
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for 2000
compared to 1999 and 1999 compared to 1998. However, 2000 results are not
directly comparable to 1999 results and 1999 results are not directly comparable
to 1998 results due to a 53-week year in both 2000 and 1998, recent acquisitions
(see footnote 3 of the financial statements), and a change in our fiscal
calendar in 1999 (the "Calendar Change"). The 1998 results include the results
of Ralphs/Food 4 Less from March 10, 1998. As a result of the calendar change,
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 Flows.
Sales
Total sales for the 53 weeks of 2000 were $49.0 billion compared to $45.4
billion for the 52 weeks of 1999 and $43.1 billion for the 53 weeks of 1998.
These sales amounts represent annual increases of 8.0% in 2000 and 5.3% in 1999.
Adjusting for the change in Kroger's fiscal calendar, excluding sales from
divested stores, and adjusting for a 53rd week of sales in 2000 and 1998, annual
increases would have been 6.0% in 2000 and 6.1% in 1999. These increases were
the results of strong store operations that helped increase identical food store
sales (stores in operation and not expanded or relocated for four full quarters)
by 1.5% in 2000 and 2.3% in 1999. Comparable store sales, which include
expansions and relocations, increased 1.9% in 2000 and 3.0% in 1999.
Gross Profit
Coordinated purchasing, category management, technology related
efficiencies and increases in corporate brand sales have enabled us to increase
our gross profit to 26.91% of sales in 2000, from 26.48% in 1999 and 25.60% in
1998. Adjusting for the calendar change and excluding one-time expenses, an
accounting change made in 1998
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(see note five of the financial statements), and the effect of LIFO, gross
profit as a percent of sales increased to 26.99% in 2000, from 26.60% in 1999
and 26.12% in 1998.
Operating, General and Administrative Expenses
Operating, general and administrate expenses as a percent of sales were
18.65% in 2000, 18.43% in 1999, and 18.02% in 1998. Excluding one-time expenses
and adjusting the 1998 amounts to reflect the calendar change, operating,
general and administrative expenses as a percent of sales were 18.43% in 2000,
18.30% in 1999, and 18.15% in 1998. These costs increased due to higher health
care and energy costs in 2000. The 1999 increase was due to a higher incentive
payout based on performance.
EBITDA
Our bank credit facilities and the indentures underlying our publicly
issued debt contain various restrictive covenants. Many of these covenants are
based on earnings before interest, taxes, depreciation, amortization, LIFO
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 strength. We do not intend to
present EBITDA as an alternative to any generally accepted accounting principle
measure of performance. Rather, presentation of EBITDA is based on the
definition contained in our bank credit facility. This may be a different
definition than other companies use. We were in compliance with all EBITDA-based
bank credit facility and indenture covenants on February 3, 2001.
EBITDA for 2000 increased 13.2% to $3,536 million from $3,124 million in
1999. EBITDA for 1999 increased 11.6% from $2,800 million in 1998. These EBITDA
increases were primarily due to economies of scale resulting from increased
sales, efficiencies described in "Gross Profit" above, returns from capital
investments, and returns from recent acquisitions.
The following is a summary of the calculation of EBITDA for the 2000,
1999, and 1998 fiscal years:
2000 1999 1998
(53 WEEKS) (52 WEEKS) (53 WEEKS)
(as restated) (as restated)
---------- ------------- -------------
(in millions)
Earnings before tax expense................................. $1,508 $1,102 $ 889
Interest.................................................... 675 637 645
Depreciation................................................ 907 847 745
Goodwill amortization....................................... 101 99 91
LIFO........................................................ (6) (29) 10
One-time items included in merchandise costs................ 37 58 49
One-time items included in operating, general and
administrative expenses................................... 108 27 12
Merger related costs........................................ 15 383 269
Accounting change........................................... -- -- 90
Impairment charges.......................................... 191 -- --
------ ------ ------
EBITDA...................................................... $3,536 $3,124 $2,800
Income Taxes
Our effective tax rate decreased to 41.6% in 2000 from 43.5% in 1999 and
43.3% in 1998. The decrease in the effective tax rate from 1999 to 2000 was due
primarily to the absence of non-deductible transaction costs in
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2000. The increase in the tax rate from 1998 to 1999 was due to non-deductible
transactions costs of approximately $26 million in 1999 related to mergers.
Net Earnings
Net earnings and the effects of merger related costs, one-time expenses,
the accounting change and extraordinary losses for the three years ended
February 3, 2001, were:
2000 1999 1998
(53 WEEKS) (52 WEEKS) (53 WEEKS)
(as restated) (as restated)
---------- ------------- -------------
(in millions)
Earnings before extraordinary loss excluding merger related
costs, one-time expenses, impairment charges and the
accounting change......................................... $1,130 $ 949 $ 772
Tax benefit due to effect of merger related costs, one-time
expenses, impairment charges and the accounting change.... 101 142 152
Merger related costs........................................ (15) (383) (269)
One-time expenses........................................... (145) (85) (61)
Accounting change........................................... -- -- (90)
Impairment charges.......................................... (191) -- --
------ ----- -----
Earnings before extraordinary loss.......................... 880 623 504
Extraordinary loss, net of income tax benefit............... (3) (10) (257)
------ ----- -----
Net Earnings................................................ $ 877 $ 613 $ 247
====== ===== =====
Diluted earnings per share before extraordinary loss
excluding merger related costs, one-time expenses and
accounting change......................................... $ 1.34 $1.11 $0.91
MERGER RELATED COSTS AND ONE-TIME EXPENSES
We are continuing to implement our integration plan relating to recent
mergers. The integration plan includes distribution consolidation, systems
integration, store conversions, store closures, and administration integration.
Total merger related costs were $15 million in 2000, $383 million in 1999 and
$269 million in 1998.
In addition to merger related costs that are shown separately on the
Statement of Income, we also incurred other one-time expenses that are included
in merchandise costs and operating, general and administrative expenses. The
one-time expenses incurred during 2000 and 1999 were costs related to recent
mergers. The 1998 one-time expenses were costs incurred associated with
logistics projects and operations consolidation in Texas.
During 2000, we recorded an impairment charge of approximately $191
million. We performed an impairment review due to new divisional leadership and
updated profitability forecasts for 2000 and beyond. This impairment review
occurred during the first quarter of 2000. During this review we identified
impairment losses for assets to be disposed of, assets to be held and used, and
certain investments in former suppliers that have
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experienced financial difficulty and with whom supply arrangements have ceased.
The table below details all of our merger related costs and one-time items:
2000 1999 1998
---- ---- ----
(in millions)
Merger related costs........................................ $ 15 $383 $269
---- ---- ----
One-time items related to mergers included in:
Merchandise costs......................................... 37 58 --
Operating, general and administrative..................... 108 27 --
Other one-time items included in:
Merchandise costs......................................... -- -- 49
Operating, general and administrative..................... -- -- 12
---- ---- ----
Total one-time items........................................ 145 85 61
---- ---- ----
Impairment charge........................................... 191 -- --
---- ---- ----
Total merger related costs and other one-time items......... $351 $468 $330
==== ==== ====
Please refer to financial statement footnote four for more information on
merger related costs and one-time items.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows Information
Cash flow from operations was $2,281 million in 2000 compared to $1,548
million in 1999 and $1,838 million in 1998. The increase in 2000 was due to an
increase in earnings and our efforts to reduce net operating working capital and
improve cash flow. The decrease in cash provided by operations during 1999 was
due to an increase in inventory levels at the end of fiscal year 1999 as a
result of the effect of Y2K.
Cash flows used by investing activities was $1,523 million in 2000
compared to $1,810 million in 1999 and $1,465 million in 1998. The decrease in
2000 and increase in 1999 were primarily related to our storing activity and
asset acquisitions. During 2000, 1999, and 1998 we had capital expenditures
excluding acquisitions of $1,623 million, $1,691 million, and $1,646 million,
respectively. We spent $67 million for acquisitions during 2000 compared to $230
million in 1999 and $86 million in 1998. We opened, acquired, expanded, or
relocated 150 food stores in 2000, 197 food stores in 1999, and 142 food stores
in 1998. During those same periods, we remodeled 115, 142, and 165 food stores,
respectively.
Cash used by financing activities was $878 million in 2000 compared to
cash provided of $280 million in 1999 and a use of $257 million in 1998. The
decrease in cash during 2000 was due to a decrease in the amount borrowed and an
increase in the treasury shares purchased during 2000. The increase in cash in
1999 was due to fewer debt prepayment costs in 1999 compared to 1998 and a
decrease in the financing charges incurred during 1999. The debt prepayment
costs in 1998 related primarily to debt refinancing as a result of mergers at
Fred Meyer, Inc.
Debt Management
We have several lines of credit totaling approximately $3.8 billion with
$1.4 billion of unused balances at February 3, 2001. In addition, we have a $470
million synthetic lease credit facility with no unused balance and $175 million
in money market lines with an unused balance of $75 million at February 3, 2001.
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Total debt, including both the current and long-term portions of capital
leases, decreased $468 million to $8.5 billion in 2000 and increased $441
million to $9.0 billion in 1999. Both the decrease in 2000 and the increase in
1999 were due to business acquisitions accounted for under the purchase method
of accounting in 1999. 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 employee benefit costs of $208 million at year-end
2000, and $200 million at year-end 1999 and 1998. If we exclude the debt
incurred to make these purchases, which we classify as investments, and the
prefunding of employee benefits, our net total debt would have been $8.3 billion
at year-end 2000 compared to $8.7 billion at year-end 1999, and $8.3 billion at
year-end 1998.
In addition to the available credit mentioned above, we currently have
available for issuance $925 million of securities under a shelf registration
statement filed with the Securities and Exchange Commission and declared
effective on February 2, 2000.
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IMPACT 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 we believe 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
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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.
We indirectly own a 50% interest in the entity that owns the Santee Dairy
in Los Angeles, California, and have a 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," is effective for The
Kroger Co. as of February 4, 2001. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. We have determined that the adoption of these new accounting
standards will not have a material effect on our financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 44, Accounting for Certain Transactions Involving Stock
Compensation, which clarifies the application of Accounting Principals Board
Opinion 25 for certain issues. The interpretation became effective July 1, 2000,
except for the provisions that relate to modifications that directly or
indirectly reduce the exercise price of an award and the definition of an
employee, which became effective after December 15, 1998. The adoption of FIN 44
did not have a material effect on our financial statements.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain Other
Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future;" and 00-25, "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer" become
effective for The Kroger Co. beginning in the first quarter of 2002. These
issues address the appropriate accounting for certain vendor contracts and
loyalty programs. The Company continues to assess the effect these new standards
will have on the financial statements. We expect the adoption of these standards
will not have a material effect on our financial statements.
