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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 1-303
January 2, 1999
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
Address Telephone Number
- ------- ----------------
1014 Vine St. (513) 762-4000
Cincinnati, Ohio 45202
Securities registered pursuant to section 12 (b) of the Act:
Name of Exchange on
Title of Class which Registered
- -------------- ----------------
Common $1 par value New York Stock Exchange
257,856,756 shares outstanding on
March 23, 1999
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K [ ].
The aggregate market value of the voting and non-voting common equity of The
Kroger Co. held by nonafflilates as of February 5, 1999: $15,712,730,035
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act
on or before May 3, 1999 incorporated by reference into Parts II and III of
Form 10-K.
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PART I
ITEM 1. BUSINESS
The Kroger Co. (the "Company") was founded in 1883 and incorporated in 1902. As
of January 2, 1999, the Company was the largest retailer in the United States
based on annual sales. The retail food business is highly competitive. The
Company also manufacturers and processes food for sale by its supermarkets. The
Company's principal executive offices are located at 1014 Vine Street,
Cincinnati, Ohio 45202 and its telephone number is (513) 762-4000.
As of January 2, 1999, the Company operated 1,410 supermarkets, most of which
are leased. Of this number, 1,145 supermarkets were operated, directly or
through a partnership composed of the Company and wholly-owned subsidiaries of
the Company, principally under the Kroger name in the Midwest and South. Dillon
Companies, Inc. ("Dillon"), a wholly-owned subsidiary of the Company, operated
265 supermarkets directly or through wholly-owned subsidiaries (the "Dillon
Supermarkets"). The Dillon Supermarkets, principally located in Colorado,
Kansas, Arizona and Missouri, operate under the names "King Soopers", "Dillon
Food Stores", "Fry's Food Stores", "City Market", "Gerbes Supermarkets", and
"Sav-Mor". The Company employs approximately 213,000 full and part-time
employees.
As of January 2, 1999, the Company, through its Dillon subsidiary, operated 797
convenience stores under the trade names of "Kwik Shop", "Quik Stop Markets",
"Tom Thumb Food Stores", "Turkey Hill Minit Markets", "Loaf 'N Jug", and
"Mini-Mart". The Company owned and operated 684 of these stores while 113 were
operated through franchise agreements. The convenience stores offer a limited
assortment of staple food items and general merchandise and, in most cases, sell
gasoline.
The Company intends to develop new food and convenience store locations and will
continue to assess existing stores as to possible replacement, remodeling,
enlarging, or closing.
On October 19, 1998 the Company announced its intended merger with Fred Meyer,
Inc. Under the terms of the merger agreement, Fred Meyer, Inc. shareholders will
receive one newly issued share of Kroger common stock for each Fred Meyer, Inc.
common share. The transaction will be accounted for as a pooling of interests.
The Company expects to close the transaction in spring, 1999 subject to approval
of Kroger and Fred Meyer shareholders, antitrust clearance and customary closing
conditions. Additional information regarding the merger can be found in the
Company's current report on Form 8-K dated October 20, 1998.
SEGMENTS
Based on the information monitored by the Company's operating decision makers to
manage the business, the Company has identified one reportable segment. Retail
operation information consists of results from the Company's retail food and
drug store divisions and convenience store divisions. Corporate and all other
operation information relates primarily to results from the Company's Corporate
office and manufacturing operations, none of which individually meet the
quantitative thresholds of a reportable segment. All of the Company's operations
are domestic. The Company manages income taxes, LIFO charges, interest income
and interest expense on a consolidated basis at the Corporate level. For
additional information on segments, see "Segments" in the Notes to Consolidated
Financial Statements.
ITEM 2. PROPERTIES
As of January 2, 1999, the Company operated more than 2,200 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 Midwest, South and Southwest. A
majority of the properties used in the conduct of the Company's business are
leased.
Store equipment, fixtures and leasehold improvements, as well as processing and
manufacturing equipment, are generally owned by the Company. The total cost of
the Company's owned assets and capitalized leases at January 2, 1999 was $6.862
billion while the accumulated depreciation was $3.077 billion.
Leased premises generally have base terms ranging from ten to twenty-five years
with renewal options for additional periods. Some options provide the right to
purchase the property after conclusion of the lease term. Store rentals are
normally payable monthly at a stated amount or at a guaranteed minimum amount
plus a percentage of sales over a stated dollar volume. Rentals for the
distribution, processing and miscellaneous facilities generally are payable
monthly at stated amounts. For additional information on leased premises, see
"Leases" in the Notes to Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Price Range
- --------------------------------------------------------------------------------
1998 1997
-------------------- --------------------
Quarter High Low High Low
- ------- -------- -------- -------- --------
1st 47-5/16 33-1/16 28-1/8 22-11/16
2nd 47-1/2 40-3/16 29-1/8 23-13/16
3rd 54-1/8 42 31-1/16 27-1/8
4th 60-13/16 44 37-5/16 28-1/2
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1998: 47,124
Number of shareowners at March 23, 1999: 46,870
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past three fiscal
years. See Quarterly Data Note to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
------------------------------------------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1998 1997 1996 1995 1994
(53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales............................... $28,203,304 $26,567,348 $25,170,909 $23,937,795 $22,959,122
Earnings before extraordinary
loss.............................. 449,912 444,032 352,735 318,866 268,903
Extraordinary loss (net of income
tax benefit) (A).................. (39,123) (32,376) (2,862) (16,053) (26,707)
Net earnings........................ 410,789 411,656 349,873 302,813 242,196
Diluted earnings per share
Earnings before extraordinary
loss........................... 1.70 1.69 1.36 1.28 1.10
Extraordinary loss (A)............ (.15) (.12) (.01) (.06) (.10)
Net earnings...................... 1.55 1.57 1.35 1.22 1.00
Total assets........................ 6,700,071 6,301,341 5,892,465 5,044,717 4,707,674
Long-term obligations, including
obligations under capital
leases............................ 3,228,663 3,493,075 3,659,491 3,489,728 3,889,194
Shareowners' deficit................ (387,832) (784,848) (1,181,706) (1,603,013) (2,153,684)
Cash dividends per common share..... (B) (B) (B) (B) (B)
- --------------------------------------------------------------------------------
(A) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(B) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
Our total sales in the fourth quarter 1998 increased 12.9% from $6.5
billion to $7.3 billion, compared to the fourth quarter 1997. The fourth quarter
of 1998 had an extra week compared to the same quarter of 1997 because fiscal
1998 contained 53 weeks compared to a 52 week year in 1997. For the full year,
total sales increased 6.2% and food store sales increased 6.5%. In the fourth
quarter 1998, food store sales increased 13.2%. Sales by operating segments for
the three years ended January 2, 1999, were as follows:
1998 1997 1996
% OF 1998 ----------------- ----------------- -----------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
Food Stores.............. 93.7% $26,423 +6.5% $24,801 +5.5% $23,508 +4.5%
Convenience Stores....... 3.6% 1,003 -0.2% 1,006 +6.0% 948 +11.6%
Other sales.............. 2.7% 777 +2.2% 760 +6.5% 714 +19.0%
----- ------- ------- -------
Total sales.............. 100.0% $28,203 +6.2% $26,567 +5.5% $25,170 +5.1%
After adjusting for the 53rd week in 1998, fourth quarter total sales
increased 3.9%, from $6.5 billion to $6.8 billion, and food store sales rose
4.3%, from $6.1 billion to $6.3 billion. These are in comparison to fourth
quarter 1997. After adjusting for the extra week in 1998, the percentage of
change in sales by operating segments for the three years ended January 2, 1999,
were:
% OF 1998 1998 1997 1996
SALES CHANGE CHANGE CHANGE
--------- ------ ------ ------
Food Stores............................................... 93.7% +4.3% +5.5% +4.5%
Convenience Stores........................................ 3.6% -2.1% +6.0% +11.6%
Other sales............................................... 2.7% +0.6% +6.5% +19.0%
-----
Total sales............................................... 100.0% +4.0% +5.5% +5.1%
Sales in identical food stores, which include stores in operation and not
expanded or relocated for five quarters, increased 0.4% in the fourth quarter
and increased 1.0% for the full year. Comparable store sales, which include
identical stores plus expanded and relocated stores, increased 2.4% in the
fourth quarter.
The increase in food store sales is related to the 4.3% square footage
growth generated by Kroger's capital expenditure program. This program enabled
us to open, relocate or expand 96 food stores during 1998. Most of the new and
expanded stores feature our combination store format. This "one-stop shopping"
format saves time and travel for customers and is adaptable to the demographics
of individual markets.
Total sales in our convenience stores decreased 0.2% for the year and
increased 5.8% during the fourth quarter of 1998. Adjusting for the extra week,
convenience stores total sales decreased 2.1% for the year and 2.2% in the
fourth quarter of 1998. The sales decrease during the fourth quarter can be
attributed to a 15.5% decrease in the retail price of gasoline. Total gasoline
sales dollars decreased 8.4% for the year. Total gasoline gallons sold increased
6.8% for the year. The percentage of change in convenience store identical
gasoline sales dollars, gasoline gallons sold and non-gasoline sales dollars for
the 4th quarter and year ended January 2, 1999 were:
4TH QUARTER 1998 1998
IDENTICAL CONVENIENCE STORES CHANGE CHANGE
---------------------------- ---------------- ------
Gasoline Sales Dollars...................................... -13.0% -10.9%
Gasoline Gallons Sold....................................... +2.3% +3.6%
Non-Gasoline Sales Dollars.................................. +7.4% +5.8%
5
Other sales represent sales by our manufacturing plants to entities other
than Kroger. Compared to 1997, other sales increased 14.2% for the fourth
quarter and 2.2% for the year. Adjusting for the extra week in 1998, other sales
increased 7.1% for the fourth quarter and 0.6% for the year.
Total food store square footage increased 4.3%, 5.7% and 6.7% in 1998,
1997, and 1996, respectively. Convenience store square footage decreased 1.2% in
1998 due to operational closings of 16 stores and disposition of 14 stores.
Convenience store square footage decreased 1.3% in 1997, and increased 1.5% in
1996.
Sales per average square foot for the last three years were:
TOTAL SALES PER
AVERAGE SQUARE FOOT
--------------------
1998 1996 1995
---- ---- ----
Food Stores................................................. $405 $398 $401
Convenience Stores.......................................... $554 $548 $519
Sales per average square foot for 1998 include an extra week compared to
1997 and 1996. Excluding the extra week, sales per average square foot for 1998
would have been $396 for food stores and $543 for convenience stores. Sales per
average square foot exclude stores operated by franchisees. Our storing program
in 1998 and 1997 has led to the decrease in sales per average square foot in our
food stores. The new stores, which are generally larger and built in developing
areas, take longer to contribute to higher sales per square foot. They also
reduce the sales per square foot at nearby stores.
