2.MERGER

On September 2, 2016, the Company closed its merger with Modern HC Holdings, Inc. (“ModernHEALTH”) by purchasing 100% of the outstanding shares of ModernHEALTH for $407. This merger allows the Company to expand its specialty pharmacy services by significantly increasing geographic reach and patient therapies. The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing the assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.

Pending finalization of the Company’s valuation and other items, the following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as part of the merger with ModernHEALTH:


	September 2,
	2016
ASSETS
Total current assets	$	82

Property, plant and equipment		8
Intangibles		136

Total Assets, excluding Goodwill		226

LIABILITIES
Total current liabilities		(70)

Fair-value of long-term debt including obligations under capital leases and financing obligations		(1)
Deferred income taxes		(33)

Total Liabilities		(104)

Total Identifiable Net Assets		122
Goodwill		285
Total Purchase Price	$	407

Of the $136 allocated to intangible assets, the Company recorded $131 and $5 related to pharmacy prescription files and distribution agreements, respectively. The Company will amortize the pharmacy prescription files and distribution agreements, using the straight line method, over 10 years. The goodwill recorded as part of the merger was attributable to the assembled workforce of ModernHEALTH and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The merger was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of tax basis and goodwill is not expected to be deductible for tax purposes.

On December 18, 2015, the Company closed its merger with Roundy’s, Inc. (“Roundy’s”). In the second quarter of 2016, there was a purchase price allocation adjustment to reduce goodwill and other current liabilities by $8.

Pro forma results of operations, assuming the Roundy’s merger had taken place at the beginning of 2014 and the ModernHEALTH merger had taken place at the beginning of 2015, are included in the following table. The pro forma information includes historical results of operations of Roundy’s and ModernHEALTH, as well as adjustments for interest expense that would have been incurred due to financing the mergers, depreciation and amortization of the assets acquired and excludes the pre-merger transaction related expenses incurred by Roundy’s, ModernHEALTH and the Company. The pro forma information does not include efficiencies, cost reductions, synergies or investments in our Customer 1st Strategy expected to result from the mergers. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the Roundy’s merger been completed at the beginning of 2014 or the ModernHEALTH merger been completed at the beginning of 2015. The sales and net earnings of ModernHEALTH are not material to the Company’s 2016 results.


	Third Quarter Ended		Three Quarters Ended
	November 7, 2015		November 7, 2015
Sales	$	25,989	$	87,406
Net earnings including noncontrolling interests		426		1,487
Net earnings (loss) attributable to noncontrolling interests		(1)		4

Net earnings attributable to The Kroger Co.	$	427	$	1,483