OUTLOOK
Statements elsewhere in this report and below regarding our expectations,
hopes, beliefs, intentions or strategies are forward-looking statements within
the meaning of Section 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 expect to reduce net operating working capital compared to the third
quarter of 1999 by $500 million by the end of the third quarter 2004. We
define net operating working capital as current operating assets less
current operating liabilities. We do not intend to present net operating
working capital as an alternative to any generally accepted accounting
principle measure of performance. Rather we believe this presentation is
relevant to an assessment of our financial performance. As of the end of
fiscal 2000, we have reduced net operating working capital $183 million
when compared to the fourth quarter of
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1999. A calculation of net operating working capital based on our
definition as of the fourth quarter 2000 and the fourth quarter of 1999
is provided in the following table:
FOURTH QUARTER FOURTH QUARTER
2000 1999
-------------- --------------
(in millions)
Cash............................................. $ 161 $ 281
Receivables...................................... 687 636
FIFO inventory................................... 4,562 4,440
Operating prepaid and other assets............... 410 495
Accounts payable................................. (3,012) (2,773)
Operating accrued liabilities.................... (2,124) (2,220)
Prepaid VEBA..................................... (208) (200)
------- -------
Net working capital.............................. $ 476 $ 659
======= =======
- We expect to obtain sales growth from new square footage, as well as
from increased productivity from existing locations. During the next two
years, Kroger plans to grow square footage by 4.0% -- 5.0% year over
year. We expect combination stores to increase our sales per customer by
including numerous specialty departments, such as pharmacies, natural
foods, 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,
club or warehouse stores, drug stores and restaurants.
- Our targeted annual earnings per share growth is 16% -- 18% through the
fiscal year ending February 1, 2003 and 15%, thereafter.
- Capital expenditures reflect our strategy of growth through expansion
and acquisition as well as our emphasis on self-development and
ownership of store real estate, and on logistics and technology
improvements. The continued capital spending in technology focusing on
improved store operations, logistics, manufacturing procurement,
category management, merchandising and buying practices, should reduce
merchandising costs as a percent of sales. We expect our capital
expenditures for fiscal 2001 to total $2.0 billion, excluding
acquisitions. We intend to use the combination of free cash flows from
operations, including reductions in working capital, and borrowings
under credit facilities to finance capital expenditure requirements. If
determined preferable, we may fund capital expenditure requirements by
mortgaging facilities, entering into sale/leaseback transactions, or by
issuing additional debt or equity.
- Based on current operating results, we believe that operating cash flow
and other sources of liquidity, including borrowings under our
commercial paper program and bank credit facilities, will be adequate to
meet anticipated requirements for working capital, capital expenditures,
interest payments and scheduled principal payments for the foreseeable
future. We also believe we have adequate coverage of our debt covenants
to continue to respond effectively to competitive conditions.
- A decline in the generation of sufficient cash flows to support capital
expansion plans, share repurchase programs and general operating
activities could cause our growth to slow significantly and may cause us
to miss our earnings targets, because we obtain some of our sales growth
from new square footage.
- The grocery retailing industry continues to experience fierce
competition from other grocery retailers, supercenters, club or
warehouse stores, and drug stores. Our ability to maintain our current
success is dependent upon our ability to compete in this industry and
continue to reduce operating expenses. The competitive environment may
cause us to reduce our prices in order to gain or maintain share of
sales,
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thus reducing margins. While we believe our opportunities for sustained,
profitable growth are considerable, unanticipated actions of competitors
could impact our share of sales and net income.
- Changes in laws and regulations, including changes in accounting
standards, taxation requirements, and environmental laws may have a
material impact on our financial statements.
- Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, and
employment and job growth in the markets in which we operate may affect
our ability to hire and train qualified employees to operate our stores.
This would negatively affect earnings and sales growth. General economic
changes may also affect the shopping habits of our customers, which
could affect sales and earnings.
- Changes in our product mix may negatively affect certain financial
indicators. For example, we have added and will continue to add
supermarket fuel centers. Since gasoline is a low profit margin item
with high sales dollars, we expect to see our gross profit margins
decrease as we sell more gasoline. Although this negatively affects our
gross profit margin, gasoline provides a positive effect on EBITDA and
net earnings.
- We are party to more than 335 collective bargaining agreements with
local unions representing approximately 204,120 employees. During 2000
we negotiated 45 labor contracts without any material work stoppages.
Typical agreements are three to five years in duration and, as
agreements expire, we expect to enter new collective bargaining
agreements. In 2001, 96 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.
- Our ability to integrate any companies we acquire or have acquired and
achieve operating improvements at those companies will affect our
operations.
- We retain a portion of the exposure for our workers' compensation and
general liability claims. It is possible that these claims may cause
significant expenditures that would affect the operating cash flows of
the company.
- 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.
- Adverse weather conditions could increase the cost our suppliers charge
for our products, or may decrease the customer demand for certain
products. Additionally, increases in the costs of inputs, such as
utility costs or raw material costs, could negatively impact financial
ratios and net earnings.
- Although we presently operate only in the United States, civil unrest in
foreign countries in which our suppliers do business may affect the
prices we are charged for imported goods. If we are unable to pass these
increases on to our customers our gross margin and EBITDA will suffer.
- Interest rate fluctuation and other capital market conditions may cause
variability in earnings. Although we use derivative financial
instruments to reduce our net exposure to financial risks, we are still
exposed to interest rate fluctuations and other capital market
conditions.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative financial instruments primarily to reduce our exposure
to adverse fluctuations in interest rates and, to a lesser extent, adverse
fluctuations in commodity prices and other market risks. We do not enter into
derivative financial instruments for trading purposes. As a matter of policy,
all of our derivative positions are used to reduce risk by hedging an underlying
economic exposure. Because of the high correlation between the hedging
instrument and the underlying exposure, fluctuation in the value of the
instruments are generally offset by reciprocal changes in the value of the
underlying exposure. The derivatives we use are straightforward instruments with
liquid markets.
We limit our exposure to rising interest rates through the strategic use
of variable and fixed rate debt, interest rate swaps, interest rate caps, and
interest rate collars. 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 swaps and cap agreements, at a pre-tax cost
of $17 million.
We now use derivatives primarily to fix the rates on variable rate debt
and set interest rates for future debt issuances. To do this, we use the
following guidelines:
- limit the annual amount of debt subject to interest rate reset and the
amount of variable rate debt to a combined total of $2.3 billion or
less,
- use the average daily bank balance to determine annual variable rate
debt amounts,
- include no leveraged derivative products, and
- hedge without regard to profit motive or sensitivity to current
mark-to-market status.
We review compliance with the 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 shown for 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 outstanding instruments. The variable component of
each interest rate derivative and the variable rated debt is based on one month
LIBOR using the forward yield curve as of February 3, 2001. The Fair-Value
column includes
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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
February 3, 2001. (Refer to footnotes 10 and 11 of the financial statements)
EXPECTED YEAR OF MATURITY
--------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR-VALUE
----- ------- ------- ------- ------ ---------- ------- ----------
(in millions)
DEBT
Fixed rate.............. $(307) $ (131) $ (303) $ (271) $ (776) $(4,211) $(5,999) $(4,760)*
Average interest rate... 7.67% 7.64% 7.66% 7.55% 7.58% 7.58%
Variable rate........... $ -- $(1,005) $(1,149) $ -- $ -- $ -- $(2,154) $(2,154)
Average interest rate... 5.67% 4.97% 5.76%
* It was not reasonably possible to calculate a fair value for $591 million of
fixed rate debt.
AVERAGE NOTIONAL AMOUNTS OUTSTANDING
-------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR-VALUE
----- ----- ----- ------ ----- ---------- ------ ----------
(in millions)
INTEREST RATE DERIVATIVES
Variable to fixed............... $ 526 $ 375 $ 375 $ 375 $ 375 $ 375 $ 675 $ (7)
Average pay rate................ 6.43% 6.20% 6.20% 6.20% 6.20% 6.20% 6.25%
Average receive rate............ 5.04% 4.35% 5.13% 5.58% 5.81% 5.96% 5.29%
Interest rate caps.............. $ 222 $ -- $ -- $ -- $ -- $ -- $1,050 $ --
Interest rate collar............ $ 300 $ 300 $ 143 $ -- $ -- $ -- $ 300 $ (2)
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 pay the actual interest rate for that three month period;
- if the three month LIBOR is greater than 6.50% and less than 7.50%, we
pay 6.50% for that three month period; and
- if the three month LIBOR is greater than or equal to 7.50%, we pay the
actual interest rate for that three month period.
The interest rate caps all have a strike price of 6.8% based on the one
month LIBOR rate.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
In our opinion, 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 February 3, 2001 and January
29, 2000, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended February 3, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 2 to the consolidated financial statements, the
accompanying consolidated financial statements as of January 29, 2000 and for
each of the two years in the period ended January 29, 2000 have been restated.