ONE-TIME EXPENSES
In the second quarter of 1998, we incurred a $40.8 million pre-tax, $25.3
million after-tax or $.09 per diluted share, one-time expense associated with
logistics projects. This expense included the costs associated with ending a
joint venture related to a warehouse operation that formerly served our Michigan
stores and several independent customers. The warehouse is now operated by a
third party that distributes our inventory to our Michigan stores. These
expenses also included the transition costs related to one of our new
warehouses, and one new warehouse facility operated by an unaffiliated entity
that provides services to us. These costs included carrying costs of the
facilities idled as a result of these new warehouses and the associated employee
severance costs. The expenses described above include non-cash asset writedowns
of $15.5 million and were included in merchandise costs, including warehouse and
transportation. The remaining $25.3 million of expenses are summarized as
follows:
CASH AMOUNT ACCRUED
EXPENSE PAYMENTS AT JANUARY 2, 1999
------- -------- ------------------
(THOUSANDS OF DOLLARS)
Employee Severance.......................................... $11,000 $ 6,600 $ 4,400
Carrying Costs of Idled Facilities.......................... 9,500 3,200 6,300
Ending the Joint Venture.................................... 4,800 4,800
------- ------- -------
$25,300 $14,600 $10,700
The employee severance costs will be paid through the second quarter of
1999 and the carrying costs of the idled warehouse facilities are projected to
be paid through 2001.
Additionally, in the second quarter of 1998, we incurred one-time expenses
of $11.6 million pre-tax, $7.2 million after-tax or $.03 per diluted share,
associated with accounting, data and operations consolidations in Texas. These
included the costs of closing eight stores and relocating the remaining Dallas
office employees to a smaller facility. These expenses, which include non-cash
asset writedowns of $2.2 million, were included in operating, general and
administrative expenses. Cash expenses paid to date are $0.9 million and the
remaining accrual of $8.5 million at January 2, 1999 represents estimated rent
or lease termination costs that will be paid on closed stores through 2013.
6
ACCOUNTING CHANGE
In the second quarter of 1998, we changed our 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 $89.7 million and reduced
earnings before extraordinary loss and net earnings by $55.6 million, or $0.21
per diluted share. We have not calculated the pro forma effect on prior periods
because cost information for these periods is not determinable. The item cost
method did not have a material impact on earnings subsequent to its initial
adoption.
MERCHANDISE COSTS
Merchandise costs include advertising, warehousing and transportation
expenses and charges related to valuing inventory on the LIFO method. The
following table shows the relative effect of LIFO charges, One-Time Expenses and
the Accounting Change on merchandising costs as a percent of sales.
1998 1997 1996
----- ----- -----
Merchandise costs as reported............................... 76.31% 76.23% 76.63%
One-Time Expenses........................................... .14%
Accounting Change........................................... .32%
----- ----- -----
Merchandise costs net of One-Time Expenses and Accounting
Change.................................................... 75.85% 76.23% 76.63%
LIFO charge................................................. .01% .02% .05%
----- ----- -----
Merchandise costs as adjusted............................... 75.84% 76.21% 76.58%
Our merchandise costs, adjusted for One-Time Expenses and the Accounting
Change, as a percent of sales declined during 1998 from the 1997 and 1996
levels. Merchandise costs were reduced by:
- coordinated purchasing,
- category management,
- technology related efficiencies, and
- increases in private label sales.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales were
17.42%, 17.33% and 17.36%, in 1998, 1997 and 1996 respectively. Operating,
general and administrative expenses as a percent of sales, excluding One-Time
Expenses of $11.6 million, were 17.38% for 1998. The increase is due to higher
incentive payouts based on our 1998 performance.
INCOME TAXES
We have closed all tax years through 1984 with the Internal Revenue
Service. The Internal Revenue Service has completed its examination of our tax
returns for tax years 1985-1992. On September 15, 1998, the IRS voluntarily
dismissed its appeal against Kroger. This action settled a previously unresolved
issue for tax years 1984-1992. One issue remains in dispute with the IRS for tax
years 1991 and 1992. We have provided for this and other tax contingencies.
7
NET EARNINGS
Net earnings and the effects of extraordinary losses, One-Time Expenses
and the Accounting Change for the three years ended January 2, 1999 were:
1998 1997 1996
-------- -------- --------
(THOUSANDS OF DOLLARS)
Earnings before extraordinary loss excluding One-Time
Expenses and the Accounting Change........................ $538,012 $444,032 $352,735
One-Time Expense, net of income tax benefit................. 32,500
Accounting Change, net of income tax benefit................ 55,600
-------- -------- --------
Earnings before extraordinary loss.......................... 449,912 444,032 352,735
Extraordinary loss, net of income tax benefit............... (39,123) (32,376) (2,862)
-------- -------- --------
Net earnings................................................ $410,789 $411,656 $349,873
Extraordinary losses are from the early retirement of debt. Net earnings
in 1998 compared to 1997 and 1996 were affected by:
- net interest expense in 1998 of $266.9 million compared to $285.9
million in 1997 and $300.0 million in 1996, and
- depreciation expense in 1998 of $430.0 million, compared to $380.2
million in 1997 and $343.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management and Interest Expense
The table below provides information about debt repurchases and
redemptions for the three years ended January 2, 1999.
1998 1997 1996
-------- -------- --------
(THOUSANDS OF DOLLARS)
Senior debt repurchases and redemptions..................... $315,993 $ 9,155 $ 23,363
Senior subordinated debt repurchases........................ $ 31,106 $318,590 $161,256
Mortgage loan prepayments................................... $218,551 $177,978
We used the proceeds from the issuance of new senior debt, additional bank
borrowings and cash generated from operations to make these purchases and
redemptions.
We have a 364-Day Credit Agreement and Five Year Credit Agreement
(together, the "Credit Agreement") with a consortium of bank lenders. The
364-Day Credit Agreement is a revolving credit facility in the amount of $500
million, that terminates on May 29, 1999, unless extended. The Five Year Credit
Agreement is a revolving credit facility in the amount of $1.5 billion, that
terminates on May 28, 2002, unless extended or terminated earlier by us. The
average interest rate on our bank debt was 6.14% in 1998 compared to 6.06% in
1997 and 6.16% in 1996. Our borrowings at year-end 1998 under the Credit
Agreement totaled $844 million compared to $1.262 billion at year-end 1997 and
$1.001 billion at year-end 1996. In December 1998 we amended our Credit
Agreement to permit our merger with Fred Meyer. The amendments, which become
effective when the merger is completed, increase our rates to market rates. Our
rates under the Credit Agreement are variable. As of January 2, 1999, we had
$1.147 billion available under our Credit Agreement to meet short term liquidity
needs.
Long-term debt, including capital leases and current portion thereof,
decreased $113.5 million to $3.404 billion at year-end 1998 from $3.517 billion
at year-end 1997 and $3.681 billion at year-end 1996. We purchased a portion of
the debt issued by the lenders of some structured financings in an effort to
further reduce
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our effective interest expense. We also prefunded $200 million of employee
benefit costs at year-end 1998 compared to $160 million at year-end 1997. If we
exclude the debt incurred to make these purchases, which we classify as
investments, and the prefunding of employee benefits, our year-end 1998
long-term debt would have been $267.3 million less, or $3.1 billion, compared to
$3.2 billion at year-end 1997 and $3.4 billion at year-end 1996.
Interest Rate Protection Program
We use derivatives to limit our exposure to rising interest rates. During
1998 we followed these guidelines in using derivatives:
- use average daily bank balance to determine annual debt amounts subject
to interest rate exposure,
- limit the annual amount of debt subject to interest rate reset and the
amount of floating rate debt to a combined total of $1.0 billion or
less,
- include no leveraged derivative products, and
- hedge without regard to profit motive or sensitivity to current
mark-to-market status.
We review compliance with these guidelines annually with the Financial
Policy Committee of our Board of Directors. In addition, our internal auditors
review compliance with these guidelines on an annual basis. These guidelines may
change as our business needs dictate.
The table below provides information about our interest rate derivative
and underlying debt portfolio. The amounts each year represent the contractual
maturities of long-term debt, excluding capital leases, and the outstanding
notional amount of interest rate derivatives. Interest rates reflect the
weighted average for the maturing instruments. The variable component of each
interest rate derivative and variable rate debt is based on 6 month LIBOR using
the forward yield curve as of January 2, 1999. The Fair-Value column includes
only those debt instruments for which it is reasonably possible to calculate a
fair value and interest rate derivatives as of January 2, 1999. (See Fair Value
of Financial Instruments footnote.)
EXPECTED YEAR OF MATURITY
(THOUSANDS OF DOLLARS)
-------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR-VALUE
--------- --------- ------- ------- --------- ---------- --------- ----------
LONG-TERM DEBT
- ------------------------
Fixed rate.............. 163,904 209,913 13,356 162,976 76,928 1,719,079 2,346,156 1,985,813
Average interest rate... 7.76% 7.94% 7.94% 7.74% 7.75% 7.75%
Variable rate........... 843,728 843,728 843,728
Average interest rate... 5.22% 5.28% 5.44% 5.55%
INTEREST RATE
DERIVATIVES AVERAGE NOTIONAL AMOUNTS OUTSTANDING
- ------------------------ -------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
Variable to fixed....... 962,500 752,500 392,000 88,000 65,000 58,500 1,000,000 (43,218)
Average pay rate........ 7.08% 7.05% 7.24% 6.71% 6.80% 6.80% 7.07%
Average receive rate.... 5.10% 5.16% 5.32% 5.43% 5.43% 5.45% 5.19%
Fixed to variable....... 695,000 493,000 250,000 150,000 785,000 21,833
Average pay rate........ 5.10% 5.16% 5.32% 5.43% 5.19%
Average receive rate.... 6.39% 6.27% 6.86% 6.86% 6.47%
It was not practicable to determine a fair value for $472.2 million of
fixed rate debt.
9
Common Stock Repurchase Program
On January 29, 1997, we began repurchasing common stock in order to reduce
dilution caused by our stock option plans. These repurchases were made using the
proceeds, including the tax benefit, from options exercised. Further repurchases
of up to $100 million of common stock were authorized by the Board of Directors
during October 1997. On October 19, 1998, we suspended the repurchase program as
result of the merger agreement between Kroger and Fred Meyer, Inc. During 1998,
we made open market purchases of 2,625,299 shares of Kroger stock for $120.8
million compared to purchases in 1997 of 3,015,887 shares for $84.9 million.
CAPITAL EXPENDITURES
Capital expenditures for 1998 totaled $923.5 million, compared to $612.2
million in 1997, and $733.8 million in 1996. The 1998 capital expenditures
include the acquisition of seven Owens stores in the third quarter and five
Hilander stores in the fourth quarter. The Owens stores are located in Indiana
and the Hilander stores are located in Illinois. During 1998 we opened, acquired
or expanded 96 food stores and 11 convenience stores. The table below shows our
storing activity.
