1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 20,August 12, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------from________________to_________________
Commission file number 1-303
THE KROGER CO.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0345740
- ------------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1014 Vine Street, Cincinnati, OH 45202
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Unchanged
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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.
----- -----No .
--- ---
There were 825,880,361823,041,043 shares of Common Stock ($1 par value) outstanding as of
June 28,September 19, 2000.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share amounts)
(unaudited)
1st2nd Quarter Ended Two Quarters Ended
-------------------------- May 20, May 22,--------------------------
August 12, August 14, August 12, August 14,
2000 1999 ------------ -----------2000 1999
---------- ---------- ---------- ----------
Sales................................................................ $14,329 $13,493
Sales ......................................................... $11,017 $10,289 $25,346 $23,782
------- ------------- ------- -------
Merchandise costs, including advertising, warehousing, and
transportation....................................................... 10,502 9,962transportation ................................................ 8,053 7,590 18,554 17,552
Operating, general and administrative................................ 2,718 2,470
Rent................................................................. 220 199administrative ......................... 2,039 1,891 4,758 4,361
Rent .......................................................... 159 143 379 342
Depreciation and amortization........................................ 307 281amortization ................................. 234 216 541 497
Asset impairment charges.............................................charges ...................................... -- -- 191 --
Merger related costs................................................. 9 35costs .......................................... 2 200 11 235
------- ------- ------- -------
Operating profit................................................... 382 546profit ............................................ 530 249 912 795
Interest expense..................................................... 206 199expense .............................................. 155 143 361 342
------- ------- ------- -------
Earnings before income tax expense................................. 176 347expense and extraordinary loss.... 375 106 551 453
Income tax expense................................................... 70 140expense ............................................ 157 50 227 190
------- ------- ------- -------
Earnings before extraordinary loss .......................... $ 218 $ 56 $ 324 $ 263
Extraordinary loss, net of income tax benefit ................. (2) (10) (2) (10)
------- ------- ------- -------
Net Earnings.......................................................earnings ................................................ $ 106216 $ 20746 $ 322 $ 253
======= ======= ======= =======
Earnings per basic common share:
Earnings before extraordinary loss .......................... $ 0.26 $ 0.07 $ 0.39 $ 0.32
Extraordinary loss .......................................... 0.00 (0.01) 0.00 (0.01)
------- ------- ------- -------
Net earnings ................................................................................................ $ 0.130.26 $ 0.250.06 $ 0.39 $ 0.31
======= ======= ======= =======
Average number of common shares used in basic calculation............ 831 827calculation...... 824 829 828 828
Earnings per diluted common share:
Earnings before extraordinary loss .......................... $ 0.26 $ 0.06 $ 0.38 $ 0.30
Extraordinary loss .......................................... 0.00 (0.01) 0.00 (0.01)
------- ------- ------- -------
Net earnings.................................................... 0.12earnings ............................................. $ 0.240.26 $ 0.05 $ 0.38 $ 0.29
======= ======= ======= =======
Average number of common shares used in diluted calculation.......... 850 863calculation.... 847 860 849 861
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
12
3
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)
May 20,August 12, January 29,
2000 2000
-------------------- ------------------------------ -----------
ASSETS
Current assets
Cash..................................................................Cash ........................................................ $ 163155 $ 281
Receivables........................................................... 608Receivables ................................................. 573 622
Inventories........................................................... 3,903Inventories ................................................. 3,795 3,938
Prepaid and other current assets...................................... 435assets ............................ 261 690
---------- ---------------- -------
Total current assets.............................................. 5,109assets .................................... 4,784 5,531
Property, plant and equipment, net....................................... 8,360net ............................. 8,534 8,275
Goodwill, net............................................................ 3,725net .................................................. 3,726 3,761
Other assets............................................................. 426assets ................................................... 311 399
---------- ---------------- -------
Total Assets...................................................... $ 17,620 $ 17,966
========== =========assets ............................................ $17,355 $17,966
======= =======
LIABILITIES
Current liabilities
Current portion of long-term debt.....................................debt ........................... $ 570586 $ 536
Accounts payable...................................................... 3,047 2,867
Salariespayable ............................................ 2,911 2,775
Accrued salaries and wages.................................................... 657wages .................................. 637 695
Other current liabilities............................................. 1,548 1,630
---------- ---------liabilities ................................... 1,729 1,722
------- -------
Total current liabilities......................................... 5,822liabilities ............................... 5,863 5,728
Long-term debt........................................................... 7,619debt ................................................. 7,222 8,045
Other long-term liabilities.............................................. 1,575liabilities .................................... 1,531 1,510
---------- ---------------- -------
Total Liabilities................................................. 15,016liabilities ....................................... 14,616 15,283
---------- ---------------- -------
Commitments and contingent liabilities ......................... -- --
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 shares authorized
and unissued..........................................................unissued ................................................ -- --
Common stock, $1 par, 1,000 shares authorized: 888 shares issued
in 2000 and 885 shares issued in 1999.................................1999 ....................... 888 885
Additional paid-in capital............................................... 2,044capital ..................................... 2,061 2,023
Retained earnings........................................................ 338earnings .............................................. 557 232
Common stock in treasury, at cost, 6166 shares in 2000 and
50 shares in 1999..................................................... (666)1999 ........................................... (767) (457)
---------- ---------------- -------
Total Shareowners' Equity......................................... 2,604shareowners' equity ............................... 2,739 2,683
---------- ---------------- -------
Total Liabilitiesliabilities and Shareowners' Equity......................... $ 17,620 $ 17,966
========== =========shareowners' equity ............... $17,355 $17,966
======= =======
- -------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
First QuarterTwo Quarters Ended
-----------------------------------------
May 20, May 22,----------------------------
August 12, August 14,
2000 1999
------------------- ----------------------------- ----------
Cash Flows From Operating Activities:
Net earnings..................................................................earnings ...................................................... $ 106322 $ 207253
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation............................................................... 276 252Extraordinary loss ............................................ 2 10
Depreciation .................................................. 487 444
Goodwill amortization...................................................... 31 29amortization ......................................... 54 53
Non-cash items............................................................. 258 2items ................................................ 261 25
Deferred income taxes...................................................... 181 42
Other...................................................................... 18 8taxes ......................................... 189 69
Other ......................................................... 34 2
Changes in operating assets and liabilities net of effects from
acquisitions of businesses:
Inventories............................................................ 29 (31)
Receivables............................................................ 16Inventories ................................................ 140 (59)
Receivables ................................................ 51 (1)
Accounts payable....................................................... 161 25
Other.................................................................. (33) 9
---------- ---------payable ........................................... 170 92
Other ...................................................... 185 327
------- -------
Net cash provided by operating activities.......................... 1,043 594
---------- ---------activities .............. 1,895 1,215
------- -------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (455) (442)expenditures .............................................. (838) (846)
Proceeds from sale of assets.................................................. 40 15assets ...................................... 68 49
Payments for acquisitions, net of cash acquired............................... (36)acquired ................... (67) --
Other......................................................................... (46) (22)
---------- ----------Other ............................................................. (21) (40)
------- -------
Net cash used by investing activities.............................. (497) (449)
---------- ----------activities .................. (858) (837)
------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt...................................... 524 84debt .......................... 525 931
Reductions in long-term debt.................................................. (995) (246)debt ...................................... (1,360) (1,200)
Debt prepayment costs ............................................. -- (2)
Financing charges incurred....................................................incurred ........................................ (7) (1)
Increase(9)
Decrease in book overdrafts................................................... 3 51overdrafts ....................................... (48) (93)
Proceeds from issuance of capital stock....................................... 20 22stock ........................... 37 36
Treasury stock purchases...................................................... (209)purchases .......................................... (310) --
Other......................................................................... -- (4)
---------- ----------------- -------
Net cash used by financing activities.............................. (664) (94)
---------- ----------activities .................. (1,163) (337)
------- -------
Net (decrease) increase in cash and temporary cash investments.................... (118) 51investments ........ (126) 41
Cash and temporary investments:
Beginning of year..........................................................year ............................................. 281 263
---------- ---------------- -------
End of quarter.............................................................period ................................................. $ 163155 $ 314
========== =========304
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.....................................interest ........................ $ 175356 $ 165283
Cash paid during the year for income taxes.................................taxes .................... $ 6677 $ 6269
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired..........................................acquired .............................. $ 6091 $ --
Goodwill recorded......................................................recorded .......................................... $ 33 $ --
Value of stock issued.................................................. $ --30 $ --
Liabilities assumed....................................................assumed ........................................ $ 5754 $ --
- -------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
34
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in millions except per share amounts.amounts and certain prior
year amounts have been reclassified to conform to current year
presentation.