As described in Note 5 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
April 30, 2001
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CONSOLIDATED BALANCE SHEET
FEBRUARY 3, JANUARY 29,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS) 2001 2000
- ------------------------------------------------------------------------------------------
(as restated)
ASSETS
Current assets
Cash...................................................... $ 161 $ 281
Receivables............................................... 687 636
Inventories............................................... 4,066 3,938
Prepaid and other current assets.......................... 502 690
----------- ----------
Total current assets.............................. 5,416 5,545
Property, plant and equipment, net.......................... 8,820 8,266
Goodwill, net............................................... 3,639 3,718
Other assets................................................ 315 403
----------- ----------
Total Assets...................................... $ 18,190 $ 17,932
=========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations
under capital leases................................... $ 336 $ 591
Accounts payable.......................................... 3,012 2,773
Accrued salaries and wages................................ 604 695
Other current liabilities................................. 1,639 1,605
----------- ----------
Total current liabilities......................... 5,591 5,664
Long-term debt including obligations under capital leases... 8,210 8,422
Other long-term liabilities................................. 1,300 1,168
----------- ----------
Total Liabilities................................. 15,101 15,254
----------- ----------
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 shares authorized and
unissued.................................................. -- --
Common stock, $1 par, 1,000 shares authorized: 891 shares
issued in 2000 and 885 shares issued in 1999.............. 891 885
Additional paid-in capital.................................. 2,092 2,023
Accumulated earnings........................................ 1,104 227
Common stock in treasury, at cost, 76 shares in 2000 and 50
shares in 1999............................................ (998) (457)
----------- ----------
Total Shareowners' Equity......................... 3,089 2,678
----------- ----------
Total Liabilities and Shareowners' Equity......... $ 18,190 $ 17,932
=========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENT OF INCOME
Years Ended February 3, 2001, January 29, 2000 and January 2, 1999
2000 1999 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (53 WEEKS) (52 Weeks) (53 Weeks)
- ----------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Sales....................................................... $49,000 $45,352 $43,082
Merchandise costs, including advertising, warehousing, and
transportation............................................ 35,806 33,316 32,063
------- ------- -------
Gross profit........................................... 13,194 12,036 11,019
Operating, general and administrative....................... 9,138 8,327 7,761
Rent........................................................ 659 641 619
Depreciation and amortization............................... 907 847 745
Goodwill amortization....................................... 101 99 91
Asset impairment charges.................................... 191 -- --
Merger related costs........................................ 15 383 269
------- ------- -------
Operating profit....................................... 2,183 1,739 1,534
Interest expense............................................ 675 637 645
------- ------- -------
Earnings before income tax expense and extraordinary
loss................................................. 1,508 1,102 889
Tax expense................................................. 628 479 385
------- ------- -------
Earnings before extraordinary loss..................... 880 623 504
Extraordinary loss, net of income tax benefit............... (3) (10) (257)
------- ------- -------
Net earnings........................................... $ 877 $ 613 $ 247
======= ======= =======
Basic earnings per Common share
Earnings before extraordinary loss..................... $ 1.07 $ 0.75 $ 0.62
Extraordinary loss..................................... -- (0.01) (0.32)
------- ------- -------
Net earnings...................................... $ 1.07 $ 0.74 $ 0.30
======= ======= =======
Average number of common shares used in basic calculation... 823 829 816
Diluted earnings per Common Share
Earnings before extraordinary loss..................... $ 1.04 $ 0.73 $ 0.59
Extraordinary loss..................................... -- (0.01) (0.30)
------- ------- -------
Net earnings...................................... $ 1.04 $ 0.72 $ 0.29
======= ======= =======
Average number of common shares used in diluted
calculation............................................... 846 858 851
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended February 3, 2001, January 29, 2000, and January 2, 1999
2000 1999 1998
(IN MILLIONS) (53 WEEKS) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Cash Flows From Operating Activities:
Net earnings............................................ $ 877 $ 613 $ 247
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss................................... 3 10 257
Depreciation......................................... 907 847 745
Goodwill amortization................................ 101 99 91
Non cash merger charges.............................. 286 105 109
Deferred income taxes................................ 213 308 (49)
Other................................................ (4) (9) 101
Changes in operating assets and liabilities net of
effects from acquisitions of businesses:
Inventories........................................ (114) (271) 86
Receivables........................................ (49) (70) (66)
Accounts payable................................... 67 50 91
Other.............................................. (6) (134) 226
----------- --------- ---------
Net cash provided by operating activities....... 2,281 1,548 1,838
----------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures.................................... (1,623) (1,691) (1,646)
Proceeds from sale of assets............................ 127 139 96
Payments for acquisitions, net of cash acquired......... (67) (230) (86)
Other................................................... 40 (28) 171
----------- --------- ---------
Net cash used by investing activities........... (1,523) (1,810) (1,465)
----------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt................ 838 1,763 5,307
Reductions in long-term debt............................ (1,339) (1,469) (5,089)
Debt prepayment costs................................... (3) (2) (308)
Financing charges incurred.............................. (10) (11) (118)
Increase (decrease) in book overdrafts.................. 160 (62) (44)
Proceeds from issuance of capital stock................. 57 67 122
Treasury stock purchases................................ (581) (6) (122)
Other................................................... -- -- (5)
----------- --------- ---------
Net cash provided (used) by financing
activities.................................... (878) 280 (257)
----------- --------- ---------
Net (decrease) increase in cash and temporary cash
investments............................................. (120) 18 116
Cash and temporary cash investments:
Beginning of year....................................... 281 263 183
----------- --------- ---------
End of year............................................. $ 161 $ 281 $ 299
=========== ========= =========
Disclosure of cash flow information:
Cash paid during the year for interest.................. $ 691 $ 536 $ 635
Cash paid during the year for income taxes.............. $ 259 $ 113 $ 172
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired........................ $ 84 $ 201 $ 2,209
Goodwill recorded.................................... $ 33 $ 53 $ 2,344
Value of stock issued................................ $ -- $ -- $ (652)
Liabilities assumed.................................. $ (49) $ (19) $ (3,746)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY (DEFICIT)
Years Ended February 3, 2001, January 29, 2000, and January 2, 1999
COMMON STOCK ADDITIONAL TREASURY STOCK ACCUMULATED
--------------- PAID-IN --------------- EARNINGS
(IN MILLIONS) SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
- -------------------------------------------------------------------------------------------------------------
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 (as restated)............ -- -- -- -- -- 247 247
---- ---- ------ --- ----- ------ ------
Balances at January 2, 1999........... 876 876 1,913 50 (451) (411) 1,927
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 (as restated)............ -- -- -- -- -- 613 613
---- ---- ------ --- ----- ------ ------
Balances at January 29, 2000.......... 885 885 2,023 50 (457) 227 2,678
Issuance of common stock:
Stock options exercised............. 5 5 57 -- -- -- 62
Restricted stock issued............. 1 1 13 -- -- -- 14
Warrants exercised.................. -- -- (40) (1) 40 -- --
Treasury stock purchases.............. -- -- -- 27 (581) -- (581)
Tax benefits from exercise of stock
options............................. -- -- 39 -- -- -- 39
Net earnings ......................... -- -- -- -- -- 877 877
---- ---- ------ --- ----- ------ ------
Balances at February 3, 2001.......... 891 $891 $2,092 76 $(998) $1,104 $3,089
==== ==== ====== === ===== ====== ======
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in millions except per share amounts.
Certain prior year amounts have been reclassified to conform to current year
presentation.
1. ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in preparing these financial statements:
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of
The Kroger Co. and its subsidiaries ("Kroger"), and Fred Meyer, Inc. and its
subsidiaries ("Fred Meyer") which were merged with Kroger on May 27, 1999 (See
Note 3). Significant intercompany transactions and balances have been
eliminated.
Transition Period
On January 6, 1999, the Company changed its fiscal year-end to the
Saturday nearest January 31 of each year. This change is disclosed in the
Company's Current Report on Form 8-K dated January 6, 1999. The Company 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 the
Company had sales of $2,160, costs and expenses of $2,135, and net earnings of
$25.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest January 31. The
last three fiscal years consist of the 53-week period ending February 3, 2001,
the 52-week period ending January 29, 2000, and the 53-week period ending
January 2, 1999. The Fred Meyer amounts included in the consolidated financial
statements for the fiscal year ended January 2, 1999 relate to Fred Meyer's
52-week period ended January 30, 1999.
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 on a last-in,
first-out, "LIFO", basis) or market. Approximately 94% of inventories for 2000
and 97% of inventories for 1999 were valued using the LIFO method. Cost for the
balance of the inventories is determined using the FIFO method. Replacement cost
was higher than the carrying amount by $496 at February 3, 2001 and $502 at
January 29, 2000.
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 $907 in 2000, $847 in 1999, and $745
in 1998.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Interest costs on significant projects constructed for the Company's own
use are capitalized as part of the costs of the newly constructed facilities.
Upon retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the balance sheet and any gain or loss is
reflected in earnings.
Goodwill
Goodwill is generally being amortized on a straight-line basis over 40
years. Accumulated amortization was approximately $314 at February 3, 2001, and
$213 at January 29, 2000.
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. The Company's counter
parties are major financial institutions.
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 eight 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.
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale of
the Company's products. Vendor rebates and credits that relate to the Company's
buying and merchandising activities are recorded as a component of merchandise
costs as earned according to the underlying agreement.
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 $546 in 2000, $511 in 1999 and $489 in 1998.
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.
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
2. RESTATEMENT
These financial statements reflect the effect of restatements resulting
from certain intentional improper accounting practices at the Company's Ralphs
subsidiary. This restatement resulted in changes to previously reported amounts
in the consolidated financial statements as follows:
1999 1998
--------- ---------
INCREASE/(DECREASE)
STATEMENT OF INCOME
Sales................................................ No change No change
Merchandise Costs.................................... $ (1) $ 5
Operating, general and administrative................ $ 30 $ (21)
Depreciation and amortization expense................ $ (2) $ (1)
Net Earnings......................................... $ (14) $ 10
Basic earnings per common share...................... $ (0.02) $ 0.01
Diluted earnings per common share.................... $ (0.01) $ 0.01
BALANCE SHEET
Current assets....................................... $ 14 $ 10
Total assets......................................... $ (35) $ (32)
Current and total liabilities........................ $ (31) $ (42)
Total shareowners' equity............................ $ (4) $ 10
STATEMENT OF CASH FLOWS
Cash provided by operating activities................ $ (10) $ --
Cash provided by investing activities................ $ 10 $ --
3. 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.
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The accompanying Consolidated Financial Statements reflect the
consolidated results as follows:
Kroger Fred Meyer Consolidated
Historical Historical Company
- ------------------------------------------------------------------------------------------------------
1999
Subsequent to consummation date
Sales..................................................... $ -- $ -- $31,859
Extraordinary loss, net of income tax benefit............. $ -- $ -- $ (10)
Net Earnings.............................................. $ -- $ -- $ 402
Diluted earnings per common share......................... $ -- $ -- $ 0.47
1999
Prior to consummation date*
Sales..................................................... $ 8,789 $ 4,704 $13,493
Extraordinary loss, net of income tax benefit............. $ -- $ -- $ --
Net Earnings.............................................. $ 176 $ 35 $ 211
Diluted earnings per common share......................... $ 0.33 $ 0.10 $ 0.25
1998
Sales..................................................... $28,203 $14,879 $43,082
Extraordinary loss, net of income tax benefit............. $ (39) $ (218) $ (257)
Net Earnings.............................................. $ 411 $ (164) $ 247
Diluted earnings per common share......................... $ 0.78 $ (0.51) $ 0.29
- --------------------------------------------------------------------------------
* 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.
4. MERGER RELATED COSTS AND ONE-TIME EXPENSES
MERGER RELATED COSTS
We are continuing to implement 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 $15 in
2000, $383 in 1999 and $269 in 1998.