1998 1997 1996
---- ---- ----
Food Stores
New Stores................................................ 26 37 38
Relocated Stores.......................................... 31 25 35
Acquisitions (New)........................................ 10 10 4
Acquisitions (Relocations)................................ 8 5 3
Expansions................................................ 21 19 36
-- -- ---
Total Opened, Acquired or Expanded.......................... 96 96 116
Operational Closings...................................... 18 11 13
Convenience Stores
New Stores................................................ 10 15 16
Relocated Stores.......................................... 1 0 0
Acquisitions (New)........................................ 0 0 15
Expansions................................................ 0 0 4
-- -- ---
Total Opened, Acquired or Expanded.......................... 11 15 35
Operational Closings...................................... 16 12 19
In addition to the above activity, we also completed 74 food store and 13
convenience store remodels during 1998.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1998, we generated $1,142.2 million in cash from operating
activities compared to $853.6 million in 1997 and $499.4 million in 1996. The
increase over 1997 is primarily due to a net decrease in operating assets and
liabilities that provided $239.2 million of cash in 1998 compared to $12.9
million in 1997. The largest components of the change in operating assets and
liabilities was a decrease in net owned inventories of $132.9 million compared
to a decrease of $16.6 million in 1997 and an increase in other liabilities of
$132.3 million compared to $51.5 million in 1997. The increase over 1997 also
includes an increase of non-cash charges for depreciation and amortization of
$49.7 million.
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Investing activities used $759.6 million of cash in 1998 compared to
$579.4 million in 1997 and $856.9 million in 1996. The increase in the use of
cash resulted from increased capital expenditures of $311.3 million, offset by
decreased purchases of investments of $101.5 million.
Cash used by financing activities in 1998 totaled $326.7 million compared
to $275.7 million in 1997 and $345.5 million of cash provided in 1996. Compared
to 1997, our financing activities in 1998 used an additional $23.7 million of
cash for debt prepayments and finance charges, and an additional $36.7 million
to repurchase capital stock.
EBITDA
Our Credit Agreement and the indentures underlying approximately $377
million of publicly issued debt, contain various restrictive covenants. Many of
these covenants are based on earnings before interest, taxes, depreciation,
amortization and LIFO charge, or EBITDA. The ability to generate EBITDA at
levels sufficient to satisfy the requirements of these agreements is a key
measure of our financial strength. We do not intend to present EBITDA as an
alternative to any generally accepted accounting principle measure of
performance. Rather, management believes the presentation of EBITDA is important
for understanding Kroger's performance compared to our debt covenants. The
calculation of EBITDA is based on the definition contained in our Credit
Agreement. This may be a different definition than other companies use. We were
in compliance with all Credit Agreement and indenture covenants on January 2,
1999.
EBITDA for 1998, excluding one-time expenses, as described in "One-Time
Expenses" above, of $52.4 million and the $89.7 million accounting change, as
described in "Accounting Change" above, increased 12.4% to $1.556 billion
compared to $1.385 billion in 1997. EBITDA in 1996 was $1.224 billion. Excluding
the effect of strikes in the King Soopers and City Market divisions, EBITDA
would have been approximately $1.256 billion in 1996. EBITDA including One-Time
Expenses and the Accounting Change increased 2.1% in 1998 to $1.414 billion
compared to $1.385 billion in 1997.
OTHER ISSUES
On October 19, 1998 we announced our intended merger with Fred Meyer, Inc.
Under the terms of the merger agreement, Fred Meyer, Inc. shareholders will
receive one newly issued share of Kroger common stock for each Fred Meyer, Inc.
common share. The transaction will be accounted for as a pooling of interests.
We expect to close the transaction in spring 1999 subject to approval of Kroger
and Fred Meyer shareholders, antitrust clearance and customary closing
conditions. Additional information regarding the merger can be found in our
Current Report on Form 8-K dated October 20, 1998.
On January 6, 1999, we changed our fiscal year-end to the Saturday nearest
January 31 of each year. This change is disclosed in our Current Report on Form
8-K dated January 6, 1999. Our first new fiscal year will end January 29, 2000.
It will include a 16-week first quarter ending May 22, 1999, and 12-week second,
third and fourth quarters ending August 14, 1999, November 6, 1999, and January
29, 2000, respectively. We intend to file separate audited statements of
operations and cash flows covering the transition period from January 3, 1999 to
January 30, 1999 on a Current Report on Form 8-K on or before May 15, 1999.
We are party to more than 160 collective bargaining agreements with local
unions representing approximately 158,000 employees. During 1998 we negotiated
11 labor contracts without any material work stoppages. Typical agreements are 3
to 5 years in duration and, as agreements expire, we expect to enter into new
collective bargaining agreements. In 1999, 35 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.
11
OUTLOOK
Statements elsewhere in this report and below regarding our expectations,
hopes, beliefs, intentions or strategies are forward looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934. Since the
intended merger described in the "Other Issues" section above is not expected to
close until spring 1999, the effects of the merger are not considered in making
these statements unless referred to specifically. While we believe that the
statements are accurate, uncertainties and other factors could cause actual
results to differ materially from those statements. In particular:
- We obtain sales growth from new square footage, as well as from
increased productivity from existing locations. We expect 1999 full year
square footage to grow 4.5% to 5.0%. We expect to continue to realize
savings from economies of scale in technology and logistics, some of
which may be reinvested in retail price reductions to increase sales
volume and enhance market share.
- We expect combination stores to generate higher sales per customer by
the inclusion of numerous specialty departments, such as pharmacies,
seafood shops, floral shops and bakeries. We believe the combination
store format will allow us to withstand continued competition from other
food retailers, supercenters, mass merchandisers and restaurants.
- We believe we have adequate coverage of our debt covenants to continue
to respond effectively to competitive conditions.
- We expect to continue capital spending in technology focusing on
improved store operations, logistics, procurement, category management,
merchandising and distribution practices, which should continue to
reduce merchandising costs as a percent of sales.
- We expect to reduce working capital over the next 2 years.
- In the second quarter of 1998 we raised our earnings per share target to
a 15%-17% average annual increase over fiscal years 1999-2001 from the
previously stated target of a 13%-15% average annual increase. Assuming
consummation of the merger referenced in the "Other Issues" section
above, we are raising our earnings per share target to a 16%-18% average
annual increase over the next three years effective with the year 2000.
- We expect capital expenditures for the year to total $850-$950 million
compared to $923.5 million during all of 1998. Capital expenditures
reflect Kroger's strategy of growth through expansion and acquisition as
well as our emphasis, whenever possible, on self-development and
ownership of store real estate, and on logistics and technology
improvements.
- We are dependent on computer hardware, software, systems and processes
("IT Systems") and non-information technology systems such as
telephones, clocks, scales and refrigeration controllers, and other
equipment containing embedded microprocessor technology ("Non-IT
Systems"). These systems are used in several critical operating areas
including store and distribution operations, product merchandising and
procurement, manufacturing plant operations, inventory and labor
management, and accounting and administrative systems.
Year 2000 Readiness Disclosure
We are currently working to resolve the potential effect of the year
2000 on the processing of date-sensitive information within these
various systems. The year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of our programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
12
We have developed a plan to assess and update our IT Systems and Non-IT
Systems for year 2000 compliance requirements and provide for continued
functionality. The plan consists of three major phases:
1) create an inventory of systems subject to the year 2000 problem and
assess the scope of the problem as it relates to those systems
2) remediate any year 2000 problems
3) test and implement systems subsequent to remediation
The chart below shows the estimated completion status of each of these
phases expressed as a percent of completion as of the end of 1998.
PHASE 1 2 3
----- ---- ---- ----
(PERCENT COMPLETE)
IT Systems.................................................. 95% 85% 74%
Non-IT Systems.............................................. 95% 61% 40%
This summary includes all IT and Non-IT Systems without regard to their
effect on the operation of the Company. We estimate that business
critical IT Systems are 83% complete through Phase 3. We expect to
complete assessment and remediation of these by the end of the first
quarter of 1999. We will continue to test our systems, including a
simulation of the year 2000, and expect to complete all work by the end
of the third quarter of 1999.
In addition to the remediation of the IT Systems and Non-IT Systems, we
are contacting all critical product suppliers, service providers, and
those with which we exchange information, to ensure they will be able to
continue normal business operations uninterrupted. This effort also
consists of three phases:
1) identify the entities and verify address and contact information
2) mail the initial request
3) receive and accept response
This third step includes the verification of year 2000 readiness, if
appropriate. During the fourth quarter of 1998, we have identified
additional external entities to contact for year 2000 compliance. To
date, we have identified and mailed year 2000 verification requests to
approximately 58% of the critical external entities. Approximately 20%
of these entities have responded, and less than 10% of their year 2000
readiness plans have been verified. We expect that substantially all
critical external entities will have been contacted and year 2000
readiness verified by the end of the first quarter 1999.
We have not developed contingency plans related to all uncertainties in
our year 2000 plan. Based on the results of our testing, implementation
and verification efforts noted above, we will establish contingency
plans in mission critical processes to address potential additional year
2000 issues. Contingency plans are being developed and accessed by teams
of programmers and users. We expect that these contingency plans will be
in place by the end of the third quarter of 1999.
The total estimated cost for the project, over a four year period, is
$30.9 million, most of which is being expensed as incurred. This cost is
being funded through operating cash flow. This represents an
13
immaterial part of our information technology budget over the period.
The breakdown of the costs are as follows.
TOTAL PROJECTED COST INCURRED
COST TO DATE
(IN MILLIONS) (IN MILLIONS)
--------------- -------------
Labor-Internal.............................................. $ 8.8 $ 3.9
Labor-External.............................................. 8.5 6.5
Hardware Upgrades........................................... 7.5 3.0
Software Upgrades........................................... 2.6 1.2
Non-IT Upgrades............................................. 1.8 0.2
Other....................................................... 1.7 0.3
----- -----
Total.................................................. $30.9 $15.1
If we, our customers or vendors are unable to resolve processing issues
in a timely manner, it could result in the disruption of the operation
of IT Systems and or Non-IT Systems, and in a material financial risk.
We believe that we have allocated the resources necessary to mitigate
all significant year 2000 issues in a timely manner.
Inflationary factors, increased competition, construction delays, and
labor disputes could affect our ability to obtain expected increases in sales
and earnings. Delays in store maturity, increased competition and increased
capital spending could adversely affect the anticipated increase in sales per
square foot. Increases in gross profit rate may not be achieved if start-up
costs are higher than expected or if problems associated with integrating new
systems occur. Increased operating costs and changes in inflationary trends
could prevent us from reducing operating, general and administrative expenses.