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"), including Fred
Meyer, Inc. and its subsidiaries ("Fred Meyer") which were merged with
Kroger on May 27, 1999 (see note 2). The year-end balance sheet
includes Kroger's January 29, 2000 balance sheet, which was derived
from audited financial statements, and, due to its summary nature, does
not include all disclosures required by generally accepted accounting
principles. Significant intercompany transactions and balances have
been eliminated. References to the "Company" in these consolidated
financial statements mean the consolidated company.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of
results of operations for such periods but should not be considered as
indicative of results for a full year. The financial statements have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to SEC regulations. Accordingly, the accompanying
consolidated financial statements should be read in conjunction with
the fiscal 1999 Form 10-K Annual Report of The Kroger Co. filed with
the SEC on April 27, 2000.2000, as amended.
The unaudited information included in the consolidated financial
statements for the firstsecond quarter and two quarters ended May 20,August 12,
2000 and May 22,August 14, 1999 includes the results of operations of the
Company for the 1612 week quarters and 28 week periods then ended.
2. BUSINESS COMBINATIONS
On May 27, 1999, Kroger issued 312 million shares of Kroger common
stock in connection with a merger, for all of the outstanding common
stock of Fred Meyer, Inc., which operates stores primarily in the
Western region of the United States. The merger was accounted for as a
pooling of interests, and the accompanying financial statements
relating to periods in fiscal 1999 have been restated to give effect to
the consolidated results of Kroger and Fred Meyer.
3. MERGER RELATED COSTS
The Company is continuing the process of implementing its integration
plan relating to recent mergers. The integration plan, which involves
incurring transaction costs, includes distribution consolidation,
systems integration, store conversions, store closures, and
administration integration. Total merger related costs incurred were $9$2
during the firstsecond quarter of 2000, and $35$200 during the firstsecond quarter
of 1999. Year-to-date merger related costs were $11 in 2000 and $235 in
1999.
The following table presents the components of the merger related
costs:
FirstSecond Quarter Ended --------------------------------
May 20, May 22,Two Quarters Ended
---------------------- ---------------------
August 12, August 14, August 12, August 14
2000 1999 ---------------- ---------------2000 1999
---------- ---------- ---------- ---------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation.....................................consolidation..... $ -- $ 6 $ 1 $ 10
Systems integration ........... -- 19 -- 42
Store conversions ............. -- 19 -- 22
Transaction costs ............. -- 85 -- 87
Administration integration..... -- 12 4 Systems integration............................................13
---- ---- ---- ----
-- 24
Store conversions.............................................. -- 3
Transaction costs.............................................. -- 1
Administration integration..................................... 4 1
------ -----141 5 33174
NON-CASH WRITEDOWN
System integration.............................................integration ............ -- 2
------ -----1 -- 3
Store closures ................ -- 3 -- 3
Administration integration..... -- 14 -- 14
---- ---- ---- ----
-- 18 -- 20
45
6
OTHER CHARGES
Administration integration.....................................integration..... 2 -- 6 --
---- ---- ---- ----
2 -- 6 --
ACCRUED CHARGES
Distribution consolidation..... -- 5 -- 5
Store closures ................ -- 4 -- ------ -----4
Administration integration..... -- 32 -- 32
---- ---- ---- ----
-- 41 -- 41
---- ---- ---- ----
Total merger related costs........................................costs........ $ 92 $200 $ 35
====== =====11 $235
==== ==== ==== ====
TOTAL CHARGES
Distribution consolidation.....................................consolidation..... $ -- $ 11 $ 1 $ 415
Systems integration............................................integration ........... -- 2620 -- 45
Store conversions..............................................conversions ............. -- 319 -- 22
Transaction costs..............................................costs ............. -- 185 -- 87
Store closures ................ -- 7 -- 7
Administration integration..................................... 8 1
------ -----integration..... 2 58 10 59
---- ---- ---- ----
Total merger related costs........................................costs ....... $ 92 $200 $ 35
====== =====11 $235
==== ==== ==== ====
Distribution Consolidation
Represents costs to consolidate distribution operations and eliminate
duplicate facilities. The costs in the first quarter of 2000 represent severance costs
incurred and paid. The $4$11 in the firstsecond quarter of 1999 was for
incremental labor during the closing of the Hughes distribution center
and other incremental costs incurred as a part of the realignment of
the Company's distribution system.
Systems Integration
Represents the costs of integrating systems and the related conversion
of corporate office and store systems. In the firstsecond quarter of 1999,
costs totaling $24$19 were expensed as incurred including $17 of incremental
operating costs, principally labor, during the conversion process,
$5 paidpayments to third parties, and $2 of training costs. Additionally, the Company incurred $2 of asset writedowns
for computer equipment during the first quarter of 1999.