The following table presents the components of the merger related costs:
2000 1999 1998
- ------------------------------------------------------------------------------------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation................................ $ 1 $ 30 $ 16
Systems integration....................................... -- 85 50
Store conversions......................................... -- 51 48
Transaction costs......................................... -- 93 34
Administration integration................................ 4 19 12
---- ---- ----
5 278 160
---- ---- ----
NONCASH ASSET WRITEDOWN
Distribution consolidation................................ -- -- 29
Systems integration....................................... -- 3 26
Store conversions......................................... -- 10 --
Store closures............................................ -- 4 25
Administration integration................................ -- 27 3
---- ---- ----
-- 44 83
---- ---- ----
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2000 1999 1998
- ------------------------------------------------------------------------------------
OTHER CHARGES
Administration integration................................ 10 -- --
---- ---- ----
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.................................. $ 15 $383 $269
==== ==== ====
TOTAL CHARGES
Distribution consolidation................................ $ 1 $ 35 $ 45
Systems integration....................................... -- 89 77
Store conversions......................................... -- 61 48
Transaction costs......................................... -- 93 40
Store closures............................................ -- 12 32
Administration integration................................ 14 93 27
---- ---- ----
Total merger related costs.................................. $ 15 $383 $269
==== ==== ====
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 that was written off
over 18 months, after which it was 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.
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. 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. The asset writedown of $25 in 1998 relates to certain California
stores. Termination costs totaling $7 were accrued in 1998.
Administration Integration
Includes labor and severance costs related to employees identified for
termination in the integration and charges incurred to conform accounting
policies. During 2000, the Company incurred $10 resulting from the issuance of
restricted stock, and $4 for severance payments recorded as cash was expended.
Restrictions on the stock grants lapse as synergy goals are achieved. During
1999, these costs represent $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 severance costs have
subsequently been paid.
A summary of changes in accruals related to various business combinations
follows:
FACILITY EMPLOYEE INCENTIVE AWARDS
CLOSURE COSTS SEVERANCE AND CONTRIBUTIONS
------------- --------- -----------------
Balance at December 27, 1997............................ $ 19 $ 8 $ --
Additions............................................. 129 41 --
Payments.............................................. (15) (16) --
Adjustments........................................... -- (3) --
---- --- ----
Balance at January 2, 1999.............................. 133 30 --
Additions............................................. 8 24 29
Payments.............................................. (11) (25) --
---- --- ----
Balance at January 29, 2000............................. 130 29 29
Additions............................................. -- -- 10
Payments.............................................. (17) (11) (4)
---- --- ----
Balance at February 3, 2001............................. $113 $18 $ 35
==== === ====
One-Time Expenses
In addition to the "merger related costs" described above, we incurred
one-time expenses related to recent mergers of $145 and $85 during 2000 and
1999, respectively. These expenses are included in the merchandise costs and
operating, general and administrative expense lines of the income statement.
During 2000, $108 was recorded in the operating, general and administrative
expense line compared to $27 in 1999. The remaining $37 of one-time expenses in
2000 was included in merchandise cost compared to $58 in 1999.
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Included in the $108 in operating, general and administrative expenses in
2000 are accrued expenses of $67 pertaining primarily to the present value of
lease liabilities relating to closed stores. Payments of $10 were made on these
accruals during 2000. The remaining costs in 2000 and the costs in 1999 relate
primarily to system and banner conversions.
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 consolidation 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.
5. ACCOUNTING CHANGE
In the second quarter of 1998, Kroger changed its application of the
Last-In, First-Out, or LIFO, method of accounting for store inventories from the
retail method to the item cost method. The change was made to more accurately
reflect inventory value by eliminating the averaging and estimation inherent in
the retail method. The cumulative effect of this change on periods prior to
December 28, 1997, cannot be determined. The effect of the change on the
December 28, 1997, inventory valuation, which includes other immaterial
modifications in inventory valuation methods, was included in restated results
for the quarter ended March 21, 1998. This change increased merchandise costs by
$90 and reduced earnings before extraordinary loss and net earnings by $56, or
$0.07 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.
6. IMPAIRMENT CHARGE
Due to updated profitability forecasts for 2000 and beyond, the Company
performed an impairment review of its long-lived assets during the first quarter
of 2000. During this review, the Company identified impairment losses for both
assets to be disposed of and assets to be held and used.
Assets to be Disposed of
The impairment charge for assets to be disposed of related primarily to
the carrying value of land, buildings, and equipment for 25 stores that have
been closed. The impairment charge was determined using the fair value less the
cost to sell. Fair value less the cost to sell used in the impairment
calculation was based on discounted cash flows and third-party offers to
purchase the assets, or market value for comparable properties, if applicable.
Accordingly, an impairment charge of $81 related to assets to be disposed of was
recognized, reducing the carrying value of fixed assets and goodwill by $41 and
$40, respectively.
Assets to be Held and Used
The impairment charge for assets to be held and used related primarily to
the carrying value of land, buildings, and equipment for 13 stores that will
continue to be operated by the Company. Updated projections,
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
based on revised operating plans, were used, on a gross basis, first to
determine whether the assets were impaired, then, on a discounted cash flow
basis, to serve as the estimated fair value of the assets for purposes of
measuring the asset impairment charge. As a result, an impairment charge of $87
related to assets to be held and used was recognized, reducing the carrying
value of fixed assets and goodwill by $47 and $40, respectively.
Other Writedowns
In addition to the approximately $168 of impairment charges noted above,
the Company recorded a writedown of $23 to reduce the carrying value of certain
investments in unconsolidated entities, accounted for on the cost basis of
accounting, to reflect reductions in value determined to be other than
temporary. The writedowns related primarily to investments in certain former
suppliers that have experienced financial difficulty and with whom supply
arrangements have ceased.
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
2000 1999
-------------------
Land........................................................ $ 1,143 $ 1,071
Buildings and land improvements............................. 2,640 2,753
Equipment................................................... 7,228 6,005
Leasehold improvements...................................... 2,372 1,970
Construction-in-progress.................................... 342 712
Leased property under capital leases........................ 516 522
------- --------
14,241 13,033
Accumulated depreciation and amortization................... (5,421) (4,767)
------- --------
$ 8,820 $ 8,266
======= ========
Accumulated depreciation for leased property under capital leases was $218
at February 3, 2001, and $195 at January 29, 2000.
Approximately $1,044, original cost, of Property, Plant and Equipment
collateralizes certain mortgage obligations at February 3, 2001, and January 29,
2000.
8. TAXES BASED ON INCOME
The provision for taxes based on income consists of:
2000 1999 1998
-----------------------
Federal
Current................................................... $ 338 $ 123 $ 382
Deferred.................................................. 213 308 (49)
----- ----- -----
551 431 333
State and local............................................. 77 48 52
----- ----- -----
628 479 385
Tax benefit from extraordinary loss......................... (2) (6) (162)
----- ----- -----
$ 626 $ 473 $ 223
===== ===== =====
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of the statutory federal rate and the effective rate
follows:
2000 1999 1998
-----------------------
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 3.3 2.8 3.8
Non-deductible goodwill..................................... 3.9 2.7 3.2
Other, net.................................................. (0.6) 3.0 1.3
----- ----- -----
41.6% 43.5% 43.3%
===== ===== =====
The tax effects of significant temporary differences that comprise
deferred tax balances were as follows:
2000 1999
- ----------------------------------------------------------------------------
Current deferred tax assets:
Insurance related costs................................... $ 82 $ 68
Net operating loss carryforwards.......................... 47 176
Other..................................................... 83 12
----- -----
Total current deferred tax assets................. 212 256
----- -----
Current deferred tax liabilities:
Compensation related costs................................ (47) (38)
Inventory related costs................................... (79) (54)
----- -----
Total current deferred tax liabilities............ (126) (92)
----- -----
Current deferred taxes, net included in prepaid and other
current assets............................................ $ 86 $ 164
===== =====
Long-term deferred tax assets:..............................
Compensation related costs................................ $ 142 $ 148
Insurance related costs................................... 57 86
Lease accounting.......................................... 39 60
Net operating loss carryforwards.......................... 158 178
Other..................................................... 26 40
----- -----
422 512
Valuation allowance....................................... (152) (157)
----- -----
Long-term deferred tax assets, net................ 270 355
----- -----
Long-term deferred tax liabilities:.........................
Depreciation.............................................. (519) (457)
----- -----
Total long-term deferred tax liabilities.......... (519) (457)
----- -----
Long-term deferred taxes, net............................... $(249) $(102)
===== =====
Long-term deferred taxes, net are included in other liabilities at
February 3, 2001 and January 29, 2000.
At February 3, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of $551 which expire from 2004 through 2017. In
addition, the Company had net operating loss carryforwards for state income tax
purposes of $180 which expire from 2001 through 2020. The utilization of certain
of the Company's net operating loss carryforwards may be limited in a given
year.
At February 3, 2001, the Company had federal and state Alternative Minimum
Tax Credit carryforwards of $9 and $3, respectively. In addition, the Company
has Other Federal and State credit carry forwards of $3 and $20, respectively,
which expire from 2001 through 2017. The utilization of certain of the Company's
credits may be limited in a given year.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEBT OBLIGATIONS
Long-term debt consists of:
2000 1999
------- ------
Senior Credit Facility...................................... $ 1,149 $1,362
Credit Agreement............................................ 1,005 1,459
6.34% to 11.25% Senior Notes and Debentures due through
2029...................................................... 5,145 4,822
4.77% to 10.50% mortgages due in varying amounts through
2017...................................................... 516 473
Other....................................................... 338 465
------- ------
Total debt.................................................. 8,153 8,581
Less current portion........................................ 307 536
------- ------
Total long-term debt........................................ $ 7,846 $8,045
======= ======
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 2000, the term note was retired. All indebtedness under the Senior Credit
Facility is guaranteed by some of the Company's subsidiaries. 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 .625%. At February 3, 2001, the weighted average interest
rate on both the five-year term note and the amounts outstanding under the
revolving credit facility was 6.51%. The Senior Credit Facility requires the
Company to comply with certain ratios related to indebtedness to earnings before
interest, taxes, depreciation, amortization, LIFO charge, extraordinary loss,
and one-time items ("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 2000, but was
extended as a $387 facility. The 364-Day facility now terminates on May 23, 2001
unless extended, converted into a one 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 February 3, 2001, 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 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 3). The
amendments, which became effective when the merger was
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $644 and borrowings under money
market lines of $100 at February 3, 2001, have been classified as long-term
because the Company expects that 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 Company's Senior Notes and Debentures are subject to early
redemption at varying times and premiums. 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 2000 are:
2001....................................................... $ 307
2002....................................................... $1,136
2003....................................................... $1,452
2004....................................................... $ 271
2005....................................................... $ 776
The extraordinary losses in 2000, 1999, and 1998 relate to premiums paid
to retire certain indebtedness early and the write-off of deferred financing
costs.