New technologies could fail to achieve the desired savings and efficiencies. Net
interest expenses could exceed expectations due to acquisitions, higher working
capital usage, inflation, or increased competition. Our ability to achieve our
storing goals could be hampered by construction delays, labor disputes,
increased competition or delays in technology projects. The effects of the
intended merger and the inherent complexity of computer software and reliance on
third party software vendors to interface with our systems could affect the
completion of necessary "Year 2000" modifications.
14
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 of The Kroger
Co. and the related consolidated statements of operations and accumulated
deficit, and cash flows present fairly, in all material respects, the financial
position of The Kroger Co. as of January 2, 1999 and December 27, 1997, and the
consolidated results of its operations and its cash flows for the years ended
January 2, 1999, December 27, 1997, and December 28, 1996, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in the notes 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
January 28, 1999
15
CONSOLIDATED BALANCE SHEET
January 2, December 27,
(IN THOUSANDS OF DOLLARS) 1999 1997
- -----------------------------------------------------------------------------------------
ASSETS
Current assets
Cash...................................................... $ 121,431 $ 65,484
Receivables............................................... 456,917 400,529
Inventories:
FIFO cost.............................................. 2,202,088 2,273,896
Less LIFO reserve...................................... (471,932) (467,931)
----------- ----------
1,730,156 1,805,965
Property held for sale.................................... 10,291 39,672
Prepaid and other current assets.......................... 354,385 328,901
----------- ----------
Total current assets................................. 2,673,180 2,640,551
Property, plant and equipment, net.......................... 3,785,122 3,296,599
Investments and other assets................................ 241,769 364,191
----------- ----------
TOTAL ASSETS......................................... $ 6,700,071 $6,301,341
=========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt......................... $ 163,904 $ 14,304
Current portion of obligations under capital leases....... 11,300 10,031
Accounts payable.......................................... 1,785,630 1,781,527
Other current liabilities................................. 1,231,234 1,137,654
----------- ----------
Total current liabilities............................ 3,192,068 2,943,516
Long-term debt.............................................. 3,025,980 3,306,451
Obligations under capital leases............................ 202,683 186,624
Deferred income taxes....................................... 200,952 166,013
Other long-term liabilities................................. 466,220 483,585
----------- ----------
TOTAL LIABILITIES.................................... 7,087,903 7,086,189
----------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 1,000,000,000 shares
Issued: 1998 -- 281,788,752 shares
1997 -- 277,153,260 shares........................ 836,802 728,644
Accumulated deficit......................................... (773,605) (1,184,394)
Common stock in treasury, at cost
1998 -- 24,831,009 shares
1997 -- 22,182,650 shares.......................... (451,029) (329,098)
----------- ----------
TOTAL SHAREOWNERS' DEFICIT........................... (387,832) (784,848)
----------- ----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT........... $ 6,700,071 $6,301,341
=========== ==========
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
16
CONSOLIDATED STATEMENT OF OPERATIONS AND
ACCUMULATED DEFICIT
Years Ended January 2, 1999, December 27, 1997, and December 28, 1996
1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (53 Weeks) (52 Weeks) (52 Weeks)
- ---------------------------------------------------------------------------------------------------
Sales................................................... $ 28,203,304 $26,567,348 $25,170,909
------------ ----------- -----------
Costs and expenses
Merchandise costs, including warehousing and
transportation..................................... 21,523,021 20,253,354 19,287,890
Operating, general and administrative................. 4,912,215 4,604,453 4,370,324
Rent.................................................. 358,254 331,012 301,629
Depreciation and amortization......................... 429,954 380,221 343,769
Net interest expense.................................. 266,896 285,945 299,984
------------ ----------- -----------
Total......................................... 27,490,340 25,854,985 24,603,596
------------ ----------- -----------
Earnings before tax expense and extraordinary loss...... 712,964 712,363 567,313
Tax expense............................................. 263,052 268,331 214,578
------------ ----------- -----------
Earnings before extraordinary loss...................... 449,912 444,032 352,735
Extraordinary loss, net of income tax benefit........... (39,123) (32,376) (2,862)
------------ ----------- -----------
Net earnings.................................. $ 410,789 $ 411,656 $ 349,873
============ =========== ===========
Accumulated Deficit
Beginning of year..................................... $ (1,184,394) $(1,596,050) $(1,945,923)
Net earnings.......................................... 410,789 411,656 349,873
------------ ----------- -----------
End of year........................................... $ (773,605) $(1,184,394) $(1,596,050)
============ =========== ===========
Basic earnings per Common Share
Earnings before extraordinary loss.................... $ 1.76 $ 1.75 $ 1.41
Extraordinary loss.................................... (.15) (.13) (.01)
------- ------- -------
Net earnings.......................................... $ 1.61 $ 1.62 $ 1.40
------- ------- -------
------- ------- -------
Average number of common shares used in basic
calculation........................................... 255,814 254,284 250,979
Diluted earnings per Common Share
Earnings before extraordinary loss.................... $ 1.70 $ 1.69 $ 1.36
Extraordinary loss.................................... (.15) (.12) (.01)
------- ------- -------
Net earnings.......................................... $ 1.55 $ 1.57 $ 1.35
------- ------- -------
------- ------- -------
Average number of common shares used in diluted
calculation........................................... 265,382 262,860 258,837
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
17
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended January 2, 1999, December 27, 1997, and December 28, 1996
1998 1997 1996
(IN THOUSANDS OF DOLLARS) (53 Weeks) (52 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings.............................................. $ 410,789 $ 411,656 $ 349,873
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary loss..................................... 39,123 32,376 2,862
Depreciation and amortization.......................... 429,954 380,221 343,769
Amortization of deferred financing costs............... 17,130 13,907 13,004
LIFO charge............................................ 4,001 6,242 12,526
Other changes, net..................................... 1,967 (3,669) 4,296
Net increase (decrease) in cash from changes in
operating assets and liabilities..................... 239,230 12,857 (226,931)
----------- --------- ---------
Net cash provided by operating activities............ 1,142,194 853,590 499,399
----------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures...................................... (923,461) (612,198) (733,883)
Proceeds from sale of assets.............................. 30,345 24,657 9,242
(Increase) decrease in property held for sale............. 19,768 (4,165) 580
(Increase) decrease in other investments.................. 113,797 12,269 (132,796)
----------- --------- ---------
Net cash used by investing activities................ (759,551) (579,437) (856,857)
----------- --------- ---------
Cash Flows From Financing Activities:
Debt prepayment costs..................................... (11,115) (8,012) (4,196)
Financing charges incurred................................ (47,773) (27,210) (17,927)
Principal payments under capital lease obligations........ (10,563) (9,662) (9,229)
Proceeds from issuance of long-term debt.................. 892,698 662,322 382,161
Reductions in long-term debt.............................. (1,023,569) (831,952) (235,214)
Outstanding checks........................................ (57,036) (17,493) 181,993
Proceeds from issuance of capital stock................... 52,593 41,498 48,120
Capital stock reacquired.................................. (121,931) (85,212) (254)
----------- --------- ---------
Net cash provided (used) by financing activities..... (326,696) (275,721) 345,454
----------- --------- ---------
Net increase (decrease) in cash and temporary cash
investments............................................... 55,947 (1,568) (12,004)
Cash and Temporary Cash Investments:
Beginning of year......................................... 65,484 67,052 79,506
----------- --------- ---------
End of year............................................... $ 121,431 $ 65,484 $ 67,052
=========== ========= =========
Increase (Decrease) In Cash From Changes In Operating Assets
And Liabilities:
Inventories (FIFO)........................................ $ 71,809 $ (98,266) $(140,750)
Receivables............................................... (56,388) (76,478) (35,983)
Prepaid and other current assets.......................... (25,786) (53,476) (120,641)
Accounts payable.......................................... 61,139 81,712 (83,808)
Other current liabilities................................. 132,320 51,534 76,423
Deferred income taxes..................................... (19,905) 65,354 45,665
Other liabilities......................................... 76,041 42,477 32,163
----------- --------- ---------
$ 239,230 $ 12,857 $(226,931)
=========== ========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries. Certain prior year amounts have been restated to conform to
current year presentation.
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 or market. Approximately 95%
of inventories for 1998 and 90% of inventories for 1997 were valued using the
LIFO method. Cost for the balance of the inventories is determined using the
FIFO method.
Property Held for Sale
Property held for sale includes the net book value of property, plant and
equipment that the Company plans to sell. The property is valued at the lower of
cost or market on an individual property basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed principally using the straight-line method over the
estimated useful lives of individual assets, composite group lives or the
initial or remaining terms of leases. Buildings and land improvements are
depreciated based on lives varying from ten to 40 years. Equipment depreciation
is based on lives varying from three to 15 years. Leasehold improvements are
amortized over their useful lives, which vary from four to 25 years.
Interest Rate Protection Agreements
The Company uses interest rate swaps to hedge a portion of its borrowings
against changes in interest rates. The interest differential to be paid or
received is accrued as interest rates change and is recognized over the life of
the agreements currently as a component of interest expense. Gains and losses
from the disposition of hedge agreements are deferred and amortized over the
shorter of the term of the related agreements or borrowings.
Advertising Costs
The Company's advertising costs are expensed as incurred and included in
"merchandise costs, including warehousing and transportation." Advertising
expenses amounted to $341,000, $312,000, and $302,000 for 1998, 1997, and 1996,
respectively.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. The types of differences that give rise to significant portions
of deferred income tax liabilities or assets relate to: property, plant and
equipment; inventories; accruals for compensation-related costs; and other
changes. Deferred income taxes are classified as a net current and noncurrent
asset or liability based on the classification of the related asset or liability
for financial reporting. 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. (See Taxes Based on Income footnote.)
Consolidated Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be temporary cash investments. Outstanding checks, which are
included in accounts payable, represent disbursements that are funded as the
item is presented for payment.
Cash paid during the year for interest and income taxes was as follows:
1998 1997 1996
--------------------------------
Interest.................................................... $265,540 $304,176 $304,240
Income taxes................................................ 192,529 154,025 166,732
MERGER
On October 19, 1998 we announced our intended merger with Fred Meyer, Inc.
Under the terms of the merger agreement, Fred Meyer, Inc. shareholders will
receive one newly issued share of Kroger common stock for each Fred Meyer, Inc.
common share. The transaction will be accounted for as a pooling of interests.
We expect to close the transaction in spring, 1999 subject to approval of Kroger
and Fred Meyer shareholders, antitrust clearance and customary closing
conditions. Additional information regarding the merger can be found in our
current report on Form 8-K dated October 20, 1998.