Store Conversions
Includes the cost to convert store banners. All costs represented
incremental cash expenditures for advertising and promotions to
establish the banner, changing store signage, labor required to
remerchandise the store inventory and other services that were expensed
as incurred.
Transaction Costs
Represents fees paid to outside parties, employee bonuses that were
contingent upon the completion of the mergers, and an employee stay
bonus program. The Company incurred costs totaling $1$85 in the firstsecond
quarter of 1999, related to fees and employee bonuses recorded as the
cash was expended.
Store Closures
Includes the costs to close stores identified as duplicate facilities
and to sell stores pursuant to settlement agreements. Costs totaling $7
incurred during the second quarter of 1999 related to the closure of
five stores identified as duplicate facilities and to sell five stores
pursuant to a settlement with the Federal Trade Commission.
6
7
Administration Integration
Includes labor and severance costs related to employees identified for
termination in the integration and charges to conform accounting
policies. During the firstsecond quarter of 2000, the Company incurred costs
totaling $8
including approximately $4$2 resulting from the issuance of restricted stock related to
merger synergies,synergies. Year-to-date 2000, the Company has recorded costs
totaling $10 which includes $6 resulting from restricted stock, and charges of $4
for severance payments recorded as cash was
expended. The restrictionsRestrictions on the
stock grants will lapse as synergy goals are achieved. 5
7During the second
quarter of 1999, the Company accrued severance costs totaling $12 and
$20 for an obligation to make a charitable contribution within seven
years from the date of the Fred Meyer merger.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
------------- --------- ----------------- -------------- ------------------
Balance at January 2, 1999.....................................1999.............................. $ 133 $ 30 $ --
Additions..................................................Additions........................................... 8 24 29
Payments...................................................Payments............................................ (11) (25) --
------ ------ ------
Balance at January 29, 2000....................................2000............................. 130 29 29
Payments...................................................Payments............................................ (10) (8) (6) --
------ ------ ------
Balance at May 20, 2000........................................August 12, 2000.............................. $ 122120 $ 2321 $ 29
====== ====== ======
4. ONE-TIME ITEMS
In addition to the Merger Related Costs described above, the Company
incurred one-time expenses related to recent mergers of $81$89 and $6
during the first quarters of$36
year-to-date 2000 and 1999, respectively. The one-time items in the first quarter of 2000
included approximately $15$19 for inventory writedowns included as
merchandise costs. The remaining $66$70 in 2000 is included in operating,
general and administrative costs and relates primarily to stores that
have closed or will close and severance expenses related to headcount
reductions and other miscellaneous costs. Of the $66, $11$70, $15 represented
cash expenditures and $55 represented charges that were accrued
duringrelating primarily to the quarter.net present value of lease liabilities
relating to closed stores. No material payments were made on these
accruals during the quarter. All of theThe 1999 one-time items wererepresent costs
related to mergers recorded as cash was expended. Of the $36, $18 was
included in operating, general and areadministrative costs, and $18 was
included in merchandise costs.
5. ASSET IMPAIRMENT CHARGES
As a result of recent investments in stores that did not perform as
expected,Due to updated profitability forecasts for 2000 and beyond and new
divisional leadership, the Company performed an impairment review of
its long-lived assets. During this review, the Company identified
impairment losses for both assets to be disposed of and assets to be
held and used.
Assets to be Disposed of
The impairment charge for assets to be disposed of related primarily to
the carrying value of land, buildings, and equipment for 25 stores that
werehave been closed in the first quarter or that management has committed to close by the end
of the fiscal year. The impairment charge was determined using the fair
value less the cost to sell. Fair value less the cost to sell used in
the impairment calculation was based on discounted cash flows and
third partythird-party offers to purchase the assets, or market value for
comparable properties, if applicable. Accordingly, an impairment charge
of $81 related to assets to be disposed of was recognized, reducing the
carrying value of fixed assets and goodwill by $41 and $40,
respectively.
Assets to be Held and Used
The impairment charge for assets to be held and used related primarily
to the carrying value of land, buildings, and equipment for 13 stores
that will continue to be operated by the Company. Updated projections,
based on revised operating plans, were used, on a gross basis, to first
determine whether the assets were impaired, then, on a discounted cash
flow basis, to serve as the estimated fair value of the assets for
purposes of measuring the asset impairment charge. As a result, an
impairment charge of
7
8
$87 related to assets to be held and used was recognized, reducing the
carrying value of fixed assets and goodwill by $47 and $40,
respectively.
Other writedowns
In addition to the approximately $168 of impairment charges noted
above, the Company recorded a writedown of $23 to reduce the carrying
value of certain investments in unconsolidated entities, accounted for
on the cost basis of accounting, to reflect reductions in value
determined to be other than temporary. The writedowns related primarily
to investments in certain former suppliers that have experienced
financial difficulty and with whom supply arrangements have ceased.
6
8
6. INCOME TAXES
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and the amortization
and impairment writedown of non-deductible goodwill.
7. EARNINGS PER COMMON SHARE
Earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding, after giving effect to
dilutive stock options.
The amounts below are calculated based on earnings before extraordinary
items. The extraordinary items during 2000 and 1999 resulted from the
early retirement of debt. The following table provides a reconciliation
of earnings and shares used in calculating basic earnings per share to
those used in calculating diluted earnings per share.
For the quarter ended For the quarter ended
May 20,August 12, 2000 May 22,August 14, 1999
----------------------------------------- ----------------------------------------------------------------------------- --------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------------- --------------------------------------
Basic earnings per common share......share....... $ 106 831218 824 $ 0.130.26 $ 207 82756 829 $ 0.250.07
Dilutive effect of stock options and
Warrants..........................warrants.......................... -- 1923 -- 36
--------- --------- ---------31
-------- -------- -------- -------
Diluted earnings per common share.... $ 106 850218 847 $ 0.120.26 $ 207 86356 860 $ 0.24
========= ========= ========= =========0.06
======== ======== ======== =======
For the two quarters ended For the two quarters ended
August 12, 2000 August 14, 1999
-------------------------------------- --------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------- --------------------------------------
Basic earnings per common share....... $ 324 828 $ 0.39 $ 263 828 $ 0.32
Dilutive effect of stock options and
warrants.......................... -- 21 -- 33
-------- -------- -------- -------
Diluted earnings per common share.... $ 324 849 $ 0.38 $ 263 861 $ 0.30
======== ======== ======== =======
8
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8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This standard, as
amended, is effective for fiscal years beginning after June 15, 2000.
Given current activities, the Company expects that the adoption of the
standard will not have a material impact on the financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation." This standard becomesbecame effective July 1, 2000. The
Company expects that the adoption of the standard willdid not have a material impact on the
financial statements.