10. 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.
The Company's current 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 to
determine annual debt amounts subject to interest rate exposure, (ii) limit the
annual amount of debt subject to interest rate reset and the amount of floating
rate debt to a combined total of $2,300 or less, (iii) include no leveraged
products, and (iv) hedge without regard to profit motive or sensitivity to
current mark-to-market status.
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 one month LIBOR using the forward yield curve as of
February 3, 2001.
2000 1999
---- ----
Receive variable swaps
Notional amount........................................... $300 $300
Duration in years......................................... 0.9 1.9
Average receive rate...................................... 6.41% 6.36%
Average pay rate.......................................... 6.66% 6.66%
In addition, as of February 3, 2001, the Company has: an interest rate
collar on a notional amount of $300 million with a maturity date of July 24,
2003; three interest rate caps each with a notional amount of $350 million and a
termination date of April 20, 2001; and three forward receive variable swaps
with notional amounts of $125 million each becoming effective June 1, 2001. Two
of the forward swaps mature June 1, 2011; the other forward swap matures June 1,
2031. 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 pays the actual interest rate 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% for that three month period; and
- If the three month LIBOR is greater than or equal to 7.50%, the
Company pays the actual interest rate for that three month period.
The interest rate caps all have a strike price of 6.8% based on the one
month LIBOR rate. The three forward receive variable swaps have an average pay
rate of 6.20% and will receive a variable rate based on one month LIBOR.
11. 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, Accounts Payable, Accrued
Salaries and Wages and Other Current 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.
34
36
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 $2,154 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:
2000 1999
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Long-term investments for which it is
Practicable............................... $ 118 $ 121 $ 100 $ 103
Not Practicable........................... $ 28 $ -- $ 4 $ --
Debt for which it is
Practicable............................... $ (7,562) $ (6,914) $ (7,904) $ (7,752)
Not Practicable........................... $ (591) $ -- $ (677) $ --
Interest Rate Protection Agreements
Receive variable swaps.................... $ -- $ (7) $ -- $ 2
Interest rate caps and collar............. $ -- $ (2) -- 1
---------- ---------- ---------- ----------
$ -- $ (9) $ -- $ 3
========== ========== ========== ==========
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.
12. 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:
2000 1999 1998
-------- -------- --------
Minimum rentals............................................. $ 731 $ 720 $ 683
Contingent payments......................................... 16 15 18
Sublease income............................................. (88) (94) (82)
-------- -------- --------
$ 659 $ 641 $ 619
======== ======== ========
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Minimum annual rentals for the five years subsequent to 2000 and in the
aggregate are:
CAPITAL OPERATING
LEASES LEASES
------- ---------
2001........................................................ $ 70 $ 727
2002........................................................ 64 709
2003........................................................ 60 651
2004........................................................ 56 613
2005........................................................ 54 577
Thereafter.................................................. 483 4,758
---- ------
787 $8,035
======
Less estimated executory costs included in capital leases... 14
----
Net minimum lease payments under capital leases............. 773
Less amount representing interest........................... 380
----
Present value of net minimum lease payments under capital
leases.................................................... $393
====
Total future minimum rentals under noncancellable subleases at February 3,
2001, were $408.
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 February 3, 2001, the Company had utilized $470 of the
facility, which matures March 2003.
13. 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.
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 2, 1999
--------------------------- --------------------------- ---------------------------
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
------- -------- ------ ------- -------- ------ ------- -------- ------
Basic EPS..................... $ 880 823 $1.07 $623 829 $0.75 $504 816 $0.62
Dilutive effect of stock
option awards............... 23 29 35
----- --- ---- --- ---- ---
Diluted EPS................... $ 880 846 $1.04 $623 858 $0.73 $504 851 $0.59
===== === ==== === ==== ===
At February 3, 2001, and January 29, 2000, there were options outstanding
for approximately 9.6 shares and 18.2 shares of common stock, respectively, that
were excluded from the computation of diluted EPS. These shares were excluded
because their inclusion would have had an anti-dilutive effect on EPS. There
were no items that would have had an anti-dilutive effect at January 2, 1999.
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.
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. 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 generally provide for the exercise of options by exchanging issued
shares of stock of the Company. At February 3, 2001, 14.6 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 from the date of grant
or, for certain options, the earlier of the Company's stock reaching certain
pre-determined market prices or nine years and six months 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 awards, were:
SHARES SUBJECT WEIGHTED AVERAGE
TO OPTION EXERCISE PRICE
-------------- ----------------
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
Granted..................................................... 6.8 $16.79
Exercised................................................... (8.2) $ 7.15
Canceled or Expired......................................... (2.0) $20.68
-----
Outstanding, year-end 2000.................................. 62.6 $13.65
=====
A summary of options outstanding and exercisable at February 3, 2001
follows:
WEIGHTED-
AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------- -----------------------------------
(IN MILLIONS) (IN YEARS) (IN MILLIONS)
$ 2.94 - $ 5.86 13.4 2.15 $ 5.09 13.4 $ 5.09
$ 5.92 - $10.38 18.0 4.92 $ 8.44 17.4 $ 8.43
$10.46 - $16.59 13.3 7.55 $14.95 5.9 $13.57
$17.37 - $24.41 8.2 7.21 $21.03 4.0 $21.07
$24.94 - $31.91 9.7 8.32 $27.15 2.8 $27.19
---- ----
$ 2.94 - $31.91 62.6 5.71 $13.65 43.5 $10.47
==== ====
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, "Accounting for
37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock-Based Compensation," the Company's net earnings and diluted earnings per
common share would have been reduced to the pro forma amounts below:
2000 1999 1998
------------------ ------------------ ------------------
ACTUAL PRO FORMA Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ ---------
Net earnings................................ $ 877 $ 841 $ 613 $ 575 $ 247 $ 205
Diluted earnings per common share........... $1.04 $0.99 $0.72 $0.67 $0.29 $0.24
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 pro forma 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:
2000 1999 1998
----------- --------- ---------
KROGER
Weighted average expected volatility (based on historical
volatility)............................................... 27.69% 26.23% 26.60%
Weighted average risk-free interest rate.................... 4.88% 6.64% 4.60%
Expected term............................................... 8.1 YEARS 8.0 years 7.8 years
FRED MEYER
Weighted average expected volatility (based on historical
volatility)............................................... N/A n/a 39.37%
Weighted average risk-free interest rate.................... N/A n/a 5.32%
Expected term............................................... N/A n/a 5.0 years
The weighted average fair value of options granted during 2000, 1999, and
1998, was $7.48, $12.93, and $9.87, respectively.
15. CONTINGENCIES
The Company continuously evaluates contingencies based upon the best
available evidence.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable. To the
extent that resolution of contingencies results in amounts that vary from
management's estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Insurance -- The Company's workers' compensation risks are self-insured in
certain states. In addition, other workers' compensation risks and certain
levels of insured general liability risks are based on retrospective premium
plans, deductible plans, and self-insured retention plans. The liability for
workers' compensation risks is accounted for on a present value basis. Actual
claim settlements and expenses incident thereto may differ from the provisions
for loss. Property risks have been underwritten by a subsidiary and are
reinsured with unrelated insurance companies. Operating divisions and
subsidiaries have paid premiums, and the insurance subsidiary has provided loss
allowances, based upon actuarially determined estimates.
Litigation -- The Company is involved in various legal actions arising in
the normal course of business. Although occasional adverse decisions (or
settlements) may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
38
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Purchase Commitment -- The Company indirectly owns a 50% interest in the
Santee Dairy ("Santee") and has a 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.
16. 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, 10 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.
17. STOCK
Preferred Stock
The Company has authorized 5 shares of voting cumulative preferred stock;
2 were available for issuance at February 3, 2001. Fifty thousand shares have
been designated as "Series A Preferred Shares" and are reserved for issuance
under the Company's warrant dividend plan. The stock has a par value of $100 and
is issuable in series.
Common Stock
The Company has authorized 1,000 shares of common stock, $1 par value per
share. On May 20, 1999, the shareholders authorized an amendment to the Amended
Articles of Incorporation to increase the authorized shares of common stock from
1,000 to 2,000 when the Board of Directors determines it to be in the best
interest of the Company.
18. BENEFIT PLANS
The Company administers non-contributory defined benefit retirement plans
for substantially all non-union employees, and some union-represented employees
as determined by the terms and conditions of collective bargaining agreements.
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 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 benefits
occurs as claims or premiums are paid.
39
41
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:
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 1,128 $ 1,192 $ 253 $ 272
Change in benefit obligation during transition period....... -- 4 -- 1
Addition to benefit obligation from acquisitions............ 6 -- -- --
Service cost................................................ 36 37 9 11
Interest cost............................................... 90 82 19 19
Plan participants' contributions............................ -- -- 6 4
Amendments.................................................. (3) 15 -- 4
Actuarial loss (gain)....................................... (18) (140) (2) (39)
Settlements................................................. -- (2) -- --
Curtailment credit.......................................... -- (2) -- (7)
Benefits paid............................................... (70) (58) (21) (12)
------- ------- ------- -------
Benefit obligation at end of year........................... $ 1,169 $ 1,128 $ 264 $ 253
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 1,393 $ 1,375 $ -- $ --
Change in fair value of plan assets during transition
period.................................................... -- 15 -- --
Addition to plan assets from acquisitions................... 6 -- -- --
Actual return on plan assets................................ 111 57 -- --
Employer contribution....................................... 4 4 15 8
Plan participants' contributions............................ -- -- 6 4
Benefits paid............................................... (70) (58) (21) (12)
------- ------- ------- -------
Fair value of plan assets at end of year.................... $ 1,444 $ 1,393 $ -- $ --
======= ======= ======= =======
Pension plan assets include $179 and $121 of common stock of The Kroger Co. at
February 3, 2001, and January 29, 2000, respectively.