ONE-TIME EXPENSES
In the second quarter of 1998, we incurred a $40,800 pre-tax, $25,300
after-tax or $.09 per diluted share, one-time expense associated with logistics
projects. This expense included the costs associated with ending a joint venture
related to a warehouse operation that formerly served our Michigan stores and
several independent customers. The warehouse is now operated by a third party
that distributes our inventory to our Michigan stores. These expenses also
included the transition costs related to one of our new warehouses, and one new
warehouse facility operated by an unaffiliated entity that provides services to
us. These costs included carrying costs of the facilities idled as a result of
these new warehouses and the associated employee severance costs. The expenses
described above included non-cash asset writedowns of $15,500 and were included
in merchandise costs, including warehouse and transportation. The remaining
$25,300 of expenses are summarized as follows:
CASH AMOUNT ACCRUED
EXPENSE PAYMENTS AT JANUARY 2, 1999
------- -------- ------------------
Employee Severance.......................................... $11,000 $ 6,600 $ 4,400
Carrying Costs of Idled Facilities.......................... 9,500 3,200 6,300
Ending the Joint Venture.................................... 4,800 4,800
------- ------- -------
$25,300 $14,600 $10,700
======= ======= =======
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The employee severance costs will be paid through the second quarter of
1999 and the carrying costs of the idled warehouse facilities are projected to
be paid through 2001.
Additionally, in the second quarter of 1998, we incurred one-time expenses
of $11,600 pre-tax, $7,200 after-tax or $.03 per diluted share, associated with
accounting, data and operations consolidations in Texas. These included the cost
of closing eight stores and relocating the remaining Dallas office employees to
a smaller facility. These expenses, which included non-cash asset writedowns of
$2,200, were included in operating, general and administrative expenses. Cash
expenses paid to date are $900 and the remaining accrual of $8,500 at January 2,
1999 represents estimated rent or lease termination costs that will be paid on
closed stores through 2013.
ACCOUNTING CHANGE
In the second quarter of 1998, we changed our 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 $89,700 and reduced
earnings before extraordinary loss and net earnings by $55,600, or $0.21 per
diluted share. We have not calculated the pro forma effect on prior periods
because cost information for these periods is not determinable. The item cost
method did not have a material impact on earnings subsequent to its initial
adoption.
PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consists of:
1998 1997
--------------------------
Health and welfare benefit costs............................ $ 200,000 $ 160,000
Other....................................................... 154,385 168,901
----------- -----------
$ 354,385 $ 328,901
=========== ===========
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
1998 1997
--------------------------
Land........................................................ $ 389,953 $ 352,319
Buildings and land improvements............................. 1,493,674 1,263,700
Equipment................................................... 3,317,134 3,106,548
Leasehold improvements...................................... 1,027,984 908,948
Construction-in-progress.................................... 335,583 278,821
Leased property under capital leases........................ 297,600 272,911
----------- -----------
6,861,928 6,183,247
Accumulated depreciation and amortization................... (3,076,806) (2,886,648)
----------- -----------
$ 3,785,122 $ 3,296,599
=========== ===========
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Approximately $271,284 and $369,295, original cost, of Property, Plant and
Equipment collateralizes certain mortgage obligations at 1998 and 1997,
respectively.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
1998 1997
--------------------
Deferred financing costs.................................... $ 52,316 $ 59,939
Goodwill.................................................... 48,937 39,119
Investments in Debt Securities.............................. 67,314 155,141
Other....................................................... 73,202 109,992
-------- --------
$241,769 $364,191
======== ========
The Company is amortizing deferred financing costs using the interest
method. Substantially all goodwill is amortized on the straight-line method over
40 years.
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
1998 1997
------------------------
Salaries and wages.......................................... $ 322,025 $ 300,202
Taxes, other than income taxes.............................. 172,886 147,905
Interest.................................................... 42,023 36,699
Other....................................................... 694,300 652,848
---------- ----------
$1,231,234 $1,137,654
========== ==========
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
1998 1997 1996
--------------------------------
Federal
Current................................................... $262,164 $173,715 $146,296
Deferred.................................................. (19,904) 65,354 43,638
-------- -------- --------
242,260 239,069 189,934
State and local............................................. 20,792 29,262 24,644
-------- -------- --------
263,052 268,331 214,578
Tax credit from extraordinary loss.......................... (21,736) (19,427) (1,792)
-------- -------- --------
$241,316 $248,904 $212,786
======== ======== ========
A reconciliation of the statutory federal rate and the effective rate is
as follows:
1998 1997 1996
----------------------------
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 2.0 2.7 2.8
Tax credits................................................. (.3) (.2) (.2)
Other, net.................................................. .2 .2 .2
---- ---- ----
36.9% 37.7% 37.8%
==== ==== ====
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences that comprise
deferred tax balances were as follows:
1998 1997
- ------------------------------------------------------------------------------------
Current deferred tax assets:
Compensation related costs................................ $ 43,347 $ 32,772
Insurance related costs................................... 38,210 35,971
Inventory related costs................................... 53,339 16,257
Other..................................................... 39,901 18,001
--------- ---------
174,797 103,001
--------- ---------
Current deferred tax liabilities:
Compensation related costs................................ (103,613) (85,913)
Lease accounting.......................................... (4,216) (4,128)
Inventory related costs................................... (67,245) (62,830)
Other..................................................... (4,408) (9,658)
--------- ---------
(179,482) (162,529)
--------- ---------
Current deferred taxes, net................................. $ (4,685) $ (59,528)
========= =========
Long-term deferred tax assets:
Compensation related costs................................ $ 128,275 $ 130,825
Insurance related costs................................... 31,967 37,788
Lease accounting.......................................... 25,981 25,110
Other..................................................... 24,214 20,692
--------- ---------
210,437 214,415
--------- ---------
Long-term deferred tax liabilities:
Depreciation.............................................. (374,273) (339,951)
Compensation related costs................................ (9,791) (10,328)
Lease accounting.......................................... (538) (740)
Deferred charges.......................................... (2,239) (6,653)
Other..................................................... (24,548) (22,756)
--------- ---------
(411,389) (380,428)
--------- ---------
Long-term deferred taxes, net............................... $(200,952) $(166,013)
========= =========
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
1998 1997
---------- ----------
Five-Year Credit Agreement.................................. $ 843,728 $1,262,058
6 3/8% Senior Notes due 2008................................ 200,000
7% Senior Notes due 2018.................................... 200,000
6% Senior Notes due 2010.................................... 200,000
6.8% Senior Notes due 2018.................................. 300,000
9 1/4% Senior Secured Debentures, due 2005.................. 100,648
8 1/2% Senior Secured Debentures, due 2003.................. 197,845
8.15% Senior Notes due 2006................................. 222,500 240,000
7.65% Senior Notes due 2007................................. 200,000 200,000
9 7/8% Senior Subordinated Debentures, due 2002............. 77,245 81,530
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009...................................................... 145,377 171,909
10% Senior Subordinated Notes, due 1999..................... 123,572 123,861
10% Mortgage loans, with semi-annual payments due through
2004...................................................... 205,301 426,219
3 3/4% to 8 5/8% Industrial Revenue Bonds, due in varying
amounts through 2021...................................... 201,330 201,030
7 7/8% to 10 1/4% mortgages, due in varying amounts through
2017...................................................... 259,827 267,368
3 1/2% to 10 1/4% notes, due in varying amounts through
2017...................................................... 11,004 48,287
---------- ----------
Total debt.................................................. 3,189,884 3,320,755
Less current portion........................................ 163,904 14,304
---------- ----------
Total long-term debt........................................ $3,025,980 $3,306,451
========== ==========
The aggregate annual maturities and scheduled payments of long-term debt
for the five years subsequent to 1998 are:
1999.................................................... $ 163,904
2000.................................................... $ 209,913
2001.................................................... $ 13,356
2002.................................................... $1,006,704
2003.................................................... $ 76,928
364-Day Credit Agreement and Five-Year Credit Agreement
The Company has a 364-Day Credit Agreement and a Five-Year Credit
Agreement dated as of May 28, 1997 (collectively the "Credit Agreement"). The
following constitutes only a summary of the principal terms and conditions of
the Credit Agreement. Reference is directed to the Credit Agreement attached as
an exhibit to the Company's Current Reports on Form 8-K dated June 2, 1997 and
January 8, 1999.
The 364-Day facility is a revolving credit facility in the amount of
$500,000, that terminates on May 29, 1999, unless extended in accordance with
its terms. It may be converted into a term loan maturing two years after the
conversion unless earlier terminated by the Company as provided in the Credit
Agreement. The Five-Year facility is a revolving credit facility in the amount
of $1,500,000. It terminates on May 28, 2002, unless extended or earlier
terminated by the Company as provided in the Credit Agreement.
Interest Rates
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
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
The Applicable Margin for the 364-Day facility varies from .125% to .200%
prior to conversion to a term loan facility and thereafter, if exercised by the
Company, from .175% to .300%. The Applicable Margin for the Five-Year facility
varies from .105% to .175%. In addition, the Company pays a Facility Fee ranging
from .050% to .100% on the entire amount of the 364-Day facility and a Facility
Fee ranging from .070% to .125% on the entire amount of the Five-Year facility.
Both the Applicable Margin and the Facility Fee vary based on the Company's
achievement of a financial ratio. As of January 2, 1999, the Applicable Margin
for the 364-Day facility was .140% and for the Five-Year facility was .120%. The
Facility Fee for the 364-Day facility was .060% and for the Five-Year facility
was .080%.
In December 1998 we amended our Credit Agreement to permit our merger with
Fred Meyer (See Merger footnote). The amendments, which become effective when
the merger is completed, increase our rates to market rates.
Prepayment
The Company may prepay the Credit Agreement, in whole or in part, at any
time, without a prepayment penalty. Certain Senior Notes totaling $900,000 are
eligible for early redemption at varying times and premiums.
Certain Covenants
The Credit Agreement contains covenants which, among other things,
restrict dividends and require the maintenance of certain financial ratios and
levels, including fixed charge coverage ratios and leverage ratios.
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $250,000
9 7/8% Senior Subordinated Debentures due August 1, 2002, redeemable at any time
on or after August 1, 1999, in whole or in part at the option of the Company at
par (the Company has repurchased $172,755 of the 9 7/8% Senior Subordinated
Debentures in total, $4,285 in 1998); (ii) $355,774 6 3/4% to 9 5/8% Senior
Subordinated Notes due March 15, 1999 to October 15, 2009, with portions of
these issues subject to early redemption by the Company at varying times and
premiums (the Company has repurchased or redeemed $210,397 of the notes in
total, $26,532 in 1998); (iii) $250,000 10% Senior Subordinated Notes due May 1,
1999. This issue is not subject to early redemption by the Company (the Company
has repurchased $126,428 of the 10% Senior Subordinated Notes in total, $289 in
1998).