9. GUARANTOR SUBSIDIARIES
Certain of the Company's Senior Notes and Senior Subordinated Notes
(the "Guaranteed Notes") are jointly and severally, fully and
unconditionally guaranteed by certain Kroger subsidiaries (the
"Guarantor Subsidiaries"). At May 20,August 12, 2000, a total of approximately
$5.6$5.3 billion of Guaranteed Notes were outstanding. The Guarantor
Subsidiaries and non-guarantor subsidiaries are wholly-owned
subsidiaries of Kroger. Separate financial statements of Kroger and
each of the Guarantor Subsidiaries are not presented because the
guarantees are full and unconditional and the Guarantor Subsidiaries
are jointly and severally liable. The Company believes that separate
financial statements and other disclosures concerning the Guarantor
Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an
individual and aggregate basis of consolidated assets, pretax earnings,
cash flow, and equity. Therefore, the non-guarantor subsidiaries'
information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor
Subsidiaries to make payments under the guarantees referred to above,
but the obligations of each guarantor under its guarantee are limited
to the maximum amount as will result in obligations 7
9
of such guarantor
under its guarantee not constituting a fraudulent conveyance or
fraudulent transfer for purposes of Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any
similar Federal or state law (e.g. adequate capital to pay dividends
under corporate laws).
The following tables present summarized financial information as of
May
20,August 12, 2000 and January 29, 2000 and for the two quarters ended
May 20,August 12, 2000 and May 22,August 14, 1999.
SUMMARIZED FINANCIAL INFORMATION AS OF MAY 20,AUGUST 12, 2000 AND FOR THE QUARTERTWO
QUARTERS THEN ENDED:
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------- ---------------------------------------------- --------------- ------------------ ------------------ ------------------
Current assets $ 661554 $ 4,4484,230 $ -- $ 5,1094,784
Non-current assets $ 11,00710,992 $ 11,25511,276 $ (9,751)(9,697) $ 12,51112,571
Current liabilities $ 1,1481,254 $ 4,6744,609 $ -- $ 5,8225,863
Non-current liabilities $ 7,9077,552 $ 1,2871,201 $ -- $ 9,1948,753
Sales $ 1,9863,480 $ 12,55022,238 $ (207)(372) $ 14,32925,346
Gross profit $ 385663 $ 3,4586,157 $ (16)(28) $ 3,8276,792
Operating (loss) profit $ 52(25) $ 330937 $ -- $ 382912
Net earnings $ 106322 $ 18813,719 $ (188)(13,719) $ 106322
9
10
SUMMARIZED FINANCIAL INFORMATION AS OF JANUARY 29, 2000:
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------- ---------------------------------------------- --------------- ------------------ ------------------ ------------------
Current assets $ 578 $ 4,953 $ -- $ 5,531
Non-current assets $ 11,652 $ 11,180 $ (10,397) $ 12,435
Current liabilities $ 1,109 $ 4,619 $ -- $ 5,728
Non-current liabilities $ 8,437 $ 1,118 $ -- $ 9,555
SUMMARIZED FINANCIAL INFORMATION FOR THE QUARTERTWO QUARTERS ENDED MAY 22,AUGUST 14,
1999:
Guarantor
(in millions of dollars) Kroger Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------------------------------------- --------------- ------------------ ------------------ ------------------
Sales $ 1,9123,398 $ 11,79520,770 $ (214)(386) $ 13,49323,782
Gross profit $ 355648 $ 3,1905,608 $ (14)(26) $ 3,5316,230
Operating (loss) profit $ 33(80) $ 513875 $ -- $ 546795
Net earnings $ 207253 $ 294502 $ (294)(502) $ 207253
10. COMMITMENTS AND CONTINGENCIES
The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee") and has
a 10-year product supply agreement with Santee that requires Kroger to
purchase 9 million gallons of fluid milk and other products annually.
The product supply agreement expires on July 29, 2007. Upon acquisition
of Ralphs/Food 4 Less, Santee became excess capacity and a duplicate
facility. The Company is currently engaged in efforts to dispose of its
interest in Santee that may result in a loss.
11. SUBSEQUENT EVENTS
On June 22,TREASURY STOCK
During the quarter, the Company invested $101 to repurchase 4.7 shares
of Kroger common stock. During the first two quarters of 2000, the
Company announced that it had reachedrepurchased approximately 16 shares of its common stock for a
total investment of $310. The Company has purchased 15.2 shares for
approximately $293 under its $750 stock repurchase plan and has
purchased an agreement with Winn-Dixie Stores, Inc.additional 0.8 shares under its program to terminaterepurchase
common stock funded by the previously
announced plans to purchase 74 Winn-Dixie stores in Texasproceeds and Oklahoma.
This announcement was a direct result of the Federal Trade Commission's
decision to withhold approval of the Company's purchase of these
stores.
8tax benefits from stock option
exercises.
10
1011
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis should be read in conjunction with the
consolidated financial statements.
BUSINESS COMBINATIONS
On May 27, 1999 Kroger issued 312 million shares of Kroger common stock
in connection with a merger, for all of the outstanding common stock of
Fred Meyer Inc., which operates stores primarily in the Western region
of the United States. This merger was accounted for as a pooling of
interests, and the accompanying financial statements have been restated
to give effect to the consolidated results of Kroger and Fred Meyer for
all years presented.
RESULTS OF OPERATIONS
Total sales for the firstsecond quarter of 2000 increased 6.2%7.1% to $14.3$11
billion while year-to-date sales increased 6.6% to $25 billion.
Excluding sales from divested stores, sales for the firstsecond quarter
increased 6.8%7.2% or $902$738 million over the same period in 1999.
Year-to-date sales, excluding divested stores, increased 6.9% or $1.6
billion over the first two quarters of 1999. The increase in sales is
attributable to an increase in comparable and identical store sales and
an increase in the number of stores due to acquisitions and expansions.
Identical food store sales, which includes stores that have been in
operation and have not been expanded or relocated for five quarters,
grew 1.3%1.7% from the firstsecond quarter of 1999. Comparable food stores
sales, which includes relocations and expansions, increased 1.8%2.1% over
the prior year.
Excluding our Fry's
division, which has converted 35 former Smith's stores to the Fry's
banner, identical food store sales grew 1.4% and comparable food store
sales rose 1.9%.
As previously stated, aA portion of the increase in sales also was also due to an increase in the
number of stores. During the firstsecond quarter of 2000, we opened,
acquired, expanded or relocated and remodeled or expanded 57 food
stores stores and closed 1838 food stores. We had 12 operational
closings and completed 28 within the wall remodels. We operated 2,3192,338
food stores at May 20,August 12, 2000, compared to 2,2062,192 food stores at May 22,August
14, 1999. As of May 20,August 12, 2000, food store square footage totaled 121 million, excluding
divested stores.122
million. This represents an increase of 6.5%8.0% over May 22, 1999.