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
NET AMOUNT RECOGNIZED AT END OF YEAR:
Funded status at end of year................................ $ 275 $ 265 $ (264) $ (253)
Unrecognized actuarial gain................................. (305) (307) (71) (81)
Unrecognized prior service cost............................. 27 33 (15) (17)
Unrecognized net transition asset........................... (4) (5) $ 1 $ 1
------- ------- ------- -------
Net amount recognized at end of year........................ $ (7) $ (14) $ (349) $ (350)
======= ======= ======= =======
Prepaid benefit cost........................................ $ 40 $ 33 $ -- $ --
Accrued benefit liability................................... (47) (47) (349) (350)
------- ------- ------- -------
$ (7) $ (14) $ (349) $ (350)
======= ======= ======= =======
40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate............................................... 7.50% 8.00% 7.50% 8.00%
Expected return on plan assets.............................. 9.50% 9.50%
Rate of compensation increase............................... 4.00% 4.50% 4.00% 4.50%
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of other benefits was assumed for 1999 and thereafter.
PENSION BENEFITS OTHER BENEFITS
---------------------- --------------------
2000 1999 1998 2000 1999 1998
----- ----- ---- ---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.................................... $ 36 $ 37 $ 37 $ 9 $ 11 $ 9
Interest cost................................... 90 82 77 19 19 18
Expected return on plan assets.................. (120) (109) (98) -- -- --
Amortization of:
Transition asset........................... (1) (1) -- -- -- --
Prior service cost......................... 4 4 2 -- (3) (3)
Actuarial (gain) loss...................... (10) -- 1 (2) -- (1)
Curtailment credit.............................. -- (2) -- (4) (7) (17)
----- ----- ---- ---- ---- ----
Net periodic benefit cost....................... $ (1) $ 11 $ 19 $ 22 $ 20 $ 6
===== ===== ==== ==== ==== ====
The accumulated benefit obligation and fair value of plan assets for pension
plans with accumulated benefit obligations in excess of plan assets were $47 and
$7 at February 3, 2001, and $40 and $1 at January 29, 2000.
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:
1% POINT 1% POINT
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components..... 4 (3)
Effect on postretirement benefit obligation................. 24 (21)
The Company also administers certain defined contribution plans for
eligible union and non-union employees. The cost of these plans for 2000, 1999,
and 1998, was $45, $46, and $40, 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 2000, 1999, and 1998, were $103, $121, and
$133, respectively.
19. 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
but who resigned from the Board of Directors on January 8, 2001. 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 3).
41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Yucaipa or an affiliate holds warrants for the purchase of up to 4.3
million shares of Common Stock at an exercise price of $11.91 per share. Of
those warrants, 0.6 million expire in 2005 and 3.7 million expire in 2006.
Additionally, at the option of Yucaipa, the warrants are 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.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," is effective for The
Kroger Co. as of February 4, 2001. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. We have determined the adoption of these new accounting
standards will not have a material impact on the financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 44, Accounting for Certain Transactions involving Stock
Compensation, which clarifies the application of Accounting Principals Board
Opinion 25 for certain issues. The interpretation became effective July 1, 2000,
except for the provisions that relate to modifications that directly or
indirectly reduce the exercise price of an award and the definition of an
employee, which became effective after December 15, 1998. The adoption of FIN 44
did not have a material impact on the Company's financial statements.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain Other
Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future;" and 00-25, "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer" become
effective for The Kroger Co. beginning in the first quarter of 2002. These
issues address the appropriate accounting for certain vendor contracts and
loyalty programs. The Company continues to assess the effect these new standards
will have on the financial statements. The Company expects the adoption of these
standards will not have a material effect on our financial statements.
21. SUBSEQUENT EVENTS
The Board of Directors authorized the repurchase of an incremental $1
billion of Kroger common stock on March 1, 2001. This new repurchase program is
in addition to the existing $750 million stock buyback plan.
22. GUARANTOR SUBSIDIARIES
The Company's outstanding public debt (the "Guaranteed Notes") is jointly
and severally, fully and unconditionally guaranteed by The Kroger Co. and
certain of its subsidiaries (the "Guarantor Subsidiaries"). At February 3, 2001,
a total of approximately $5.2 billion of Guaranteed Notes were outstanding. The
Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned
subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co.
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.
42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, but rather is included in the column labeled
"Guarantor Subsidiaries."
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
February 3, 2001 and January 29, 2000, and for the three years ended February 3,
2001.
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF FEBRUARY 3, 2001
GUARANTOR
THE KROGER CO. SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------
Current assets
Cash...................................... $ 25 $ 136 $ -- $ 161
Receivables............................... 134 553 -- 687
Net inventories........................... 340 3,726 -- 4,066
Prepaid and other current assets.......... 149 353 -- 502
------- ------- -------- -------
Total current assets.............. 648 4,768 -- 5,416
Property, plant and equipment, net.......... 866 7,954 -- 8,820
Goodwill, net............................... 1 3,638 -- 3,639
Other assets................................ 653 (338) -- 315
Investment in and advances to
subsidiaries.............................. 10,410 -- (10,410) --
------- ------- -------- -------
Total Assets...................... $12,578 $16,022 $(10,410) $18,190
======= ======= ======== =======
Current liabilities
Current portion of long-term debt
including obligations under
capital leases......................... $ 274 $ 62 $ -- $ 336
Accounts payable.......................... 250 2,762 -- 3,012
Other current liabilities................. 449 1,794 -- 2,243
------- ------- -------- -------
Total current liabilities......... 973 4,618 -- 5,591
Long-term debt including obligations
under capital leases................... 7,563 647 -- 8,210
Other long-term liabilities................. 953 347 -- 1,300
------- ------- -------- -------
Total Liabilities................. 9,489 5,612 -- 15,101
------- ------- -------- -------
Shareowners' Equity (deficit)............... 3,089 10,410 (10,410) 3,089
------- ------- -------- -------
Total Liabilities and Shareowners'
Equity (deficit)................ $12,578 $16,022 $(10,410) $18,190
======= ======= ======== =======
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF JANUARY 29, 2000
(as restated)
GUARANTOR
THE KROGER CO. SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------
Current assets
Cash...................................... $ 30 $ 251 $ -- $ 281
Receivables............................... 112 524 -- 636
Net inventories........................... 314 3,624 -- 3,938
Prepaid and other current assets.......... 122 568 -- 690
------- ------- -------- -------
Total current assets.............. 578 4,967 -- 5,545
Property, plant and equipment, net.......... 793 7,473 -- 8,266
Goodwill, net............................... -- 3,718 -- 3,718
Other assets................................ 463 (60) -- 403
Investment in and advances to
subsidiaries.............................. 10,256 -- (10,256) --
------- ------- -------- -------
Total Assets...................... $12,090 $16,098 $(10,256) $17,932
======= ======= ======== =======
Current liabilities
Current portion of long-term debt
including obligations under
capital leases......................... $ 492 $ 99 $ -- $ 591
Accounts payable.......................... 216 2,557 -- 2,773
Other current liabilities................. 357 1,943 -- 2,300
------- ------- -------- -------
Total current liabilities......... 1,065 4,599 -- 5,664
Long-term debt including obligations under
capital leases......................... 7,703 719 -- 8,422
Other long-term liabilities................. 644 524 -- 1,168
------- ------- -------- -------
Total Liabilities................. 9,412 5,842 -- 15,254
------- ------- -------- -------
Shareowners' Equity (deficit)............... 2,678 10,256 (10,256) 2,678
------- ------- -------- -------
Total Liabilities and Shareowners'
Equity (deficit)................ $12,090 $16,098 $(10,256) $17,932
======= ======= ======== =======
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE YEAR ENDED FEBRUARY 3, 2001
GUARANTOR
THE KROGER CO. SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------
Sales....................................... $6,712 $43,047 $ (759) $49,000
Merchandise costs, including warehousing and
transportation............................ 5,316 31,197 (707) 35,806
------ ------- ------- -------
Gross profit.............................. 1,396 11,850 (52) 13,194
Operating, general and administrative....... 1,059 8,079 -- 9,138
Rent........................................ 173 538 (52) 659
Depreciation and amortization............... 91 917 -- 1,008
Merger related costs and asset impairments.. 179 27 -- 206
------ ------- ------- -------
Operating profit (loss)................... (106) 2,289 -- 2,183
Interest expense............................ (625) (50) -- (675)
Equity in earnings of subsidiaries.......... 1,304 -- (1,304) --
------ ------- ------- -------
Earnings before tax expense and
extraordinary loss........................ 573 2,239 (1,304) 1,508
Tax expense (benefit)....................... (307) 935 -- 628
------ ------- ------- -------
Earnings before extraordinary loss.......... 880 1,304 (1,304) 880
Extraordinary loss, net of income tax
benefit................................... (3) -- -- (3)
------ ------- ------- -------
Net earnings........................... $ 877 $ 1,304 $(1,304) $ 877
====== ======= ======= =======
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE YEAR ENDED JANUARY 29, 2000
(as restated)
GUARANTOR
THE KROGER CO. SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------
Sales....................................... $6,333 $39,617 $(598) $45,352
Merchandise costs, including warehousing and
transportation............................ 5,083 28,781 (548) 33,316
------ ------- ----- -------
Gross profit.............................. 1,250 10,836 (50) 12,036
Operating, general and administrative....... 941 7,386 -- 8,327
Rent........................................ 119 572 (50) 641
Depreciation and amortization............... 95 851 -- 946
Merger related costs........................ 64 319 -- 383
------ ------- ----- -------
Operating profit.......................... 31 1,708 -- 1,739
Interest expense............................ (428) (209) -- (637)
Equity in earnings of subsidiaries.......... 846 -- (846) --
------ ------- ----- -------
Earnings before tax expense and
extraordinary loss........................ 449 1,499 (846) 1,102
Tax expense (benefit)....................... (173) 652 -- 479
------ ------- ----- -------
Earnings before extraordinary loss.......... 622 847 (846) 623
Extraordinary loss, net of income tax
benefit................................... (9) (1) -- (10)
------ ------- ----- -------
Net earnings........................... $ 613 $ 846 $(846) $ 613
====== ======= ===== =======
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE YEAR ENDED JANUARY 2, 1999
(as restated)
GUARANTOR