Redemption Event
Subject to certain conditions (including repayment in full of all
obligations under the Credit Agreement or obtaining the requisite consents under
the Credit Agreement), the Company's publicly issued debt will be subject to
redemption, in whole or in part, at the option of the holder upon the occurrence
of a redemption event, upon not less than five days' notice prior to the date of
redemption, at a redemption price equal to the default amount, plus a specified
premium. "Redemption Event" is defined in the indentures as the occurrence of
(i) any person or group, together with any affiliate thereof, beneficially
owning 50% or more of the voting power of the Company or (ii) any one person or
group, or affiliate thereof, succeeding in having a majority of its nominees
elected to the Company's Board of Directors, in each case, without the consent
of a majority of the continuing directors of the Company.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Mortgage Financing
During 1989 the Company completed a $612,475, 10% mortgage financing of
127 of its retail properties, distribution warehouse facilities, food processing
facilities and other properties (the "Properties"), with a net book value of
$325,327 held by 13 newly formed wholly-owned subsidiaries. The wholly-owned
subsidiaries mortgaged the Properties, which are leased to the Company or
affiliates of the Company, to a newly formed special purpose corporation,
Secured Finance Inc.
The mortgage loans had an original maturity of 15 years. The Properties
are subject to the liens of Secured Finance Inc. The mortgage loans are subject
to semi-annual payments of interest and principal on $150,000 of the borrowing
based on a 30-year payment schedule and interest only on the remaining $462,475
principal amount. The unpaid principal amount will be due on December 15, 2004.
In total, the Company has prepaid 89 mortgages with an original balance of
$348,349. During 1998 the Company prepaid 54 mortgages with an original balance
of $198,002. The mortgage balances at the time of the prepayment totaled
$182,126. Pursuant to the terms of the mortgages a 20% premium payment was
required. The premium totaled $36,425 and was applied, on a pro-rata basis, to
the 38 remaining mortgage loans.
Subsequent to the prepayment the remaining mortgage loans totaled
$205,301. The remaining mortgage loans are subject to semi-annual payments of
interest and principal on $45,777 based on the original 30-year payment
schedule, adjusted for the pre-payment, and interest only on the remaining
$159,524 principal amount.
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to
$2,000,000 of unrated commercial paper and borrow up to $2,000,000 from the
lenders under the Credit Agreement on a competitive bid basis. The total of
unrated commercial paper, $141,257 at January 2, 1999, however, may not exceed
$2,000,000. All commercial paper must be supported by availability under the
Credit Agreement. These borrowings have been classified as long-term because the
Company expects that during 1999 these borrowings will be refinanced using the
same type of securities. Additionally, the Company has the ability to refinance
the short-term borrowings under the Five-Year facility of the Credit Agreement
which matures May 28, 2002.
Interest Rate Protection Program
The Company uses derivatives to limit its exposure to rising interest
rates. During 1998 we followed these guidelines in using derivatives: (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 $1,000,000 or
less, (iii) include no leveraged derivative products, and (iv) hedge without
regard to profit motive or sensitivity to current mark-to-market status. We
review compliance with these guidelines annually with the Financial Policy
Committee of the Company's Board of Directors. In addition, our internal
auditors review compliance with these guidelines on an annual basis. These
guidelines may be changed at any time as our business needs dictate.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 6 month LIBOR using the forward yield curve as of
January 2, 1999.
1998 1997
---------- ----------
Receive fixed swaps
Notional amount........................................... $ 785,000 $1,085,000
Duration in years......................................... 2.0 3.0
Average receive rate...................................... 6.50% 6.33%
Average pay rate.......................................... 5.30% 5.79%
Receive variable swaps
Notional amount........................................... $ 925,000 $1,250,000
Duration in years......................................... 2.4 2.7
Average receive rate...................................... 5.57% 5.83%
Average pay rate.......................................... 7.09% 6.92%
Interest rate caps
Notional amount........................................... $ -- $ 200,000
Duration in years......................................... -- .9
Average receive rate...................................... -- 5.81%
In addition, as of January 2, 1999, the Company had entered into a 2 year
$75,000 receive variable swap that becomes effective July 1, 1999.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Long-term Investments
The fair values of these investments are estimated based on quoted market
prices for those or similar investments.
Long-term Debt
The fair value of the Company's long-term debt, including the current
portion thereof, is estimated based on the quoted market price for the same or
similar issues. The fair value of $843,728 of long-term debt outstanding under
the Company's Credit Agreement approximates carrying value.
Interest Rate Protection Agreements
The fair value of these agreements is based on the net present value of
the future cash flows using the forward interest rate yield curve in effect at
the respective years-end. If the swaps and caps were cancelled as of the
respective years-end the result would have been a net cash outflow for 1998 and
1997. The swaps are linked to the Company's debt portfolio. (See Accounting
Policies and Debt Obligations footnotes.)
The estimated fair values of the Company's financial instruments are as
follows:
1998 1997
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Long-term investments for which it is
Practicable................................. $ 71,102 $ 71,582 $ 167,609 $ 168,512
Not Practicable............................. $ 8,800 -- $ 33,605 $ --
Long-term debt for which it is
Practicable................................. $2,717,723 $2,829,541 $2,804,070 $2,937,041
Not Practicable............................. $ 472,161 -- $ 516,685 $ --
Interest Rate Protection Agreements
Receive fixed swaps......................... $ -- $ 21,833 $ -- $ 11,307
Receive variable swaps...................... $ -- $ (43,218) $ -- $ (42,016)
Interest rate caps.......................... $ -- $ -- $ 1,130 $ 434
---------- ---------- ---------- ----------
$ 0 $ (21,385) $ 1,130 $ (30,275)
========== ========== ========== ==========
The use of different assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could actually realize. In addition, the Company is not subjected to
a concentration of credit risk related to these instruments.
The investments for which it was not practicable to estimate fair value
relate to equity investments accounted for under the equity method and
investments in real estate development partnerships for which there is no
market.
It was not practicable to estimate the fair value of Industrial Revenue
Bonds of $201,330, various mortgages of $259,827, and other notes of $11,004 for
which there is no market.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
LEASES
The Company operates primarily in leased facilities. Lease terms generally
range from 10 to 25 years with options to renew at varying terms. Certain of the
leases provide for contingent payments based on a percent of sales.
Rent expense (under operating leases) consists of:
1998 1997 1996
-------- -------- --------
Minimum rentals............................................. $347,977 $321,782 $291,256
Contingent payments......................................... 10,277 9,230 10,373
-------- -------- --------
$358,254 $331,012 $301,629
======== ======== ========
Assets recorded under capital leases consists of:
1998 1997
--------- ---------
Distribution and manufacturing facilities................... $ 30,382 $ 30,382
Store facilities............................................ 267,218 242,529
Less accumulated amortization............................... (132,952) (123,891)
--------- ---------
$ 164,648 $ 149,020
========= =========
Minimum annual rentals for the five years subsequent to 1998 and in the
aggregate are:
CAPITAL OPERATING
LEASES LEASES
---------- ----------
1999........................................................ $ 36,806 $ 347,646
2000........................................................ 35,863 325,112
2001........................................................ 34,805 305,141
2002........................................................ 33,743 287,334
2003........................................................ 31,641 270,513
Thereafter.................................................. 287,977 2,337,555
---------- ----------
460,835 $3,873,301
==========
Less estimated executory costs included in capital leases... 16,414
----------
Net minimum lease payments under capital leases............. 444,421
Less amount representing interest........................... 230,438
----------
Present value of net minimum lease payments under capital
leases.................................................... $ 213,983
==========
EXTRAORDINARY LOSS
The extraordinary loss in 1998, 1997, and 1996 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
JANUARY 2, 1999 DECEMBER 27, 1997 DECEMBER 28, 1996
---------------------------- ---------------------------- ----------------------------
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................... $449,912 255,814 $1.76 $444,032 254,284 $1.75 $352,735 250,979 $1.41
Dilutive effect of stock
option awards............. 9,568 8,576 7,858
-------- ------- -------- ------- -------- -------
Diluted EPS................. $449,912 265,382 $1.70 $444,032 262,860 $1.69 $352,735 258,837 $1.36
======== ======= ======== ======= ======== =======
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at January 2, 1999. Fifty thousand
shares have been designated "Series A Preferred Shares" and are reserved for
issuance under the Company's Shareholders' rights plan. The stock has a par
value of $100 and is issuable in series.
COMMON STOCK
The Company has authorized 1,000,000,000 shares of common stock, $1 par
value per share. On January 29, 1997, the Company began repurchasing its common
stock in order to reduce dilution caused by the Company's stock option plans.
These repurchases were made using the proceeds, including the tax benefit, from
options exercised. Further repurchases of up to $100,000 of the Company's common
stock were authorized by the Board of Directors during October of 1997. On
October 18, 1998, the Company suspended its repurchase program as result of the
merger agreement between the Company and Fred Meyer, Inc. The main trading
market for the Company's common stock is the New York Stock Exchange, where it
is listed under the symbol KR. For the three years ended January 2, 1999,
changes in common stock were:
ISSUED IN TREASURY
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------
December 30, 1995..................................... 267,555,842 $586,541 19,151,900 $243,631
Exercise of stock options including restricted stock
grants.............................................. 5,367,200 50,091 11,812 255
Tax benefit from exercise of non-qualified stock
options............................................. 21,598
----------- -------- ---------- --------
December 28, 1996..................................... 272,923,042 658,230 19,163,712 243,886
Exercise of stock options including restricted stock
grants.............................................. 4,230,218 43,693 3,051 280
Open market purchases................................. 3,015,887 84,932
Tax benefit from exercise of non-qualified stock
options............................................. 26,721
----------- -------- ---------- --------
December 27, 1997..................................... 277,153,260 728,644 22,182,650 329,098
Exercise of stock options including restricted stock
grants.............................................. 4,635,492 53,553 23,060 1,101
Open market purchases................................. 2,625,299 120,830
Tax benefit from exercise of non-qualified stock
options............................................. 54,605
----------- -------- ---------- --------
January 2, 1999....................................... 281,788,752 $836,802 24,831,009 $451,029
=========== ======== ========== ========
STOCK OPTION PLANS
The Company grants options for common stock to employees under various
plans, as well as to its non-employee directors owning a minimum of 1,000 shares
of common stock of the Company, at an option price equal to the fair market
value of the stock at the date of grant. In addition to cash payments, the plans
provide for the exercise of options by exchanging issued shares of stock of the
Company. At January 2, 1999, 4,992,558 shares of
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
common stock were available for future options. Options generally will expire 10
years from the date of grant. Options vest in one year to five years or, for
certain options, upon the Company's stock reaching certain pre-determined market
prices within ten years from the date of grant. All grants outstanding become
immediately exercisable upon certain changes of control of the Company.