TheAugust 14, 1999,
after adjusting for divested stores.
Our gross profit rate, excluding one-time expenses and the effect of
LIFO, was 27.0% in the second quarter of 2000 and 26.4% in the second
quarter of 1999. On this same basis, our year-to-date gross profit rate
was 26.9% in 2000 and 26.3% in 1999. During the firstsecond quarter of 2000,
we incurred $15$4 million of one-time expenses included in merchandise
costs comparedbringing our year-to-date one-time costs for 2000 to only $6$19 million.
This compares to $13 million during the same period ofsecond quarter and $18 million
year-to-date 1999. Including these costs, theour gross profit rates were
26.8% in26.9% for the second quarter and year-to-date 2000 and 26.3% in26.2% for the
second quarter and year-to-date 1999. This increase is primarily the
result of synergy savings, reductions in product costs through our
corporate-wide merchandising programs, and increases in private labelprivate-label
sales and profitability. The economies of scale created by the merger
are providing reduced costs by enabling strategic initiatives in
coordinated purchasing. Technology and logistics efficiencies also have also
led to improvements in category management and various other aspects of
our operations, resulting in a decreased cost of product. During the
quarter, we introduced 256160 private-label products that produce a higher
gross profit than the comparable national brands.
We incurred $66$4 million of one-time operating, general and
administrative expenses in the firstsecond quarter of 2000 compared to none$17
million during the firstsecond quarter of 1999. Year-to-date these costs are
$70 million for 2000 and $18 million for 1999. Excluding these one-time
items, operating, general and administrative expenses as a percent of
sales were 18.5% during the firstsecond quarter and year-to-date 2000. On
this same basis, the operating, general and administrative expenses as
a percent of 2000.sales were 18.2% for the second quarter 1999 and 18.3%
year-to-date. Including these one-timthe one-time items, operating, general and
administrative expenses as a percent of sales were 19.0%18.5% in the firstsecond
quarter of 2000 and 18.8% year-to-date 2000, compared to 18.3%18.4% in the
firstsecond quarter of 1999. Nearly half of this increase was due to the
reclassification of several Fred Meyer expenses to operating, general1999 and administrative in the current year. These expenses were reclassed
primarily from interest, depreciation and amortization expense. There
was no effect on net earnings due to these reclassifications.18.3% year-to-date 1999. The increase in
operating, general and administrative expenses as a percent of sales is also
due to higher bonus accruals, and higher health care costs.costs, higher utility
costs, and increasing credit card fees.
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12
The effective tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and the amortization
and impairment writeoff of non-deductible goodwill. Goodwill
amortization was $31$23 million in the second quarter of 2000 and $23
million in the second quarter of 1999. The goodwill impairment
writedown taken in the first quarter of 2000 and $29 million in the first quarter of 1999.was $80 million.
Net earnings before extraordinary loss, excluding merger related costs
and one-time items, were $276$233 million or $0.33$0.28 per diluted share infor
the firstsecond quarter of 2000. These results represent anThis represents a 17% increase of approximately 22% over
net
earnings of $0.27 per diluted sharebefore extraordinary loss, excluding merger related costs and
one-time items, of $0.24 per diluted share for the firstsecond quarter of
1999. On these same bases, year-to-date 2000 earnings before
extraordinary loss were $510 million or $0.60 per diluted share. These
results represent an increase of 20% over year-to-date 1999 earnings
before extraordinary loss of $0.50 per diluted share.
MERGER RELATED COSTS
We are continuing the process of implementing our integration plan
relating to recent mergers. The integration plan, which involves
incurring transationtransaction costs, includes distribution consolidation,
systems integration, store conversions, store closures, 9
11
and
administration integration. Total merger related costs incurred were $9$2
million during the firstsecond quarter of 2000, and $35$200 million during the
firstsecond quarter of 1999. Year-to-date merger related costs incurred were
$11 million in 2000 and $235 million in 1999.
The following table presents the components of the merger related
costs:
Second Quarter Ended --------------------------------
May 20, May 22,Two Quarters Ended
-------------------------- --------------------------
August 12, August 14, August 12, August 14
2000 1999 ---------------- ---------------
(in millions)2000 1999
---------- ---------- ---------- ---------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation..................................... $ -- $ 6 $ 1 $ 410
Systems integration............................................ -- 2419 -- 42
Store conversions.............................................. -- 319 -- 22
Transaction costs.............................................. -- 185 -- 87
Administration integration..................................... -- 12 4 1
------13
----- ----- ----- -----
-- 141 5 33174
NON-CASH WRITEDOWN
System integration............................................. -- 2
------1 -- 3
Store closures................................................. -- 3 -- 3
Administration integration..................................... -- 14 -- 14
----- ----- ----- -----
-- 18 -- 20
OTHER CHARGES
Administration integration........................................integration..................................... 2 -- 6 --
----- ----- ----- -----
2 -- 6 --
ACCRUED CHARGES
Distribution consolidation..................................... -- 5 -- 5
Store closures................................................. -- 4 -- ------4
Administration integration..................................... -- 32 -- 32
----- ----- ----- -----
-- 41 -- 41
----- ----- ----- -----
Total merger related costs........................................ $ 92 $ 35
======200 $ 11 $ 235
===== ===== ===== =====
TOTAL CHARGES
Distribution consolidation..................................... $ -- $ 11 $ 1 $ 415
Systems integration............................................ -- 2620 -- 45
Store conversionsconversions.............................................. -- 319 -- 22
Transaction costs.............................................. -- 185 -- 87
Store closures -- 7 -- 7
Administration integration..................................... 8 1
------2 58 10 59
----- ----- ----- -----
Total merger related costs........................................ $ 92 $ 35
======200 $ 11 $ 235
===== ===== ===== =====
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13
Distribution Consolidation
Charges related to "Distribution Consolidation" represent costs to
consolidate distribution operations and eliminate duplicate facilities.
The costs in the first quarter of 2000 represent severance costs
incurred and paid. The $4$11 million in the firstsecond quarter of 1999 was for incremental labor
during the closing of the Hughes distribution center and other
incremental costs incurred as a part of the realignment of the Company'sour
distribution system.
Systems Integration
Charges related to "Systems Integration" represent the costs of
integrating systems and the related conversion of corporate office and
store systems. In the firstsecond quarter of 1999, costs totaling $24$19
million were expensed as incurred including $17 million of incremental operating
costs, principally labor, during the conversion process, $5
million paidpayments to
third parties, and $2 million of training costs.
Additionally, the Company incurred $2 million of asset writedowns for
computer equipment during the first quarter of 1999.
Store Conversions
Charges related to "Store Conversions" include the cost to convert
store banners. All costs represented incremental cash expenditures for
advertising and promotions to establish the banner, changing store
signage, labor required to remerchandise the store inventory and other
services that were expensed as incurred.