THE KROGER CO. SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------
Sales....................................... $8,849 $34,845 $(612) $43,082
Merchandise costs, including warehousing and
transportation............................ 7,283 25,307 (527) 32,063
------ ------- ----- -------
Gross profit.............................. 1,566 9,538 (85) 11,019
Operating, general and administrative....... 1,348 6,413 -- 7,761
Rent........................................ 199 505 (85) 619
Depreciation and amortization............... 113 723 -- 836
Merger related costs........................ -- 269 -- 269
------ ------- ----- -------
Operating profit (loss)................... (94) 1,628 -- 1,534
Interest expense............................ (218) (427) -- (645)
Equity in earnings of subsidiaries.......... 483 -- (483) --
------ ------- ----- -------
Earnings before tax expense and
extraordinary loss........................ 171 1,201 (483) 889
Tax expense benefit......................... (115) 500 -- 385
------ ------- ----- -------
Earnings before extraordinary loss.......... 286 701 (483) 504
Extraordinary loss, net of income tax
benefit................................... (39) (218) -- (257)
------ ------- ----- -------
Net earnings........................... $ 247 $ 483 $(483) $ 247
====== ======= ===== =======
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 3, 2001
GUARANTOR
THE KROGER CO. SUBSIDIARIES CONSOLIDATED
-------------- ------------ ------------
Net cash provided by operating activities................ $1,242 $1,039 $2,281
------ ------ ------
Cash flows from investing activities:
Capital expenditures................................... (85) (1,538) (1,623)
Other.................................................. 20 80 100
------ ------ ------
Net cash used by investing activities............... (65) (1,458) (1,523)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 838 -- 838
Reductions in long-term debt........................... (1,269) (70) (1,339)
Proceeds from issuance of capital stock................ 57 -- 57
Capital stock reacquired............................... (581) -- (581)
Other.................................................. (73) 220 147
Net change in advances to subsidiaries................. (154) 154 --
------ ------ ------
Net cash (used) provided by financing activities.... (1,182) 304 (878)
------ ------ ------
Net decrease in cash and temporary cash investments.... (5) (115) (120)
Cash and temporary cash investments:
Beginning of year................................... 30 251 281
------ ------ ------
End of year......................................... $ 25 $ 136 $ 161
====== ====== ======
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 29, 2000
(as restated)
GUARANTOR
THE KROGER CO. SUBSIDIARIES CONSOLIDATED
-------------- ------------ ------------
Net cash provided by operating activities................ $ 687 $ 861 $ 1,548
------- ------- -------
Cash flows from investing activities:
Capital expenditures................................... (102) (1,589) (1,691)
Other.................................................. 11 (130) (119)
------- ------- -------
Net cash used by investing activities............... (91) (1,719) (1,810)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 1,707 56 1,763
Reductions in long-term debt........................... (675) (794) (1,469)
Proceeds from issuance of capital stock................ 55 12 67
Capital stock reacquired............................... (6) -- (6)
Other.................................................. 26 (101) (75)
Net change in advances to subsidiaries................. (1,698) 1,698 --
------- ------- -------
Net cash (used) provided by financing activities.... (591) 871 280
------- ------- -------
Net increase in cash and temporary cash investments.... 5 13 18
Cash and temporary cash investments:
Beginning of year................................... 25 238 263
------- ------- -------
End of year......................................... $ 30 $ 251 $ 281
======= ======= =======
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 1999
(as restated)
GUARANTOR
THE KROGER CO. SUBSIDIARIES CONSOLIDATED
-------------- ------------ ------------
Net cash (used) provided by operating activities......... $ (164) $ 2,002 $ 1,838
------- ------- -------
Cash flows from investing activities:
Capital expenditures................................... (278) (1,368) (1,646)
Other.................................................. 128 53 181
------- ------- -------
Net cash used by investing activities............... (150) (1,315) (1,465)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 893 4,414 5,307
Reductions in long-term debt........................... (801) (4,288) (5,089)
Proceeds from issuance of capital stock................ 53 69 122
Capital stock reacquired............................... (122) -- (122)
Other.................................................. (29) (446) (475)
Net change in advances to subsidiaries................. (967) 967 --
------- ------- -------
Net cash (used) provided by financing activities.... (973) 716 (257)
------- ------- -------
Net (decrease) increase in cash and temporary cash
investments......................................... (1,287) 1,403 116
Cash and temporary cash investments:
Beginning of year................................... 38 145 183
------- ------- -------
End of year......................................... $(1,249) $ 1,548 $ 299
======= ======= =======
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
23. QUARTERLY DATA (UNAUDITED)
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
2000 (16 WEEKS) (12 WEEKS) (12 WEEKS) (13 WEEKS) (53 WEEKS)
- --------------------------------------------------------------------------------------------------------------
SALES......................................... $14,329 $11,017 $10,962 $12,692 $49,000
GROSS PROFIT.................................. $ 3,829 $ 2,966 $ 2,915 $ 3,484 $13,194
EARNINGS BEFORE EXTRAORDINARY ITEMS........... $ 99 $ 210 $ 203 $ 368 $ 880
EXTRAORDINARY LOSS............................ $ -- $ (2) $ (1) $ -- $ (3)
NET EARNINGS.................................. $ 99 $ 208 $ 202 $ 368 $ 877
NET EARNING PER COMMON SHARE:
EARNINGS BEFORE EXTRAORDINARY LOSS....... $ 0.12 $ 0.25 $ 0.25 $ 0.45 $ 1.07
EXTRAORDINARY LOSS....................... -- -- -- -- --
------- ------- ------- ------- -------
BASIC NET EARNINGS PER COMMON SHARE........... $ 0.12 $ 0.25 $ 0.25 $ 0.45 $ 1.07
DILUTED EARNINGS PER COMMON SHARE:
EARNINGS BEFORE EXTRAORDINARY LOSS....... $ 0.12 $ 0.25 $ 0.24 $ 0.44 $ 1.04
EXTRAORDINARY LOSS....................... -- -- -- -- --
------- ------- ------- ------- -------
DILUTED NET EARNINGS PER COMMON SHARE......... $ 0.12 $ 0.25 $ 0.24 $ 0.44 $ 1.04
Quarter
-------------------------------------------------
First Second Third Fourth Total Year
1999 (16 weeks) (12 weeks) (12 weeks) (12 weeks) (52 weeks)
- ---------------------------------------------------------------------------------------------------------------
Sales.......................................... $13,493 $10,289 $10,329 $11,241 $45,352
Gross profit................................... $ 3,536 $ 2,701 $ 2,726 $ 3,073 $12,036
Earnings before extraordinary items............ $ 211 $ 53 $ 127 $ 232 $ 623
Extraordinary loss............................. $ -- $ (10) $ -- $ -- $ (10)
Net earnings................................... $ 211 $ 43 $ 127 $ 232 $ 613
Net earnings per common share:
Earnings before extraordinary loss........ $ 0.26 $ 0.06 $ 0.15 $ 0.28 $ 0.75
Extraordinary loss........................ -- (0.01) -- -- (0.01)
------- ------- ------- ------- -------
Basic net earnings per common share............ $ 0.26 $ 0.05 $ 0.15 $ 0.28 $ 0.74
Diluted earnings per common share:
Earnings before extraordinary loss........ $ 0.25 $ 0.06 $ 0.15 $ 0.27 $ 0.73
Extraordinary loss........................ -- (0.01) -- -- (0.01)
------- ------- ------- ------- -------
Diluted net earnings per common share.......... $ 0.25 $ 0.05 $ 0.15 $ 0.27 $ 0.72
The amounts reflected in the quarterly data presented above have been
reclassified to conform to current year presentation and reflect the effect of
restatements, described in note two, resulting from certain intentional improper
accounting practices at the
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
Company's Ralphs subsidiary. This restatement resulted in changes to previously
reported amounts in the consolidated financial statements as follows:
2000 QUARTER 1999 Quarter
--------------------- ----------------------------------------------
FIRST SECOND FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------------------------------------
increase/(decrease) from amounts previously reported
Statement of Income
Sales.............................. No Change No Change
Gross Profit....................... $ (5) $ (4) $ 3 $ (1) $ -- $ (1)
Earnings before extraordinary
items........................... $ (7) $ (8) $ 4 $ (3) $ (2) $ (13)
Net Earnings....................... $ (7) $ (8) $ 4 $ (3) $ (2) $ (13)
Basic earnings per common share.... $(0.01) $(0.01) $0.01 $(0.01) $(0.01) $(0.01)
Diluted earnings per common
share........................... $ -- $(0.01) $0.01 $ -- $ -- $(0.02)
There were no changes for the third and fourth quarters of 2000 due to the
restatement.
49
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is set forth in Item
No. 1, Election of Directors, of the definitive proxy statement to be filed by
the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of the copies of all Section 16(a) forms received by
the Company, or written representations from certain persons that no Forms 5
were required for those persons, the Company believes that during fiscal year
2000 all filing requirements applicable to its officers, directors and 10%
beneficial owners were timely satisfied except that Mr. Geoffrey Covert filed a
Form 5 reporting the sale of 3,400 shares of stock that inadvertently was not
reported on a prior Form 4 during 2000, Mr. Carver Johnson filed a Form 5
reporting the acquisition of 10,000 stock options that inadvertently was not
reported during 1999, Ms. Lynn Marmer filed a Form 4 reporting the sale of 600
shares of stock that inadvertently was not reported on a prior Form 4 during
2000, and Mr. James Thorne filed a Form 4 reporting the sale of 5,000 shares of
stock (held indirectly by his wife) that inadvertently was not reported on a
prior Form 4 during 2000.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the names and ages of the executive officers and the
positions held by each such person or those chosen to become executive officers
as of March 6, 2000. Except as otherwise noted below, each person has held
office for at least five years and was elected to that office at the 1999
Organizational Meeting of the Board of Directors held May 20, 2000. Each officer
will hold office at the discretion of the Board for the ensuing year until
removed or replaced.
Recent
Name Age Employment History
- ---- --- ------------------
Donald E. Becker 51 Mr. Becker was promoted to Senior Vice President
effective January 26, 2000. Prior to his election,
Mr. Becker was appointed President of the Company's
Central Marketing Area in 1996. Before this, Mr. Becker
served in a number of key management positions in the
Company's Cincinnati/Dayton Marketing Area, including
Vice President of Operations and Vice President of
Merchandising. He joined the Company in 1969.
Warren F. Bryant 55 Mr. Bryant was promoted to Senior Vice President of The
Kroger Co. in January 1999. He was elected President
and Chief Executive Officer of Dillon Companies, Inc., a
subsidiary of the Company, effective September 1, 1996.
Prior to this Mr. Bryant was elected President and Chief
Operating Officer of Dillon Companies, Inc. on June 18,
1995, Senior Vice President of Dillon Companies, Inc. on
52
May 1, 1993, and Vice President of Dillon Companies, Inc. on
March 1, 1990. Before this, he served as Vice President of
Marketing, Dillon Stores Division, from June 1988 until March
1990, and in a number of key management positions with the
Company, including Director of Merchandising for the
Mid-Atlantic Marketing Area and Director of Operations for the
Charleston, West Virginia division of the Mid-Atlantic
Marketing Area. Mr. Bryant joined the Company in 1964.