Changes in options outstanding under the stock option plans, excluding
restricted stock grants, were:
WEIGHTED AVERAGE
SHARES SUBJECT OF EXERCISE
TO OPTION PRICE OF OPTIONS
----------------------------------
Outstanding, December 30, 1995.............................. 25,327,054 $ 9.68
Granted..................................................... 5,687,020 $20.71
Exercised................................................... (5,339,416) $ 9.04
Cancelled or expired........................................ (183,518) $16.12
----------
Outstanding, December 28, 1996.............................. 25,491,140 $12.23
Granted..................................................... 3,110,560 $26.67
Exercised................................................... (4,229,352) $ 9.89
Cancelled or expired........................................ (210,670) $12.53
----------
Outstanding, December 27, 1997.............................. 24,161,678 $14.50
Granted..................................................... 3,210,415 $43.13
Exercised................................................... (4,541,437) $11.59
Cancelled or expired........................................ (175,865) $28.72
----------
Outstanding, January 2, 1999................................ 22,654,791 $19.52
==========
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock awards and
certain options where vesting is contingent upon the Company's stock reaching
certain pre-determined market prices. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and diluted net earnings per share would
have been reduced by approximately $16,306, or $.06 per share, $13,616, or $.05
per share, and $12,800, or $.05 per share, for 1998, 1997 and 1996,
respectively. The weighted average fair value of the options granted during
1998, 1997, and 1996 was estimated as $18.72, $10.82 and $5.89, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: volatility of 26.6%, 24.0% and 22.7% for
1998, 1997 and 1996, respectively; risk-free interest rate of 4.6%, 5.7% and
6.3% for 1998, 1997 and 1996, respectively; and an expected term of
approximately 7.8 years for 1998, 5.4 years for 1997, and 3.3 years for 1996. A
summary of options outstanding and exercisable at January 2, 1999 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AS OF 1/2/99 LIFE PRICE AS OF 1/2/99 PRICE
- ------------------------------------------------------- ------------------------
$ 4.85 - $ 6.22 936,026 1.30 $ 6.21 936,026 $ 6.21
6.47 - 7.85 1,778,989 3.69 7.75 1,778,989 7.75
8.10 - 10.29 2,278,179 3.43 9.35 2,278,179 9.35
10.57 - 11.69 2,500,857 5.37 11.68 2,500,857 11.68
11.72 - 12.66 1,650,667 2.49 11.75 1,650,667 11.75
12.75 - 12.97 3,016,299 6.30 12.75 3,016,299 12.75
13.04 - 20.75 4,269,784 7.26 20.34 3,508,376 20.25
21.19 - 41.63 2,864,049 8.37 26.99 1,292,478 26.79
42.13 - 54.47 3,359,941 9.30 44.69 14,475 44.48
---------- ----------
$ 4.85 - $54.47 22,654,791 6.11 $19.52 16,976,346 $13.80
========== ==========
At December 27, 1997 and December 28, 1996, options for 18,127,665 and
16,906,890 shares were exercisable at a weighted average exercise price of
$11.72 and $9.44, respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Also, the Company may grant restricted stock awards to eligible employee
participants. In general, a restricted stock award entitles an employee to
receive a stated number of shares of common stock of the Company subject to
forfeiture if the employee fails to remain in the continuous employ of the
Company for a stipulated period. The holder of an award is entitled to the
rights of a shareowner except that the restricted shares and the related rights
to vote or receive dividends may not be transferred. The award is charged to
earnings over the period in which the employee performs services and is based
upon the market value of common stock at the date of grant for those grants
without performance contingencies. As of January 2, 1999 and December 27, 1997,
awards related to 382,898 and 354,850 shares, respectively, were outstanding.
The charge to earnings for grants with performance-contingent vesting includes
share appreciation between the grant date and the vesting date.
Incentive shares may be granted under the 1994 plan, which consist of
shares of common stock issued subject to achievement of performance goals. No
incentive shares were outstanding as of January 2, 1999 and December 27, 1997.
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:
Income Taxes -- We have closed all tax years through 1984 with the
Internal Revenue Service. The Internal Revenue Service has completed its
examination of our tax returns for tax years through 1992. On September 15,
1998, the IRS voluntarily dismissed its appeal against Kroger. This action
settled a previously unresolved issue for tax years 1984-1992. One issue remains
in dispute with the IRS for tax years 1991 and 1992. We have provided for this
and other tax contingencies.
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. Management is of the opinion that their outcome
will not have a material adverse effect on the Company's financial position or
results of operations.
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 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 tradeable, ten days after a person or group
acquires 10% or more of the Company's common stock or ten business days
following a tender offer or exchange offer resulting in a person or group having
beneficial ownership of 10% or more of the Company's common stock. In the event
the rights become exercisable, each right will entitle the holder the right, if
that holder pays the exercise price, to purchase the Company's common stock,
having a market value of twice the exercise
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
price of the right. Under certain other circumstances, including certain
acquisitions of the Company in a merger or other business combination
transaction, or if 50% or more of the Company's assets or earning power are sold
under certain circumstances, each right will entitle the holder to receive upon
payment of the exercise price, shares of common stock of the acquiring company
with a market value of two times the exercise price. At the Company's option,
the rights, prior to becoming exercisable, are redeemable in their entirety at a
price of $.01 per right. The rights are subject to adjustment and expire March
19, 2006. This summary description of the Plan is qualified in its entirety by
the terms of the plan more particularly set forth in the Company's Forms 8-A/A
dated April 4, 1997 and October 18, 1998.
OTHER POST EMPLOYMENT BENEFITS
The Company administers non-contributory defined benefit retirement plans
for substantially all non-union employees. Funding for the pension plans is
based on a review of the specific requirements and on evaluation of the assets
and liabilities of each plan. Employees are eligible to participate upon the
attainment of age 21 (25 for participants prior to January 1, 1986) and the
completion of one year of service, and benefits are based upon final average
salary and years of service. Vesting is based upon years of service.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. The majority of
the Company's employees may become eligible for these benefits if they reach
normal retirement age while employed by the Company. Funding of retiree health
care and life insurance benefits occurs as claims or premiums are paid.
33
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
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.............. $ 943,456 $ 874,097 $ 247,712 $ 253,172
Service Cost......................................... 27,959 26,682 8,596 9,463
Interest Cost........................................ 68,456 67,701 16,841 19,609
Plan participants' contributions..................... -- -- 3,420 3,655
Amendments........................................... -- -- -- (4,741)
Actuarial loss (gain)................................ 48,486 22,088 12,428 (13,587)
Curtailment credit................................... -- -- (16,970) --
Benefits paid........................................ (49,277) (47,112) (16,076) (19,859)
---------- ---------- --------- ---------
Benefit obligation at end of year.................... $1,039,080 $ 943,456 $ 255,951 $ 247,712
========== ========== ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year....... $1,095,118 $ 947,726 $ -- $ --
Actual return on plan assets......................... 190,613 191,755 -- --
Employer contribution................................ 2,987 2,750 12,656 16,203
Plan participants' contributions..................... -- -- 3,420 3,656
Benefits paid........................................ (49,277) (47,112) (16,076) (19,859)
---------- ---------- --------- ---------
Fair value of plan assets at end of year............. $1,239,441 $1,095,118 $ -- $ --
========== ========== ========= =========
Pension plan assets include $166,548 and $148,942 of common stock of The Kroger Co. at the end of 1998
and 1997, respectively.
NET AMOUNT RECOGNIZED AT END OF YEAR:
Funded status at end of year......................... $ 200,361 $ 151,662 $(255,951) $(247,712)
Unrecognized actuarial gain.......................... (207,597) (153,582) (38,290) (52,274)
Unrecognized prior service cost...................... 18,840 21,213 (20,985) (23,231)
Unrecognized net transition asset.................... (5,292) (5,914) -- --
---------- ---------- --------- ---------
Net amount recognized at end of year................. $ 6,312 $ 13,379 $(315,226) $(323,217)
========== ========== ========= =========
Prepaid benefit cost................................. $ 32,476 $ 36,979 $ -- $ --
Accrued benefit liability............................ (26,164) (23,600) (315,226) (323,217)
---------- ---------- --------- ---------
Net amount recognized at end of year................. $ 6,312 $ 13,379 $(315,226) $(323,217)
========== ========== ========= =========
PENSION BENEFITS OTHER BENEFITS
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate.......................................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets......................... 9.50% 9.50%
Rate of compensation increase.......................... 3.25% 3.75% 3.25% 3.75%
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999 and thereafter.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PENSION BENEFITS OTHER BENEFITS
------------------------------ ----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- ------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost............................ $ 27,959 $ 26,682 $ 25,977 $ 8,596 $ 9,463 $ 9,558
Interest cost........................... 68,456 67,701 61,091 16,841 19,608 18,006
Expected return on plan assets.......... (88,049) (81,102) (76,353) -- -- --
Amortization of:
Transition asset................... (622) (8,541) (8,541) -- -- --
Prior service cost................. 2,373 2,373 2,373 (2,131) (1,775) (829)
Actuarial (gain) loss.............. (63) 570 487 (1,555) (811) (162)
Curtailment credit...................... -- -- -- (17,086) -- --
-------- -------- -------- -------- ------- -------
Net periodic benefit cost............... $ 10,054 $ 7,683 $ 5,034 $ 4,665 $26,485 $26,573
======== ======== ======== ======== ======= =======
The accumulated benefit obligation for pension plans with no plan assets was
$26,164 as of January 2, 1999, and $23,600 as of December 27, 1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in the assumed
health care cost trend rates would have the following effects:
1%
POINT 1% POINT
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components..... $ 2,734 $ (2,300)
Effect on postretirement benefit obligation................. $24,026 $(21,271)
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1998, 1997, and 1996
was $27,595, $22,445, and $21,278, respectively.
The Company participates in various multi-employer plans for substantially all
union employees. Benefits are generally based on a fixed amount for each year of
service. Contributions and expense for 1998, 1997, and 1996 were $86,185,
$83,506, and $88,758, respectively.
SEGMENTS
The Company operates retail food and drug stores in the Midwest, South and
Southwest. The Company also manufactures and processes food for sale by its
supermarkets and others, and also operates convenience stores.