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12
Transaction Costs
Charges related to "Transaction Costs" represent fees paid to outside
parties, employee bonuses that were contingent upon the completion of
the mergers, and an employee stay bonus program. We incurred costs
totaling $1$85 million in the firstsecond quarter of 1999, related to fees and
employee bonuses recorded as the cash was expended.
Store Closures
Charges related to "Store Closures" include the costs to close stores
identified as duplicate facilities and to sell stores pursuant to
settlement agreements. Costs totaling $7 million incurred during the
second quarter of 1999 were to close five stores identified as
duplicate facilities and to sell five stores pursuant to a settlement
with the Federal Trade Commission.
Administration Integration
Charges related to "Administration Integration" include labor and
severance costs related to employees identified for termination in the
integration and charges to conform accounting policies. During the
firstsecond quarter of 2000, we incurred costs totaling $8 including
approximately $4 million$2 resulting from
the issuance of restricted stock related to merger synergies,synergies.
Year-to-date 2000, we have recorded costs totaling $10 million which
includes approximately $6 million resulting from restricted stock, and charges of approximately
$4 million for severance payments recorded as cash was expended.
The
restrictionRestrictions on the stock grants will lapse as synergy goals are achieved.
During the second quarter of 1999, we accrued severance costs totaling
$12 million and $20 for an obligation to make a charitable contribution
within seven years from the date of the Fred Meyer merger.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
------------- --------- ----------------- -------------- -------------------
(in millions)
Balance at January 2, 1999........................................1999............................ $ 133 $ 30 $ --
Additions......................................................Additions......................................... 8 24 29
Payments.......................................................Payments.......................................... (11) (25) --
-------- ------------- ------ ------
Balance at January 29, 2000.......................................2000........................... 130 29 29
Payments.......................................................Payments.......................................... (10) (8) (6) --
-------- ------------- ------ ------
Balance at May 20, 2000...........................................August 12, 2000............................ $ 122120 $ 2321 $ 29
======== ============= ====== ======
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14
ONE-TIME ITEMS
In addition to the Merger Related Costs described above, we incurred
one-time expenses related to recent mergers of $81$89 million and $6$36
million during the first quarters ofyear-to-date 2000 and 1999, respectively. The one-time items in
the first quarter of 2000 included approximately $15$19 million for inventory writedowns
included as merchandise costs. The remaining $66$70 million in 2000 is
included in operating, general and administrative costs and relates
primarily to stores that have closed or will close and severance
expenses related to headcount reductions.reductions and other miscellaneous costs.
Of the $66$70 million, $11$15 million represented cash expenditures and $55
million represented charges that were accrued duringrelating primarily to the
quarter.net present value of lease liabilities relating to closed stores. No
material payments were made on these accruals during the quarter. All of theThe
1999 one-time items arerepresent costs related to mergers recorded as cash
was expended. Of the $36 million, $18 million was included in
operating, general and administrative costs, and $18 million was
included in merchandise costs.
ASSET IMPAIRMENT CHARGES
As a result of recent investments in stores that did not perform as
expected,Due to updated profitability forecasts for 2000 and beyond and new
divisional leadership, we performed an impairment review of our
long-lived assets. During this review, we identified impairment losses
for both assets to be disposed of and assets to be held and used.
Assets to be Disposed of
The impairment charge for assets to be disposed of related primarily to
the carrying value of land, buildings, and equipment for 25 stores that
werehave been closed in the first quarter or that management has committed to close by the end
of the fiscal year. The impairment charge was determined using the fair
value less the cost to sell. Fair value less the cost to sell used in
the impairment calculation was based on discounted cash flows and third
party offers to purchase the assets, or market value for comparable
properties, if applicable. Accordingly, an impairment charge of $81
million related to assets to be disposed of was recognized, reducing
the carrying value of fixed assets and goodwill by $41 million and $40
million, respectively.
11
13
Assets to be Held and Used
The impairment charge for assets to be held and used related primarily
to the carrying value of land, buildings, and equipment for 13 stores
that we will continue to operate. Updated projections, based on revised
operating plans, were used, on a gross basis, to first determine
whether the assets were impaired, then, on a discounted cash flow basis
to serve as the estimated fair value of the assets for purposes of
measuring the asset impairment charge. As a result, an impairment
charge of $87 related to assets to be held and used was recognized,
reducing the carrying value of fixed assets and goodwill by $47 million
and $40 million, respectively.
Other writedowns
In addition to the approximately $168 million of impairment charges
noted above, we recorded a writedown of $23 million to reduce the
carrying value of certain investments in unconsolidated entities,
accounted for on the cost basis of accounting, to reflect reductions in
value determined to be other than temporary. The writedowns related
primarily to investments in certain former suppliers that have
experienced financial difficulty and with whom supply arrangements have
ceased.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
---------------
During the quarter, we invested $209$101 million to repurchase 11.34.7 million
shares of Kroger stock at an average price of $18.52$21.39 per share. We
purchased 10.7During
the first two quarters of 2000, we repurchased approximately 16 million
shares of our common stock at an average price of $19.27 per share for
a total investment of $310 million. We have purchased 15.2 million
shares for approximately $293 million under our $750 million stock
repurchase plan and we purchased an additional 0.60.8 million shares under
our program to repurchase common stock funded by the proceeds and tax
benefits from stock option exercises.
We had several lines of credit totaling $4.0 billion, with $2.0 billion
in unused balances at May 20,August 12, 2000. In addition, we had a $470
million synthetic lease credit facility with no unused balance and a
$95$175 million money market line with an unused balance of $83$75 million at
May
20,August 12, 2000.
14
15
Net debt increased $77decreased $205 million to $8.6$8.1 billion at the end of the
firstsecond quarter of 2000 compared to the firstsecond quarter of the prior
year. NetWe define net debt is defined as long-term debt, including capital leases
and current portion thereof, less investments in Kroger debt securities
and prefunded employee benefits. We do not intend to present net debt
as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe that presentation of this
calculation is important to the understanding of our financial
condition. Net debt decreased $355$659 million from year-end 1999, despite
the $209$310 million repurchase of Kroger stock and acquisitions completed
during the first quarter.two quarters of 2000. The decrease since year-end
resulted from strong free cash flow from operations, including an
improvement in net working capital.
Our bank credit facilities and the indentures underlying our publicly
issued debt contain various restrictive covenants. Some of these
covenants are based on EBITDA, which we define as earnings before
interest, taxes, depreciation, amortization, LIFO, extraordinary
losses, and one-time items. The ability to generate EBITDA at levels
sufficient to satisfy the requirements of these agreements is a key
measure of our financial strength. We do not intend to present EBITDA
as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe the presentation of EBITDA
is important for understanding our performance compared to our debt
covenants. The calculation of EBITDA is based on the definition
contained in our bank credit facilities. This may be a different
definition than other companies use. We were in compliance with all
EBITDA-based bank credit facilitiesfacility and indenture covenants on May 20,August 12,
2000.