Geoffrey J. Covert 49 Mr. Covert was promoted to Senior Vice President effective
April 25, 1999. Prior to that he was Group Vice President and
President of Kroger Manufacturing effective April 19, 1998.
Mr. Covert joined the Company and was appointed Vice
President, Grocery Products Group, on March 18, 1996. Prior to
joining the Company, he had 23 years of service with Procter &
Gamble. In his last role with Procter & Gamble, Mr. Covert was
responsible for Manufacturing Purchasing, Customer
Service/Logistics, Engineering, Human Resources, and Contract
Manufacturing for Procter & Gamble's Hard Surface Cleaner
business for North America.
Terry L. Cox 59 Mr. Cox was promoted to Group Vice President - Drug/GM
Merchandising and Procurement effective April 25, 1999. He was
promoted to Vice President, Drug/GM Merchandising in December
1989. Prior to that Mr. Cox served as President of Peyton's,
Inc., Kroger's drug and general merchandise procurement and
distribution division, and as Director of Marketing in the
Company's Grocery Merchandising Department. He joined Kroger
in 1962.
David B. Dillon 49 Mr. Dillon was named President and Chief Operating Officer
effective January 26, 2000. Upon the merger with Fred Meyer,
Inc., he was named President of the combined Company. Prior
thereto, Mr. Dillon was elected President and Chief Operating
Officer of Kroger effective June 18, 1995. Prior to this he
was elected Executive Vice President of Kroger on September
13, 1990, Chairman of the Board of Dillon Companies, Inc. on
September 8, 1992, and President of Dillon Companies, Inc. on
April 22, 1986. Before his election he was appointed President
of Dillon Companies, Inc.
Paul W. Heldman 49 Mr. Heldman was elected Senior Vice President effective
October 5, 1997, Secretary on May 21, 1992, and Vice President
and General Counsel effective June 18, 1989. Prior to his
election Mr. Heldman held various positions in the Company's
Law Department. He joined the Company in 1982.
Michael S. Heschel 59 Mr. Heschel was elected Executive Vice President effective
June 18, 1995. Prior to this he was elected
53
Senior Vice President - Information Systems and Services on
February 10, 1994, and Group Vice President - Management
Information Services on July 18, 1991. Before this Mr. Heschel
served as Chairman and Chief Executive Officer of Security
Pacific Automation Company. From 1985 to 1990 he was Vice
President of Baxter International, Inc.
Carver L. Johnson 51 Mr. Johnson joined the Company as Group Vice President of
Management Information Systems in December 1999. Prior to
joining the Company, he served as Vice President and Chief
Information Officer of Gymboree. From 1993 to 1998, Mr.
Johnson was Senior Systems Director of Corporate Services for
Sears, Roebuck & Co. He previously held management positions
with Jamesway Corp., Linens 'n Things, and Pay 'n Save Stores,
Inc.
Saundra Linn 40 Ms. Linn was elected Group Vice President of Retail Operations
in December 2000. She joined Kroger in 1983 as an industrial
engineer. Ms. Linn was named Director of Capital Management
and Finance in 1996 and served as Vice President of Operations
in Kroger's Atlanta Division.
Lynn Marmer 48 Ms. Marmer was elected Group Vice President effective January
19, 1998. Prior to her election, Ms. Marmer was an attorney in
the Company's Law Department. Ms. Marmer joined the Company in
1997. Before joining the Company she was a partner in the law
firm of Dinsmore & Shohl.
Don W. McGeorge 46 Mr. McGeorge was promoted to Executive Vice President
effective January 26, 2000. Prior to that he was elected
Senior Vice President effective August 10, 1997. Before his
election, Mr. McGeorge was President of the Company's Columbus
Marketing Area effective December 29, 1996; and prior thereto
President of the Company's Michigan Marketing Area effective
June 20, 1993. Before this he served in a number of key
management positions with the Company, including Vice
President of Merchandising of the Company's Nashville
Marketing Area. Mr. McGeorge joined the Company in 1977.
W. Rodney McMullen 40 Mr. McMullen was named Executive Vice President - Strategy,
Planning and Finance effective January 26, 2000. Prior to that
he was elected Executive Vice President and Chief Financial
Officer on May 20, 1999, and elected Senior Vice President
effective October 5, 1997, and Group Vice President and Chief
Financial Officer effective June 18, 1995. Before that he was
appointed Vice President-Control and Financial Services on
March 4, 1993, and Vice President, Planning and Capital
Management effective December 31, 1989. Mr. McMullen joined
the Company in 1978 as a part-time stock clerk.
54
Derrick A. Penick 45 Mr. Penick was promoted to Group Vice President, Perishables
Merchandising and Procurement effective April 25, 1999. Prior
to that he was appointed Vice President Corporate
Meat/Seafood/Deli Merchandising and Procurement in 1996; and
Vice President, Merchandising in the Dallas Marketing Area in
1993. Before that Mr. Penick held various management positions
in meat and deli merchandising as well as operations since
joining Kroger in 1974.
Joseph A. Pichler 61 Mr. Pichler was elected Chairman of the Board on September 13,
1990, and Chief Executive Officer effective June 17, 1990.
Prior to this he was elected President and Chief Operating
Officer on October 24, 1986, and Executive Vice President on
July 16, 1985. Mr. Pichler joined Dillon Companies, Inc. in
1980 as Executive Vice President and was elected President of
Dillon Companies, Inc. in 1982.
J. Michael Schlotman 43 Mr. Schlotman was promoted to Group Vice President and Chief
Financial Officer effective January 26, 2000. Prior to that he
was appointed Vice President, Financial Services and Control
in 1995, and served in various positions in corporate
accounting since joining Kroger in 1985.
James R. Thorne 54 Mr. Thorne was elected Senior Vice President effective June
18, 1995. Prior to his election he was appointed President of
the Company's Mid-Atlantic Marketing Area in 1993. Before this
Mr. Thorne served in a number of key management positions in
the Mid-Atlantic Marketing Area, including Advertising
Manager, Zone Manager, Director of Operations, and Vice
President-Merchandising. He joined the Company in 1966 as a
part-time grocery clerk.
Lawrence M. Turner 53 Mr. Turner was elected Vice President on December 5, 1986. He
was elected Treasurer on December 2, 1984. Mr. Turner has been
with the Company since 1974.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the section entitled
Compensation of Executive Officers in the definitive proxy statement to be filed
by the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the tabulation of the
amount and nature of Beneficial Ownership of the Company's securities in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section entitled
Information Concerning The Board Of Directors - Certain Transactions in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet as of February 3, 2001 and January 29, 2000
Consolidated Statement of Income for the years ended February 3, 2001,
January 29, 2000, and January 2, 1999
Consolidated Statement of Cash Flows for the years ended February 3,
2001 and January 29, 2000
Consolidated Statement of Changes in Shareowners' Equity (Deficit)
Notes to Consolidated Financial Statements
Financial Statement Schedules:
There are no Financial Statement Schedules included with this filing for
the reason that they are not applicable or are not required or the
information is included in the financial statements or notes thereto
(b) Reports on Form 8-K:
On December 5, 2000, The Kroger Co. filed a Current Report on Form 8-K
with the SEC disclosing its earnings release for the third quarter 2000,
including unaudited financial statements for that quarter.
(c) Exhibits
3.1 Amended Articles of Incorporation of The Kroger Co.
are incorporated by reference to Exhibit 3.1 of The
Kroger Co.'s Quarterly Report on Form 10-Q for the
quarter ended October 3, 1998. The Kroger Co.'s
Regulations are incorporated by reference to Exhibit
4.2 of The Kroger Co.'s Registration Statement on
Form S-3 (Registration No. 33-57552) filed with the
SEC on January 28, 1993.
4.1 Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries
are not filed as Exhibits because the amount of debt
under each instrument is less than 10% of the
consolidated assets of the Company. The Company
undertakes to file these instruments with the
Commission upon request.
10.1 Material Contracts - Third Amended and Restated
Employment Agreement dated as of July 22, 1993,
between the Company and Joseph A. Pichler is hereby
incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended October 9,
1993.
10.2 Non-Employee Directors' Deferred Compensation Plan.
Incorporated by reference to Appendix J to Exhibit
99.1 of Fred Meyer, Inc.'s Current Report on Form 8-K
dated September 9, 1997, SEC File No. 1-13339.
12.1 Statement of Computation of Ratio of Earnings to
Fixed Charges.
21.1 Subsidiaries of the Registrant.
56
23.1 Consent of Independent Public Accountants.
24.1 Powers of Attorney.
99.1 Annual Reports on Form 11-K for The Kroger Co.
Savings Plan, the Dillon Companies, Inc. Employee
Stock Ownership Plan and Trust, and the Fred Meyer,
Inc. 401(k) Savings Plan for Collective Bargaining
Unit Employees for the Year 2000 will be filed by
amendment on or before June 29, 2001.
57
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: May 2, 2001 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: May 2, 2001 By (*J. Michael Schlotman)
J. Michael Schlotman
Group Vice President and
Chief Financial Officer
Dated: May 2, 2001 By (*M. Elizabeth Van Oflen)
M. Elizabeth Van Oflen
Vice President & Corporate Controller
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on the 2nd day of May, 2001.
(*Reuben V. Anderson) Director
Reuben V. Anderson
Director
- -------------------------
Robert D. Beyer
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
(*Carlton J. Jenkins) Director
Carlton J. Jenkins
(*Bruce Karatz) Director
Bruce Karatz
58
(*John T. LaMacchia) Director
John T. LaMacchia
(*Edward M. Liddy) Director
Edward M. Liddy
(*Clyde R. Moore) Director
Clyde R. Moore
(*T. Ballard Morton, Jr.) Director
T. Ballard Morton, Jr.
Director
- -------------------------
Thomas H. O'Leary
(*Katherine D. Ortega) Director
Katheriine D. Ortega
(*Joseph A. Pichler) Chairman of the Board of
Joseph A. Pichler Directors, Chief Executive
Officer, and Director
(*Steven R. Rogel) Director
Steven R. Rogel
Director
- -------------------------
Martha Romayne Seger
(*Bobby S. Shackouls) Director
Bobby S. Shackouls
(*James D. Woods) Director
James D. Woods
*By: (Bruce M. Gack)
Bruce M. Gack
Attorney-in-fact