Based on the information monitored by the Company's operating decision makers to
manage the business, the Company has identified one reportable segment. Retail
operation information consists of results from the Company's retail food and
drug store divisions and convenience store divisions. Corporate and all other
operation information relates primarily to results from the Company's Corporate
office and manufacturing operations, none of which individually meet the
quantitative thresholds of a reportable segment. All of the Company's operations
are domestic. The Company manages income taxes, LIFO charges, interest income
and interest expense on a consolidated basis at the Corporate level.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Information about the Company's operations by operating segment is as
follows:
CORPORATE AND AMOUNTS NOT UNUSUAL
RETAIL ALL OTHER ALLOCATED(A) ITEMS(B) CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------
1998
Sales............................... $27,426,412 $ 776,892 $28,203,304
Depreciation and amortization....... 365,239 64,715 429,954
Operating income.................... 951,730 174,231 $(270,897) $(142,100) 712,964
Total assets........................ 5,603,662 1,096,409 6,700,071
Capital expenditures................ 786,398 137,063 923,461
- -----------------------------------------------------------------------------------------------------------
1997
Sales............................... $25,806,915 $ 760,433 $26,567,348
Depreciation and amortization....... 301,237 78,984 380,221
Operating income.................... 910,726 93,824 $(292,187) 712,363
Total assets........................ 5,062,003 1,239,338 6,301,341
Capital expenditures................ 508,438 103,760 612,198
- -----------------------------------------------------------------------------------------------------------
1996
Sales............................... $24,456,730 $ 714,179 $25,170,909
Depreciation and amortization....... 270,551 73,218 343,769
Operating income.................... 811,369 68,454 $(312,510) 567,313
Total assets........................ 4,705,459 1,187,006 5,892,465
Capital expenditures................ 449,134 284,749 733,883
- -----------------------------------------------------------------------------------------------------------
Intercompany eliminations are not material.
(A) Amounts not allocated to segments include LIFO charges, interest income, and
interest expense.
(B) See One-Time Expenses ($52,400) and Accounting Change ($89,700) footnotes.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
and No. 134 "Accounting for Mortgage Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". The Company has not yet determined what effect, if any, these
statements will have.
COMPREHENSIVE INCOME
The Company has no items of other comprehensive income in any period
presented. Therefore net earnings as presented in the Consolidated Statement of
Operations equals comprehensive income.
SUBSEQUENT EVENTS
On January 6, 1999, we changed our fiscal year-end to the Saturday nearest
January 31 of each year. This change is disclosed in our Current Report on Form
8-K dated January 6, 1999. Our first new fiscal year will end January 29, 2000.
It will include a 16-week first quarter ending May 22, 1999, and 12-week second,
third and fourth quarters ending August 14, 1999, November 6, 1999, and January
29, 2000, respectively. We intend to file separate audited statements of
operations and cash flows covering the transition period from January 3, 1999 to
January 30, 1999 on a Current Report on Form 8-K on or before May 15, 1999.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
QUARTERLY DATA (UNAUDITED)
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
1998 (12 WEEKS) (12 WEEKS) (16 WEEKS) (13 WEEKS) (53 WEEKS)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Sales................................... $6,388,759 $6,441,616 $8,023,906 $7,349,023 $28,203,304
Merchandise costs....................... 4,956,007 4,911,644 6,091,003 5,564,367 21,523,021
Extraordinary loss...................... (4,293) (6,490) (28,340) (39,123)
Net earnings............................ 47,428 94,329 117,895 151,137 410,789
Basic earnings per common share:
Earnings before extraordinary
loss............................. .20 .37 49 .70 1.76
Extraordinary loss................. (.02) (.03) (.10) (.15)
---------- ---------- ---------- ---------- -----------
Basic net earnings per common share..... .18 .37 .46 .60 1.61
Diluted earnings per common share:
Earnings before extraordinary
loss............................. .20 .36 .47 67 1.70
Extraordinary loss................. (.02) (.02) (11) (.15)
---------- ---------- ---------- ---------- -----------
Diluted net earnings per common share... .18 .36 .45 .56 1.55
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
1997 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Sales................................... $6,139,413 $6,231,794 $7,686,639 $6,509,502 $26,567,348
Merchandise costs....................... 4,686,363 4,741,737 5,863,919 4,961,335 20,253,354
Extraordinary loss...................... (5,210) (3,033) (803) (23,330) (32,376)
Net earnings............................ 87,050 105,104 95,727 123,775 411,656
Basic earnings per common share:
Earnings before extraordinary
loss............................. .36 .43 .38 .58 1.75
Extraordinary loss................. (.02) (.01) (.09) (.13)
---- ---- ---- ---- ----
Basic net earnings per common share..... .34 .42 .38 .49 1.62
Diluted earnings per common share:
Earnings before extraordinary
loss............................. .35 .41 .37 .56 1.69
Extraordinary loss................. (.02) (.01) (.09) (.12)
---- ---- ---- ---- ----
Diluted net earnings per common share... .33 .40 .37 .47 1.57
Common Stock Price Range
1998 1997
------------------ ------------------
QUARTER HIGH LOW HIGH LOW
- ----------------------------------------------------------------
1st................... 47 5/16 33 1/16 28 1/8 22 11/16
2nd................... 47 1/2 40 3/16 29 1/8 23 13/16
3rd................... 54 1/8 42 31 1/16 27 1/8
4th................... 60 13/16 44 37 5/16 28 1/2
The number of shareowners of record of common stock as of March 23, 1999,
was 46,870.
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.
37
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
1998 all filing requirements applicable to its officers, directors and ten
percent beneficial owners were timely satisfied except that Mr. Lawrence M.
Turner filed an amended Form 4 reporting the inadvertent understatement of 7,000
shares reported in the exercise of a stock option and the sale of the underlying
securities, and Ms. Lynn Marmer filed a Form 5 reporting the sale of 200 shares
of stock that inadvertently was not reported on a Form 4 during 1998.
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 as of February 5, 1999. Except as otherwise
noted below, each person has held office for at least five years and was elected
to that office at the 1998 Organizational Meeting of the Board of Directors held
May 14, 1998. Each officer will hold office at the discretion of the Board for
the ensuing year until removed or replaced.
Recent
Name Age Employment History
- ---- --- ------------------
Warren F. Bryant 53 Mr. Bryant was elected President and Chief Executive
Officer of Dillon Companies, Inc. effective September 1,
1996. Prior to this he was elected President and Chief
Operating Officer of Dillon Companies, Inc. on June 18,
1995, Senior Vice President of Dillon Companies, Inc. on
May 1, 1993, and Vice President of Dillon Companies, Inc.
on March 1, 1990. Before this Mr. Bryant 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. He
joined the Company in 1964.
Geoffrey J. Covert 47 Mr. Covert was elected Group Vice President and
President of Kroger Manufacturing effective April 19, 1998.
Prior to this he joined the Company and was appointed
Vice President, Grocery Products Group, on March 18,
38
Recent
Name Age Employment History
- ---- --- ------------------
1996. Prior to joining the Company, Mr. Covert had 23 years
of service with Procter & Gamble. In his last role with
Procter & Gamble, he was responsible for Manufacturing
Purchasing, Customer Service/Logistics, Engineering, Human
Resources, and Contract Manufacturing for Procter & Gamble's
Hard Surface Cleaner business worldwide.
David B. Dillon 47 Mr. Dillon was elected President and Chief Operating
Officer of Kroger effective June 18, 1995. Prior to this he
was elected Executive Vice President 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 47 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 he held various positions in the Company's
Law Department. Mr. Heldman joined the Company in 1982.
Michael S. Heschel 57 Mr. Heschel was elected Executive Vice President effective
June 18, 1995. Prior to this he was elected Senior Vice
President - Information Systems and Services on February 10,
1994, and Group Vice President - Management Information
Services on July 18, 1991. Before this Mr. Heschel served as
Chairman and Chief Executive Officer of Security Pacific
Automation Company. From 1985 to 1990 he was Vice President
of Baxter International, Inc.
Lynn Marmer 46 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 44 Mr. McGeorge was elected Senior Vice President effective
August 10, 1997. Prior to 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 38 Mr. McMullen was elected Senior Vice President effective
October 5, 1997, Group Vice President and Chief Financial
Officer effective June 18, 1995. Prior to this he
39
Recent
Name Age Employment History
- ---- --- ------------------
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.
Joseph A. Pichler 59 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.
James R. Thorne 52 Mr. Thorne was elected Senior Vice President effective June
18, 1995. Prior to his election Mr. Thorne 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. Mr. Thorne
joined the Company in 1966 as a part-time grocery clerk.
Lawrence M. Turner 51 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.
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.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet as of January 2, 1999 and December 27, 1997
Consolidated Statement of Operations and Accumulated Deficit for the
years ended January 2, 1999, December 27, 1997, and December 28, 1996
Consolidated Statement of Cash Flows for the years ended January 2,
1999, and December 27, 1997 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 October 20, 1998, The Kroger Co. filed a current report on Form 8-K
with the SEC disclosing its unaudited earnings for the third quarter
1998, and its Agreement and Plan of Merger dated as of October 18, 1998,
between The Kroger Co., Jobsite Holdings, Inc., and Fred Meyer, Inc.
On October 23, 1998, The Kroger Co. filed a current report on Form 8-K
dated October 22, 1998, disclosing materials that were distributed at
meetings with analysts conducted in October 1998, relating to The Kroger
Co.'s proposed merger with Fred Meyer, Inc.
On December 8, 1998, The Kroger Co. filed a current report on Form 8-K
with the SEC disclosing Fred Meyer, Inc.'s financial information and
proformas
On December 11, 1998, The Kroger Co. filed a current report on Form 8-K
with the SEC disclosing its Underwriting Agreement dated December 8,
1998, among The Kroger Co. and the Underwriters named therein; its
Pricing Agreement dated December 8, 1998, among The Kroger Co., Goldman,
Sachs & Co., Chase Securities Inc., and Salomon Smith Barney Inc.,
relating to The Kroger Co.'s 6.80% Senior Notes due 2018; and its Third
Supplemental Indenture, dated as of December 11, 1998, between The
Kroger Co. and Star Bank, National Association, as Trustee, relating to
The Kroger Co.'s 6.80% Senior Notes due 2018
(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
41
12.1 Statement of Computation of Ratio of Earnings to
Fixed Charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Annual Reports on Form 11-K for The Kroger Co.
Savings Plan and the Dillon Companies, Inc. Employee
Stock Ownership Plan and Trust for the Year 1998 will
be filed by amendment on or before May 3, 1999
42
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: March 26, 1999 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: March 26, 1999 By (*W. Rodney McMullen)
W. Rodney McMullen
Senior Vice President and
Chief Financial Officer
Dated: March 26, 1999 By (*J. Michael Schlotman)
J. Michael Schlotman
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 26th day of March, 1999.
(*Reuben V. Anderson) Director
Reuben V. Anderson
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
(*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.
43
Director
- ----------------------
Thomas H. O'Leary
(Katherine D. Ortega) Director
Katherine D. Ortega
(*Joseph A. Pichler) Chairman of the Board of
Joseph A. Pichler Directors, Chief Executive
Officer, and Director
(*Martha Romayne Seger) Director
Martha Romayne Seger
(*James D. Woods) Director
James D. Woods
*By: (Bruce M. Gack)
Bruce M. Gack
Attorney-in-fact