12
14
The following is a summary of the calculation of EBITDA for the first
quarter ofsecond
quarters ended August 12, 2000 and August 14, 1999.
1stSecond Quarter Ended ----------------------------------
May 20, May 22,Two Quarters Ended
---------------------------- ----------------------------
August 12, August 14, August 12, August 14,
2000 1999 ---------------- ----------------2000 1999
---------- ---------- ---------- ----------
(in millions) (in millions)
Earnings before tax expense............................. $ 176375 $ 347106 $ 551 $ 453
Interest................................................ 206 199155 143 361 342
Depreciation............................................ 276 252211 193 487 444
Goodwill amortization................................... 31 2923 23 54 53
LIFO.................................................... 124 -- 16 12
One-time items included in merchandise costs............ 15 64 13 19 18
One-time items included in operating, general and
Administrativeadministrative expenses.............................. 66 --4 17 70 18
Merger related costs.................................... 9 352 200 11 235
Impairment chargescharges...................................... -- -- 191 --
Other................................................... -- (1)
---------- ------------------- --------- --------- ---------
EBITDA.................................................. $ 982778 $ 879
==========705 $ 1,760 $ 1,575
========= ========= ========= =========
Cash Flow
---------
We generated $1.043$1.9 billion of cash from operating activities
during
the first quarter ofyear-to-date 2000 compared to $594 million in the first quarter
of$1.2 billion year-to-date 1999. Cash flow
from operating activities increased in the firstsecond quarter of 2000
largely due to a reduction in working capital and an increase in net
earnings excluding non-cash charges.
Investing activities used $497$858 million of cash during the first quarter
ofyear-to-date 2000
compared to $449$837 million inyear-to-date 1999. This increase was primarily
due to the paymentpayments made for acquisitions and the funding of a new insurance
subsidiary.during 2000.
Financing activities used $664$1,163 million of cash in the first quarter ofyear-to-date 2000
compared to $94$337 million in the firstsecond quarter of 1999. This increase
is due to our repurchase of treasury shares and reductionreductions in debt.
CAPITAL EXPENDITURES
Capital expenditures excluding acquisitions totaled $455$384 million in the
firstsecond quarter of 2000 compared to $442$404 million in the firstsecond quarter
of 1999. During the second quarter of 2000 we opened, acquired,
expanded, or relocated 38 food stores. We had 12 operational closings
and completed 28 within the wall remodels. Excluding divested stores,
square footage increased 8.0% over the prior year.
15
16
Year-to-date 2000 capital expenditures totaled $838 million compared to
$846 million year-to-date 1999. During the first quartertwo quarters of 2000
we opened, acquired, expanded, or relocated 57 food stores. We had 1830
operational closings and completed 3058 within the wall remodels.
Square footage increased 6.5%
excluding divested stores.
OTHER ISSUES
On March 31, 2000, the Board of Directors approved a $750 million
common stock repurchase program. This repurchase program replaced the
$100 million program authorized in January of 2000.
Due to the Federal Trade Commission's decision to withhold approval of
our purchase of 74 Winn-Dixie stores in Texas and Oklahoma, on June 22,
2000, we announced that we had reached an agreement with Winn-Dixie
Stores, Inc. to terminate the previously announced plans to purchase
the 74 stores.
We are a 50% owner of Santee Dairies, L.L.C. ("Santee") and have a
10-year product supply agreement with Santee that requires us to
purchase 9 million gallons of fluid milk and other products annually.
The product supply agreement expires on July 29, 2007. Upon the merger
of Ralphs/Food 4 Less, Santee became excess capacity and a duplicate
facility. We are currently engaged in efforts to dispose of our
interest in Santee that may result in a loss.
13
15
OUTLOOK
Information provided by us, including written or oral statements made
by our representatives, may contain forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, which address
activities, events or developments that we expect or anticipate will or
may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of our
business, future capital expenditures and our business strategy,
contain forward-looking information. Statements elsewhere in this
report and below regarding our expectations, hopes, beliefs,
intentions, or strategies are also forward looking statements. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. While we believe that the statements
are accurate, uncertainties and other factors could cause actual
results to differ materially from those statements. In particular:
-o We obtain sales growth from new square footage, as well as
from increased productivity from existing locations. We
expect 2000 full year square footage to grow 4.5% to 5.0%.
excluding acquisitions. 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.
-o We expect combination stores to increase our sales per
customer by including 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.
-o We believe we have adequate coverage of our debt covenants
to continue to respond effectively to competitive
conditions.
-o We expect to continue capital spending in technology
focusing on improved store operations, logistics,
manufacturing procurement, category management,
merchandising and buying practices, which should continue to
reduce merchandising costs as a percent of sales.
-o We expect to reduce working capital as compared to the third
quarter of 1999 by a total of $500 million over the next 5
years. We define working capital as current operating assets
less current operating liabilities. We do not intend to
present working capital as an alternative to any generally
accepted accounting principle measure of performance.
Rather, we believe this presentation is relevant to an
assessment of our financial condition. As of the end of the
firstsecond quarter we have reduced working capital $197$335 million
since the third quarter of 1999.1999; however, we typically
experience an increase in working capital during the third
quarter due to an increase in inventory for the holiday
season. A calculation of working capital based on our
definition as of the end of the firstsecond quarter 2000 and the
third quarter of 1999 is provided below:
16
17
FirstSecond Quarter Third Quarter
2000 1999
--------------------------- -------------
Cash..................................... $ 163155 $ 283
Receivables.............................. 608573 620
FIFO inventory........................... 4,4164,313 4,812
Operating prepaid and other assets....... 358252 199
Accounts payable......................... (3,047) (3,292)(2,911) (3,199)
Operating accrued liabilities............ (2,223) (2,268)(2,307) (2,361)
Prepaid VEBA............................. (118)(56) --
---------- ---------------- -------
Working capital ......................... $ 15719 $ 354
========== ================ =======
-o Our earnings per share target is a 16%-18% average annual
increase over the next three years.
-o We expect our capital expenditures for the year to total
$1.5-$1.6approximately $1.8 billion, net of acquisitions. Capital
expenditures reflect our 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
intend to use the combination of cash flows from operations,
including reductions in working capital, and borrowings
under credit facilities to finance capital expenditure
requirements. If determined preferable, we may fund capital
expenditure requirements by mortgaging facilities, entering
into sale/leaseback transactions, or by issuing additional
debt or equity.
-o We expect to meet or exceed $380 million in annual synergy
savings
over the next three years as a result of our mergers.mergers by the end of fiscal
2001. We project the timingexpect to exceed our previously stated annual
synergy savings goal of the annual savings by fiscal year to be
as follows: $260 million in 2000, $345 million in 2001,
14
16
and $380 million in 2002 and beyond.for fiscal 2000. As of
the end of the firstsecond quarter of 2000 we have achieved an
annual run rate of $198$257 million. Some of these savings will
be reinvested in the business to drive sales growth.
o We expect interest expense for the year to total $655 - $670
million. We continue to utilize interest rate swaps and
other derivatives to limit our exposure to rising interest
rates. The derivatives are used primarily to fix the rates
on variable debt and limit the floating rate debt to a total
of $2.3 billion or less. Currently, a 100 basis point
increase from the current range of interest rates would have
less than $0.01a one-half cent a share impact on this year's
second half earnings. For the balance of the year, we expect
less than 10% of our outstanding debt will be exposed to
upward movements in interest rates and expect this floating
rate debt to average $800 - $850 million for the restremainder
of the year.
Our ability to achieve our expectations may be impacted by several
factors that could cause actual results to differ materially from our
expectations. We operate in an increasingly competitive environment
that could adversely affect our expected increases in sales and
earnings. Competitors' pricing strategies, store openings, and remodels
may effect our sales and earnings growth. A downturn in the general
business or economic conditions in our operating regions may also
adversely affect our sales and earnings. Such an economic downturn may
include fluctuations in the rate of inflation, decreases in population,
or employment and job growth. Although we believe we have adequate
coverage of our debt covenants, our significant indebtedness could adversely affect
us by reducing our flexibility to respond to changing business and
economic conditions and increasing our borrowing costs. Increases in
labor costs and relations with union bargaining units representing our
employees or delays in opening new stores could also cause us to fall
short of our sales and earnings targets. Sales growth may also be
negatively affected if the impact of new square footage on existing
stores is greater than anticipated. While we expect to reduce working
capital, our ability to do so may be impaired by changes in vendor
payment terms, seasonal variations in inventory levels, or systems
problems that result in increases in inventory levels. Our capital
expenditures could fall outside of the expected range if we are
unsuccessful in acquiring suitable sites for new stores, if development
costs exceed those budgeted, or if our logistics and technology
projects are not completed in the time frame expected or on budget.
While we expect to achieve benefits through logistics and technology,
due to our recent mergers and acquisitions, there are inherent
uncertainties that may hinder the development of new systems and
integration of systems. Unforeseen difficulties in integrating Fred
Meyer or any other acquired entity with Kroger could cause us to fail
to achieve the anticipated synergy savings, and could otherwise
adversely affect our ability to meet our other expectations. Changes in
laws and regulations, including changes in accounting standards and
taxation requirements may adversely affect our operations. Accordingly,
actual events and results may vary significantly from those included in
or contemplated or implied by forward looking statements made by us.
1517
1718
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to risk from the changes in interest rates as a result
of borrowing activities. We continue to utilize interest rate swaps and
other derivatives to limit our exposure to rising interest rates. The
derivatives are used primarily to fix the rates on variable debt and
limit the floating rate debt to a total of $2.3 billion or less.
There have been no significant changes in our exposure to market risk
from the information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk on our Form 10K filed with the SEC on
April 27, 2000.
1618
1819
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) June 22, 2000 - Annual Meeting
(b) The shareholders elected five directors to serve until the annual
meeting of shareholders in 2003 or until their successors have been
elected and qualified; elected one director to serve until the annual
meeting of shareholders in 2001 or until his successor has been
elected and qualified; and ratified the selection of
PricewaterhouseCoopers LLP, as Company auditors for 2000. The
shareholders also adopted a shareholder proposal recommending that the
Board of Directors take steps to implement the annual election of all
Board members as opposed to election in classes and defeated a
shareholder proposal recommending the Company remove genetically
engineered items from its products sold under its brand names or
private labels.
Votes were cast as follows:
For Withheld
----------- ----------
To Serve Until 2003
-------------------
Reuben V. Anderson 689,638,909 18,454,919
Clyde R. Moore 691,997,956 16,095,872
Joseph A. Pichler 694,998,231 13,095,597
Steven R. Rogel 693,458,528 14,635,300
Martha Romayne Seger 691,667,824 16,426,004
To Serve Until 2001
-------------------
Ronald W. Burkle 694,858,055 13,235,773
For Against Withheld Broker Non-Votes
----------- ---------- --------- ----------------
PricewaterhouseCoopers LLP 701,919,660 2,832,838 3,341,330 --
For Against Withheld Broker Non-Votes
----------- ---------- --------- ----------------
Shareholder proposal
(declassify Board) 398,197,134 221,983,456 7,064,080 80,849,158
For Against Withheld Broker Non-Votes
----------- ---------- --------- ----------------
Shareholder proposal
(genetically engineered items) 21,356,929 536,145,611 69,742,130 80,849,158
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company are
hereby incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 3, 1998.
The Company's Regulations are incorporated by reference to Exhibit 4.2
of the Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries are not filed as Exhibits
because the amount of debt under each instrument is less than 10% of
the consolidated assets of the Company. The Company undertakes to file
these instruments with the Commission upon request.
EXHIBIT 27.1 - Financial Data Schedule.
EXHIBIT 99.1 - Additional Exhibits - Statement of Computation of Ratio
of Earnings to Fixed Charges.
(b) The Company disclosed and filed an underwriting agreement,
pricing agreement, andits earnings release for the Seventh Supplemental Indenture
related to the issuancefirst
quarter of $500,000,000, 8.05% Senior
Notes,fiscal year 2000 in its Current Report on Form 8-K dated
February 11,
2000; and its earnings release for the fourth quarter and
fiscal year of 1999 in its Current Report on Form 8-K dated
March 9, 2000, as amended May 24,June 20, 2000.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE KROGER CO.
Dated: June 30,September 22, 2000 By: /s/ Joseph A. Pichler
--------------------------------------------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: June 30,September 22, 2000 By: /s/ M. Elizabeth Van Oflen
--------------------------------------------------------------
M. Elizabeth Van Oflen
Vice President and
Corporate Controller
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Exhibit Index
-------------
Exhibit 3.1 - Amended Articles of Incorporation of the Company are hereby
incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 3,
1998. The Company's Regulations are incorporated by reference to
Exhibit 4.2 of the Company's Registration Statement on Form S-3
as filed with the Securities and Exchange Commission on January
28, 1993, and bearing Registration No. 33-57552.
Exhibit 4.1 - Instruments defining the rights of holders of long-term debt of
the Company and its subsidiaries are not filed as Exhibits
because the amount of debt under each instrument is less than 10%
of the consolidated assets of the Company. The Company undertakes
to file these instruments with the Commission upon request.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of
Earnings to Fixed Charges.
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